As filed with the Securities and Exchange Commission on November 15, 2006

Registration No. 333-137664

 

AMENDMENT NO. 1

to

FORM F-4

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

 

 

 

1 Yishun Avenue 7

Singapore 768923

Tel: (65) 6755-7888

(Address, including zip code, and telephone number, including area code,

of registrants’ principal executive offices)

 

 

 

 

Corporation Service Company

1090 Vermont Avenue NW

Washington, D.C. 20005

Tel: (800) 222-2122

(Name, address, including zip code, and telephone number, including area code,

of agent for service)

 

 

 

 

With a copy to:

Anthony J. Richmond, Esq.

William C. Davisson, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

Tel: (650) 328-4600

 

 

 

 

Approximate date of commencement of proposed exchange offers:   As soon as practicable after this Registration Statement is declared effective.

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

 

 

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

TABLE OF ADDITIONAL REGISTRANT SUBSIDIARY CO-ISSUERS AND GUARANTORS

 

 

 

 

 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If you receive any other information, you should not rely on it. We are not making an offer of these securities in any state where the offer is not permitted.

 

REGISTRATION STATEMENT
ON FORM F-4

 

The issuer and the subsidiary co-issuers and guarantors have filed with the Securities and Exchange Commission (SEC) a registration statement on Form F-4 under the Securities Act relating to the exchange offers that incorporates important business and financial information about us that is not included in or delivered with this prospectus. This prospectus does not contain all of the information included in the registration statement. The information is available without charge to holders of the securities upon written or oral request to Avago Technologies Finance Pte. Ltd., 1 Yishun Avenue 7, Singapore 768923, Attention: Pe-Wynn Kin, telephone number (65) 6755-7888. To obtain timely delivery, note holders must request the information no later than five business days before the expiration date of the exchange offers, which is          , 2006. If we have made references in this prospectus to any contracts, agreements or other documents and also filed any of those contracts, agreements or documents as exhibits to the registration statement, you should read the relevant exhibit for a more complete understanding of the document or matter involved.

 

 

PROSPECTUS SUMMARY

	•	Wireless Communications:   We support the wireless industry with a broad variety of RF semiconductor devices, including diodes and discrete transistors, monolithic microwave integrated circuits (MMICs), filters and duplexers using our proprietary film bulk acoustic resonator (FBAR) technology, and front end modules that incorporate multiple die into multi-function RF devices. The broad range of our RF portfolio allows us to address applications ranging from mobile handsets and infrastructure to satellite communications, point-to-point communications, military communications, and wireless networking for computing applications. Our expertise in amplifier design, FBAR technology and module integration capability enables us to offer industry-leading efficiency in RF transmitter applications. Our proprietary gallium arsenide (GaAs) processes are critical to the production of low noise amplifier (LNA) products. In addition to RF devices, we provide a variety of peripheral devices for mobile handset applications. We were an early developer of complementary metal-oxide semiconductor (CMOS) image sensors for camera-phone applications and today supply image sensor components to camera module assemblers for integration into handsets. We also supply LEDs for camera-phone flashes and for backlighting applications in mobile handset keypads, as well as sensors for backlighting control and infrared transceivers to enable secure access of files in mobile phones and smartphones.

	•	Wired Infrastructure:   In the telecommunications, storage and Ethernet networking markets, we supply transceivers that receive and transmit information along optical fibers. We provide a range of options for customers to select the bandwidth desired, including options ranging from 125 MBd Fast Ethernet transmitters and receivers to 10 Gigabit storage transceivers. We also supply parallel optic transceivers with as many as 12 parallel channels. In metropolitan networking applications, we supply SONET-compliant transceivers ranging from OC-3 to OC-192 standards. We also supply components for networking and enterprise storage I/O applications, including serializers/deserializers (SerDes) integrated into application specific integrated circuits (ASICs). Our CMOS processes provide low power consumption and superior noise immunity.
	•	Industrial/Automotive Electronics:   We provide a broad variety of products for the general industrial, automotive and consumer appliance markets. LEDs and related integrated modules represent a significant product family, with a number of different colors, form factors and integration options. Our LEDs provide reliability, using aluminum indium gallium phosphide (AlInGaP), indium gallium nitride (InGaN) and gallium phosphide (GaP) materials, among others, to cover a wide spectrum of colors and brightness levels. Our LEDs offer high brightness and stable light output over thousands of hours, enabling us to support the electronic signs and signals market with LED assemblies for traffic signals, large commercial signs and other displays. We also offer optical isolators, or optocouplers, which provide electrical insulation and signal isolation for systems that are susceptible to electrical noise caused by crosstalk, power glitches or electrical interference. Our ability to integrate LEDs, detectors and communication ICs enables us to offer high performance with respect to isolation and power dissipation, as well as high speed digital optocouplers. Optocouplers are used in a diverse set of applications, including industrial motors, power generation and distribution systems, switching power supplies, medical equipment, telecommunications equipment, consumer appliances, computers and office equipment, plasma displays, and military electronics. Industrial motors and robotics require optical sensors for motion control. We supply optical encoders in module form and housed in ingress-protected enclosures, as well as ICs for the controller and decoder functions to accompany the motion sensors themselves. For industrial networking, we provide fast Ethernet transceivers using plastic optical fiber that enable quick and interoperable networking in industrial control links and factory automation and for medical equipment.
	•	Computing Peripherals:   We manufacture motion control encoders that control the paper feed and print head movement in printers and other office automation products. In addition, we were an early developer of image sensors for optical mouse applications, using LEDs and CMOS image sensors to create a subsystem that can detect motion over an arbitrary desktop surface. We are a leading supplier of image sensors for optical mice today, and have launched a new line of laser-based mouse products with improved precision. Many PCs incorporate infrared transceivers for “beaming” information to and from handheld devices or printers, and we supply transceivers that can be used for these applications. Computer displays, especially in notebook computer applications, use our products for LED backlighting and sensors to control display brightness based on ambient light conditions.

General		On December 1, 2005, Avago Technologies Finance Pte. Ltd. and the subsidiary co-issuers issued $500 million aggregate principal amount of the outstanding fixed rate senior notes, $250 million aggregate principal amount of the outstanding floating rate senior notes and $250 million aggregate principal amount of the outstanding senior subordinated notes in a private offering. In connection with the private offering, Avago Technologies Finance Pte. Ltd. and the subsidiary co-issuers and guarantors of the notes entered into a registration rights agreement with the initial purchasers in which we agreed, among other things, to deliver this prospectus to you and to complete the exchange offers within 360 days after the date of original issuance of the outstanding notes. You are entitled to exchange in the applicable exchange offer your outstanding notes for exchange notes which are identical in all material respects to the outstanding notes except:
		• the exchange notes have been registered under the Securities Act;
		• the exchange notes are not entitled to any registration rights under the registration rights agreement; and
		• the liquidated damages provision of the registration rights agreement is no longer applicable.
The Exchange Offers		We are offering to exchange:
		• $500 million aggregate principal amount of exchange fixed rate senior notes which have been registered under the Securities Act for any and all of the outstanding fixed rate senior notes;
		• $250 million aggregate principal amount of exchange floating rate senior notes which have been registered under the Securities Act for any and all of the outstanding floating rate senior notes; and
		• $250 million aggregate principal amount of exchange senior subordinated notes which have been registered under the Securities Act for any and all of the outstanding senior subordinated notes.

Issuer		Avago Technologies Finance Pte. Ltd., a Singapore private limited company
Subsidiary Co-Issuers		Avago Technologies U.S. Inc. and Avago Technologies Wireless (U.S.A.) Manufacturing Inc., each a Delaware corporation and an indirect wholly owned subsidiary of Avago Technologies Finance Pte. Ltd.
Securities Offered		We are offering: $500 million aggregate principal amount of 10 1 / 8 % Senior Notes due 2013, which we refer to as the exchange fixed rate senior notes; $250 million aggregate principal amount of Senior Floating Rate Notes due 2013, which we refer to as the exchange floating rate senior notes; and $250 million aggregate principal amount of 11 7 / 8 % Senior Subordinated Notes due 2015, which we refer to as the exchange senior subordinated notes.
Maturity		The exchange fixed rate senior notes will mature on December 1, 2013. The exchange floating rate senior notes will mature on June 1, 2013. The exchange senior subordinated notes will mature on December 1, 2015.
Interest Rate		The exchange fixed rate senior notes will bear interest at a rate of 10 1 / 8 % per annum. The exchange floating rate senior notes will bear interest at a rate per annum equal to three-month LIBOR plus 5.5%. Interest on the exchange floating rate senior notes will be reset quarterly. The exchange senior subordinated notes will bear interest at a rate of 11 7 / 8 % per annum.
Interest Payment Dates		Interest on the exchange fixed rate senior notes and the exchange senior subordinated notes will be payable on June 1 and December 1. Interest on the exchange floating rate senior notes will be payable on March 1, June 1, September 1 and December 1. Interest will accrue from the issue date of the notes.
Ranking		The exchange senior notes will be our senior unsecured obligations and will:
		• rank senior in right of payment to our debt and other obligations that are, by their terms, expressly subordinated in right of payment to the exchange senior notes, including the senior subordinated notes;
		• rank equally in right of payment to all of our senior debt and other obligations that are not, by their terms, expressly subordinated in right of payment to the exchange senior notes; and
		• be effectively subordinated in right of payment to all of our secured debt (including obligations under our senior credit

		amount, plus accrued and unpaid interest to the repurchase date. See “Description of Exchange Senior Notes — Repurchase at the Option of Holders — Change of Control” and “Description of Exchange Senior Subordinated Notes — Repurchase at the Option of Holders — Change of Control.”
Certain Indenture Provisions		The exchange senior notes and the exchange senior subordinated notes are governed by separate indentures. The indentures governing the exchange notes contain covenants limiting our ability and the ability of our restricted subsidiaries to:
		• incur additional debt or issue certain preferred shares;
		• pay dividends on or make distributions in respect of our capital stock or make other restricted payments;
		• make certain investments;
		• sell certain assets;
		• create liens on certain assets to secure debt;
		• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
		• enter into certain transactions with our affiliates; and
		• designate our subsidiaries as unrestricted subsidiaries.
		These covenants are subject to a number of important limitations and exceptions. During any period in which the exchange notes have an Investment Grade Rating (as defined) we will not be subject to many of the covenants in the indentures. See “Description of Exchange Senior Notes” and “Description of Exchange Senior Subordinated Notes.”
No Public Market		The exchange notes will be freely transferable but will be new securities for which there will not initially be a market. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of any market. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market in the exchange notes. The initial purchasers are not obligated, however, to make a market in the exchange notes, and any such market-making may be discontinued by the initial purchasers in their discretion at any time without notice.

Risk Factors

 

You should carefully consider all the information in the prospectus prior to exchanging your outstanding notes. In particular, we urge you to consider carefully the factors set forth under the heading “Risk Factors.”

		Predecessor(1)																					Company
														Nine				One					Nine
														Months				Month					Months
														Ended				Ended					Ended
		Year Ended October 31,												July 31,				Nov. 30,					July 31,
		2003				2004				2005				2005				2005					2006(2)
		(In millions)
Statements of Operations Data:
Net revenue(3)		$	1,305			$	1,783			$	1,559			$	1,126			$	125				$	1,073
Costs and expenses:
Cost of products sold			992				1,249				1,037				749				96					701
Amortization of intangible assets			—				—				—				—				—					41
Total cost of products sold			992				1,249				1,037				749				96					742
Research and development			232				207				218				161				24					147
Selling, general and administrative			256				250				256				181				28					178
Amortization of intangible assets			—				—				—				—				—					56
Acquired in-process research and development			—				—				—				—				—					2
Total costs and expenses			1,480				1,706				1,511				1,091				148					1,125
Income (loss) from operations(3)			(175	)			77				48				35				(23	)				(52	)
Interest expense(4)			—				—				—				—				—					114
Other income, net			1				4				7				10				—					8
Income (loss) from continuing operations before income taxes			(174	)			81				55				45				(23	)				(158	)
Provision for income taxes			10				25				33				13				2					3
Income (loss) from continuing operations			(184	)			56				22				32				(25	)				(161	)
Income from discontinued operations, net of income taxes			7				17				9				14				1					12
Net income (loss)		$	(177	)		$	73			$	31			$	46			$	(24	)			$	(149	)
Balance Sheet Data (at end of period):
Total assets																							$	2,222
Long-term debt																								1,004
Total shareholder’s equity																								908
Other Financial Data
Ratio of earnings to fixed charges(5)																								—

(1)		Predecessor refers to the Semiconductor Products Group business segment of Agilent Technologies, Inc.
(2)		We completed the Acquisition on December 1, 2005. The Acquisition was accounted for as a purchase business combination under United States generally accepted accounting principles (“U.S. GAAP”) and thus the financial results for all periods from and after December 1, 2005 are not necessarily comparable to the prior results of Predecessor. We did not have any operating activity prior to December 1, 2005.

		Accordingly, our results for the nine months ended July 31, 2006 represent only the eight months of our operations since completion of the Acquisition.

(3)		The divestiture of the Camera Module Business by Predecessor on February 3, 2005 did not meet the criteria for discontinued operations treatment under U.S. GAAP and, as such, its historical results remain included in the results from continuing operations as presented in this prospectus. The following table presents the operating results of the Camera Module Business:

		Predecessor																					Company
														Nine				One
														Months				Month
														Ended				Ended					Nine Months
		Year Ended October 31,												July 31				November 30,					Ended July 31,
		2003				2004				2005				2005				2005					2006
		(In millions)
Net revenue		$	58			$	296			$	69			$	69				—					—
Loss from operations			(37	)			(63	)			(7	)			(7	)			—					—

(4)		Interest expense for the nine months ended July 31, 2006 includes an aggregate of $29 million of amortization of debt issuance costs and commitment fees for expired facilities, including $19 million of unamortized debt issuance costs that were written off in conjunction with the repayment of the term loan facility during this period. As of July 31, 2006, we had permanently repaid all outstanding amounts under the term loan facility.
(5)		For purposes of computing this ratio of earnings to fixed charges, “fixed charges” consist of interest expense on all indebtedness plus amortization of debt issuance costs and an estimate of interest expense within rental expense. “Earnings” consist of pre-tax income (loss) from continuing operations plus fixed charges and unamortized capitalized debt issuance costs. For the nine months ended July 31, 2006, earnings were insufficient to cover fixed charges by $120 million.

 

You should carefully consider the following risk factors and all other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offers. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of the exchange notes could decline or we may not be able to make payments of interest and principal on the notes, and you may lose some or all of your investment.

 

Risks Related to the Exchange Offers

 

If you do not properly tender your outstanding notes, you will continue to hold unregistered outstanding notes and your ability to transfer outstanding notes will be adversely affected.

 

If you do not properly tender your outstanding notes for exchange notes in the applicable exchange offer, you will continue to be subject to restrictions on transfer of your outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Summary — The Exchange Offers” and “The Exchange Offers” for information about how to tender your outstanding notes. The tender of outstanding notes under the exchange offers will reduce the outstanding amount of each series of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the outstanding notes due to a reduction in liquidity.

 

Risks Relating to Our Indebtedness

 

Our substantial indebtedness could adversely affect our financial health and our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate indebtedness and prevent us from fulfilling our obligations under the notes or other indebtedness.

 

In connection with the Acquisition, we entered into senior credit facilities in an aggregate principal amount of $975 million, consisting of a six-year revolving credit facility in an aggregate principal amount of $250 million and a seven-year term loan facility in an aggregate principal amount of up to $725 million. Up to $250 million was available under our term loan facility on a delayed-draw basis until April 30, 2006. On January 26, 2006, as permitted by our senior credit agreement and the indentures governing the outstanding notes, we drew the full $250 million under the delayed-draw portion of our term loan facility to retire all of our redeemable convertible preference shares.

 

The following table presents our long-term indebtedness as of July 31, 2006:

 

Subject to restrictions in the indentures governing the notes and the senior credit agreement, we may incur additional indebtedness. Our substantial indebtedness could have important consequences including:

 

 

The indentures governing the notes and our senior credit agreement impose significant restrictions on our business.

 

The indentures governing the notes and the senior credit agreement contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions placed on us and our restricted subsidiaries include limitations on our ability and the ability of our restricted subsidiaries to:

 

 

In addition, over a specified limit, our senior credit agreement requires us to meet a financial ratio test and restricts our ability to make capital expenditures or prepay certain other indebtedness. Our ability to meet the financial ratio test may be affected by events beyond our control, and we do not know whether we will be able to maintain this ratio.

 

The foregoing restrictions could limit our ability to plan for, or react to, changes in market conditions or our capital needs. We do not know whether we will be granted waivers under, or amendments to, our senior

credit agreement or the indentures if for any reason we are unable to meet these requirements, or whether we will be able to refinance our indebtedness on terms acceptable to us, or at all.

 

The breach of any of these covenants or restrictions could result in a default under the indentures governing the notes or our senior credit facilities. An event of default under our debt agreements would permit some or all of our lenders to declare all amounts borrowed from them to be due and payable. If we are unable to repay these amounts, lenders having secured obligations, including the lenders under our senior credit facilities, could proceed against the collateral securing that debt. In addition, if any of our other debt is accelerated, we may be restricted from making interest payments on the notes or repaying the principal amount of the notes.

 

Despite current indebtedness levels, we and our subsidiaries may still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

 

The terms of the indentures governing the notes allow us and our subsidiaries to incur additional indebtedness in the future. Any secured indebtedness permitted under the senior credit agreement and the indentures would be effectively senior to the notes and the subsidiary guarantees. Our revolving credit facility permits additional borrowings of up to $250 million, including outstanding letters of credit. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indentures governing the notes allow us to incur obligations that do not constitute indebtedness.

 

We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.

 

Our cash interest expense for the eight-month period from the date of the Acquisition through July 31, 2006 was $93 million. We presently estimate that our cash interest expense for the fiscal years ending October 31, 2006 and 2007 will be $112 million and $109 million, respectively, subject to increase in the event of an increase in the interest rates applicable to our variable rate indebtedness. Our ability to make payments on and to refinance our indebtedness, including the notes, and to fund capital expenditures and research and development efforts will depend on our ability to generate cash in the future. To a certain extent, our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As a result of these and other factors, our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our revolving credit facility or otherwise to enable us to pay our indebtedness, including the notes, or to fund other liquidity needs. If we cannot generate sufficient cash to pay our indebtedness, we may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We do not know whether we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all.

 

Without sufficient cash, we could be forced to reduce or delay investments and capital expenditures or to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. Restrictive covenants in our senior credit agreement and the indentures governing the notes limit our ability to sell assets and restrict the use of proceeds from any such sale. Furthermore, our senior credit facilities are secured by substantially all of our assets. We may not be able to sell our assets quickly enough or for sufficient amounts to enable us to meet our debt service obligations.

 

Risks Relating to our Separation from Agilent

 

Our historical financial information may not be indicative of our actual historical financial results or future financial performance.

 

Historically, we conducted our operations as part of Agilent and not as a separate entity. Accordingly, our Predecessor’s financial information included in this prospectus does not necessarily reflect the historical financial condition, results of operations and cash flows we would have experienced had we operated during all periods presented as a separate, stand-alone entity and may not be indicative of our future financial performance.

We have operated as a stand-alone entity only since December 1, 2005. Our financial information presented herein for all periods other than the nine months ended July 31, 2006 has been derived from the books and records of Agilent. Historically, Agilent provided us with certain accounting, facilities, finance, governance, human resources, information technology, tax and other corporate services. Accordingly, the financial information for the Predecessor for the fiscal years ended October 31, 2004 and 2005 and for the month ended November 30, 2005 include an allocation of a portion of Agilent’s costs for these and other items. Some of these costs may not be indicative of the costs we would have incurred had we operated as an independent, stand-alone entity for all periods presented. Furthermore, the historical financial statements do not reflect the costs to us of borrowing funds as a separate entity.

 

In connection with the Acquisition, we entered into a Master Separation Agreement, or MSA, with Agilent pursuant to which Agilent provided select services to our company on a transitional basis. Since the completion of the Acquisition on December 1, 2005, we have progressively reduced the services sourced from Agilent under the MSA as we have brought online substitute services either provided internally or through outsourcing vendors we have retained. Agilent’s obligations under the MSA terminated on August 31, 2006. In addition, our interim results to date in fiscal 2006 reflect one-time costs associated with establishing the corporate infrastructure required to operate as a stand-alone entity. Our costs to operate as a stand-alone entity may be higher, perhaps substantially, than we presently anticipate.

 

We have a limited history operating as an independent entity without Agilent, and have recently implemented the information technology, or IT, infrastructure we need to operate as a stand-alone entity. We do not know if the infrastructure we have put into place will meet all of our current and future business requirements.

 

We have only recently completed our transition of certain key services from Agilent. At the closing of the Acquisition, we assumed responsibility for certain key services previously provided by Agilent, including audit, human resources, legal, payroll accounting, procurement, tax accounting and treasury. Pursuant to the MSA, Agilent provided us with other key services on an interim basis, including, among others, accounting and IT services (including enterprise resource planning systems). Agilent’s obligations under the MSA terminated on August 31, 2006. We currently provide these services internally and, in some cases, through outsourcing arrangements with third parties. Any failure of these services to be adequate for our current and future needs could result in a material adverse effect on our business, financial condition and results of operations.

 

We have recently implemented our IT infrastructure. To operate successfully as a stand-alone entity, our new IT infrastructure must be stable, reliable and capable of meeting our current and future requirements. Our new IT infrastructure, among other things, integrates our basic telecommunications infrastructure, network monitoring and maintenance systems, billing systems, customer relationship management systems, corporate finance systems, human resource and payroll systems and backup data centers. We do not know whether the infrastructure we have put into place will meet our current and future business requirements.

 

We rely on third parties to provide services necessary for the operation of our business. Any failure of one or more of our vendors to provide these services could have a material adverse effect on our business.

 

We rely on third party vendors to provide critical services historically provided by Agilent, including, among other things, certain services related to accounting, billing, human resources, IT, network development and network monitoring. We depend on these vendors to ensure that our corporate infrastructure will consistently meet our business requirements. The ability of these third party vendors to successfully provide reliable, high quality services is subject to technical and operational uncertainties that are beyond our control. While we may be entitled to damages if our vendors fail to perform under their agreements with us, our agreements with these vendors limit the amount of damages we may receive. In addition, we do not know whether we will be able to collect on any award of damages or that any such damages would be sufficient to cover the actual costs we would incur as a result of any vendor’s failure to perform under its agreement with us. Any failure of our corporate infrastructure could have a material adverse effect on our business, financial

condition and results of operations. Upon expiration or termination of any of our agreements with third party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us.

 

The application of the purchase method of accounting may result in changes in our financial statements and adversely impact key financial measures.

 

In accordance with United States generally accepted accounting principles, or U.S. GAAP, we accounted for the Acquisition using the purchase accounting method. Under the purchase method of accounting, we allocated the acquisition cost to the net assets acquired in proportion to estimates of their respective fair values. We recorded the excess of the purchase over the estimated fair value of the net assets acquired as goodwill. The estimation of fair values involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized. We will incur amortization expense over the useful lives of amortizable intangible assets acquired. Significant changes in fair value estimates due to divestitures or changes in business conditions may materially impact our financial statements and key financial measures.

 

The inability of our senior management team to effectively manage our business as a stand-alone entity would hinder the implementation of our strategy.

 

Our future operating results will depend substantially upon the performance of our key personnel. Some of our executive officers are new to us and have not been involved with our business for a significant period of time. The focus and attention of these executives and senior managers may be diverted while they familiarize themselves with our business. The inability of our senior management team to effectively manage our business as a stand-alone entity would hinder the implementation of our strategy.

 

We may not be successful in establishing a brand identity.

 

From 1999 to 2005, we conducted our business under Agilent’s brand name, and prior to that, under Hewlett-Packard’s. We believe our customers, suppliers and potential employees recognized the value of those brand names. As part of our separation from Agilent, we renamed our company “Avago” and are now investing time, effort and resources to establish our new brand identity in the marketplace. We do not know whether this effort will ultimately be successful. If our effort to establish a brand identity for “Avago” is unsuccessful, our business, financial condition and results of operations may suffer.

 

As an independent company, we may experience increased costs resulting from a decrease in the purchasing power we had while we operated as part of Agilent.

 

Prior to our separation from Agilent, we were able to take advantage of Agilent’s size and purchasing power in procuring goods, technology and services, including audit services, employee benefit support and insurance. As a stand-alone entity, we are significantly smaller than Agilent and likely will not have access to financial and other resources comparable to those available to us prior to the separation. As an independent company, we may be unable to obtain goods, technology and services at prices and on terms as favorable as those available to us prior to the separation, which could increase our costs and reduce our profitability.

 

Risks Related to Our Business

 

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving technical standards, short product life cycles (for semiconductors and for the end-user products in which they are used) and wide fluctuations in product supply and demand. From time to time, these and other factors, together with changes in general economic conditions, cause significant upturns and downturns in the industry in general and in our business in particular. Periods of industry downturns have been characterized by diminished demand for end-user products, high inventory levels, underutilization of manufacturing capacity, changes in revenue mix and accelerated erosion

of average selling prices. In recent periods, these factors have been exacerbated by the threat or actual occurrence of armed international conflict or terrorist attacks. In the event of a downturn, we may not be able to grow our revenues or reduce our costs quickly enough to maintain our operating profitability. Any future downturns could have a material adverse effect on our business, financial condition and results of operations.

 

If we do not adapt to technological changes in the semiconductor industry, we could lose customers or market share.

 

The semiconductor industry is subject to rapid and significant changes in technology, frequent new product introductions and evolving technical standards. Technological developments may reduce the competitiveness of our products and require unbudgeted upgrades that could be expensive and time consuming to implement. Our products could become obsolete sooner than we expect because of faster than anticipated, or unanticipated, changes in one or more of the technologies related to our products. Furthermore, we continually evaluate expenditures for research and development and must choose among alternative technologies based on our expectations of future market growth and other factors. We may be unable to develop and introduce new or enhanced products that satisfy customer requirements and achieve market acceptance in a timely manner or at all, and we may be unable to anticipate new industry standards and technological changes. We also may not be able to respond successfully to new product announcements and introductions by competitors. If we fail to adapt successfully to technological changes or fail to obtain access to important new technologies, we may be unable to retain customers, attract new customers or sell new products to our existing customers.

 

The transformation from a business segment of Agilent to a stand-alone company and the implementation of our new business strategy entail significant near- to mid-term risks, which may make it more difficult for us to retain and attract qualified personnel. Our business would be adversely affected if existing key personnel leave or if we are unable to recruit and motivate new personnel.

 

We are continuing to evolve from a business segment of Agilent to a fully independent, stand-alone company with its own culture, identity, management structure, operational goals and business strategy. In addition, as we seek to maximize our opportunities and increase our profitability, we expect to evaluate opportunities to increase our outsourcing activities, particularly in the area of semiconductor assembly and test, to more tightly focus our research and development activities, and to evaluate additional purchases or sales of assets, businesses or investments. All of these activities involve significant change and pose significant risks as new processes must be created and personnel must adapt to a dynamic, and different, environment.

 

Our future success depends on our ability to retain, attract and motivate qualified personnel, including executive officers and other key management and technical personnel. We do not know whether we will be able to retain all of our key personnel as we continue our evolution and pursue our business strategy. The loss of the services of one or more of our key employees, officers or design and technical personnel, or our inability to retain, attract and motivate qualified personnel in this new environment, could have a material adverse effect on our business.

 

As the source of our technological and product innovations, our key technical personnel represent a significant asset. We and our Predecessor have historically encountered difficulties in hiring and retaining qualified engineers because there is a limited pool of engineers with expertise in analog, mixed-signal and optoelectronic semiconductor design. Competition for such personnel is intense in the semiconductor industry. Further, in the past, we believe our Predecessor benefited from Agilent’s name and reputation as an employer. To the extent we do not achieve similar recognition, our ability to attract and retain key technical personnel could be harmed.

 

We are subject to varying levels of taxation in different jurisdictions. Changes to the corporate tax rate and laws of any of these jurisdictions could significantly increase or decrease the amount of corporate taxes we have to pay.

 

We have structured our operations to maximize income in countries where tax incentives have been extended to encourage investment or where income tax rates are low. In exchange for agreeing to certain

increases in headcount, capital expenditures and business undertakings, we expect our Singapore and Malaysian operations will benefit from multi-year tax concessions. However, we must meet certain operating conditions to retain these tax benefits. Our interpretations and conclusions regarding the tax concessions are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax concessions are substantially modified or rescinded, we could suffer material adverse tax and other financial consequences, which would significantly increase our expenses and reduce our profitability.

 

In addition, taxable income in any jurisdiction is dependent upon acceptance of our intercompany transfer pricing by local tax authorities as being on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard, as well as lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could substantially increase our tax expense.

 

Unless we and our suppliers continuously improve manufacturing efficiency and quality, our financial performance could be adversely affected.

 

Manufacturing semiconductors involves highly complex processes that require advanced equipment. We and our suppliers, as well as our competitors, continuously modify these processes in an effort to improve yields and product performance. Defects or other difficulties in the manufacturing process can reduce yields and increase costs. Our manufacturing efficiency will be an important factor in our future financial performance, and we may be unable to maintain or increase our manufacturing efficiency to the same extent as our competitors. For products that we outsource manufacturing, our product yields and performance will be subject to the manufacturing efficiencies of our third-party suppliers.

 

From time to time, we and our suppliers have experienced difficulty in beginning production at new facilities, transferring production to other facilities, achieving and maintaining a high level of process quality and effecting transitions to new manufacturing processes, all of which have caused us to suffer delays in product deliveries or reduced yields. We and our suppliers may 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 be adversely affected by any increase in costs related to increases in production capacity if revenues do not increase proportionately.

 

Winning business is subject to lengthy competitive selection processes that require us to incur significant expense. Even if we begin a product design, a customer may decide to cancel or change its product plans, which could cause us to generate no revenues from a product and adversely affect our results of operations.

 

We are focused on winning competitive bid selection processes, known as “design wins,” to develop semiconductors for use in our customers’ products. These selection processes are typically lengthy and can require us to incur significant design and development expenditures. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. Failure to obtain a design win sometimes prevents us from offering an entire generation of a product. This can result in lost revenues and could weaken our position in future competitive selection processes.

 

After winning a product design, we may experience delays in generating revenue from our products as a result of the lengthy development cycle typically required. In addition, a delay or cancellation of a customer’s plans could materially and adversely affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, our customers’ failure to successfully market and sell their products could reduce demand for our products and materially adversely affect our business, financial condition and results of operations.

Competition in our industry could prevent us from growing our revenue and from raising prices to offset increases in costs.

 

The semiconductor industry is highly competitive and includes hundreds of companies, a number of which have achieved substantial market share. We compete in different product categories to various degrees on the basis of price, quality, technical performance, product features, product system compatibility, system-level design capability, customized design, strategic relationships with customers, new product innovation, product availability, delivery timing and reliability, and customer sales and technical support. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. Some of our competitors are well established as independent companies and have substantially greater market share and manufacturing, financial, research and development and marketing resources to pursue development, engineering, manufacturing, marketing and distribution of their products. In addition, many of our competitors have longer independent operating histories, greater presence in key markets, more comprehensive patent protection and greater name recognition. We also compete with smaller and emerging companies that sell their products in specialized markets, and with the internal capabilities of many of our significant customers. We expect to experience continuing competitive pressures in our markets from existing competitors and new entrants. In addition, companies not currently in direct competition with us may introduce competing products in the future. Because our products are often building block semiconductors that in some cases can be integrated into more complex integrated circuits, or ICs, we also face competition from manufacturers of ICs, as well as customers that develop their own IC products. The semiconductor industry has also been undergoing significant restructuring and consolidations that could adversely affect our competitiveness.

 

Gross margins in the semiconductor industry vary by degree of engineering difficulty and performance, level of competition, the existence of product alternatives and geographic region, where local demand for the products in which semiconductors are used, such as personal computers, industrial and telecommunications equipment, consumer electronics and automotive parts, may vary. Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as manufacturers of semiconductors reduced prices in order to combat production overcapacity and high inventory levels. Many of our competitors have substantially greater financial and other resources with which to withstand similar adverse economic or market conditions in the future.

 

Our operating results are subject to substantial quarterly and annual fluctuations.

 

Our revenues and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:

 

 

 

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. In addition, a significant amount of our operating expenses is relatively fixed in nature due to our significant sales, research and development and manufacturing overhead costs. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations.

 

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. Many of our products, such as our optical mouse products, originated with our research and development efforts and have provided us with a significant competitive advantage. Although we are committed to investing in new product development in order to stay competitive in our markets and plan to invest in process development and maintain research and development fabrication capabilities in order to develop manufacturing processes for devices that are invented internally, we do not know whether we will have sufficient resources to maintain the level of investment in research and development required to remain competitive.

 

Failure to adjust our supply chain volume due to changing market conditions or failure to estimate our customers’ demand could adversely affect our results of operations.

 

Our results of operations could be harmed if we are unable to adjust our supply chain volume to address market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate. The sale of our products is dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile and is subject to seasonality related to the holiday selling season, making demand difficult to anticipate. During a market upturn, we may not be able to purchase sufficient supplies or components, or secure sufficient contract manufacturing capacity, to meet increasing product demand, which could harm our reputation, prevent us from taking advantage of opportunities and reduce revenue growth. In addition, some parts are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work. If one of our suppliers ceases to manufacture such a component, we may be forced to re-engineer a product. In addition to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In order to secure components for the production of products, we may continue to enter into non-cancelable purchase commitments with vendors or make advance payments to suppliers, which could reduce our ability to adjust our inventory to declining market demands. Prior commitments of this type have resulted in an excess of parts when demand for our products has decreased. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges.

 

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on contract manufacturing and outsourcing, 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 and reduce margins. We may not have sufficient capacity at any given time to meet our customers’ demands. Conversely, downturns in the semiconductor industry have in the past caused, and may in the future cause, our customers to significantly reduce the amount

of products ordered from us. Because certain of our sales, research and development and manufacturing overhead expenses are relatively fixed, a reduction in customer demand may decrease our gross margins and operating income.

 

Our operating results and financial condition could be harmed if the markets into which we sell our products decline.

 

Visibility into our markets is limited. Any decline in our customers’ markets would likely result in a reduction in demand for our products and make it more difficult to collect on outstanding amounts due us. For example, if the Asian market does not grow as anticipated or if the semiconductor market declines, our results of operations would likely suffer. In such an environment, pricing pressures could intensify and, if we were unable to respond quickly, could significantly reduce our gross margins. To the extent we cannot offset recessionary periods or periods of reduced growth that may occur in these markets through increased market share or otherwise, our net revenue may decline and our business, financial condition and results of operations may suffer. Pricing pressures and competition are especially intense in semiconductor-related industries, which could prevent achievement of our long-term financial goals and could require us to implement additional cost-cutting measures.

 

Furthermore, projected industry growth rates may not be as forecasted, which could result in spending on process and product development well ahead of market requirements, which could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense and loss of our intellectual property rights.

 

The semiconductor industry is characterized by the vigorous pursuit, protection and enforcement of intellectual property rights. From time to time, third parties assert against us their patent, copyright, trademark, trade secret and other intellectual property rights to technologies that are important to our business. Claims that our products or processes infringe or misappropriate these rights (including claims arising through our contractual indemnification of our customers), regardless of their merit or resolution, are frequently costly and divert the efforts and attention of our management and technical personnel. We do not know whether we will prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

 

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.

 

We rely on patents, trade secrets, trademark, copyrights and other intellectual property rights to help protect our products and technologies. Some of our products and technologies are not covered by any patents or pending patent applications, and we do not know whether:

 

 

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 one or more relevant jurisdictions.

 

The loss of one or more of our significant customers may adversely affect our business.

 

Some of our customers are material to our business and results of operation. In the fiscal years ended October 31, 2004 and 2005 and the nine months ended July 31, 2006, Cisco Systems, Inc. accounted for 10%, 13% and 15%, respectively, of our net revenue from continuing operations, Avnet, Inc., a distributor, accounted for 10%, 11% and 15%, respectively, of our net revenue from continuing operations, Arrow Electronics, Inc., a distributor, accounted for 7%, 8% and 10%, respectively, of our net revenue from continuing operations, and our top 10 customers collectively accounted for 68%, 61% and 71%, respectively, of our net revenue from continuing operations. We believe our top customers’ strength has given them the ability to make greater demands on their suppliers, including us. We expect this trend to continue, which we expect will result in our results of operations becoming increasingly sensitive to deterioration in the financial condition of, or other adverse developments related to, one or more of our significant customers. Although we believe that our relationships with our major customers are good, we generally do not have long-term contracts with any of them, which is typical of our industry. As a result, although our customers provide indications of their product needs and purchases on an annual basis, they generally purchase our products on a weekly or daily basis and the relationship, as well as particular orders, can be terminated at any time. The loss of any of our major customers, or any substantial reduction in sales to any of these customers, could have a material adverse effect on our business, financial condition and results of operations.

We generally do not have any long-term supply contracts with our contract manufacturers or materials suppliers and may not be able to obtain the products or raw materials required for our business, which could have a material adverse affect on our business.

 

We either obtain the products we need for our business from third-party contract manufacturers or we obtain the materials we need for our products from suppliers. Substantially all of our purchases from contract manufacturers and suppliers of raw material are on a purchase order basis, and we have not generally entered into long-term contracts with our contract manufacturers or suppliers. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of materials in a timely manner or if the costs of our materials increase significantly or their quality deteriorates.

 

Our manufacturing processes rely on many materials, including silicon and GaAs wafers, copper lead frames, mold compound, ceramic packages and various chemicals and gases. 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 materials are adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry.

 

We purchase a significant portion of our semiconductor materials from a few suppliers. For the nine months ended July 31, 2006, we purchased approximately 50% of the materials for our manufacturing processes from six suppliers. These supply relationships are generally conducted on a purchase order basis. In the event that these purchase orders are terminated, we cannot obtain sufficient quantities of raw materials at reasonable prices, we fail to satisfy our customers’ requirements or we are not able to pass on higher materials costs to our customers, our business, financial condition and results of operations could be adversely impacted.

 

We use third-party contractor manufacturers for most of our manufacturing activities, primarily for wafer fabrication and module assembly and test services. Our agreements with these manufacturers typically require us to forecast product needs, commit to purchase services consistent with these forecasts and, in some cases, require long-term commitments in the early stages of the relationship. Our operations could be adversely affected in the event that these contractual relationships were disrupted or terminated, the cost of such services increased significantly, the quality of the services provided deteriorated, our forecasts proved to be materially incorrect or capacity is consumed by our competitors.

 

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.

 

Our manufacturing operations are primarily fabless. As part of our efforts to further streamline operations and cut costs, we plan to continue to evaluate additional outsourcing opportunities. As a result, our products are manufactured in fewer owned facilities and we are increasingly relying on third-party foundry wafer fabrication and assembly and test capacity, including sole sourcing for many components or products. The ability and willingness of our contract manufacturers to perform is largely outside of our control. If one or more of our contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, in the event that manufacturing capacity is reduced or eliminated at one or more facilities, manufacturing could be disrupted, we could have difficulties fulfilling our customer orders and our net revenue could decline. In addition, if these third parties on whom we are becoming increasingly reliant fail to deliver quality products and components on time and at reasonable prices, we could have difficulties fulfilling our customer orders and our net revenue could decline. In such events, our business, financial condition and results of operations would be adversely affected.

 

To the extent we rely on third-party manufacturing relationships, we face the following risks:

 

 

 

Much of our outsourcing takes place in developing countries, and as a result may additionally be subject to geopolitical uncertainty. See “— Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.”

 

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 expense. Although we outsource most of our manufacturing activities, we do retain some semiconductor fabrication and assembly and test facilities. If we are unable to utilize our owned fabrication and assembly and test 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. In the past, we and our Predecessor have experienced periods where our gross margins declined due to, among other things, reduced factory utilization resulting from reduced customer demand, reduced selling prices and a change in product mix towards lower margin devices. Increased competition and the existence of product alternatives, more complex engineering requirements, lower demand and other factors may lead to further price erosion, lower revenues and lower margins for us in the future.

 

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

 

We sell our products throughout the world. In addition, a significant majority of our employees are located outside of the United States. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition and results of operations. These factors include:

 

 

International conflicts are creating many economic and political uncertainties that are impacting the global economy. A continued escalation of international conflicts could severely impact our operations and demand for our products.

 

A majority of our products are manufactured in Asia, primarily in Singapore, Malaysia and Taiwan. Any conflict or uncertainty in these countries, including due to public health or safety concerns could have a material adverse effect on our business, financial condition and results of operations. In addition, if the government of any country in which our products are manufactured or sold sets technical standards for products manufactured in or imported into their country that are not widely shared, it may lead certain of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border manufacturing relationships which, in each case, could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, our subsidiaries may require future equity-related financing, and any capital contributions to certain of our subsidiaries may require the approval of the relevant authorities in the jurisdiction in which the subsidiary is incorporated. The approvals are required from the investment commissions or similar agency of the particular jurisdiction and relate to any initial or additional equity investment by foreign entities in local corporations.

 

We are subject to currency exchange risks that could adversely affect our operations.

 

We are subject to currency exchange risks that could adversely affect our operations and our ability to reinvest earnings from operations. We prepare our financial statements in U.S. dollars in accordance with U.S. GAAP, although a portion of our revenue and operating expenses is in foreign currencies. As a result, we are subject to currency risks, including:

 

 

Changes in exchange rates will result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our equity. Although we may seek to minimize our currency exposure by engaging in hedging transactions where we deem it appropriate, we do not know whether our efforts will be successful.

 

We may pursue acquisitions, dispositions, investments and joint ventures, which could affect our results of operations.

 

We have disposed of significant portions of the business originally acquired from Agilent through the sale of our Storage Business to PMC-Sierra, Inc. in February 2006 and the sale of our Printer ASICs Business to Marvell Technology Group Ltd. in May 2006. We may seek additional opportunities to maximize efficiency and value through various transactions, including purchases or sales of assets, businesses, investments or contractual arrangements. These transactions may be intended to result in the reduction of our indebtedness, the realization of cost savings, the generation of cash or income or the reduction of risk. Acquisition transactions may be financed by additional borrowings. These transactions may also affect our consolidated results of operations.

 

Any potential transactions involve risks, and we do not know whether:

 

 

Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expenses. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.

 

Our business is subject to various significant international and U.S. laws and other legal requirements, including packaging, product content, labor and import/export regulations. These regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to conduct our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products.

 

Our products and operations are also subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies, such as the U.S. Federal Communications Commission. If we fail to adequately address any of these rules or regulations, our business could be harmed.

 

We must conform the manufacture and distribution of our semiconductors to various laws and adapt to regulatory requirements in all countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products in commerce until the products or component substances are brought into compliance.

 

We are subject to environmental, health and safety laws, which could increase our costs, restrict our operations and require expenditures that could have a material adverse affect on our results of operations and financial condition.

 

We are subject to a variety of international and U.S. laws and other legal requirements relating to the use, disposal, clean-up of and human exposure to, hazardous materials. Any failure by us to comply with environmental, health and safety requirements could result in the limitation or suspension of production or subject us to future liabilities in excess of our reserves. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes. In the event of the discovery of new contamination, additional requirements with respect to existing contamination, or the imposition of other cleanup obligations for which we are responsible, we may be required to take remedial or other measures which could have a material adverse effect on our business, financial condition and results of operations.

 

We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that apply to specified electronics products sold in the European Union as of July 1, 2006 under the Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive. Other countries, such as the United States, China and Japan, have enacted or may enact laws or regulations similar to the EU legislation. Other environmental regulations may require us to reengineer our products to utilize components which are more environmentally compatible. Such reengineering and component substitution may result in excess inventory or other additional costs and could have a material adverse effect on our results of operations.

 

In addition to the costs of complying with environmental, health and safety requirements, we have incurred and may in the future incur costs defending against environmental litigation brought by government agencies and private parties. We may be defendants in lawsuits brought by parties in the future alleging environmental damage, personal injury or property damage. A significant judgment against us could harm our business, financial condition and results of operations.

In the last few years, there has been increased media scrutiny and associated reports focusing on a potential link between working in semiconductor manufacturing clean room environments and certain illnesses, primarily different types of cancers. Regulatory agencies and industry associations have begun to study the issue to see if any actual correlation exists. Because we utilize clean rooms, we may become subject to liability claims. In addition, these reports may also affect our ability to recruit and retain employees.

 

We cannot predict:

 

 

If we suffer loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously harmed.

 

Our factories, facilities and distribution system, and those of our contract manufacturers, are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters. A number of our facilities and those of our contract manufacturers are located in areas with above average seismic activity. Any catastrophic loss to any of these facilities would likely disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility.

 

Risks Relating to the Investments in Singapore Companies

 

Judgments of U.S. courts against us may not be enforceable outside of the United States.

 

We are incorporated under the laws of the Republic of Singapore, and a majority of our consolidated assets are located outside the United States. Although we are incorporated outside the United States, we have agreed to accept service of process in the United States through our agent designated for that purpose. Nevertheless, it may be difficult for you to enforce civil liabilities against us in courts outside the United States. Furthermore, since a substantial portion of the assets owned by us and the guarantors are located outside the United States, any judgment obtained in the United States against us may not be collectible within the United States.

 

There is no treaty between the United States and Singapore providing for the reciprocal recognition and enforcement of judgments. As a result, U.S. judgments are not automatically enforceable in Singapore. We have been advised that judgments of U.S. courts based on the civil liability provisions of the federal securities laws of the United States may not be enforceable in Singapore courts. We have also been advised that there is doubt as to whether Singapore courts will enter judgments in original actions brought in Singapore courts based solely upon the civil liabilities provisions of the U.S. securities laws.

 

Risks Relating to the Exchange Notes

 

Your right to receive payments on the exchange notes is junior to that of lenders who have a security interest in our and our subsidiaries’ assets.

 

Our obligations under the exchange notes and the related guarantees will be unsecured, but our obligations under our senior credit facilities are secured by an interest in substantially all of our and our subsidiaries’ assets. If we are declared bankrupt or insolvent, or if we default under our senior credit facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we are unable to repay such indebtedness, the lenders could foreclose on the pledged assets to

the exclusion of holders of the exchange notes and the guarantees, even if an event of default exists under the indentures at such time. Furthermore, if the lenders foreclose on the equity interests in a subsidiary, that subsidiary will be released from its obligation under the exchange notes automatically upon such sale, provided that such sale is made in compliance with the provisions of the indentures.

 

In any such event, because the exchange notes will not be secured, it is possible that there would be no assets remaining from which claims of the holders of exchange notes could be satisfied or, if any assets remained, that they would be insufficient to satisfy such claims fully. See “Description of Other Indebtedness — Senior Credit Facilities.”

 

Your right to receive payments on the exchange senior subordinated notes will be junior to the rights of the lenders under our revolving credit facility and all of our other senior debt, including the senior notes, and any of our future senior indebtedness.

 

The exchange senior subordinated notes will be general unsecured obligations that will be junior in right of payment to all of our existing and future senior indebtedness. As of July 31, 2006, we had approximately $750 million of senior indebtedness and $239 million available under our revolving credit facility (net of $11 million of outstanding letters of credit).

 

We may not pay principal, premium, if any, interest or other amounts on account of the exchange senior subordinated notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under our revolving credit facility, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, we may not be permitted to pay any amount on account of the exchange senior subordinated notes for a designated period of time.

 

Because of the subordination provisions in the exchange senior subordinated notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the exchange senior subordinated notes until we have made all payments in cash on our senior indebtedness. We do not know whether sufficient assets will remain after all these payments have been made to make any payments on the exchange senior subordinated notes, including payments of principal or interest when due.

 

Your right to receive payments on the exchange notes is also junior to the rights of those unsecured creditors whose debts are mandatorily preferred by law.

 

Under Singapore insolvency laws and under the laws of the United States, in the event of the bankruptcy, liquidation or dissolution of our company, certain unsecured debts are mandatorily preferred by law to other unsecured debts. These preferential unsecured debts include:

 

 

These preferential unsecured debts will rank in priority to all of our other unsecured debts, including payments under the exchange notes. As a result, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the exchange notes until we have made all payments on the preferential unsecured debts. We do not know whether sufficient assets will remain after these payments have been made to make any payments on the exchange notes, including payments of principal or interest when due.

 

The obligations of our subsidiaries under the exchange notes could be deemed a fraudulent conveyance under certain circumstances and a court may subordinate or void them.

 

Under various fraudulent conveyance or fraudulent transfer laws (including under the laws of the United States), a court could subordinate or void the obligations of our subsidiaries under the exchange notes.

Generally, to the extent that a court were to find that at the time one of the subsidiary co-issuers issued the exchange notes or one of our subsidiaries entered into a subsidiary guarantee either:

 

 

 

the court could void or subordinate the subsidiary co-issuer’s obligations under the exchange notes or the subsidiary guarantee in favor of the issuer’s or the subsidiary guarantor’s other obligations. In addition, any payment by a subsidiary co-issuer or any subsidiary guarantor could be voided and required to be returned to the subsidiary co-issuer or such subsidiary guarantor, or to a fund for the benefit of its creditors.

 

Among other things, a legal challenge of a subsidiary co-issuer’s obligations under the exchange notes or a subsidiary guarantee on fraudulent conveyance grounds could focus on the benefits, if any, realized by the subsidiary co-issuers or subsidiary guarantors as a result of the issuance of the exchange notes. To the extent a subsidiary co-issuer’s obligations under the exchange notes or a subsidiary guarantee is voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the exchange notes would not have any claim against that subsidiary co-issuer or subsidiary guarantor and would be creditors solely of the subsidiary co-issuers and subsidiary guarantors, if any, whose obligations under the exchange notes or subsidiary guarantees were not held unenforceable.

 

We may not be able to raise the money necessary to finance the change of control offer required by the indentures.

 

Upon the occurrence of certain specific kinds of change of control events, we are required to offer to repurchase all outstanding exchange notes at 101% of the principal amount plus accrued and unpaid interest and additional interest, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of exchange notes or that restrictions under our senior credit facilities or other agreements will not allow such repurchases. If any change of control occurs, we do not know whether we will have sufficient funds to satisfy all of our debt obligations. See “Description of Exchange Senior Notes — Repurchase at the Option of Holders” and “Description of Exchange Senior Subordinated Notes — Repurchase at the Option of Holders.”

 

The interests of our controlling shareholder may differ from the interests of the holders of the exchange notes.

 

Our controlling shareholder, Bali Investments S.ár.l., beneficially owns approximately 81% of the outstanding voting shares of Avago Technologies Limited, the ultimate parent company of the obligors under the exchange notes offered hereby. As a result of this ownership and the terms of a shareholder agreement, this shareholder is entitled to elect at least a majority of the directors of Avago Technologies Limited, to appoint new management and to approve actions requiring the approval of the holders of its outstanding voting

shares as a single class, including adopting most amendments to our articles of association and approving mergers or sales of all or substantially all of our assets. Through their control of Avago Technologies Limited, Bali Investments controls us, the subsidiary co-issuers and all of our subsidiary guarantors.

 

The interests of our controlling shareholder may differ from your interests in material respects. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our controlling shareholder and its affiliates, as equity holders, might conflict with your interests as an exchange note holder. Our controlling shareholder and its affiliates may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance the value of their equity investments, even though such transactions might involve risks to you as an exchange note holder. Additionally, the indentures governing the exchange notes permit us to pay advisory fees, dividends or make other restricted payments under certain circumstances, and our controlling shareholder and its affiliates may have an interest in our doing so.

 

Affiliates of our controlling shareholder are in the business of making investments in companies, and may from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. You should consider that the interests of these holders may differ from yours in material respects. See “Security Ownership of Certain Beneficial Owners,” “Certain Relationships and Related Party Transactions,” “Description of Other Indebtedness,” “Description of Exchange Senior Notes” and “Description of Exchange Senior Subordinated Notes.”

 

Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the exchange notes.

 

We are offering the exchange notes to the holders of the outstanding notes. The outstanding notes were offered and sold in December 2005 to institutional investors and are eligible for trading in the PORTAL market.

 

We do not intend to apply for a listing of the exchange notes on any securities exchange or on any automated dealer quotation system in the United States or elsewhere. There is currently no established market for the exchange notes and we cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market with respect to the exchange notes. However, these initial purchasers are not obligated to do so, and any market making with respect to the exchange notes may be discontinued at any time without notice. In addition, such market making activity may be limited during the pendency of the exchange offers or the effectiveness of a shelf registration statement in lieu thereof. Therefore, we do not know whether an active market for the exchange notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market, if any, for the exchange notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your exchange notes.

 

Avago Technologies Finance Pte. Ltd. has no operations of its own and may not have sufficient cash to make payments on the exchange notes.

 

We have no operations of our own and derive substantially all of our revenue and cash flows from our subsidiaries. Our principal assets are the equity interests we hold in our operating subsidiaries. As a result, we are dependent upon dividends and other payments from our subsidiaries to generate the funds necessary to meet our outstanding debt service and other obligations. Our subsidiaries may not generate sufficient cash from operations to enable us to make principal and interest payments on our indebtedness, including the notes. Payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings. Our subsidiaries are, or in the future may be, subject to agreements that may restrict payments from the applicable subsidiary to us.

While the indentures and our senior credit facilities provide for limitations on these restrictions, we cannot assure you that agreements governing the current and future indebtedness of our subsidiaries will permit the applicable subsidiary to provide us with sufficient cash to fund payments on the exchange notes when due.

 

We are not currently required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, which may lead to our investors losing confidence in our reported financial information.

 

We are not currently subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of a reporting company to annually review, assess and disclose the effectiveness of the company’s internal control over financial reporting and a report by independent auditors addressing such assessments. We currently expect that we will not be subject to Section 404 until our fiscal year ending October 31, 2008. We do not know whether our assessment will identify material weaknesses in our internal controls.

 

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “estimate,” or “anticipate” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. Some of the factors that we believe could affect our results include:

 

 

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

The Acquisition

 

On December 1, 2005, our parent company (Avago Technologies Limited), a limited company organized under the laws of the Republic of Singapore, completed the Acquisition of the assets of Agilent’s Semiconductor Products Group business segment for approximately $2.7 billion. The Equity Investors invested approximately $1,300 million, consisting of $1,050 million of ordinary shares and $250 million of redeemable convertible preference shares, in our business as part of the Acquisition. These funds were invested by the Equity Investors directly or indirectly in Parent, which contributed the proceeds to its wholly owned subsidiary, Avago Technologies Holding Pte. Ltd. (Holdings), a private limited company organized under the laws of the Republic of Singapore, which in turn contributed the proceeds to its wholly owned subsidiary, Avago Technologies Finance Pte. Ltd., a Singapore private limited company and one of the issuers of the notes.

 

The following chart presents our present organizational structure. For further information, please see “Capitalization,” and “Security Ownership of Certain Beneficial Owners.”

 

 

 

Since the closing of the Acquisition, we have assumed responsibility for providing certain key services previously provided by Agilent, including audit, human resources, legal, payroll accounting, procurement, tax accounting and treasury. Pursuant to the Master Separation Agreement, Agilent provided us with other key services on an interim basis, including, among others, accounting and IT services (including enterprise resource planning systems). Agilent’s obligations under the Master Separation Agreement terminated on August 31, 2006. We currently provide these services internally and, in some cases, through outsourcing arrangements with third parties.

 

USE OF PROCEEDS

 

We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offers. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes. The outstanding notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.

 

The following table summarizes our capitalization as of July 31, 2006. This table should be read in conjunction with the information included under the headings “Selected Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

 

Set forth below is selected financial information as of and for the periods presented. You should read this data together with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus. The selected statements of operations data for the years ended October 31, 2004 and 2005, the nine months ended July 31, 2005, the one month ended November 30, 2005 and the nine months ended July 31, 2006 and the selected balance sheet data as of October 31, 2005 and July 31, 2006 have been derived from audited historical financial statements and related notes included elsewhere in this prospectus. The selected statements of operations data for the year ended October 31, 2003 and the selected balance sheet data as of October 31, 2003 and 2004 and July 31, 2005 have been derived from audited historical financial statements and related notes not included in this prospectus. We represent that selected financial data for the year ended October 31, 2002 cannot be prepared without incurring unreasonable effort or expense. The historical financial data may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been if we had operated as a stand-alone entity during all of the periods presented.

 

 

 

 

 

 Camera Module Business results:

 

 

 

The following discussion and analysis of our financial condition and results of operations includes periods prior to the Acquisition and related financings (collectively, the “Transactions”). Accordingly, the discussion and analysis of the Predecessor period does not reflect the significant impact of the Transactions. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” or in other parts of this prospectus.

 

Overview

 

We are a leading global supplier of a broad range of mostly analog semiconductors that enable digital semiconductors to effectively interpret and interface with users in the real world. Our operations are primarily fabless, which means that we rely on independent foundries and third-party contractors to perform most manufacturing, assembly and test functions. This strategy allows us to focus on designing, developing and marketing our products and significantly reduces the amount of capital we need to invest in manufacturing products. We serve four primary target markets: wireless communications, wired infrastructure, industrial/automotive electronics and computing peripherals.

 

We are the Successor to the Semiconductor Products Group (“SPG”) business segment of Agilent. We purchased the assets of SPG on December 1, 2005 for approximately $2.7 billion. The Acquisition was accounted for by the purchase method of accounting for business combinations and, accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. Agilent operated with a fiscal year ending on each October 31, and we have retained that annual fiscal period. The accompanying consolidated financial statements are presented for two periods: Predecessor and Successor, which relate to the period preceding the Acquisition and the period succeeding the Acquisition, respectively. We did not have any significant operating activity prior to December 1, 2005 and accordingly, all references to the nine months ended July 31, 2006 represent only the eight months of our operations since completion of the Acquisition. All of the financial statements included in this prospectus are presented in U.S. GAAP and expressed in U.S. dollars unless otherwise noted.

 

Predecessor’s financial statements were prepared using Agilent’s historical bases in the assets and liabilities. As such, the Predecessor financial statements include allocations of certain Agilent corporate expenses, including centralized research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other Agilent corporate and infrastructure costs. The expense allocations were determined on bases that Agilent considered to be a reasonable reflection of the utilization of services provided or the benefit received by Predecessor. These internal allocations by Agilent ended on November 30, 2005. From and after December 1, 2005, we acquired select services on a transitional basis from Agilent under a Master Separation Agreement (“MSA”). Over the eight-month period ended July 31, 2006, we progressively reduced the services provided by Agilent under the MSA and transitioned to substitute services either provided internally or through outsourcing vendors retained by us. Agilent’s obligations under the MSA terminated on August 31, 2006. Therefore, the financial information presented in Predecessor’s financial statements is not necessarily indicative of what our consolidated financial position, results of operations or cash flows would have been had we been a separate, stand-alone entity. Further, our interim results to date in fiscal 2006 reflect a changing combination of Agilent-sourced and internally-sourced services and do not necessarily represent our cost structure that will apply in future periods when all such services are sourced solely by us.

 

We financed the Acquisition through the issuance to Holdings of approximately $1,300 million of equity, consisting of $1,050 million of ordinary shares, $250 million of redeemable convertible preference shares, borrowings under our senior credit facilities in the principal amount of $475 million and the issuance of the notes in the principal amount of $1,000 million. In January 2006, as permitted by our senior credit agreement and the indentures governing the notes, we drew the full $250 million under the delayed-draw portion of our

term loan facility to retire all of our redeemable convertible preference shares. We have subsequently permanently repaid the term loan facility principally through the net proceeds from the dispositions of our Storage Business and Printer ASICs Business.

 

Dispositions

 

On February 17, 2006, we entered into a definitive agreement to sell our Printer ASICs Business to Marvell International Technology Ltd., or Marvell. Our agreement with Marvell also provides for up to $35 million in additional performance-based payments by Marvell to us upon the achievement of certain revenue targets by the acquired business. This transaction closed on May 1, 2006, resulting in $245 million of net cash proceeds. For financial reporting purposes, there was no gain or loss recorded on the sale. In May 2006, we used the net proceeds to permanently repay a portion of the term loan facility.

 

On October 28, 2005, we entered into a definitive agreement to sell our Storage Business to PMC-Sierra, Inc., subject to certain conditions, including our completion of the Acquisition. This transaction closed on February 28, 2006, resulting in $420 million of net cash proceeds. For financial reporting purposes, there was no gain or loss recorded on the sale. In March 2006, we used the net proceeds from this sale to permanently repay a portion of the term loan facility.

 

On February 3, 2005, Predecessor sold its Camera Module Business to Flextronics International Ltd., or Flextronics. The assets sold did not include the image sensor products, which were retained and which we now provide to Flextronics as a supplier. Flextronics paid $13 million upon closing and agreed to pay an additional $12 million (in twelve equal quarterly installments) payable each fiscal quarter following the February 2005 closing date. The agreement also provides for up to $13 million in additional performance-based payments by Flextronics upon the achievement of certain revenue targets by the acquired business.

 

The Printer ASICs Business and the Storage Business are treated as discontinued operations in our consolidated financial statements. However, the divestiture of the Camera Module Business by Predecessor did not meet the criteria for discontinued operations treatment under U.S. GAAP and, as such, historical results of the Camera Module Business are included in Predecessor’s financial results from continuing operations until February 3, 2005.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management. Those policies include revenue recognition, valuation of long-lived assets, intangible assets and goodwill, inventory valuation and accounting for income taxes.

 

Revenue recognition.   We recognize revenue, net of sales returns and allowances, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments or when any such adjustments are accounted for. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance of an order. Revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor allowances. We recognize revenue from sales of our products to distributors upon delivery of product to the distributors. An allowance for distributor credits covering price adjustments and scrap allowances is made based on our estimate of historical experience rates as well as considering economic

conditions and contractual terms. Actual distributor claims activity have been materially consistent with the provisions we have made based on our historical estimates.

 

Valuation of long-lived assets, intangible assets and goodwill.   We assess the impairment of long-lived assets, intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. We are also required to perform annual assessments of goodwill impairment. Factors we consider important which could trigger an impairment review include (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business, and (iii) significant negative industry or economic trends. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss will generally be measured as the difference between the net book values of the asset and its estimated fair value. We intend to perform an annual impairment review during the fourth fiscal quarter of each year, or more frequently if we believe indicators of impairment exist.

 

Inventory valuation.   We value our inventory at the lower of the actual cost of the inventory or the current estimated market value of the inventory, cost being determined under the first-in, first-out method. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements. Demand for our products can fluctuate significantly from period to period. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, which may cause us to understate or overstate both the provision required for excess and obsolete inventory and cost of products sold. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our results of operations.

 

Accounting for income taxes.   We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. If we determine, in the future, a valuation allowance is required, such adjustment to the deferred tax assets would increase tax expense in the period in which such determination is made. Conversely, if we determine, in the future a valuation allowance is excess to our requirement, such adjustment to the deferred tax assets would decrease tax expense in the period in which such determination is made. In evaluating the exposure associated with various tax filing positions, we accrue income tax charges for probable exposures.

 

Net Revenue

 

Substantially all of our net revenue is derived from sales of semiconductor components incorporated into electronic products. We serve four primary target markets: wireless communications, wired infrastructure, industrial/automotive electronics and computing peripherals. We sell our products primarily through our direct sales force. We also utilize distributors for a portion of our business.

Erosion of average selling prices of established products is typical of the industry, with new products typically yielding higher gross margins. Consistent with trends in the semiconductor industry, we anticipate that average selling prices will continue to drop in the future. However, as part of our normal course of business, we plan to offset price reductions with efforts to reduce manufacturing costs of existing products and with new product introductions.

 

Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. In the fiscal years ended October 31, 2004 and 2005 and the nine months ended July 31, 2006, Cisco Systems, Inc. accounted for 10%, 13% and 15%, respectively, of our net revenue from continuing operations, Avnet, Inc., a distributor, accounted for 10%, 11% and 15%, respectively, of our net revenue from continuing operations, Arrow Electronics, Inc., a distributor, accounted for 7%, 8% and 10%, respectively, of our net revenue from continuing operations, and our top 10 customers collectively accounted for 68%, 61% and 71%, respectively, of our net revenue from continuing operations. We expect to continue to experience significant customer concentration in future periods.

 

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

 

 

For these and other reasons, our net revenue for the nine months ended July 31, 2006 and prior periods may not necessarily be indicative of future net revenue and results of operations.

 

Costs and Expenses

 

Cost of products sold.   Our cost of products sold consists primarily of the cost of semiconductor wafers and other materials, and the cost of assembly and test. Cost of products sold also includes personnel costs and overhead related to our manufacturing and manufacturing engineering operations, related occupancy, computer services and equipment costs, manufacturing quality, order fulfillment and inventory adjustments, including write-downs for inventory obsolescence and other manufacturing expenses.

 

Research and development.   Research and development expense consists primarily of personnel costs for our engineers engaged in the design, development and technical support of our products and technologies. These expenses also include project material costs, third-party fees paid to consultants, prototype development expenses, allocated facilities costs and other corporate expenses and computer services costs related to supporting computer tools used in the engineering and design process.

 

Selling , general and administrative.   Our sales and marketing expense consists primarily of compensation and associated costs for sales and marketing personnel, sales commissions paid to our independent sales representatives, costs of advertising, trade shows, corporate marketing, promotion, travel related to our sales and marketing operations, related occupancy and equipment costs and other marketing costs. Our general and administrative expense consists primarily of compensation and associated costs for executive management, finance, human resources and other administrative personnel, outside professional fees, allocated facilities costs and other corporate expenses.

 

Amortization of intangible assets.   In connection with the Acquisition, we recorded intangible assets of $1,233 million, net of assets of the Storage Business held for sale. These are being amortized over their

estimated useful lives of six months to 20 years. In connection with the Acquisition we also recorded goodwill of $193 million, net of assets of the Storage Business held for sale, which is not being amortized.

 

Interest expense.   In connection with the Acquisition, we incurred substantial indebtedness. Although this debt has been substantially reduced over the past eight months, principally through net proceeds derived from the divestiture of our Storage Business and Printer ASICs Business, the interest expense relating to this debt has adversely affected, and will continue to adversely affect, our earnings.

 

Other income, net.   Other income, net includes interest income, currency gain (loss) on balance sheet remeasurement and other miscellaneous items.

 

Provision for income taxes.  W e have received material tax concessions in Singapore and in Malaysia. Such tax concessions require that we meet certain operating conditions to retain these tax concessions. As a result of the tax concessions, we expect our operations to be subject to relatively lower income taxes than would otherwise be the case under ordinary tax rates.

 

Results from Continuing Operations

 

Combined Nine Months Ended July 31, 2006 Compared to Predecessor’s Nine Months Ended July 31, 2005

 

The table below combines the results of operations for the Company for the nine months ended July 31, 2006 (which includes the operations of our business only for the eight months from and after the closing of the Acquisition on December 1, 2005) with those of Predecessor for the month of November 2005. From our inception in September 2005 through November 30, 2005, the Company had no revenues, cost of goods sold, research and development expense or significant operating activities. During this period, the sole activities of the Company were those undertaken in connection with the preparation for the consummation of the Acquisition on, and in anticipation of the commencement of operating activities following, December 1, 2005. For these reasons, management believes that combining the one month Predecessor results with the eight months post-acquisition results is the most meaningful presentation. The combined operating results have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved absent the Acquisition and may not be predictive of future results of operations. In addition, despite the combined interim presentation not being in accordance with U.S. GAAP because of, among other things, the change in the historical carrying value or basis of assets and liabilities that resulted from the Acquisition and our transition to a stand-alone entity, the Company believes that for comparison purposes, such a presentation is most meaningful to an understanding of the results of the business. Additionally, the

historic periods do not reflect the impact the Acquisition had on us, most notably significantly increased leverage and liquidity requirements, and may not be predictive of future results of operations.