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As filed with the Securities and Exchange Commission on January 21, 2004

Registration No. 333-          



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


JAZZ SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  3674
(Primary Standard Industrial
Classification Code Number)
  75-3005127
(I.R.S. Employer
Identification Number)

4321 Jamboree Road
Newport Beach, California 92660
(Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices)


Shu Li
President and Chief Executive Officer
Jazz Semiconductor, Inc.
4321 Jamboree Road
Newport Beach, California 92660
(949) 435-8000
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Christopher L. Kaufman, Esq.
Jonn R. Beeson, Esq.
Latham & Watkins LLP
650 Town Center Drive, Suite 2000
Costa Mesa, California 92626-1925
(714) 540-1235
  John D. Wilson, Esq.
Shearman & Sterling LLP
555 California Street
San Francisco, California 94109
(415) 616-1100

        Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.    o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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(c) 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                   

        If delivery of this prospectus is expected to be made pursuant to Rule 434, please check the following box. o


CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee


Common Stock, $0.001 par value   $150,000,000   $12,135

(1)
Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of computing the amount of the registration fee.


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant 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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JANUARY 21, 2004

             Shares

GRAPHIC

Common Stock


        We are selling                   shares of common stock and the selling stockholders are selling                   shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

        Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $        and $        per share. We intend to apply to list our common stock on the NASDAQ National Market under the symbol "JAZZ".

        The underwriters have an option to purchase a maximum of                  additional shares from the selling stockholders to cover over-allotments of shares.

        Investing in our common stock involves risks. See "Risk Factors" on page 6.

 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds to
Jazz Semiconductor

  Proceeds to
the Selling
Stockholders

Per Share   $                     $                     $                     $                  
Total   $                     $                     $                     $                  

        Delivery of the shares of common stock will be made on or about                        , 2004.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

  Credit Suisse First Boston Lehman Brothers  

  SG Cowen  

 

Wachovia Securities

 

 

Thomas Weisel Partners LLC

 

 

Needham & Company, Inc.

 

The date of this prospectus is                  , 2004.



TABLE OF CONTENTS

 
  PAGE
PROSPECTUS SUMMARY   1
THE OFFERING   3
SUMMARY CONSOLIDATED FINANCIAL DATA   4
RISK FACTORS   6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS   22
USE OF PROCEEDS   23
DIVIDEND POLICY   23
CAPITALIZATION   24
DILUTION   25
SELECTED CONSOLIDATED FINANCIAL DATA   27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   29
BUSINESS   51
MANAGEMENT   71
RELATIONSHIPS WITH RELATED PARTIES AND OTHERS   87
PRINCIPAL AND SELLING STOCKHOLDERS   98
DESCRIPTION OF CAPITAL STOCK   101
SHARES ELIGIBLE FOR FUTURE SALE   105
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS   107
UNDERWRITING   110
NOTICE TO CANADIAN RESIDENTS   114
LEGAL MATTERS   115
EXPERTS   115
WHERE YOU CAN FIND MORE INFORMATION   115
GLOSSARY OF TERMS   116
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

        You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate as of the date of this document.

Dealer Prospectus Delivery Obligation

        Until            , 2004 (25 days after the date of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.



PROSPECTUS SUMMARY

        References in this prospectus to "Jazz," "we," "our" and "us" refer to Jazz Semiconductor, Inc. and its consolidated subsidiaries. This summary highlights key aspects of the information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock, which we discuss under "Risk Factors," and our consolidated financial statements and related notes.

Our Business

        We are an independent wafer foundry focused primarily on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. These semiconductor devices are used in products such as cellular phones, wireless local area network devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives. Our focus differs from traditional independent foundries, which primarily provide standard complementary metal oxide semiconductor, or CMOS, process technologies for the manufacture of digital semiconductors. While we provide standard CMOS process technologies, our primary focus on specialty process technologies for the manufacture of analog and mixed-signal semiconductors distinguishes us from these traditional independent foundries. Our customers include Conexant Systems, Inc., Skyworks Solutions, Inc., RF Micro Devices, Inc., Texas Instruments, Inc., ESS Technology, Inc. and UTStarcom Inc. For the year ended December 31, 2003, we had revenues of $185.2 million.

        In the past, most semiconductor companies were vertically integrated and designed, fabricated, packaged, tested, and marketed their own semiconductors. However, as the cost and skills required for designing and manufacturing complex semiconductors have increased, the semiconductor industry has increasingly become disaggregated. This disaggregation has fueled the growth of foundries providing standard digital CMOS process technologies to manufacture semiconductors for both fabless semiconductor companies and for vertically integrated device manufacturers. According to Gartner Dataquest, CMOS foundry industry revenue was $3.2 billion in 1993 and $10.4 billion in 2002, and is expected to grow to $23.2 billion by 2006, representing a compound annual growth rate of 22% from 2002.

        We believe that many of the factors that have driven growth in the outsourcing of standard digital CMOS manufacturing will also fuel growth in the outsourcing of manufacturing using other process technologies. Other process technologies, which we refer to as specialty process technologies, include analog CMOS, radio frequency CMOS, advanced radio frequency CMOS, bipolar CMOS and silicon germanium bipolar CMOS processes. Specialty processes are used to produce analog-digital, or mixed-signal, semiconductors that combine analog and digital functions on a single integrated circuit, or IC. Integrating analog and digital components on a single, mixed-signal IC enables smaller, more power-efficient, feature-rich and cost-effective semiconductor devices. International Data Corporation estimates that the global market for analog and mixed-signal semiconductors will grow from $26.4 billion in 2003 to $36.6 billion in 2006.

        To date, the primary focus of independent foundries has not been on the specialty process technology opportunity. We have an over 35-year heritage of developing processes for the manufacture of analog and mixed-signal semiconductors and we benefit from the investment of approximately $1 billion in manufacturing assets since 1995. We are a leader in specialty process technologies, particularly in silicon germanium bipolar CMOS, or SiGe BiCMOS. SiGe BiCMOS is well suited for applications in attractive end markets such as wireless and wireline communications, consumer electronics, storage and computing. According to Semico Research, the market for semiconductors manufactured using SiGe BiCMOS processes, or SiGe BiCMOS market, is expected to grow from

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$0.7 billion in 2003 to $2.7 billion in 2006, which represents a compound annual growth rate of approximately 57%.

        We currently provide cost-effective manufacturing capacity to our customers from our wafer fabrication facility, or fab, located in Newport Beach, California. In addition, we have manufacturing partnerships with Advanced Semiconductor Manufacturing Corporation and Hua Hong NEC Electronics Co., Ltd., two of China's leading foundries, which provide us with guaranteed capacity at specified pricing. We believe that these manufacturing partnerships will allow us to increase our production capacity and provide multiple fab sourcing for our customers without incurring significant capital expenditures.

        Our objective is to be the world's leading independent wafer foundry focused on delivering specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. Key elements of our strategy are to:

    further strengthen our leadership position in specialty process technologies;

    target large and growing communications, consumer electronics, storage and computing markets;

    increase the percentage of our business that is derived from higher margin specialty process technologies;

    diversify our customer base;

    maintain capital efficiency by leveraging our flexible capacity and manufacturing model; and

    capitalize on our presence in China to address the domestic Chinese semiconductor market.

Our Formation

        We were incorporated under the laws of the State of Delaware on February 15, 2002 under the name Jazz Semiconductor Systems, Inc. We changed our name to Specialtysemi, Inc. in February 2002 and to Jazz Semiconductor, Inc. in May 2002. Prior to March 12, 2002, our business was the Newport Beach, California semiconductor fabrication operations of Conexant Systems, Inc. Our business was formed upon the contribution of those fabrication operations by Conexant to its wholly-owned subsidiary, Newport Fab, LLC and the contribution of Newport Fab, LLC by Conexant to us, together with a cash investment in us by affiliates of The Carlyle Group. Conexant and affiliates of The Carlyle Group continue to be our largest stockholders. Substantially all of our business operations are owned by our wholly-owned subsidiary, Newport Fab, LLC. We describe our business in this prospectus as if it was our business even for periods prior to our formation.

Corporate Information

        Our principal executive offices are located at 4321 Jamboree Road, Newport Beach, California 92660, and our telephone number is (949) 435-8000. Our web site is located at www.jazzsemi.com. Information contained in our web site is not incorporated by reference into and does not form any part of this prospectus.

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THE OFFERING

Common stock being offered:    
  by us                shares
  by the selling stockholders                shares

Common stock to be outstanding after the offering

 

             shares(1)

Use of proceeds

 

We intend to use the net proceeds from this offering for working capital and general corporate purposes, including expansion of our sales and marketing activities, research and development and potential acquisitions or other strategic investments. See "Use of Proceeds." We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Proposed NASDAQ National Market symbol

 

"JAZZ"

Risk factors

 

See "Risk Factors" beginning on page 6 for a discussion of factors that you should consider carefully before deciding to purchase our common stock.

(1)
The number of shares of common stock that will be outstanding after this offering is based on the number of shares outstanding on January 15, 2004 and excludes:

11,522,380 shares of common stock issuable upon the exercise of options outstanding under our 2002 equity incentive plan with a weighted average exercise price of $1.27 per share as of such date; and

up to 1,885,086 additional shares of common stock reserved for future grant or issuance under our 2002 equity incentive plan as of such date.

        Unless otherwise indicated, all information in this prospectus assumes:

    an initial public offering price of $     per share, the midpoint of the estimated offering price range set forth on the cover page to this prospectus;

    the conversion of all outstanding shares of our series A preferred stock and our series B preferred stock into our class B common stock, which will automatically occur immediately prior to the completion of this offering;

    the conversion of all outstanding shares of our class A common stock into class B common stock, which will automatically occur immediately prior to the completion of this offering;

    the effectiveness of our amended and restated certificate of incorporation upon the completion of this offering, which, among other things, reclassifies our class B common stock into common stock; and

    no exercise by the underwriters of their over-allotment option.


3



SUMMARY CONSOLIDATED FINANCIAL DATA

        The following tables provide summary consolidated financial data. The consolidated statement of operations data for the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003 and the consolidated balance sheet data as of December 31, 2003 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, except for the categorization of our revenues, which is unaudited and has been derived from our accounting records.

        We maintain a 52- or 53-week fiscal year ending on the Friday on or preceding December 31. Each of the first three quarters of our fiscal year end on the last Friday in each of March, June and September. For consistency of presentation, we have expressed the end of each fiscal period presented in the financial information in this prospectus as ending on the last day of the final month in such period.

        You should read this information together with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Consolidated Statement of Operations Data

 
  Period from
March 12, 2002
(inception)
to December 31, 2002

  Year Ended
December 31, 2003

 
 
  (in thousands, except per share data)

 
Revenues:(1)              
  Standard processes   $ 93,656   $ 102,169  
  Specialty processes     29,421     83,016  
   
 
 
    Total revenues     123,077     185,185  

Cost of goods sold(2)

 

 

102,744

 

 

158,351

 
   
 
 

Gross profit

 

 

20,333

 

 

26,834

 

Operating expenses:

 

 

 

 

 

 

 
  Research and development(2)     12,333     18,572  
  Selling, general and administrative(2)     9,515     13,173  
  Amortization of intangible assets     243     741  
  Loss on disposal of equipment         751  
  Stock compensation expense(3)     629     9,778  
   
 
 
    Total operating expenses     22,720     43,015  
   
 
 
Operating loss     (2,387 )   (16,181 )
Interest income     514     513  
Gain (loss) on investments(3)     (12,651 )   9,682  
   
 
 
Loss before income taxes     (14,524 )   (5,986 )
Income tax provision     12     12  
   
 
 
Net loss   $ (14,536 ) $ (5,998 )
   
 
 

Preferred stock dividends

 

 

(4,335

)

 

(11,276

)
   
 
 
Net loss attributable to common stockholders   $ (18,871 ) $ (17,274 )
   
 
 

Net loss per common share, basic and diluted(4)

 

 

 

 

$

(31.64

)
         
 
Pro forma net loss per common share, basic and diluted(5)   $ (0.14 ) $ (0.05 )
   
 
 

(1)
Standard processes are comprised of digital CMOS and standard analog CMOS process technologies and specialty processes are comprised of advanced analog CMOS, RF CMOS and advanced RF CMOS, BiCMOS and SiGe BiCMOS process technologies. Included in total revenues for the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003 are revenues from related parties of $119.8 million and $169.9 million, respectively.

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(2)
Amounts exclude stock compensation expense equal to the amounts set forth in the following table. The aggregate of the amounts for each period have been included under stock compensation expense in our consolidated statement of operations data:

 
  Period from
March 12, 2002
(inception)
to December 31, 2002

  Year Ended
December 31, 2003

 
  (in thousands)

             
Cost of goods sold   $ 149   $ 2,298
Research and development   $ 273   $ 4,243
Selling, general and administrative   $ 207   $ 3,237
(3)
For a discussion of stock compensation expense and gain (loss) on investments, and their relationship to one another, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview" and "—Critical Accounting Policies."

(4)
On July 31, 2002, 5,500,000 shares of class A common stock and 4,500,000 shares of class B common stock, representing all of the then outstanding shares of our common stock, were recapitalized into 55,000,000 and 45,000,000 shares of series A preferred stock and series B preferred stock, respectively. The recapitalization has been reflected as occurring on March 12, 2002 (inception) for purposes of calculating net loss per common share. Net loss per common share is not shown for periods where there were effectively no weighted average shares of common stock outstanding.

(5)
Pro forma net loss per common share gives effect to the conversion of our recapitalized convertible preferred stock into common stock immediately prior to the completion of this offering, as if the conversion had occurred on the date of issuance.

Consolidated Balance Sheet Data

 
  As of December 31, 2003
 
  Actual
  Pro forma as adjusted(1)
(unaudited)

 
  (in thousands)

             
Cash and cash equivalents   $ 65,591   $  
Working capital     87,135      
Property, plant and equipment, net     50,936     50,936
Total assets     177,733      
Total debt        
Total stockholders' equity     122,698      

(1)
The consolidated balance sheet data on a pro forma as adjusted basis reflects the automatic conversion of all of our outstanding shares of convertible preferred stock into 113,071,888 shares of our common stock immediately prior to the completion of this offering as if the conversion had occurred on December 31, 2003, the sale of            shares of common stock offered by us under this prospectus at an assumed initial public offering price per share of $            , and our receipt of the net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before making an investment decision. If any of the possible adverse events described below actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

If we are not able to continue transitioning our product mix from lower margin standard complementary metal oxide semiconductor process technologies to higher margin specialty process technologies, our business will be harmed.

        Since our separation from Conexant Systems, Inc., we have focused our research and development and marketing efforts primarily on specialty process technologies. We anticipate that any growth in our business will primarily result from these technologies. However, the majority of our revenues to date have been derived from standard complementary metal oxide semiconductor, or CMOS, process technologies, and primarily from our two major customers, Conexant Systems, Inc. and Skyworks Solutions, Inc. Standard CMOS processes generally have lower margins than the more specialized advanced analog CMOS, radio frequency CMOS, or RF CMOS, advanced RF CMOS, bipolar CMOS, or BiCMOS, and silicon germanium BiCMOS, or SiGe BiCMOS. In addition, there are significantly more providers of foundry services for standard CMOS processes and consequently much greater competition. To be successful, we will need to increase our percentage of revenues derived from specialty processes in order to support our business plan. In order to expand and diversify our customer base we will need to identify and attract customers who will use the specialty process technologies we target. We cannot assure you that demand for these specialty process technologies will increase or that we will be able to attract customers who use them. If we are not able to increase our percentage of revenues from specialized processes, our business and results of operations will be harmed.

We presently depend on Conexant and Skyworks for the vast majority of our revenues. A reduction in business from either one of these customers could seriously harm our business.

        For the period March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003, our top two customers, Conexant and Skyworks, an entity that resulted from the spin-off of Conexant's wireless division and subsequent merger with Alpha Industries, Inc., together accounted for 97.3% and 90.3% of our revenues, respectively. We expect that we will continue to be dependent upon Conexant and Skyworks for a significant majority of our revenues for the foreseeable future. While we have long-term supply agreements with Conexant and Skyworks, our agreement with Conexant is for products primarily utilizing standard CMOS processes. Consequently, if we are not able to capture Conexant's next generation of designs, we expect its business with us to decline significantly as it moves away from its current designs and processes. We cannot assure you that our revenues generated from these customers, individually or in the aggregate, will reach or exceed historical levels in any future period. Loss or cancellation of business from, significant changes in scheduled deliveries to, or decreases in the prices of services sold to, either one of these customers has, in the past, significantly reduced our revenues for a reporting period and could, in the future, harm our financial condition and business.

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Our business plan is premised on the increasing use of outsourced foundry services by both fabless semiconductor companies and integrated device manufacturers, or IDMs, for the production of semiconductors using specialty process technologies and our business will not be successful if this trend does not develop as we expect.

        We operate as an independent wafer foundry focused primarily on specialty process technologies. Our business model assumes that demand for these highly specialized processes within the semiconductor industry will grow and will follow the broader trend towards outsourcing foundry operations. Although the use of independent foundries is established and growing for standard CMOS processes, the use of outsourced foundry services for specialty process technologies is less common and may never develop into a significant part of the semiconductor industry. If fabless companies and IDMs determine that they cannot reduce their costs or allocate resources and capital more efficiently by accessing independent specialty foundry capacity, the manufacture of specialty process technologies may not follow the trend of standard CMOS processes. If the broader trend to outsourced foundry services does not prove applicable to the specialty process technologies we intend to target, our business and results of operations will be harmed.

We may not be successful in adding new customers or in securing significant volume from new customers.

        In order to be successful under our business plan, we need to add new customers whose products utilize our specialty processes and generate significant revenues from those customers. To date, we have not derived significant revenues from any individual customer other than Conexant and Skyworks, and we cannot assure you that we will be able to attract new customers or generate significant revenues from existing or new customers in the future. The sales cycle for our services is long and requires us to invest significant resources as we work with each potential customer, without assurance of sales to that customer. Due to the highly specialized nature of the processes we target, our sales cycle typically begins with the potential customer's design phase as we seek to convince potential customers to design products that take advantage of our specialty process technologies. When a potential customer decides to design a specific integrated circuit, or IC, using one of our processes, we refer to this as a design win. The period between design win and production often takes between eight and 26 months. Due in part to the length of this process, we cannot assure you that a given design will actually be implemented in our customer's product and result in commercial orders or generate any revenues. If we are not successful in adding new customers who use our specialty process technologies, or do not convert design wins with those customers into revenue generating products, our revenues and results of operations will be harmed.

We expect to rely on Advanced Semiconductor Manufacturing Corporation and Hua Hong NEC Electronics Co., Ltd., for a significant portion of our future manufacturing capacity.

        We operate one semiconductor fabrication facility in Newport Beach, California, in which we currently produce substantially all of our products. We have entered into strategic relationships and supply agreements with Advanced Semiconductor Manufacturing Corporation, or ASMC, and Hua Hong NEC Electronics Co., Ltd., or HHNEC, to allow us to utilize production capacity at two additional fabrication facilities in China. The capacity at the ASMC facility is currently available to us, but the capacity at the HHNEC facility will not be available until October 2004. We expect to use our Newport Beach fab to develop and implement the specialty process technologies required to meet the needs of our customers, and to use the foundry capacity of ASMC and HHNEC to implement higher volume production runs for our customers once process implementation is complete and as the capacity of our Newport Beach fab is exceeded. We are dependent on these arrangements to achieve the capacity levels needed for our business to continue to grow. However, we have limited control over ASMC's and HHNEC's production and quality control systems, and these companies have little or no prior manufacturing experience using our specialty process technologies. Should we fail to maintain and

7



expand our strategic relationships, or if ASMC or HHNEC do not deliver the capacity that we require in a timely manner, or do not produce wafers to specifications and at costs acceptable to our customers, our ability to meet our customers' needs could be seriously harmed and our customers may turn to our competitors to satisfy their requirements causing us to lose significant sources of revenues.

If we cannot compete successfully in the highly competitive foundry segment of the semiconductor industry, our business will suffer.

        We compete internationally and domestically with dedicated foundry service providers as well as with IDMs, which have internal semiconductor manufacturing capacity or foundry operations. Most of our competitors have substantially greater production, financial, research and development and marketing resources than our company. As a result, these companies may be able to compete more aggressively over a longer period of time than we can. In addition, several new dedicated foundries have commenced operations and may compete directly with us.

        IBM competes actively in both the standard CMOS segment and in specialty process technologies. In addition, there are a number of smaller participants in the specialty process arena. We believe that the largest independent participants in the foundry services market, Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation and Chartered Semiconductor Manufacturing Ltd., compete primarily in the standard CMOS segment, but they have some capacity for specialty process technologies. Prior to our separation, Conexant licensed certain intellectual property rights in 0.35 micron and 0.18 micron SiGe BiCMOS process technology to Taiwan Semiconductor Manufacturing Company. A number of semiconductor manufacturers have announced plans to increase their manufacturing capacity and, as a result, we expect that there will be a significant increase in worldwide semiconductor capacity during the next several years. If growth in demand fails to match the growth in capacity, or occurs more slowly than anticipated, there may be more intense competition and pricing pressure on our services, and underutilization of our capacity may result.

        Any significant increase in competition or pricing pressure may erode our profit margins, weaken our earnings or increase our losses. If we cannot compete successfully in our industry, our results of operations will be harmed.

We are dependent on the highly cyclical semiconductor market, which has experienced significant and sometimes prolonged downturns and overcapacity. A significant or prolonged downturn in this industry would cause our revenues, earnings and margins to decline significantly.

        Our business is dependent upon market conditions in the highly cyclical semiconductor industry. Variations in order levels from our customers directly result in volatility in our revenues and earnings. From time to time, the semiconductor industry has experienced significant, and sometimes prolonged, downturns. According to Gartner Dataquest's estimates, global semiconductor sales decreased by approximately 32% in 2001 and increased by approximately 2% in 2002. Because our business is, and will continue to be, dependent on the requirements of semiconductor companies for our services, downturns in this industry lead to reduced demand for our services and increased pricing pressure. Historically, companies in the semiconductor industry have aggressively expanded their manufacturing capacity during periods of increased demand, as was the case in 2000. As a result, periods of overcapacity in the semiconductor industry have frequently followed periods of increased demand. Starting in the first quarter of 2001, the semiconductor industry experienced a significant downturn due to a number of factors, including a slowdown in the global economy, oversupply and overcapacity in the semiconductor industry and a worldwide inventory adjustment. Due to the significant downturn in the industry, most, if not all, IDMs that had previously begun purchasing wafer fabrication services from foundries reduced purchases from such foundries, and many IDMs allocated a portion of their internal foundry capacity to contract production of semiconductor wafers for others, particularly fabless companies, which we also target as customers. Any significant downturn in our customers' markets or

8



in general economic conditions would likely result in a reduction in demand for our services, which may force us to operate at significantly less than full capacity and could reduce our margins and harm our financial condition and results of operations.

We have experienced net losses during our limited history operating as an independent company and we may never attain or sustain profitability.

        Since the inception of our business on March 12, 2002, we have incurred cumulative net losses of $20.5 million. While we achieved net income for the second quarter of 2003, we have subsequently continued to incur net losses and may continue to do so in the future. We cannot assure you that we will be able to attain or sustain profitability on a quarterly or annual basis in the future. If we are not able to achieve or sustain profitability, our stock price will decline.

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

        Since our inception, the vast majority of our revenues have been derived from our two largest customers, and have primarily been derived from products manufactured using digital CMOS and standard analog CMOS processes that we do not intend to have as our focus in the future. As customers design their products for more advanced CMOS processes, they may look to other foundries to provide their requisite manufacturing capacity. It is unlikely that we will continue to generate the same level of revenues from our digital CMOS and standard analog processes in the future as we shift our focus and operations to our more specialized processes: advanced analog CMOS, RF CMOS, advanced RF CMOS, BiCMOS and SiGe BiCMOS.

        In connection with our formation, we entered into a wafer supply agreement with Conexant. Under the supply agreement, Conexant is obligated to purchase aggregate minimum annual volumes of wafers that decline to zero over the first three years of the agreement. We also have a supply agreement with Skyworks that provides for certain declining minimum annual wafer volume commitments. If we are unable to sell additional capacity to Conexant and Skyworks or other customers as Conexant's and Skyworks' minimum purchase obligations decline, our revenues will decline.

We expect our operating results to fluctuate from quarter to quarter and year to year, which may make it difficult to predict our future performance and could cause our stock price to fluctuate and decline.

        Our revenues, expenses and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly from quarter to quarter and year to year in the future due to a number of factors, many of which are beyond our control. For example, our revenues for the four successive quarters of 2003 were $40.2 million, $49.5 million, $39.8 million and $55.6 million. We had a net loss of $3.8 million for the quarter ended March 31, 2003, net income of $1.7 million for the quarter ended June 30, 2003, a net loss of $2.3 million for the quarter ended September 30, 2003 and a net loss of $1.6 million for the quarter ended December 31, 2003. A significant portion of our overall costs are fixed, so reductions in demand for our services or changes in the mix of products towards standard CMOS products, which typically have lower margins, can have a negative effect on our results of operations, as we are less able to reduce costs to respond to downturns. For example, revenues were lower than we expected in the third quarter of 2003 in part because we delayed shipment of products to a customer at its request. We expect fluctuations to continue for a number of reasons, including:

    slow or negative growth in the communications, consumer electronics, storage and computing semiconductor industries and in the markets served by our customers;

    our customers' adjustments in their inventory;

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    the loss of a key customer or the postponement of orders from a key customer;

    the rescheduling or cancellation of large orders by our customers, or the deferral of shipment of our finished products to customers;

    unanticipated delays or problems in introducing new products by us or our customers;

    our ability to obtain equipment, raw materials, electricity, water and other required utilities on a timely and economic basis;

    our or our competitors' announcements of new products, services or technological innovations;

    changes in our pricing policies or the pricing policies of our competitors;

    the level of utilization of our manufacturing facility;

    variation in the yield of our fab in Newport Beach and those of our manufacturing partners;

    costs related to possible acquisitions of technologies or businesses;

    an increase in the number or magnitude of product liability claims;

    our inability to accurately forecast our sub-contracted assembly and test needs;

    the occurrence of accounts receivable write-offs;

    intellectual property right disputes;

    our effective tax rate, which may take into account tax benefits that may not be available in the future;

    changes in foreign currency exchange rates; and

    events, such as fires and earthquakes, or industrial accidents.

        Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations.

Most of our customers do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues, adjust production costs and allocate capacity efficiently on a timely basis.

        Most of our customers generally place purchase orders only two or three months before shipment. Other than our major customers, most of our customers are also generally able to cancel or delay the delivery of orders on short notice. In addition, due to the cyclical nature of the semiconductor industry, our customers' purchase orders have varied significantly from period to period. The lack of significant backlog and the limited certainty of customer orders can make it difficult for us to forecast our revenues in future periods and allocate our capacity efficiently. Moreover, our expense levels are based in part on our expectations of future revenues and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls.

Decreases in demand and average selling price for end-user applications of our customers' products may decrease demand for our services and may result in a decrease in our revenues and results of operations.

        A vast majority of our revenues are derived from customers who use our services to produce semiconductors for use in wireless and wireline communications, consumer electronics, storage and computing. Any significant decrease in the demand for end-user applications of semiconductors manufactured using our services may decrease the demand for our services and may result in a decrease in our revenues and earnings. In addition, the historical and continuing trend of declining

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average selling prices of end-user applications places pressure on the prices of the components that go into these end-user applications. If the average selling prices of end-user applications continue to decrease, the pricing pressure on components produced by us for our customers may lead to a reduction of our revenues and earnings.

If we are unable to maintain high capacity utilization or improve our yields, we may be unable to achieve and maintain profitability.

        Our ability to achieve and maintain profitability depends, in part, on our ability to:

    maintain high capacity utilization, which is the number of wafers we produce in relation to our capacity;

    continuously maintain and improve our fab yield, which is the number of wafers completed that meet certain acceptance criteria, expressed as a percentage of total wafer starts; and

    continuously maintain and improve our manufacturing yield, which is the percentage of functioning die on a wafer, expressed as a percentage of total die per wafer.

        Our capacity utilization affects our operating results because a large percentage of our costs are fixed. Our fab and manufacturing yields directly affect our ability to attract and retain customers, as well as the price of our services. If we are unable to maintain high capacity utilization and continuously improve our yields, our margins may substantially decline and our business and results of operations may be harmed.

We rely on subcontractors for assembly and test services.

        We offer our customers assembly and test services for completed semiconductors through our outsourcing relationships with assembly and test service providers, including Advanced Semiconductor Engineering, Inc. and ST Assembly Test Services Ltd. in Taiwan and Singapore, respectively. We are dependent on these outsourcing partners for our ability to offer semiconductor assembly and test services. If our subcontractors are not able to meet our timing and quality requirements, our ability to meet our customers' needs could be seriously harmed and our customers may turn to our competitors to satisfy their requirements, causing us to lose significant sources of revenues.

We may not be able independently to develop or secure on commercially reasonable terms critical process technology, which may result in our loss of customers and market share and may cause us to incur an investment obligation or give up rights.

        Enhancing our manufacturing process technologies is critical to our ability to provide services for our customers. The semiconductor industry and the process technologies used are constantly changing. If we do not anticipate these changes in process technologies and rapidly develop innovative technologies, or secure on commercially reasonable terms the rights to use critical process technology developed by others, we may not be able to provide specialty foundry services on competitive terms. If we are unable to maintain the ability to provide specialty foundry services on competitive terms, some of our customers may use the services of our competitors instead of our services. As a result, we expect that we will need to offer, on an ongoing basis, increasingly advanced and cost-effective process technologies prior to these technologies and processes being offered by our competitors. If we are not able to independently develop, or secure on commercially reasonable terms, critical process technology, we may lose customers and market share, and our business and results of operations may be harmed.

        In addition, we have agreed to develop and license to HHNEC certain process technologies by December 2005. If we are unable to develop these technologies or to license them to HHNEC we will be obligated to either contribute an additional $10.0 million to HHNEC or reduce our equity ownership in HHNEC by a corresponding amount.

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We intend to expand our operations, which may strain our resources and increase our operating expenses.

        We plan to expand our operations, domestically and internationally, and may do so through internal growth, strategic relationships or acquisitions. We expect that this expansion will strain our systems and operational and financial controls. In addition, we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls. If we fail to do so, our growth will be limited. Our officers have limited experience in managing large or rapidly growing businesses. Further, our officers have limited experience managing companies through acquisitions and technological changes. In addition, our management has limited experience in managing a public company. If we fail to effectively manage our planned expansion of operations, our business and results of operations may be harmed.

If we fail to adequately protect our intellectual property rights, we may lose valuable assets, experience reduced revenues and incur costly litigation to protect our rights.

        We depend in part on patents and other intellectual property rights covering our design and manufacturing processes. We hold patents and patent licenses and we intend to continue to seek patents on our inventions relating to product designs and manufacturing processes. The process of seeking patent protection can be long and expensive, however, and we cannot guarantee that all of our currently pending or future applications will result in issued patents. Even if patents are issued, they may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage. Because patent and other intellectual property litigation is costly and unpredictable, our attempts to protect our rights or to defend ourselves against claims made by others could impose high costs and risks on our business. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business and results of operations.

        A portion of our intellectual property is also used by our manufacturing partners in China, a country in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater risk for us as we increase our use of manufacturing capacity in China, which provides less protection for intellectual property than does the United States. Our inability to enforce our intellectual property rights, and the inability of our manufacturing partners to enforce their intellectual property rights in some countries, especially China, may harm our business and results of operations.

If we are subject to a protracted infringement claim or one that results in significant damage awards, our results of operations may be adversely affected.

        Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are either published or granted. Due to the complexity of the technology used and the multitude of patents, copyrights and other overlapping intellectual property rights, the semiconductor industry is characterized by frequent litigation regarding patent, trade secret, copyright and other intellectual property rights. It is common for patent owners to assert their patents against semiconductor manufacturers. From time to time we receive communications from third parties asserting that their patents cover certain of our technologies and alleging infringement of their intellectual property rights, and we expect to continue to receive such communications in the future. As a result, we engage in discussions from time to time concerning the licensing of third party technology or cross-licensing such technology and our technology. We are currently in discussions regarding a potential intellectual property cross license and release agreement with an unrelated third party. Under terms being discussed, we would agree to make certain payments in exchange for the license and the

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release. However, we cannot assure you as to whether an agreement will be reached or as to the terms of any agreement that is consummated. As a result, we are currently unable to estimate the timing or amount of payments that may be negotiated and no related amounts have been recorded in the consolidated financial statements. In the event any third party were to make a successful claim against us or our customers that we or our customers have misappropriated their trade secrets or infringed on their patents, copyrights or other intellectual property rights, we or our customers could be required to:

    acquire licenses, which may not be available on commercially reasonable terms, if at all;

    discontinue using certain process technologies, which could cause us to stop manufacturing certain products;

    pay substantial monetary damages; and

    develop non-infringing technologies, which may not be feasible.

        In addition, third parties, some of which are potential competitors, may initiate litigation against our manufacturing partners or our suppliers, alleging infringement of their proprietary rights with respect to existing or future materials, processes or equipment. In the event of a successful claim of infringement and the failure or inability to license or independently develop alternative, non-infringing technology on a timely basis by us or our manufacturing partners or suppliers, we may be unable to obtain sufficient manufacturing capacity or offer competitive products. As a result, our product portfolio would be limited, and we would experience increased expenses.

        Any one of these developments could place substantial financial and administrative burdens on us and hinder our business. We may not have sufficient resources to defend ourselves or our customers against litigation. If we fail to obtain necessary licenses or if litigation relating to patent infringement or other intellectual property matters occurs, it could hurt our reputation in our industry and prevent us from manufacturing particular products or applying particular process technologies, which could reduce our opportunities to generate revenues. As a result, our business, operating results and financial condition could be significantly harmed.

The international nature of our business exposes us to financial and regulatory risks.

        A significant portion of our planned manufacturing capacity, as well as our ability to provide assembly and test services through subcontractors, is derived from our international relationships with manufacturers and others, particularly in Asia. We have an established office in Asia and we are seeking to expand our global presence by opening additional offices, particularly in Asia and Europe. To date, we do not have significant sales in foreign countries. If we are successful in expanding our global presence, we will be more significantly exposed to risks associated with international operations. International operations are subject to a number of risks, including the following:

    political and economic instability, international terrorism and anti-American sentiment;

    laws and business practices favoring local companies;

    withholding tax obligations on license revenues that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;

    the timing and availability of export licenses;

    tariffs and other trade barriers;

    difficulties in collecting accounts receivable;

    currency exchange risks;

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    burdens and costs of compliance with a variety of foreign laws;

    less effective protection of intellectual property than is afforded to us in the United States; and

    difficulties and costs of staffing and managing foreign operations.

        In addition, the United States or foreign countries may implement quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products, leading to a reduction in sales and profitability in that country. The geographical distance between the United States, Asia and Europe also creates a number of logistical and communication challenges. We cannot assure you that we will not experience any serious harm in connection with our international operations.

Failure to comply with governmental regulations by us, our manufacturing partners or our customers could reduce our sales or require design modifications.

        The semiconductors we produce and the export of technologies used in our manufacturing processes may be subject to U.S. export control and other regulations as well as various standards established by authorities in other countries. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic foreign regulatory approvals or certificates could materially harm our business by reducing our production capacity, requiring modifications to our processes that we license to our foreign manufacturing partners or requiring unacceptable modifications to the products of our customers. If controlled, neither we nor our customers may export such products without obtaining an export license. In addition, we depend on our manufacturing partners in China for a significant portion of our planned manufacturing capacity, and export licenses may be required in order for us to transfer technology related to our manufacturing processes to our foreign manufacturing partners. These restrictions may make foreign competitors facing less stringent controls on their processes and their customers' products more competitive in the global market than we or our customers are. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised.

Our manufacturing partners in China are subject to extensive government regulation, which can lead to uncertainty.

        Our manufacturing partners, ASMC and HHNEC, on which we expect to rely for a significant portion of our future manufacturing capacity, are located in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. China's government has also implemented policies from time to time to regulate economic expansion in China. The economy of China has been transitioning from a planned economy to a market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industrial development. It also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. New regulations or the readjustment of previously implemented regulations could require us and our manufacturing partners to change our business plan, increase our costs or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results.

        In addition, the Chinese government and provincial and local governments have provided, and continue to provide, various incentives to domestic companies in the semiconductor industry, including our manufacturing partners and competitors, in order to encourage development of the industry. Such

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incentives include tax rebates, reduced tax rates, favorable lending policies and other measures. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to us or our manufacturing partners could adversely affect our business and operating results.

We depend on key personnel, and we may not be able to retain, hire and integrate sufficient qualified personnel to maintain and expand our business.

        Our success depends to a significant extent upon our key senior executives and research and development, engineering, marketing, sales, manufacturing, support and other personnel. Our success also depends upon our ability to continue to attract, retain and integrate qualified personnel, particularly engineers. The competition for these employees is intense, especially in southern California, and we cannot assure you that we will be able to secure the services of enough qualified personnel, or do so at a reasonable cost, for our business to succeed. If we fail to retain, hire, train and integrate qualified employees, we will not be able to maintain and expand our business.

A significant portion of our workforce is unionized, and our operations may be adversely affected by work stoppages, strikes or other collective actions.

        A significant portion of our employees at our Newport Beach fab are represented by a union and covered by a collective bargaining agreement that expires in 2008. We cannot predict the effect that continued union representation or future organizational activities will have on our business. Conexant experienced a work stoppage at our Newport Beach fab in 1998; however, we have not experienced any work stoppages and we believe that our relations with employees and the union are generally good. We cannot predict the effect continued union representation or organizational activities will have on our future operations. We cannot assure you that we will not experience a material work stoppage in the future.

If we are unable to collaborate successfully with electronic design automation vendors and third-party design service companies to meet our customers' design needs, our business could be harmed.

        We have established relationships with electronic design automation vendors and third-party design service companies. We work together with these vendors to develop complete design kits that our customers can use to meet their design needs using our process technologies. Our ability to meet our customers' design needs successfully depends on the availability and quality of the relevant services, tools and technologies provided by electronic design automation vendors and design service providers, and on whether we, together with these providers, are able to meet customers' schedule and budget requirements. Difficulties or delays in these areas may adversely affect our ability to attract customers, and thereby harm our company.

We provide foundry services to Conexant, Skyworks and RF Micro Devices, Inc., which may result in conflicts of interest in the future.

        We provide foundry services to Conexant and RF Micro Devices, two of our significant stockholders that also have representatives on our board of directors. We also provide foundry services to Skyworks. Two of our directors are also members of the board of directors of Skyworks.

        While our board has implemented procedures to ensure that these stockholders and customers cannot control business decisions involving them, and to protect the confidential information of our customers that may be competitors of Conexant, Skyworks or RF Micro Devices, circumstances may arise in the future in which our business relationship with Conexant, Skyworks and RF Micro Devices may be influenced by their officers or directors who are members of our board or their significant

15



percentage ownership of our capital stock, particularly Conexant. There could be situations in which the interests of these stockholders and customers conflict with your interests.

Risks Relating to Manufacturing

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can significantly increase our costs and delay product shipments to our customers.

        Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve fab and manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of products in process. As system complexity has increased and process technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become more demanding. Although we continue to enhance our manufacturing capabilities and efficiency, from time to time we have experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. In the past, we have encountered manufacturing and related problems, including:

    capacity constraints due to changes in product mix or the delayed delivery of equipment critical to our production, including steppers and chemical stations;

    delays during expansions and upgrades of our clean rooms and other facilities;

    difficulties in increasing production at our Newport Beach, California fab;

    difficulties in changing or upgrading our process technologies;

    raw materials shortages and impurities; and

    other operational and engineering problems resulting in reduced product yields for our customers.

        We cannot guarantee you that we will be able to increase our manufacturing capacity or maintain our efficiency in the future, to the same extent as in the past. In addition, we cannot guarantee you that our manufacturing partners in China will not experience production difficulties.

If we are unable to obtain raw materials and equipment in a timely manner, our production schedules could be delayed and we may lose customers.

        We depend on our suppliers of raw materials. To maintain competitive manufacturing operations, we must obtain from our suppliers, in a timely manner, sufficient quantities of materials at acceptable prices. Although we source most of our raw materials from several suppliers, we use only one supplier of silicon wafers because of the consistent quality of their wafers, the long working history of Rockwell and Conexant with this supplier and our sales arrangement with this supplier. We also use single suppliers for photomasks and certain photoresists used in our processes. We do not have long-term contracts with most of our suppliers. From time to time, vendors have extended lead times or limited the supply of required materials to us because of capacity constraints. Consequently, we have experienced difficulty in obtaining the quantities of raw materials we need on a timely basis.

        In addition, from time to time we may reject materials that do not meet our specifications, resulting in a decline in manufacturing or fab yields. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and other supplies in a timely manner. If the supply of materials is substantially diminished or if there are significant increases in the costs of raw materials, we may not be able to obtain raw materials at all or we may be forced to incur additional costs to

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acquire sufficient quantities of raw materials to sustain our operations, which may increase our marginal costs and reduce profitability.

        We also depend on a limited number of manufacturers and vendors that make and maintain the complex equipment we use in our manufacturing processes. We rely on these manufacturers and vendors to improve our technology to meet our customers' demands as technology improves. In periods of volatile market demand, the lead times from order to delivery of this equipment can be as long as six to 12 months. If there are delays in the delivery of equipment or if there are increases in the cost of equipment, it could cause us to delay our introduction of new manufacturing capacity or process technologies and delay product deliveries, which may result in the loss of customers and revenues.

If the semiconductors we manufacture are used in defective products, we may be subject to product liability or other claims and our reputation could be harmed.

        We provide custom manufacturing to our customers who use the semiconductors we manufacture as components in their products sold to end users. If these products are used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. The occurrence of a problem could result in product liability claims as well as a recall of, or safety alert or advisory notice relating to, the product. While we maintain product liability insurance, we cannot assure you that it will be adequate to satisfy claims made against us in the future or that we will be able to obtain insurance in the future at satisfactory rates, in adequate amounts, or at all. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and on our ability to attract and retain customers.

We may be subject to the risk of loss due to fire because the materials we use in our manufacturing processes are highly flammable and our insurance coverage may not be sufficient to cover all of our potential losses.

        We use highly flammable materials such as silane and hydrogen in our manufacturing processes and may therefore be subject to the risk of loss arising from fires. The risk of fire associated with these materials cannot be completely eliminated. We maintain insurance policies to reduce losses caused by fire, including business interruption insurance. Our insurance coverage is subject to deductibles and would not be sufficient to cover all of our potential losses such as the full replacement of our fab. If our fab or our manufacturing partners' fabs were to be damaged or cease operations as a result of a fire, the time to repair or rebuild the fab would be significant and it would reduce our manufacturing capacity, delay the manufacture of our customers' products, reduce our revenues and profits and may cause us to lose important customers.

Our business could be significantly harmed by natural disasters, particularly earthquakes.

        Our fab is located in southern California, a region known for seismic activity. In addition, substantially all of our manufacturing partners' capacity is located in a geographically concentrated area in China, where disruptions from natural disasters may affect the region. Due to the complex and delicate nature of our manufacturing processes, our and our manufacturing partners' facilities are particularly sensitive to the effects of vibrations associated with even minor earthquakes. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. The structure of our Newport Beach fab has been upgraded to minimize the risk of disruption from seismic events. We cannot be certain that the precautions we have taken will be adequate to protect our facilities in the event of a major earthquake, and any resulting damage could seriously disrupt our production and result in reduced revenues.

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Our production may be interrupted if we cannot maintain sufficient sources of fresh water and electricity.

        The semiconductor manufacturing process requires extensive amounts of fresh water and a stable source of electricity. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the areas in which our fabs are located. In particular, our Newport Beach fab is located in an area that is susceptible to water and electricity shortages. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, we may need to limit or delay our production, which could adversely affect our business and operating results. In addition, a power outage, even of very limited duration, could result in a loss of wafers in production and a deterioration in our manufacturing yields.

Failure to comply with environmental regulations could harm our business.

        We use hazardous materials and substances in the manufacturing and testing of products and in the development of our technologies in our research and development laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous materials and substances. Failure to comply with environmental regulations could result in revocation of operating permits, the imposition of substantial fines or penalties on us, interruption of production, alteration of our manufacturing processes or cessation of operations. In addition, we must obtain and comply with operating permits in a timely manner to support our product development and product ramp or our production may be delayed or halted. Compliance with environmental regulations could require us to acquire expensive pollution control equipment or to incur other substantial expenses. We could also be required to incur costs associated with the investigation and remediation of contamination at currently or formerly owned, operated or used sites, or at sites at which our hazardous waste was disposed. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liability under certain statues. The imposition of these liabilities could significantly harm our business.

Risks Related To This Offering

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

        Following the completion of this offering, our executive officers, directors, major stockholders and their affiliates will directly or indirectly beneficially own or control approximately            % of our outstanding shares of common stock (after giving effect to the exercise of all outstanding vested options exercisable within 60 days from January 15, 2004). In addition, our major stockholders will enter into an amended and restated stockholders agreement to be effective upon the completion of this offering under which they will agree to vote all capital stock held by them in favor of their designees to our board of directors. For a discussion of the amended and restated stockholders agreement, refer to "Description of Capital Stock—Stockholders Agreement."

        Following this offering, our executive officers, directors, major stockholders and their affiliates, acting as a group, will have substantial control over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. Some of these persons or entities may have interests different than yours. For example, these stockholders may delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders, or pursue strategies that are different from the wishes of other investors. The significant concentration of

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stock ownership may adversely affect the trading price of our common stock due to investors' perception that conflicts of interest may exist or arise. See "Management" and "Principal and Selling Stockholders" for details on the composition of our board of directors and our capital stock ownership. In addition, we are a "controlled company" within the meaning given to that term under the rules of the NASDAQ Stock Market. As a controlled company, we are exempt from the requirements that our board of directors be comprised of a majority of independent directors or that our compensation committee and governance and nominating committee be comprised of independent directors. Directors who are independent from Jazz may from time to time after this offering comprise less than a majority of our board of directors and, if so, independent directors will have less influence over our corporate governance and other issues in which stockholders may have an interest than if they comprised a majority of our board of directors.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations.

        Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by The NASDAQ Stock Market, could result in increased costs to us as we evaluate the implications of any new rules and respond to their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Management may invest or spend the proceeds of this offering received by us in ways with which you may not agree and in ways that may not yield a return to our stockholders.

        Management will retain broad discretion over the use of proceeds received by us from this offering. Stockholders may not deem such uses desirable, and our use of the proceeds may not yield a significant return or any return at all for our stockholders. Management intends to use a majority of the proceeds from this offering for research and development, working capital and other general corporate purposes, and potentially to finance future acquisitions or strategic investments. Because of the number and variability of factors that determine our use of the proceeds from this offering, our intended uses for the proceeds of this offering may vary substantially from our currently planned uses. Pending our use of the proceeds from this offering, we intend to invest the net proceeds from this offering in interest-bearing, investment grade securities.

Our common stock has no prior public market, and it is not possible to predict how our stock will perform after the distribution.

        There has not been a public market for our common stock. An active trading market for our common stock may not develop following this offering. You may not be able sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Please see "Underwriting" for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

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        The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

    the depth and liquidity of the market for our common stock;

    developments generally affecting the semiconductor foundry industry;

    investor perceptions of us and our business;

    actions by institutional or other large stockholders;

    terrorist acts;

    our results of operations and financial performance;

    general economic, industry and market conditions.

        In addition, the stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

You will incur immediate and substantial dilution in the net tangible book value of the stock you purchase.

        The initial public offering price is substantially higher than the prices paid for our common stock in the past. This is referred to as dilution. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $             per share in the net tangible book value per share of our common stock from the price you pay for our common stock. The exercise of outstanding options or warrants may result in further dilution.

Substantial future sales of our common stock in the public market may cause the price of our stock to decline.

        If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market following this offering, the market price of our common stock could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon the completion of this offering, we will have outstanding approximately             shares of common stock, based upon the assumptions described in "The Offering." Of these shares, the shares sold in this offering will be freely tradable. Of the remaining shares of common stock outstanding immediately after this offering, approximately              shares will be available for sale in the public market 180 days after the date of this prospectus when the lock-up agreements described in "Underwriting" between the underwriters and the stockholders expire. However, some of those sales will be subject to the volume restrictions imposed by Rule 144 under the federal securities laws on our affiliates. The remaining outstanding shares will become tradable upon expiration of various holding periods under Rule 144, subject in some cases to the volume restrictions of that rule, or earlier and without restrictions if they are registered under the federal securities laws.

        After this offering, the holders of an aggregate of             shares of our common stock will have registration rights to include their shares in public offerings we undertake in the future. After this offering, we intend to register all shares of common stock that we may issue under our equity incentive plan. Once we register these shares, they may be freely sold in the public market upon issuance, subject to the lock-up agreements described in "Underwriting."

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Our amended and restated certificate of incorporation, bylaws and Delaware law will contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.

        In addition to the effect that the concentration of ownership by our significant stockholders may have, our amended and restated certificate of incorporation and our bylaws will contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Such provisions, to be set forth in our restated certificate of incorporation or bylaws effective upon the completion of this offering, include:

    our board of directors will be authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock;

    advance notice requirements for nominations to serve on our board of directors or for proposals that can be acted upon at stockholder meetings;

    our board will be classified so not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

    stockholder action by written consent will be prohibited;

    special meetings of the stockholders will be permitted to be called only by the chairman of our board of directors, our president or by a majority of our board of directors;

    stockholders will not be permitted to cumulate their votes for the election of directors;

    vacancies on our board of directors will be filled only by majority vote of the remaining directors;

    our board of directors will be expressly authorized to make, alter or repeal our bylaws; and

    stockholders will be permitted to amend our bylaws only upon receiving at least 75% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

        Upon completion of the offering, we will also be subject to the restrictions contained in Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an "interested stockholder" and may not engage in "business combinations" with us for a period of three years from the time the person acquired 15% or more of our voting stock. Section 203 of the Delaware General Corporate Law may also have the effect of discouraging, delaying or preventing a change in control of our company.

21



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should" or "will" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors," and "Business" that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not rely upon forward-looking statements as predictors of future events. We are not under any duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results, unless required by law.

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USE OF PROCEEDS

        We estimate that our net proceeds from the sale of                        shares of our common stock in this offering will be approximately $            million, assuming an initial public offering price of $            per share and after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

        The principal purposes of the offering are to create a public market for our common stock for the benefit of all stockholders, to attract and retain qualified employees by providing them with equity incentives and to obtain additional working capital. We intend to use the proceeds of the offering for:

    expansion of sales and marketing activities;

    research and development;

    joint ventures and strategic investments;

    acquisitions of complementary businesses or intellectual property;

    working capital;

    capital expenditures; and

    other general corporate purposes.

        Although we periodically engage in preliminary discussions with respect to strategic investments and acquisitions, we are not currently a party to any agreements or commitments and we have no understandings with respect to any such investments or acquisitions.

        We have not yet specifically identified the amount of net proceeds we will use for each of the foregoing purposes. The timing and amount of our actual expenditures will depend on numerous factors, including the nature, timing and amounts of any acquisitions or investments, and the amount of cash generated by our operations. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. Until the funds are used as described above, we intend to invest the proceeds of the offering in interest-bearing, investment-grade securities. See "Risk Factors—Risks Related to this Offering—Management may invest or spend the proceeds of this offering received by us in ways with which you may not agree and in ways that may not yield a return to our stockholders."


DIVIDEND POLICY

        Since our inception, we have not declared or paid cash dividends on our preferred stock or common stock. As of the completion of this offering there will be no accrued dividends outstanding on our preferred stock, and all outstanding preferred stock will be converted into shares of our common stock. The payment of dividends on our common stock is within the discretion of our board of directors. We currently intend to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

23



CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2003 as follows:

    on an actual basis;

    on a pro forma as adjusted basis to reflect:

    the filing of an amended and restated certificate of incorporation to provide for authorized capital stock of                        shares of common stock and                         shares of undesignated preferred stock;

    the conversion of all of our preferred stock into common stock immediately prior to the completion of this offering;

    the sale of                        shares of common stock offered by us and the selling stockholders in this offering at an assumed initial public offering price of $          per share; and

    the receipt of the net proceeds of the offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        You should read this information together with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes to our consolidated financial statements appearing elsewhere in this prospectus.

 
  As of December 31, 2003
 
 
  Actual
  Pro forma
as adjusted
(unaudited)

 
 
  (in thousands, except share and per share data)

 
Cash and cash equivalents   $ 65,591   $    
   
 
 
Total debt          
   
 
 

Stockholders' equity:

 

 

 

 

 

 

 
  Preferred stock, $0.001 par value              
    Authorized—200,000,000 actual;         shares pro forma as adjusted              
    Issued and outstanding—113,071,888 shares actual; no shares pro forma as adjusted     113      
  Common stock, $0.001 par value              
    Authorized—255,000,000 actual;         shares pro forma as adjusted              
    Issued and outstanding—4,199,534 shares actual,        shares pro forma as adjusted     4        
  Additional paid in capital     145,463        
  Deferred stock compensation     (2,348 )   (2,348 )
  Accumulated deficit     (20,534 )   (20,534 )
   
 
 
  Total stockholders' equity     122,698        
   
 
 
    Total capitalization   $ 122,698   $    
   
 
 

        The number of shares of common stock in the table above excludes:

    11,562,993 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2003, under our 2002 equity incentive plan with a weighted average exercise price of $1.28 per share; and

    up to 1,884,473 additional shares of common stock reserved for future grant or issuance under our 2002 equity incentive plan as of December 31, 2003.

        For consistency of presentation, we have described December 26, 2003, the last day of our 2003 fiscal year, as December 31, 2003 for purposes of "Capitalization."

24



DILUTION

        If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

        Our net tangible book value as of December 31, 2003, was approximately $119.6 million, or $28.47 per share of our common stock. Our net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities divided by the number of shares of our common stock outstanding on December 31, 2003.

        Our pro forma net tangible book value as of December 31, 2003 was approximately $119.6 million, or $1.02 per share of our common stock. Our pro forma net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities divided by the number of shares of our common stock outstanding on December 31, 2003 and assumes the automatic conversion of all of our outstanding shares of preferred stock into 113,071,888 shares of our common stock upon the completion of this offering.

        Without taking into account any changes in pro forma net tangible book value after December 31, 2003, other than to give effect to the sale of            shares of our common stock offered by us at an assumed initial public offering price of $    per share (the midpoint of the range shown on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2003 would have been approximately $    million, or $    per share of our common stock. This amount represents an immediate increase in pro forma net tangible book value of $    per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $    per share to new investors purchasing shares in this offering. The following table illustrates the dilution in pro forma net tangible book value per share to new investors in connection with this offering.

Assumed initial public offering price per share         $          
Net tangible book value per share as of December 31, 2003   $ 28.47      
Decrease in net tangible book value per share attributable to conversion of convertible preferred stock     (27.45 )    
   
     
Pro forma net tangible book value per share before this offering   $ 1.02      
Increase in net tangible book value attributable to new investors            
   
     
Pro forma as adjusted net tangible book value per share after this offering         $  
         
Pro forma dilution per share to new investors         $  
         

        The following table sets forth, on a pro forma as adjusted basis as of December 31, 2003, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares in this offering. We have assumed an initial offering price of $            per share, and we have not deducted

25



estimated underwriting discounts and commissions and estimated offering expenses payable by us in our calculations.

 
  Shares purchased
  Total consideration
   
 
  Average
price per
share

 
  Number
  Percentage
  Amount
  Percentage
Existing stockholders(1)   117,271,422     % $ 143,195,768     % $ 1.22
New investors(2)         %         %    
   
 
 
 
 
Total       100 % $     100 % $  
   
 
 
 
 

(1)
Includes 4,199,534 shares of common stock outstanding and 113,071,888 shares of common stock issuable upon the conversion of preferred stock outstanding.

(2)
The            shares offered in this offering include                        shares to be sold by existing stockholders.

        The foregoing discussion and tables assume no exercise of any outstanding stock options after December 31, 2003. The exercise of all options outstanding as of December 31, 2003 having an exercise price less than the offering price would increase the dilutive effect to new investors to $            per share. See "Capitalization," "Management—Employee Benefit Plans" and "Description of Capital Stock."

        If the underwriters exercise their over-allotment option in full, the following will occur:

    the number of shares of our common stock held by existing stockholders will decrease to approximately    % of the                        total number of shares of our common stock outstanding after this offering; and

    the number of shares of our common stock held by new investors will increase to                        shares, or approximately    % of the total number of shares of our common stock outstanding after this offering.

        For consistency of presentation, we have described December 26, 2003, the last day of our 2003 fiscal year, as December 31, 2003 for purposes of "Dilution."

26



SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial and other operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003 and the consolidated balance sheet data as of December 31, 2002 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus, except for the categorization of our revenues, which is unaudited and has been derived from our accounting records.

 
  Period from March 12, 2002 (inception) to December 31, 2002
  Year Ended December 31, 2003
 
 
  (in thousands, except per share data)

 
Consolidated Statement of Operations Data              

Revenues:(1)

 

 

 

 

 

 

 
  Standard processes   $ 93,656   $ 102,169  
  Specialty processes     29,421     83,016  
   
 
 
    Total revenues     123,077     185,185  

Cost of goods sold(2)

 

 

102,744

 

 

158,351

 
   
 
 

Gross profit

 

 

20,333

 

 

26,834

 

Operating expenses:

 

 

 

 

 

 

 
  Research and development(2)     12,333     18,572  
  Selling, general and administrative(2)     9,515     13,173  
  Amortization of intangible assets     243     741  
  Loss on disposal of equipment         751  
  Stock compensation expense(3)     629     9,778  
   
 
 
    Total operating expenses     22,720     43,015  
   
 
 
Operating loss     (2,387 )   (16,181 )

Interest income

 

 

514

 

 

513

 
Gain (loss) on investments(3)     (12,651 )   9,682  
   
 
 
Loss before income taxes     (14,524 )   (5,986 )
Income tax provision     12     12  
   
 
 
Net loss   $ (14,536 ) $ (5,998 )
   
 
 

Preferred stock dividends

 

 

(4,335

)

 

(11,276

)
   
 
 

Net loss attributable to common stockholders

 

$

(18,871

)

$

(17,274

)
   
 
 

Net loss per common share, basic and diluted(4)

 

 

 

 

$

(31.64

)
         
 

Weighted average shares used to compute net loss per common share, basic and diluted

 

 

 

 

 

546

 
         
 

Pro forma net loss per common share, basic and diluted(5)

 

$

(0.14

)

$

(0.05

)
   
 
 

Weighted average shares used to compute pro forma net loss per common share, basic and diluted

 

 

102,979

 

 

113,618

 
   
 
 

Other Operating Data:

 

 

 

 

 

 

 
Adjusted net income (loss)(6)   $ (1,256 ) $ (5,902 )

Other Financial Data:

 

 

 

 

 

 

 
Capital expenditures   $ 10,742   $ 14,249  
Depreciation and amortization   $ 11,584   $ 15,170  
 
  As of December 31,
2002

  As of December 31,
2003

 
  (in thousands)

Consolidated Balance Sheet Data            
Cash and cash equivalents   $ 54,552   $ 65,591
Working capital     60,896     87,135
Property, plant and equipment, net     52,844     50,936
Total assets     144,002     177,733
Total debt        
Total stockholders' equity     97,828     122,698

(1)
Standard processes are comprised of digital CMOS and standard analog CMOS process technologies and specialty processes are comprised of advanced analog CMOS, RF CMOS and advanced RF CMOS, BiCMOS and SiGe BiCMOS process

27


    technologies. Included in total revenues for the periods from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003 are revenues from related parties of $119.8 million and $169.9 million, respectively.

(2)
Amounts exclude stock compensation expense equal to the amounts set forth in the following table. The aggregate of the amounts for each period have been included under stock compensation expense in our consolidated statement of operations data:

 
  Period from March 12, 2002 (inception) to December 31, 2002
  Year Ended December 31, 2003
 
  (in thousands)

             
Cost of goods sold   $ 149   $ 2,298
Research and development   $ 273   $ 4,243
Selling, general and administrative   $ 207   $ 3,237
(3)
For a discussion of stock compensation expense and gain (loss) on investments, and their relationship to one another, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview" and "—Critical Accounting Policies."

(4)
On July 31, 2002, 5,500,000 shares of class A common stock and 4,500,000 shares of class B common stock, representing all of the then outstanding shares of our common stock, were recapitalized into 55,000,000 and 45,000,000 shares of series A preferred stock and series B preferred stock, respectively. The recapitalization has been reflected as occurring on March 12, 2002 (inception) for purposes of calculating net loss per common share. Net loss per common share is not presented for periods where there were effectively no weighted average common shares outstanding.

(5)
Pro forma net loss per common share gives effect to the conversion of our recapitalized convertible preferred stock into common stock immediately prior to the completion of this offering, as if the conversion had occurred on the date of issuance.

(6)
Adjusted net income (loss) constitutes net loss before stock compensation expense and (gain) loss on investments. The following table provides a reconciliation of net loss to adjusted net income (loss), which we believe is the most directly comparable measure under generally accepted accounting principles:

 
  Period from March 12, 2002 (inception) to December 31, 2002
  Year Ended December 31, 2003
 
 
  (in thousands)

 
               
Net loss   $ (14,536 ) $ (5,998 )

Adjustments to net loss:

 

 

 

 

 

 

 
  Stock compensation expense     629     9,778  
  (Gain) loss on investments     12,651     (9,682 )
   
 
 
Adjusted net income (loss)   $ (1,256 ) $ (5,902 )
   
 
 
We
believe that adjusted net income (loss) is a useful supplement to net loss and may be used by some investors to measure or further understand our operating performance. Management uses adjusted net income (loss) to evaluate our performance because it believes that this measure more accurately reflects our operating results as it excludes items that management believes are not indicative of our operating performance. However, adjusted net income (loss) is not a measure of financial performance under generally accepted accounting principles, or GAAP, should not be construed as an indicator of our operating performance and should not be considered in isolation from or as a substitute for net loss, cash flows from operating activities or other cash flow data prepared in accordance with GAAP. Adjusted net income (loss) is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.

28



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion of the financial condition and results of our operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The discussion in this prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in "Risk Factors," as well as those discussed elsewhere. See "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

General

        We are an independent wafer foundry focused primarily on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. These semiconductor devices are used in products such as cellular phones, wireless local area network devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives. Our focus differs from traditional independent foundries, which primarily provide standard complementary metal oxide semiconductor, or CMOS, process technologies for the manufacture of digital semiconductors. While we provide standard CMOS process technologies, our primary focus on specialty process technologies for the manufacture of analog and mixed-signal semiconductors distinguishes us from these traditional foundries. Our customers include Conexant Systems, Inc., Skyworks Solutions, Inc., RF Micro Devices, Inc., Texas Instruments, Inc., ESS Technology, Inc. and UTStarcom, Inc. For the year ended December 31, 2003, we had revenues of $185.2 million.

Business Overview

    Our Formation

        Prior to the inception of our business on March 12, 2002, our business was the Newport Beach, California semiconductor fabrication, or fab, operations and related research, development and design activities of Conexant. Conexant and its predecessor, Rockwell International Corporation, developed these operations through an investment of approximately $1 billion in manufacturing assets since 1995 and the development of process technologies over more than 35 years. Following a decision by Conexant to outsource all of its manufacturing needs, we were formed through a cash investment by affiliates of The Carlyle Group, one of the largest U.S. private equity funds, and a contribution by Conexant of:

    its Newport Beach, California semiconductor fabrication and probing operations and related research, development and design activities;

    research and development and other support operations;

    software licenses, patents, and intellectual property rights;

    other assets required to operate our business; and

    a warrant to purchase 2,900,000 shares of Conexant's common stock.

        Conexant also granted us a perpetual, non-exclusive, royalty-free license of intellectual property for the design, development and improvement of semiconductor wafers and devices. In return for its contributions and licenses, we agreed to pay to Conexant a percentage of our gross revenues derived from the sale of silicon germanium, or SiGe, products to parties other than Conexant and its spun-off entities during our first 10 years of operation.

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        We accounted for our formation using the purchase method of accounting and obtained independent appraisals for long-lived tangible and intangible assets.

        To support our operations following our separation from Conexant, we entered into a transition services agreement with Conexant under which we have provided each other with certain administrative and operational support and related services. Most of the services are no longer provided to either party. Conexant also provides us with information technology services pursuant to an information technology services agreement. Conexant has notified us that it intends to terminate the information technology service agreement in December 2004. We have begun a process to identify and qualify a replacement information technology service provider. Based on discussions with third-party information technology service providers, we believe that we can qualify and transition to a new information technology service provider without significant disruption to our existing information technology systems or our operations.

        We lease our headquarters and Newport Beach, California fabrication and probing facility from Conexant. These leases expire on March 12, 2017 and we have the option to extend their terms for two consecutive five-year periods. Our rent under these leases consists of our pro rata share of the expenses incurred by Conexant in the ownership of these buildings, including property taxes, building insurance, depreciation and common area maintenance. We are not permitted to sublease space that is subject to these leases without Conexant's prior consent. The equipment contained in these buildings is owned by us and is not covered by the lease agreements.

        You may find more detail regarding the agreements we entered into with Conexant under "Relationships with Related Parties and Others."

        Prior to our formation, our fab was a manufacturing cost center of Conexant and was not a segment, division or other separately identifiable line of business. The cost center did not sell or market its products. Rather, it manufactured products for use by Conexant based on its demand requirements. The semiconductors produced by the fab were only one component in the end semiconductor products sold by Conexant. Conexant did not provide a transfer pricing mechanism between its Newport Beach, California fab operations and its business units and did not allocate general functional expenses to the fab because it was only one of multiple elements of the cost of producing the products it sold to its customers. The fab participated in Conexant's cash management system wherein all cash disbursements associated with fab activities were funded by Conexant. As a result, our business did not have revenues prior to our separation from Conexant, and we are unable to determine actual historical costs that would have been incurred by us if services performed by Conexant had been purchased from independent third parties. For this reason, we are unable to present historical financial information for periods prior to March 12, 2002, the inception of our business as a stand-alone entity.

    Current Major Customers

        In connection with our formation, we entered into a wafer supply agreement with Conexant. Under the wafer supply agreement, as amended, Conexant is obligated to purchase aggregate minimum annual volumes of wafers that decline to zero over the initial three years of the agreement. The initial price for wafers, which includes probe services up to the aggregate minimum annual volume commitment, under the agreement, is fixed at an amount that is based on Conexant's historical cost to manufacture wafers at its Newport Beach, California fab, assuming the same levels of production immediately prior to our formation. The pricing was formulated to provide us a certain gross margin during our first two years of operations, assuming we maintain our historical operating cost structure. Beginning in April 2004, prices for non-specialty wafers in excess of Conexant's volume commitment may, depending on market conditions, be increased at incremental rates until April 2005, at which time the contract price for all wafers will be adjusted to the best price we provide to any customer for

30


similar volumes and schedules or, if lower, the price offered by leading foundries for similar technologies, volumes and schedules. Beginning in April 2004, we will review and update the pricing every six months. We provided Conexant with credits to be applied against any increase in the contract price for each wafer purchased by Conexant after the second year of the agreement. If Conexant guarantees it will meet certain volume commitments, it may apply a specified portion of any unused credits to its wafer purchases for two years following the expiration of the agreement. The wafer supply agreement provides that Conexant may assign its purchase obligations, credits and pricing to entities that it spins-off, though it is not obligated to do so. These spun-off entities also have the right to enter into separate wafer supply agreements with us on substantially the same terms as our wafer supply agreement with Conexant. Wafers purchased under agreements with spun-off entities, as described below, are counted towards Conexant's minimum purchase obligations. In light of the Conexant wafer supply agreement, our ability to sustain our operations and achieve profitability is significantly dependent upon our ability to control our manufacturing cost structure as well as to expand our customer base.

        In June 2002, Conexant spun-off and merged its wireless communications division with Alpha Industries, Inc., a manufacturer of radio frequency and microwave integrated circuit products, primarily for wireless communications, to form Skyworks. In accordance with the terms of our wafer supply agreement with Conexant regarding Conexant spin-offs, Skyworks entered into a separate wafer supply agreement with us. Under its wafer supply agreement with us, as amended, Skyworks must provide us with rolling forecasts of its projected requirements for certain types of wafers. Skyworks must purchase a specified percentage of its forecast over the term of the rolling forecast, but in no event less than a minimum annual volume of wafers, which declines to zero from 2002 to 2005. Skyworks' purchases are counted towards Conexant's minimum annual purchase obligations under the Conexant wafer supply agreement. In order to meet our manufacturing obligations to Skyworks, we may utilize capacity at our Newport Beach fab or, subject to certain conditions, those of our manufacturing partners. Prior to November 2005, we will manufacture wafers incorporating specified product designs that were in production in May 2003 for Skyworks at specific contract prices. Prior to November 2005, for all wafers incorporating product designs that were not in production in May 2003, and beginning in November 2005 for specified wafers incorporating product designs that were in production on that date, prices will equal the lower of specific contract prices or the best price we provide to any customer for similar technologies and volumes, or, if lower, the price offered by leading foundries for similar technologies and volumes. We will review and update the prices offered by leading foundries quarterly. We also agreed to certain probe yield guarantees and related pricing.

        You may find more detail regarding the wafer supply agreements between us and Conexant and Skyworks under "Relationships with Related Parties and Others."

        Since our formation, these customers have accounted for almost all of our revenues. For the year ended December 31, 2003, revenues from Conexant and Skyworks accounted for 47.6% and 42.8%, respectively, of our revenues.

    New Customers

        In addition to seeking to increase our penetration of Conexant and Skyworks, our strategy is to pursue new customers aggressively and diversify our customer base in the wireless and wireline communications, consumer electronics, storage and computing markets. We plan to continue to obtain new customers and increase our penetration of existing customers by assisting them to design new products using our process technologies. A key milestone in accomplishing this plan is to obtain new design wins. We refer to a potential customer's decision to design a specific integrated circuit product using one of our processes as a "design win." If that potential customer has not previously been a customer, we also recognize them as a new customer upon achieving the design win. The design phase typically takes from four to eight months, after which time the customer provides a circuit data file so

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that we can commence the prototype phase. The entire cycle from design win to production typically takes eight to 26 months. This does not include the initial time we spend to achieve the design win, which may range from one month to over one year. During this cycle, our customers will typically dedicate from three to 12 engineers to support of the design, prototype and evaluation phases of their product. At any time in this process, the customer may decide to abandon its design effort. If this occurs, the design win we achieved will result in no production revenues.

        At formation, we had a very limited number of customers and design wins. We currently have over 40 customers and over 100 design wins. Customers other than Conexant and Skyworks accounted for $3.3 million of our revenues for the period from March 12, 2002 (inception) through December 31, 2002 and $17.9 million for the year ended December 31, 2003. Our relationships with most of our customers, other than Conexant and Skyworks, have been developed over a short period of time and are generally in the preliminary stages. We cannot assure you that these customers will generate significant revenues, that we will be able to retain these customers or that we will continue to be successful in attracting new customers. We expect that we will continue to be dependent upon a relatively limited number of customers, in particular Conexant and Skyworks, for a significant majority of our revenues for the foreseeable future.

    Migration to Specialty Processes

        The price of wafers processed with different technologies varies significantly. Accordingly, the mix of wafers that we produce is one of the primary factors that affect our revenues and profitability. Our strategy includes increasing our revenues derived from wafers employing our specialty process technologies, advanced analog CMOS, radio frequency CMOS, or RF CMOS, advanced RF CMOS, bipolar CMOS, or BiCMOS, and SiGe BiCMOS, as a percentage of our total revenues, as compared to revenues derived from wafers employing our standard process technologies, which are digital CMOS and standard analog process technologies. We are typically able to obtain higher gross margins on revenues derived from our specialty process technologies as compared to revenues derived from our standard process technologies. We believe our experience in the specialty process arena, particularly in SiGe BiCMOS process technology, provides us with competitive advantages in our target markets as compared with foundries that primarily provide standard CMOS process technologies. Revenues from specialty processes increased to $83.0 million, or 44.8% of our total revenues, for the year ended December 31, 2003 as compared to $29.4 million, or 23.9% of our total revenues, for the period from March 12, 2002 (inception) to December 31, 2002. This technology migration has and will continue to require significant capital and research and development investment by us in future periods.

    Capacity

        We currently have the capacity to produce up to 17,500 200-millimeter wafer starts per month, depending on process technology mix, in our Newport Beach, California fab. Our strategy is to obtain additional capacity through strategic relationships with other foundries to add capacity on a cost-effective basis without significant capital cost to us. Consistent with this strategy, we have entered into supply agreements with each of Advanced Semiconductor Manufacturing Corporation, or ASMC, and Shanghai Hua Hong NEC Electronics Co., Ltd., or HHNEC, two of China's leading silicon wafer foundries.

        ASMC has agreed to manufacture wafers for us utilizing our processes at specified prices and initiated production in the fourth quarter of 2003. ASMC guaranteed us minimum production capacity of at least 5,000 wafer starts per month between September 2003 and March 2004 and at least 10,000 wafer starts per month between April 2004 and December 2006 with respect to the manufacture of specified wafers using specialty processes. While we are obligated to purchase capacity that we forecast from time to time under certain circumstances, we do not have a minimum purchase obligation with ASMC. On April 1, 2004, the prices for all wafers supplied by ASMC will decrease by a specified

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percentage, and ASMC has agreed to exercise commercially reasonable efforts to decrease wafer prices by additional amounts in each subsequent year. Either party may, however, request to renegotiate pricing based on changing market conditions.

        HHNEC has guaranteed us capacity for the manufacture of up to 8,000 wafers per month commencing in October 2004, and up to 10,000 wafers per month commencing in January 2005, provided we give them forecasts with six months' advance notice. If HHNEC qualifies the manufacturing process of wafer products by required milestone dates, we will be required to order a minimum of $30.2 million of wafers between October 2004 and the end of 2005. Commencing January 2006, HHNEC will be obligated to manufacture all wafers ordered by us upon advance notice for fixed six-month periods, provided that HHNEC will not be obligated to manufacture a number of wafers that exceeds the average number of wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. In addition, we will be required to purchase a minimum of 50% of the wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. The prices for wafers purchased by us will be at commercially competitive prices, not to exceed specified amounts fixed through 2006. We and HHNEC will review wafer pricing annually and adjust the pricing downward consistent with market price declines, but not less than a specified percent decline in any year.

        HHNEC has additional obligations with respect to the production and qualification of certain process technologies. By September 30, 2004, HHNEC must qualify our 0.18 micron RF CMOS/SiGe BiCMOS wafers and have the necessary equipment installed to support the manufacture of 0.18 micron CMOS/SiGe BiCMOS wafers. HHNEC must also have the necessary equipment installed to support 0.18 micron CMOS wafer production capacity for a minimum of 5,000 wafer starts per month by December 2004, and an additional 5,000 wafer starts per month by the end of June 2005, for a total of 10,000 wafer starts per month. In addition to the minimum number of wafers that it is obligated to manufacture, HHNEC has agreed to use its commercially reasonable best efforts to provide additional production capacity to us if we provide adequate notice of such need.

        As part of our relationship with HHNEC, we acquired an equity interest in HHNEC of approximately 11% in return for the license of certain process technologies and a cash investment of $10.0 million in HHNEC. With respect to SiGe technologies, the license we granted is restricted for use only to manufacture products for us. We paid $1.5 million of the investment in December 2003 and $4.25 million is due in each of November 2004 and November 2005. Upon mutual agreement, the payments due in 2004 and 2005 may be accelerated. This investment is carried at its original cost basis and is accounted for using the cost method of accounting for investments. If we are unable to develop and license certain of our process technologies to HHNEC by December 2005, we will have the option to contribute an additional $10.0 million to HHNEC or reduce our ownership in HHNEC by a corresponding amount.

        We believe our agreements with ASMC and HHNEC will enable us to increase our manufacturing capacity in our specialty process technologies at specified costs over the next three years without incurring significant capital expenditures.

    Factory Utilization

        Our operating results are characterized by relatively high fixed costs. Increases and decreases in our factory utilization rates result in the allocation of fixed manufacturing costs over a larger or reduced number of wafers, which yields lower or higher per unit costs. As a result, our capacity utilization rates can significantly affect our gross profit margin. Our utilization rates have varied from period to period based on production capacity and market demand. Other factors affecting utilization rates are the complexity and mix of the wafers produced, the level of customer orders, mechanical

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failures, disruption of power supply, scheduled facility or equipment maintenance, relocation of equipment for production process adjustments and fire or other natural disasters.

        Our production capacity is determined by us based on the capacity ratings given by manufacturers of the equipment used in the fab, adjusted for, among other factors, actual output during uninterrupted trial runs, expected down time due to set up for production runs and maintenance and expected product mix as well as other significant assumptions made by us. Because these factors include subjective elements, our measurement of capacity utilization rates is unlikely to be comparable to those of our competitors. We use a consistent methodology to determine factory utilization for all fiscal periods presented in order to allow for analysis of utilization trends.

    Fab and Manufacturing Yield

        Fab yield is defined as the number of wafers completed that meet certain acceptance criteria, expressed as a percentage of total wafer starts. Manufacturing yield is defined as the number of functioning die on a wafer, expressed as a percentage of total die per wafer. Our ability to achieve and maintain high levels of fab and manufacturing yields is a key requirement for our customers' and our business operations. Our manufacturing processes are highly complex and precise, requiring production in a tightly controlled clean room environment. Impurities or other difficulties in the manufacturing process, such as defects in the masks used to print circuits on a wafer, equipment failure or operational error may cause a percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. In addition, we may experience problems in achieving acceptable yields in connection with the production of a new product, the adoption of new manufacturing processes or any expansion or upgrade of our manufacturing capacity, or the manufacturing capacity of ASMC or HHNEC that is available to us. The interruption of manufacturing, including power or labor interruptions, may also affect our fab and manufacturing yields.

        We expense, to cost of goods sold, defective inventory caused by fab or manufacturing yields below our expectations, which causes our gross margins to fluctuate. Future decreases in our fab or manufacturing yields may result in a delay in our delivery of products to our customers and could have a material adverse effect on our ability to retain existing customers or attract new customers, which would significantly reduce our revenues and decrease our gross margins.

Financial Operations Overview

    Fiscal Year

        We maintain a 52- or 53-week fiscal year ending on the Friday on or preceding December 31. Each of the first three quarters of our fiscal year end on the last Friday in each of March, June and September. As a result, each fiscal quarter consists of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the first three quarters consist of 13 weeks and the fourth quarter consists of 14 weeks. Fiscal year 2003 consists of 52 weeks. For simplicity of presentation, we have expressed the end of each fiscal period presented in the financial and outstanding securities information in this prospectus as ending on the last day of the final month in such period.

    Revenues

        We generate revenues primarily from the manufacture of semiconductor wafers. We also derive a small portion of our revenues from engineering services and wafer probe services, performed both internally and by subcontractors, and from the procurement of photomasks, which we generally subcontract to third parties.

        We record revenues net of wafer credits due to the respective customer, if applicable.

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    Cost of Goods Sold

        Cost of goods sold for wafers manufactured consists primarily of purchased manufacturing materials, the cost for purchased photomasks; test services, labor and manufacturing-related overhead associated with the design and manufacture of products at our Newport Beach, California fab; the purchase price that we will pay to our manufacturing partners for wafers; shipping and other costs incurred by us in connection with the purchase of wafers; as well as technology licensing expenses. We expense to cost of goods sold defective inventory caused by fab and manufacturing yields below our expectations as incurred. We also review our inventories for indications of obsolescence or impairment and provide reserves as deemed necessary.

    Research and Development

        Research and development costs are expensed as incurred and primarily consist of salaries and wages for process and technology research and development activities, fees incurred in connection with the license of design libraries and the cost of wafers used for research and development purposes. We plan to continue to focus our research and development activities on the development of specialty process technologies for new applications in the future, which may cause our research and development expenses to increase.

    Selling, General and Administrative

        Selling, general and administrative expenses consist primarily of salaries and benefits for our selling and administrative personnel, including the human resources, executive, finance and legal departments. We expect our selling, general and administrative expenses to increase as we support our expanding operations, undertake additional selling efforts to expand our presence in Europe and Asia, and as a result of expenses associated with being a publicly-traded company.

    Stock Compensation Expense

        Stock Appreciation Rights.    At the time of our separation from Conexant, the substantial majority of Conexant's employees working in the Newport Beach, California fab became our employees. In connection with their employment, Conexant had granted these employees options to purchase Conexant common stock. The terms of these options generally provided that they would expire within three months following an employee's termination of employment by Conexant. Conexant and we decided to provide employees transferred to us with a continuing economic interest in Conexant common stock. Accordingly, we issued stock appreciation rights to these employees that entitle the holder to receive, upon exercise, a cash settlement for the excess, if any, of the fair market value of a share of Conexant common stock over the reference price of the stock appreciation right. On March 12, 2002, we granted 2,979,456 stock appreciation rights with a reference price of $13.05. The number of shares relating to, and the reference price of, the stock appreciation rights is subject to adjustment for, among other things, distributions of securities by Conexant to holders of its common stock. Unless accelerated in connection with specified transactions, the stock appreciation rights vest at a rate of 25% on each six month anniversary of the date of grant, such that the stock appreciation rights will be fully vested on March 12, 2004. The unexercised stock appreciation rights expire on December 31, 2004.

        To substantially offset the economic effect on us of the stock appreciation rights, Conexant granted us a warrant to purchase 2,900,000 shares of its common stock at an exercise price of $13.05 per share that expires on the earlier of 20 days after the accelerated vesting of all stock appreciation rights or January 20, 2005. The warrant is subject to adjustment for, among other things, subsequent distributions of securities by Conexant to holders of its common stock. The warrant is fully vested.

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        Adjustments were made to the stock appreciation rights and the warrant in connection with Conexant's spin-off of its wireless division and subsequent merger with Alpha Industries, Inc. to form Skyworks in June 2002, and Conexant's spin-off of Mindspeed Technologies, Inc. in June 2003. The per share exercise price and the number of shares subject to the warrant were equitably adjusted to take into account the economic effect of each transaction. In connection with these transactions, we also received warrants to purchase Mindspeed common stock and Skyworks common stock. Following these adjustments and issuances, and taking account of exercises of the warrants and stock appreciation rights, as of December 31, 2003, the issued and outstanding warrants and stock appreciation rights were as follows:

Associated Common Stock

  Warrants
  Stock Appreciation Rights
  Exercise/Reference Price Per Share
Conexant   2,679,425   2,713,346   $ 3.76
Skyworks   1,017,900   1,027,285   $ 24.02
Mindspeed   842,866   852,784   $ 2.57

        Recently, Conexant announced that it intends to merge with GlobespanVirata, Inc. Following the merger, our warrants for Conexant common stock will become exercisable for common stock of the combined corporation and stock appreciation rights in respect of Conexant common stock will be tied to the value of the common stock of the combined corporation.

        Upon a holder's exercise of a stock appreciation right, we exercise a corresponding portion of the applicable warrant and sell the underlying securities received upon exercise such that the transactions are cash neutral to us. We expect that the number of stock appreciation rights outstanding will decrease through employee attrition and other forfeits prior to exercise such that we will be able to acquire sufficient shares upon the exercise of warrants to substantially offset cash payments we are required to make to holders of stock appreciation rights upon the exercise of such stock appreciation rights. However, our cash balances will be reduced to the extent we are unable to acquire sufficient shares upon the exercise of warrants to offset the exercise of all stock appreciation rights.

        Upon our separation from Conexant, we recorded an asset equal to the fair value of the Conexant warrant and a liability equal to the fair value of the granted stock appreciation rights on our consolidated balance sheet. In addition, we recorded on our consolidated balance sheet, as part of the purchase price allocation, deferred compensation for the fair value of the stock appreciation rights granted to employees. The stock appreciation right liability was offset by the deferred compensation, resulting in a net amount of zero for the stock appreciation right liability on our consolidated balance sheet as of March 12, 2002 (inception). The deferred compensation is being amortized over the vesting period of the stock appreciation rights such that, as portions of the outstanding stock appreciation rights vest, a corresponding portion of the deferred compensation amount is recorded as a stock compensation expense in our consolidated statement of operations as a non-cash charge and the net difference between the remaining amount of deferred compensation and the stock appreciation right liability is reflected on the consolidated balance sheet.

        We reflect subsequent adjustments as of each interim and annual reporting date in the fair value of the warrants as a gain or loss on investments in our consolidated statement of operations. We reflect subsequent adjustments to the stock appreciation right liability and deferred compensation due to fluctuations in the fair value of the instruments and due to the amortization of the deferred compensation in compensation expense in our consolidated statement of operations. We amortize deferred compensation on a straight-line basis over the vesting period of the stock appreciation rights, which will end in March 2004. Following March 2004, the full amount of the stock appreciation right liability will be reflected as a liability on our consolidated balance sheet. During the period from the vesting of the stock appreciation rights until their expiration, expected in December 2004, changes in the fair value of these instruments will affect operating income but will not have a significant effect on net income (loss). This is because any increase or decrease in stock compensation expense will be

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substantially offset by a decrease or increase in gain (loss) on investments. Since the number of stock appreciation rights that are based on Conexant, Skyworks and Mindspeed common stock exceeds the number of warrants we hold that are exercisable for each of those companies' common stock, our accrued liability for the stock appreciation rights will, when the stock appreciation rights are fully vested, exceed the fair value of our warrants. The amount of this additional liability will be equal to the value of the stock appreciation rights that are not matched by warrants. Depending on the market prices of Conexant, Skyworks and Mindspeed common stock at the time of exercise of the stock appreciation rights, the amount of the increase in our accrued liability attributable to these additional stock appreciation rights will not be offset by a gain in the value of warrants. We will incur additional compensation expense that is not offset by gain upon the exercise of warrants to the extent that our obligations under the stock appreciation rights exceed the accrued liability attributable to the additional stock appreciation rights. Also, to the extent that we do not receive sufficient cash from exercising the warrants to satisfy our obligations under the stock appreciation rights, we will need to use cash from other sources to satisfy those obligations. We do not expect the warrants or stock appreciation rights to have a significant effect on net income (loss) for any period after December 31, 2004.

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        As of December 31, 2003, 177,544 stock appreciation rights relating to Conexant common stock and 193,940 stock appreciation rights relating to Mindspeed common stock had been exercised, resulting in compensation to employees of approximately $931,000. To offset the effect of the stock appreciation right exercises, we exercised our right to acquire equivalent shares of Conexant and Mindspeed common stock under the Conexant warrant and the Mindspeed warrant. We sold the shares of Conexant common stock and Mindspeed common stock received upon the exercise of the warrants for realized gains of approximately $931,000. No stock appreciation rights relating to Skyworks common stock have been exercised and we have not exercised our right to acquire any shares of Skyworks common stock under the Skyworks warrant.

        Stock Options.    In connection with the granting of stock options to employees, directors and consultants during the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003, we recorded an aggregate of $2.5 million in deferred stock-based compensation. These options are considered compensatory because the fair value of our stock determined for financial reporting purposes is greater than the fair value determined by the board of directors on the date of the grant. As of December 31, 2003, we had an aggregate of $2.3 million of deferred stock-based compensation remaining to be amortized. This deferred stock-based compensation balance will be amortized through fiscal 2007. We amortize the deferred stock-based compensation on a straight line basis over the vesting period of the related options, which is generally four years.

Critical Accounting Policies

    Estimates

        Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We review our estimates on an on-going basis, including those related to sales allowances, the allowance for doubtful accounts, inventories and related reserves, long-lived assets, investments, income taxes, litigation and deferred stock compensation. We base our estimates on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result. We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

    Revenue Recognition

        We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 101A, SAB 101B and SAB 104. SAB 101 requires four basic criteria to be met before revenue can be recognized:

    persuasive evidence that an arrangement exists;

    delivery has occurred or services have been rendered;

    the fee is fixed and determinable; and

    collectibility is reasonably assured.

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        Determination of the criteria set forth in the third and fourth bullet points above is based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

        We generally recognize revenues when we ship products, which is when title and risk of loss transfer to the customer. Provisions for sales allowances are recorded as a reduction to revenues, are based upon historical experience and specific identification of an event necessitating an allowance and are recorded in the period the underlying revenue has been recognized. Estimates for sales allowances are highly subjective and require a considerable amount of judgment.

        We defer the recognition of advances toward future product purchases received from customers until products are shipped. We defer the recognition of revenues from development contracts and the procurement of photomasks until the underlying related products manufactured have been shipped or we determine that no such products will be shipped.

    Accounts Receivable

        We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. Our accounts receivable are concentrated in a relatively few number of customers. Therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts, which could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

    Inventories

        We initiate production of a majority of our wafers once we have received an order from a customer. We generally do not carry a significant inventory of finished goods unless we decide to do so to accommodate a specific request of a customer. We seek to purchase and maintain raw materials at sufficient levels to meet lead times based on forecasted demand. If forecasted demand exceeds actual demand, we may need to provide an allowance for excess or obsolete quantities on hand. We also review our inventories for indications of obsolescence or impairment and provide reserves as deemed necessary. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. We state our inventories at the lower of cost, using the first-in, first-out method, or market.

    Long-lived Assets

        We review long-lived assets and identifiable intangibles for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We report long-lived assets to be disposed of at the lower of carrying amount or fair value less cost of sale.

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    Accounting for Income Taxes

        We account for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year's financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount on the consolidated balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, we must establish a valuation allowance.

        As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax liability, together with assessing temporary differences that may result in deferred tax assets. Management's judgment is required in determining any valuation allowance recorded against our net deferred tax assets, with any such valuation allowance being based on our estimates of taxable future income and the period over which our deferred tax assets would be recoverable. For the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003, we recorded an income tax provision of approximately $12,000 for each period, which resulted in an effective tax rate of approximately 0%. The difference between our effective tax rate and the federal statutory rate of 35% resulted primarily from recording a valuation allowance to offset the deferred tax assets for each reporting period. We recorded a valuation allowance against the deferred tax assets in the amount of approximately $63.1 million and $65.3 million at December 31, 2002 and December 31, 2003, respectively. During 2002 and 2003, we concluded that a full valuation allowance against our net deferred tax asssets was appropriate as a result of our cumulative losses. For income tax purposes, we have net operating losses and other attributes, and the utilization of these losses and tax attributes may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code, and also from possible disputes arising in audits from various taxing authorities. We are not currently under audit by any taxing jurisdiction.

    Pension Plans

        We maintain defined benefit pension plans for our employees covered by a collective bargaining agreement. For financial reporting purposes, the calculation of net periodic pension costs based upon a number of actuarial assumptions, including a discount rate for plan obligations, an assumed rate of return on pension plan assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions are based upon management's judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and cash funding requirements of our pension plans.

    Investments in Warrants

        We have accounted for our warrants to purchase Conexant common stock, Skyworks common stock and Mindspeed common stock, as well as the stock appreciation rights we have granted to our employees as derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and

40


Hedging Activities, and Emerging Issues Task Force (EITF) Issue 02-08, Accounting for Options Granted to Employees in Unrestricted Publicly-Traded Shares of an Unrelated Entity. Accordingly, we reflected the fair value of each instrument (effectively equivalent amounts) as an asset and a liability, respectively, in our initial purchase price allocation in connection with our separation from Conexant and on our subsequent consolidated balance sheets. In addition, as part of the purchase price allocation, we recorded deferred compensation for the fair value of the stock appreciation rights we granted to employees. Initially, the deferred compensation offset the stock appreciation right liability, resulting in a net amount of zero for the stock appreciation right liability on the consolidated balance sheet as of the date of inception. We determined the initial fair value of the warrants, based on an independent third party appraisal, and the initial fair value of the stock appreciation rights, using the Black-Scholes pricing model, each to be $14.2 million.

        We reflect subsequent adjustments as of each interim and annual reporting date in the fair value of the warrants as a gain or loss on investments on our consolidated statement of operations. We reflect subsequent adjustments to the stock appreciation right liability and deferred compensation due to fluctuations in the fair value of the instruments and due to the amortization of the deferred compensation in stock compensation expense on our consolidated statement of operations. We amortize deferred compensation on a straight-line basis over the vesting period of the stock appreciation rights. At December 31, 2002 and 2003, the fair value of the warrants was approximately $1.6 million and $10.5 million, respectively. At December 31, 2002 and 2003, the fair value of the stock appreciation rights was approximately $1.6 million and $10.4 million, respectively, and the remaining deferred compensation was $985,000 and $1.1 million, respectively. We have offset the deferred compensation against the stock appreciation right liability, which resulted in a net stock appreciation right liability of $629,000 and $9.3 million at December 31, 2002 and 2003, respectively. For the period from March 12, 2002 (inception) to December 31, 2002, we recorded a $12.7 million non-cash loss on investments for the decrease in value of the warrants and compensation expense of $629,000 for the net amortization of deferred compensation. For the year ended December 31, 2003, we recorded an $8.9 million non-cash gain on investment for the increase in value of the warrants and compensation expense of $8.7 million for the net amortization of deferred compensation. We will continue to record compensation based on the pro rata vesting of the then fair value of the stock appreciation rights, which could result in additional expense if the fair value stays consistent or increases, or a gain if the fair value decreases. Following March 2004, the full amount of the stock appreciation right liability will be reflected as a liability on our consolidated balance sheet and we expect that it will be substantially equivalent in amount to the value of the warrants that we have recorded as assets on our consolidated balance sheet. During the period from the vesting of the stock appreciation rights until their expiration, expected in December 2004, changes in the fair value of these instruments will affect operating income but will not have a significant effect on net income (loss) as any increase or decrease in stock compensation expense will be substantially offset by a decrease or increase in gain (loss) on investments. We do not expect the warrants or stock appreciation rights to have any effect on the consolidated statement of operations for any period after December 31, 2004.

41



Results of Operations

        The following table presents our historical operating results for the periods indicated as a percentage of revenues:

 
  Period from March 12,
2002 (inception) to
December 31, 2002

  Year Ended
December 31, 2003

 
Revenues:          
  Standard processes   76.1 % 55.2 %
  Specialty processes   23.9   44.8  
   
 
 
    Total revenues   100.0   100.0  
Cost of goods sold   83.5   85.5  
   
 
 
Gross profit   16.5   14.5  
Operating expenses:          
  Research and development   10.0   10.0  
  Selling, general and administrative   7.7   7.1  
  Amortization of intangible assets   0.2   0.4  
  Loss on disposal of equipment   0.0   0.4  
  Stock compensation expense   0.5   5.3  
   
 
 
    Total operating expenses   18.4   23.2  
   
 
 

Operating loss

 

(1.9

)

(8.7

)

Interest income

 

0.4

 

0.3

 
Gain (loss) on investments   (10.3 ) 5.2  
   
 
 
Loss before income taxes   (11.8 ) (3.2 )
Income tax provision   0.0   0.0  
   
 
 
Net loss   (11.8 )% (3.2 )%
   
 
 

    Year Ended December 31, 2003 Compared with Period from March 12, 2002 (inception) to December 31, 2002.

        Revenues.    Revenues increased 50.5% to $185.2 million for the year ended December 31, 2003 compared to $123.1 million for the period from March 12, 2002 (inception) to December 31, 2002. The increase in revenues was primarily due to the following during the year ended December 31, 2003:

    an $8.5 million increase in revenues from our standard process technologies;

    a $53.6 million increase in revenues from our specialty process technologies;

    an increase in our average selling price per wafer resulting from a greater portion of wafers manufactured using our specialty process technologies;

    an increase in wafer sales volume; and

    the inclusion of 12 months of operating activity for the year ended December 31, 2003, compared to approximately nine and one-half months during the period from March 12, 2002 (inception) to December 31, 2002.

        Gross Profit.    Gross profit as a percentage of revenues, or gross margin, decreased to 14.5% for the year ended December 31, 2003, compared to 16.5% for the period from March 12, 2002 (inception)

42


to December 31, 2002. The decrease in gross margin was primarily attributable to the following during the year ended December 31, 2003:

    a decrease in gross margin equal to 1.1% attributable to increased utility costs for the year ended December 31, 2003 as compared to the period from March 12, 2002 (inception) to December 31, 2002 following the expiration of a favorable utility pricing contract;

    operating costs equal to 1.4% of total revenues incurred in connection with our investment in foundry capacity at ASMC in advance of receiving revenues related to the sale of wafers produced by our manufacturing partners; and

    an inventory charge equal to 0.7% of total revenues relating to the resolution of a customer dispute.

        These decreases in gross margin were partially offset by an increase in the average wafer selling price as the percentage of revenues derived from specialty process technologies increased to 44.8% of our total revenues for the year ended December 31, 2003 from 23.9% of our total revenues for the period from March 12, 2002 (inception) to December 31, 2002. These increased costs were also partially offset by increases in factory utilization, which rose to 94% for the year ended December 31, 2003 from 84% for the period from March 12, 2002 (inception) to December 31, 2002.

        Research and Development.    Research and development costs increased to $18.6 million, or 10.0% of revenues, for the year ended December 31, 2003, from $12.3 million, or 10.0% of revenues, for the period from March 12, 2002 (inception) to December 31, 2002. The increase in absolute dollars was primarily attributable to 12 months of costs for the year ended December 31, 2003 compared to approximately nine and one-half months of costs for the period from March 12, 2002 (inception) to December 31, 2002, increased head count for engineering technical support for our customers and further investment in research and development of specialty process technologies.

        Selling, General and Administrative.    Selling, general and administrative expenses increased to $13.2 million, or 7.1% of revenues, for the year ended December 31, 2003, from $9.5 million, or 7.7% of revenues, for the period from March 12, 2002 (inception) to December 31, 2002. The increase in absolute dollars for the year ended December 31, 2003 compared to the period from March 12, 2002 (inception) to December 31, 2002 resulted from:

    the inclusion of 12 months of expenses for the year ended December 31, 2003 compared to only nine and one-half months of expenses in the period from March 12, 2002 (inception) to December 31, 2002;

    headcount expansion to support our global sales and marketing efforts; and

    increased functional overhead in connection with professional services related to potential transactions with strategic partners.

        Stock Compensation Expense.    Stock compensation expense for the year ended December 31, 2003 was $9.8 million compared to $0.6 million for the period from March 12, 2002 (inception) to December 31, 2002. The increase is primarily due to a change in the value of the outstanding stock appreciation rights as well as the scheduled vesting of the stock appreciation rights during the year ended December 31, 2003.

        Interest Income.    Interest income for the year ended December 31, 2003 was $0.5 million compared to $0.5 million in the period from March 12, 2002 (inception) to December 31, 2002. Lower interest rates were offset by an increase in the average cash balance for the comparable periods as well as the longer period over which interest was earned.

        Gain (loss) on Investments.    Gain on investments for the year ended December 31, 2003 was $9.7 million, compared to a loss of $12.7 million for the period from March 12, 2002 (inception) to December 31, 2002. The change is the result of a change in the fair market value of common stock underlying the warrants we hold for Conexant, Skyworks and Mindspeed common stock.

43


    Quarterly Results of Operations

        The following table presents our unaudited quarterly results of operations for the seven quarters prior to and including the quarter ended December 31, 2003 and for the period from March 12, 2002 (inception) to March 31, 2002. You should read the following table in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

 
   
  Three months ended
 
Consolidated Statement of
Operations Data

  Period from
Mar. 12, 2002 (inception) to Mar. 31, 2002

  June 30,
2002

  September 30, 2002
  December 31, 2002
  March 31, 2003
  June 30, 2003
  September 30, 2003
  December 31, 2003
 
 
  (in thousands, except per share data)

 
Revenues:(1)                                                  
  Standard processes   $ 4,013   $ 30,452   $ 28,488   $ 30,703   $ 26,658   $ 27,503   $ 23,510   $ 24,498  
  Specialty processes     1,642     5,422     11,697     10,660     13,550     22,029     16,317     31,120  
   
 
 
 
 
 
 
 
 
    Total revenues     5,655     35,874     40,185     41,363     40,208     49,532     39,827     55,618  

Cost of goods sold(2)

 

 

5,174

 

 

28,877

 

 

33,368

 

 

35,325

 

 

35,970

 

 

41,589

 

 

34,117

 

 

46,675

 
   
 
 
 
 
 
 
 
 
Gross profit     481     6,997     6,817     6,038     4,238     7,943     5,710     8,943  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development(2)     449     3,430     4,024     4,430     3,881     4,786     4,742     5,163  
  Selling, general and administrative(2)     542     2,841     2,715     3,417     3,005     3,396     3,112     3,660  
  Amortization of intangible assets         16     21     206     96     215     215     215  
  Loss on disposal of equipment                     625     90     29     7  
  Stock compensation expense(3)         154     (20 )   495     (163 )   4,315     5,221     405  
   
 
 
 
 
 
 
 
 
    Total operating expenses     991     6,441     6,740     8,548     7,444     12,802     13,319     9,450  
   
 
 
 
 
 
 
 
 
Operating income (loss)     (510 )   556     77     (2,510 )   (3,206 )   (4,859 )   (7,609 )   (507 )

Interest income

 

 

16

 

 

179

 

 

112

 

 

207

 

 

124

 

 

154

 

 

93

 

 

142

 
Gain (loss) on investments(3)     (1,688 )   (11,283 )   (695 )   1,015     (683 )   6,381     5,201     (1,217 )
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes     (2,182 )   (10,548 )   (506 )   (1,288 )   (3,765 )   1,676     (2,315 )   (1,582 )
Income tax provision                 12             12      
   
 
 
 
 
 
 
 
 
Net income (loss)   $ (2,182 ) $ (10,548 ) $ (506 ) $ (1,300 ) $ (3,765 ) $ 1,676   $ (2,327 ) $ (1,582 )
   
 
 
 
 
 
 
 
 
Preferred stock dividends             (1,616 )   (2,719 )   (2,819 )   (2,819 )   (2,819 )   (2,819 )
   
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders   $ (2,182 ) $ (10,548 ) $ (2,122 ) $ (4,019 ) $ (6,584 ) $ (1,143 ) $ (5,146 ) $ (4,401 )
   
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted(4)                                 $ (2.10 ) $ (8.45 ) $ (4.26 )
                                 
 
 
 
Weighted average shares used in computing net loss per common share, basic and diluted                                   543     609     1,032  
                                 
 
 
 
Pro forma net income (loss) per common share, basic and diluted(5)   $ (0.02 ) $ (0.11 ) $ (0.01 ) $ (0.01 ) $ (0.03 ) $ 0.01   $ (0.02 ) $ (0.01 )
   
 
 
 
 
 
 
 
 
Weighted average shares used in computing pro forma net income (loss) per common share:                                                  
  Basic     100,000     100,000     100,000     109,520     113,172     113,615     113,681     114,104  
   
 
 
 
 
 
 
 
 
  Diluted     100,000     100,000     100,000     109,520     113,172     117,125     113,681     114,104  
   
 
 
 
 
 
 
 
 
Other Operating Data:                                                  
Adjusted net income (loss)(6)   $ (494 ) $ 889   $ 169   $ (1,820 ) $ (3,245 ) $ (390 ) $ (2,307 ) $ 40  

(1)
Included in revenues for the period from March 12, 2002 (inception) to March 31, 2002 and for the three months ended June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 are revenues from related parties of $5.4 million, $35.3 million, $39.3 million, $39.8 million, $39.1 million, $46.8 million, $35.0 million and $49.0 million, respectively.

44


(2)
Amounts exclude stock compensation expense equal to the amounts set forth in the following table. The aggregate of the amounts for the each period have been included under stock compensation expense in our consolidated statement of operations data:

 
   
  Three months ended
 
  Period from
Mar. 12, 2002 (inception) to Mar. 31, 2002

  June 30,
2002

  September 30, 2002
  December 31, 2002
  March 31, 2003
  June 30, 2003
  September 30, 2003
  December 31, 2003
 
  (in thousands)

                                                 
Cost of goods sold   $   $ 36   $ (5 ) $ 118   $ (28 ) $ 1,015   $ 1,227   $ 84
Research and development   $   $ 67   $ (9 ) $ 215   $ (73 ) $ 1,876   $ 2,263   $ 177
Selling, general and administrative   $   $ 51   $ (6 ) $ 162   $ (62 ) $ 1,424   $ 1,731   $ 144
(3)
For a discussion of stock compensation expense and gain (loss) on investments, and their relationship to one another, see "—Financial Operations Overview" and "—Critical Accounting Policies."

(4)
On July 31, 2002, 5,500,000 shares of class A common stock and 4,500,000 shares of class B common stock, representing all of the then outstanding shares of our common stock, were recapitalized into 55,000,000 and 45,000,000 shares of series A preferred stock and series B preferred stock, respectively. The recapitalization has been reflected as occurring on March 12, 2002 (inception) for purposes of calculating net loss per common share. Net loss per common share is not shown for periods where there were effectively no weighted average shares of common stock outstanding.

(5)
Pro forma net loss per common share gives effect to the conversion of our recapitalized convertible preferred stock into common stock immediately prior to the completion of this offering, as if the conversion had taken place on the date of issuance.

(6)
Adjusted net income (loss) constitutes net loss before stock compensation expense and gain (loss) on investments. The following table provides a reconciliation of net income (loss) to adjusted net income (loss), which we believe is the most directly comparable measure under generally accepted accounting principles:

 
   
  Three months ended
 
Consolidated Statement of
Operations Data

  Period from
Mar. 12, 2002 (inception) to Mar. 31, 2002

  June 30,
2002

  September 30, 2002
  December 31, 2002
  March 31, 2003
  June 30, 2003
  September 30, 2003
  December 31, 2003
 
 
  (in thousands)

 
Net income (loss)   $ (2,182 ) $ (10,548 ) $ (506 ) $ (1,300 ) $ (3,765 ) $ 1,676   $ (2,327 ) $ (1,582 )

Adjustments to net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(Gain) loss on investments     1,688     11,283     695     (1,015 )   683     (6,381 )   (5,201 )   1,217  
Stock compensation         154     (20 )   495     (163 )   4,315     5,221     405  
   
 
 
 
 
 
 
 
 
Adjusted net income (loss)   $ (494 ) $ 889   $ 169   $ (1,820 ) $ (3,245 ) $ (390 ) $ (2,307 ) $ 40  
   
 
 
 
 
 
 
 
 

45


        The following table presents our operating results, for the periods indicated as a percentage of total revenues.

 
  Period from Mar. 12, 2002 (inception) to Mar. 31, 2002
   
   
   
   
   
   
   
 
 
  Three months ended
 
Consolidated Statement of
Operations Data

  June 30,
2002

  September 30, 2002
  December 31,
2002

  March 31,
2003

  June 30,
2003

  September 30,
2003

  December 31,
2003

 
Revenues:                                  
  Standard processes   71.0 % 84.9 % 70.9 % 74.2 % 66.3 % 55.5 % 59.0 % 44.0 %
  Specialty processes   29.0   15.1   29.1   25.8   33.7   44.5   41.0   56.0  
   
 
 
 
 
 
 
 
 
    Total revenues   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0  
Cost of goods sold   91.5   80.5   83.0   85.4   89.5   84.0   85.7   83.9  
   
 
 
 
 
 
 
 
 
Gross profit   8.5   19.5   17.0   14.6   10.5   16.0   14.3   16.1  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development   7.9   9.6   10.0   10.7   9.7   9.7   11.9   9.3  
  Selling, general and administrative   9.6   7.9   6.8   8.3   7.5   6.9   7.8   6.6  
  Amortization of intangible assets         0.5   0.1   0.3   0.5   0.4  
  Loss on disposal of equipment           1.6   0.2   0.1   0.0  
  Stock compensation expense     0.5     1.2   (0.4 ) 8.7   13.1   0.7  
   
 
 
 
 
 
 
 
 
    Total operating expenses   17.5   18.0   16.8   20.7   18.5   25.8   33.4   17.0  
   
 
 
 
 
 
 
 
 
Operating income (loss)   (9.0 ) 1.5   0.2   (6.1 ) (8.0 ) (9.8 ) (19.1 ) (0.9 )

Interest income

 

0.3

 

0.6

 

0.2

 

0.5

 

0.3

 

0.3

 

0.2

 

.3

 
Gain (loss) on investments   (29.9 ) (31.5 ) (1.7 ) 2.5   (1.7 ) 12.9   13.1   (2.2 )
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes   (38.6 ) (29.4 ) (1.3 ) (3.1 ) (9.4 ) 3.4   (5.8 ) (2.8 )
Income tax provision                  
   
 
 
 
 
 
 
 
 
Net income (loss)   (38.6 )% (29.4 )% (1.3 )% (3.1 )% (9.4 )% 3.4 % (5.8 )% (2.8 )%
   
 
 
 
 
 
 
 
 

        Revenues.    Revenues increased sequentially during each of the quarters ended June 30, 2002, September 30, 2002 and December 31, 2002. The increases were due in part to increases in wafer sales volumes throughout these periods. In addition, the increases in revenues for the quarters ended June 30, 2002 and September 30, 2002 were partially attributable to an increase in average wafer selling prices, resulting from a greater portion of wafers manufactured using our specialty process technologies.

        Revenues decreased 2.8% for the quarter ended March 31, 2003 compared to the quarter ended December 31, 2002 due to a decrease in wafer sales volume, partially offset by an increase in revenues derived from our specialty process technologies, resulting in higher average wafer selling prices. Revenues increased 23.2% for the quarter ended June 30, 2003 compared to the quarter ended March 31, 2003 primarily driven by a 62.6% increase in our specialty process revenues due to a significant increase in orders from a major customer and by a 3.2% increase in our standard process revenues. For the quarter ended September 30, 2003, compared to the quarter ended June 30, 2003, our revenues decreased 19.6% as a result of a decrease in orders from the same customer as the customer worked off inventory produced by us in the quarter ended June 30, 2003 and asked us to delay the shipment of products. Approximately 74% of these products had been shipped to the customer by the end of the fourth quarter of 2003. Revenues increased 39.6% for the quarter ended December 31, 2003 compared to the quarter ended September 30, 2003, primarily driven by a 90.7% increase in our specialty process revenues.

        The percentage of revenues from our specialty process technologies increased from 15.1% of total revenues in the quarter ended June 30, 2002 to 56.0% of total revenues in the quarter ended December 31, 2003.

        Gross Profit.    Gross profit as a percentage of revenues, or gross margin, declined to 17.0% for the quarter ended September 30, 2002 from 19.5% for the quarter ended June 30, 2002. This decrease primarily resulted from replenishment of supply stocks and higher seasonal utility rates, partially offset by an increase in our revenues derived from our specialty processes, which typically carry a higher gross

46



margin than our standard process technology, and by an increase in our factory utilization to 87% for the quarter ended September 30, 2002 from 78% for the quarter ended June 30, 2002.

        Gross margin declined to 14.6% for the quarter ended December 31, 2002 from 17.0% for the quarter ended September 30, 2002. This resulted from a write-off related to defective products equal to 2.9% of revenues, partially offset by an increase in our factory utilization to 90% for the quarter ended December 31, 2002 from 87% for the quarter ended September 30, 2002.

        Gross margin declined to 10.5% for the quarter ended March 31, 2003 from 14.6% for the quarter ended December 31, 2002. The decline was due primarily to our agreement to accept an inventory charge of approximately 3.2% of revenues relating to the resolution of a customer dispute and to an expense of approximately 0.7% of revenues incurred by us to qualify our processes for manufacture at ASMC. These additional expenses were partially offset by an increase in our revenues derived from our specialty processes and by an increase in our factory utilization to 96% for the quarter ended March 31, 2003 from 90% for the quarter ended December 31, 2002.

        Gross margin increased to 16.0% for the quarter ended June 30, 2003 from 10.5% for the quarter ended March 31, 2003 as a result of an increase in average selling price per wafer arising from an increase in revenues derived from our specialty processes and an increase in our factory utilization to 100% for the quarter ended June 30, 2003 from 96% for the quarter ended March 31, 2003. These increases were partially offset by an additional 0.5% of revenues expense as we continued to qualify our processes for manufacture at ASMC.

        Gross margin decreased to 14.3% for the quarter ended September 30, 2003 from 16.0% for the quarter ended June 30, 2003 due to a decrease in wafer sales volume, resulting from a delay in shipment of products to a customer at the customer's request, and by a decrease in factory utilization to 84% for the quarter ended September 30, 2003 from 100% for the quarter ended June 30, 2003.

        Gross margin increased to 16.1% for the quarter ended December 31, 2003 from 14.3% for the quarter ended September 30, 2003 as a result of an increase in revenues derived from our specialty processes and an increase in our factory utilization to 95% for the quarter ended December 31, 2003 from 84% for the quarter ended September 30, 2003.

        Historically, our quarterly operating results have fluctuated significantly and we expect our future operating results to continue to fluctuate. As such, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful measures of operating performance and should not be relied upon as indications of future performance. See "Risk Factors—Risks Related to Our Business and Industry—We expect our operating results to fluctuate from quarter to quarter and year to year, which may make it difficult to predict our future performance and could cause our stock price to fluctuate and decline."

Liquidity and Capital Resources

        Since the inception of our business in March 2002, we have financed our operations primarily through issuances of equity securities and cash generated from operations. We received gross proceeds of approximately $52.0 million from entities affiliated with The Carlyle Group in connection with our formation, of which we paid $19.3 million to Conexant for its contribution of assets and $5.5 million in transaction expenses. In October 2002, we received $30.0 million in cash and $30.0 million in the form of a note due October 2003 from RF Micro Devices in exchange for credit towards the purchase of future products and shares of our series B preferred stock. In October 2003, we received $30.0 million from RF Micro Devices in full payment of the note. As of December 31, 2003, we had $65.6 million in cash and cash equivalents.

47



    Operating Activities

        Net cash used in operating activities was $5.4 million for the year ended December 31, 2003, compared with net cash provided by operating activities of $20.2 million for the period from March 12, 2002 (inception) to December 31, 2002. Net cash provided by operating activities for the period from March 12, 2002 (inception) to December, 31, 2002 includes $12.2 million in deferred revenue resulting from the fair value assigned to the deferred wafer credits in connection with our stock sale to, and wafer supply agreement with, RF Micro Devices, offset by operating losses, adjusted for non-cash items and an increase in working capital. Upon inception, we had no payables or receivables and only $7.4 million of inventory.

        Net cash used in operating activities for the fiscal year ended December 31, 2003 resulted from operating losses, adjusted for non-cash items and an increase in working capital attributable to increases in restricted cash, receivables, inventory, and a decrease in payables, partially offset by increases in other liabilities. The increase in accounts receivable as of December 31, 2003 resulted from an increase in our revenues during the year ended December 31, 2003 as compared to the period from March 12, 2002 (inception) to December 31, 2002. The increase in inventory as of December 31, 2003 resulted from increases in our manufacturing activity driven by an increase in customer demand as compared to the period from March 12, 2002 (inception) to December 31, 2002. The decrease in accounts payable from December 31, 2002 to December 31, 2003 resulted from timing differences of payments to our vendors during the period ended December 31, 2002.

    Investing Activities

        Net cash used in investing activities was $14.1 million and $10.7 million for the fiscal year ended December 31, 2003 and the period from March 12, 2002 (inception) to December 31, 2002, respectively. The expenditures in both periods related primarily to our purchase of semiconductor equipment for capacity expansion and the upgrade of our existing plant and equipment for new process technologies. In addition, during December 2003 we made our initial payment of $1.5 million to HHNEC under our investment agreement. We made capital expenditures of $14.2 million and $10.7 million for the fiscal year ended December 31, 2003 and the period from March 12, 2002 (inception) to December 31, 2002, respectively. We expect capital expenditures for fiscal 2004 to increase.

    Financing Activities

        Net cash provided by financing activities was $30.6 million and $45.1 million for the year ended December 31, 2003 and the period from March 12, 2002 (inception) to December 31, 2002, respectively. Net cash provided by financing activities for the year ended December 31, 2003 resulted from the receipt of $30 million from RF Micro Devices in payment of an outstanding promissory note issued by RF Micro Devices in connection with the purchase of our stock. Net cash provided by financing activities for the period from March 12, 2002 (inception) to December 31, 2002 resulted from $30 million in cash received from the sale of series B preferred stock to RF Micro Devices and $27.1 million of net capital contributions arising from the purchase of our equity securities upon our formation.

    Contractual Obligations

        We lease our headquarters and Newport Beach, California fabrication and probing facilities from Conexant under non-cancelable operating leases through March 2017. We have the option to extend the terms of each of these leases for two consecutive five-year periods. Our rental payments under these leases consist solely of our pro rata share of the expenses incurred by Conexant in the ownership of these buildings. We have estimated future minimum costs under these leases based on our actual

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costs incurred during 2003 and applicable adjustments for increases in the consumer price index. We are not permitted to sublease space that is subject to these leases without Conexant's prior approval.

        In August 2003, we entered into a manufacturing relationship with HHNEC. Under the arrangement, we have secured additional manufacturing capacity and have committed to minimum purchases beginning in October 2004 provided that HHNEC qualifies the manufacturing of wafer products by required milestones. We have also agreed to license certain process technologies and invest $10.0 million in HHNEC. Of the $10.0 million investment, we paid $1.5 million in December 2003 and $4.25 million is due in each of November 2004 and November 2005. Upon mutual agreement, the payments due in 2004 and 2005 may be accelerated.

        We have agreed to pay to Conexant a percentage of our gross revenues derived from the sale of SiGe products to parties other than Conexant and its spun-off entities during our first 10 years of operation.

        The following table summarizes our commitments to settle contractual obligations in cash as of December 31, 2003:

 
  Payments Due by Period
Contractual Obligations

  Total
  Less than 1
year

  1-3 years
  3-5 years
  More than 5
years

 
  (in thousands)

Operating Lease Obligations   $ 41,002   $ 3,384   $ 6,272   $ 6,142   $ 25,204
Investments     8,500     4,250     4,250        
   
 
 
 
 
Total Obligations   $ 49,502   $ 7,634   $ 10,522   $ 6,142   $ 25,204
   
 
 
 
 

        We believe, based on our current plans, current levels of operations and anticipated growth, that our cash from operations, together with cash currently available and the estimated net proceeds of this offering to be received by us, will be sufficient to fund our operations for at least 12 months from the date of this prospectus. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. We cannot assure you that equity or debt financing will be available when needed or, if available, that the financing will be on terms satisfactory to us and not dilutive to our then current-stockholders.

Quantitative and Qualitative Disclosure Regarding Market Risk

        As of December 31, 2003, we had cash and cash equivalents of $65.6 million which consisted of cash and highly liquid short-term investments with original maturities of three months or less at the date of purchase, which we hold solely for non-trading purposes. These investments may be subject to interest rate risk and will decrease in value if market interest rates decrease. Declines in interest rates over time will reduce our interest income.

        We are currently billed by our vendors in U.S. dollars and we currently bill our customers in U.S. dollars. However, our financial results could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. A strengthening of the U.S. dollar could make our products less competitive in foreign markets and therefore reduce our revenues. In the future, some portion of our revenues and costs may be denominated in foreign currencies. To date, exchange rate fluctuations have had little impact on our operating results.

Recent Accounting Pronouncements

        In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that

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involve the delivery or performance of multiple products, services and/or rights to use assets. We adopted the provisions of EITF Issue No. 00-21 as of December 31, 2002. The adoption of EITF Issue No. 00-21 did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The adoption of FIN 46 did not have a material impact on our consolidated financial position, results of operations or cash flows.

        In December 2003, the FASB issued a revision of SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132R), to improve financial statement disclosures for defined benefit plans. SFAS 132R requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs, and other relevant information. In addition to expanded annual disclosures, the FASB now requires companies to report various elements of pension and other post-retirement benefit costs on a quarterly basis. Except for certain disclosures of estimated future benefit payments, effective for fiscal years ending after June 15, 2004, the disclosure requirements of SFAS 132R are effective for financial statements for fiscal years ending after December 15, 2003. We adopted the disclosure requirements of SFAS 132R effective December 26, 2003.

        In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Prescription Drug Act). FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug Act that became law on December 8, 2003. If an entity elects deferral, that election may not be changed, and the deferral continues to apply until authoritative guidance on the accounting for the federal subsidy provided by the Medicare Prescription Drug Act is issued, or a significant event occurs after January 31, 2004 that ordinarily would require remeasurement of a plan's assets and obligations. We have elected the deferral provided by FSP 106-1 such that the accumulated benefit obligation at December 31, 2002 and 2003, and the net periodic postretirement benefit cost for the periods then ended do not reflect the effects of the Medicare Prescription Drug Act on our postretirement health care plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information. The adoption of new authoritative guidance, when released, is not expected to have a material effect on our consolidated financial statements.

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BUSINESS

Overview

        We are an independent wafer foundry focused primarily on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. These semiconductor devices are used in products such as cellular phones, wireless local area network devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives. Our focus differs from traditional independent foundries, which primarily provide standard complementary metal oxide semiconductor, or CMOS, process technologies for the manufacture of digital semiconductors. While we provide standard CMOS process technologies, our primary focus on specialty process technologies for the manufacture of analog and mixed-signal semiconductors distinguishes us from these traditional independent foundries. Our customers include Conexant Systems, Inc., Skyworks Solutions, Inc., RF Micro Devices, Inc., Texas Instruments, Inc., ESS Technology, Inc. and UTStarcom Inc. For the year ended December 31, 2003, we had revenues of $185.2 million.

Our Industry

        Semiconductors, also referred to as integrated circuits, or ICs, are the building blocks of a broad range of electronic systems such as personal computers, telecommunications equipment, wireless devices and consumer electronics. Although global semiconductor sales have experienced significant cyclical variation in annual growth rates, they have increased significantly over the long term. Gartner Dataquest estimates that the global semiconductor market will reach approximately $174.0 billion in 2003 and will grow to approximately $253.4 billion in 2007. As electronic systems have become more sophisticated and integrated, satisfying the demand for semiconductors used in these systems has required advances in semiconductor design, manufacturing and packaging technologies.

    Disaggregation of the Semiconductor Industry and the Success of Foundries

        In the past, most semiconductor companies were vertically integrated. They internally designed, fabricated, packaged, tested, and marketed their own semiconductors. These vertically integrated semiconductor companies are known as integrated device manufacturers, or IDMs. As the complexity of semiconductor designs has increased, semiconductors have become increasingly challenging to manufacture, requiring both sophisticated manufacturing expertise and significant investment in fabrication facilities, or fabs. For example, according to Gartner Dataquest's estimates, the cost of building an advanced fab has grown from approximately $0.4 billion in 1990 for a 0.80-micron fab capable of producing 40,000 six-inch wafer starts per month to approximately $2.9 billion in 2003 for a 0.13-micron fab capable of producing 40,000 300-millimeter wafer starts per month. In addition, research and development of advanced semiconductor technology has become increasingly more expensive.

        As the cost and skills required for designing and manufacturing complex semiconductors have increased, the semiconductor industry has become increasingly disaggregated. This disaggregation has fueled the growth of three segments of the semiconductor industry, which together perform the significant functions of an IDM. These are:

    fabless semiconductor companies that design and market ICs;

    foundries that manufacture wafers; and

    packaging and test companies that encapsulate and test ICs.

        Fabless semiconductor companies are gaining an increasing share of the semiconductor market. According to IC Insights, sales of ICs by fabless companies as a percentage of worldwide sales more than doubled from 6.1% in 1997 to 13.4% in 2002. At the same time, many IDMs that continue to

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manufacture semiconductors internally have reduced their investment in their existing and next-generation manufacturing facilities and process technologies as they seek to increase their flexibility to reallocate their resources and capital expenditures. We believe that IDMs that have adopted this "fab-lite" strategy will outsource an increasing percentage of their manufacturing requirements to third-party foundries. We believe that utilizing third-party foundry services allows fabless semiconductor companies and IDMs to reduce their manufacturing costs, more efficiently allocate capital, research and development and management resources, and gain access to manufacturing process technologies and production capacity they do not possess.

        Third-party foundries have traditionally focused on standard CMOS processes that are primarily used for digital semiconductor applications. The proliferation of fabless semiconductor companies and the increasing use of outsourcing by many IDMs for a portion of their production have driven the growth of the CMOS foundry industry. According to Gartner Dataquest's estimates, CMOS foundry industry revenue was $3.2 billion in 1993 and $10.4 billion in 2002, and is expected to grow to $23.2 billion by 2006, representing a compound annual growth rate of 22% from 2002. In addition, according to Gartner Dataquest's estimates, the percentage of total semiconductor device revenues that is manufactured by third party foundries has increased from 8.5% in 1993 to 19.4% in 2002, highlighting the increasing role foundries are playing in the semiconductor supply chain. As a result of these and other factors, several standard CMOS-focused foundries such as Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation have enjoyed strong growth in recent years and have been responsible for a substantial portion of the economic profit of the semiconductor industry over the last decade.

    Proliferation of Analog and Mixed-Signal Semiconductors Drives the Need for Manufacturing Using Specialty Process Technologies

        The two basic functional technologies for semiconductor products are digital and analog. Digital semiconductors perform arithmetic functions on data represented by a series of ones and zeroes. Digital semiconductors provide critical processing power and have helped enable many of the computing and communication advances of recent years. Analog semiconductors monitor and manipulate real world signals such as sound, light, pressure, motion, temperature, electrical current and radio waves, for use in a wide variety of electronic products such as personal computers, cellular handsets, telecommunications equipment, consumer electronics and automotive electronics. For example, semiconductors that process high frequency signals in the radio frequency, or RF, band perform the reception and transmission functions of a cellular phone or wireless local area network device and represent a growing application of analog semiconductors. As digital systems proliferate, there is a growing need for analog functionality to enable these digital systems to interface with the real world. Analog-digital, or mixed-signal, semiconductors combine analog and digital devices on a single chip to process both analog and digital signals. International Data Corporation estimates that the global market for analog and mixed-signal semiconductors will grow from $26.4 billion in 2003 to $36.6 billion in 2006.

        Integrating analog and digital components on a single, mixed-signal IC enables smaller, more power-efficient, feature-rich and cost-effective semiconductor devices but presents significant design and manufacturing challenges. For example, combining high-speed digital circuits with sensitive analog circuits on a single, mixed-signal IC can increase electromagnetic interference and power consumption, both of which cause a higher amount of heat to be dissipated and decrease the overall performance of the IC. Challenges associated with the design and manufacture of mixed-signal ICs increase as the industry moves toward finer, more advanced process geometries. Standard electronic design automation, or EDA, tools used in the design of digital circuits have limited use in predicting the performance of certain mixed-signal designs. As a result, analog and mixed-signal semiconductors can

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be complex to manufacture and typically require sophisticated design expertise and strong application specific experience and intellectual property.

        Analog engineers typically require several years of practical experience and application knowledge to become proficient in the design of, and manufacturers need to make a significant investment in specialty process technologies to manufacture, complex analog and mixed-signal semiconductors. These specialty process technologies include advanced analog CMOS, radio frequency CMOS, or RF CMOS, advanced RF CMOS, bipolar CMOS, or BiCMOS, and silicon germanium BiCMOS, or SiGe BiCMOS, processes. Specialty process technologies can, in many cases, reduce the final die cost and increase the performance of analog and mixed-signal semiconductors as well as provide superior noise and power efficiency characteristics compared to traditional standard CMOS processes. Certain applications in the wireless and wireline communications, consumer electronics, storage and computing markets utilize specialty process technologies and, we believe, provide significant growth opportunities for these process technologies. For example, Semico Research projects that the SiGe BiCMOS market, which is targeted at the special requirements of high-performance analog and mixed-signal semiconductors, will grow at a compound annual growth rate of approximately 57% from 2003 to 2006 as evidenced in the following chart:

GRAPHIC

    Emerging Trend to Outsource Specialty Manufacturing Process Requirements.

        We believe that many of the factors that have driven the growth of outsourcing standard CMOS manufacturing will also fuel the growth in manufacturing outsourcing of specialty process technologies. As many IDMs reduce their investment in their existing and next-generation standard CMOS process technologies and manufacturing facilities, it may become less cost-effective for these IDMs to develop, maintain and operate specialty process technology manufacturing lines. These IDMs may decide to adopt a fab-lite strategy instead of operating their fabs at low utilization rates. In addition, fabless semiconductor companies are increasingly seeking access to specialty process technologies to meet their customers' requirements for analog and mixed-signal semiconductors.

        To date, third-party foundries have focused primarily on standard CMOS processes instead of specialty process technologies. While some IDMs have provided outsourced specialty process technologies, we believe that competing IDMs and fabless design companies may be reluctant to work with and provide confidential information to IDMs that also manufacture products competitive with theirs. We believe that there is significant growth potential for independent foundries with a full platform of specialty process technologies, advanced design and support capabilities and product application expertise that focus primarily on the specialty foundry opportunity.

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Our Solution

        We are an independent wafer foundry, providing a broad array of specialty process technologies, design solutions and application knowledge for the manufacture of analog and mixed-signal semiconductors. While our revenues to date have been derived primarily from standard CMOS process technologies, we are focused on continuing to increase the percentage of our business that is derived from specialty process technologies. Our solution addresses the specific requirements of high performance analog and mixed-signal semiconductors that are used in wireless and wireline communications, consumer electronics, storage and computing products.

        Key elements of our solution are as follows:

    We are an independent wafer foundry focused primarily on the specialty process technology opportunity.  We focus on addressing the growing need for access to outsourced specialty process technologies, an opportunity which we believe is underserved by competing foundry and IDM offerings. Foundries such as Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation primarily offer standard CMOS process technologies. While some IDMs also have specialty foundry manufacturing capabilities, they are focused principally on addressing their internal manufacturing needs for their own products. In addition, since many IDMs offer products that compete with those being manufactured for their foundry customers, these customers may be reluctant to outsource their manufacturing requirements to such IDMs. We believe our focus on the specialty outsourcing opportunity as our core business will better serve the increasing need for high performance specialty process technologies for our fabless and IDM customers.

    We offer a broad range of high performance specialty process technologies.  We benefit from the investment of approximately $1 billion in manufacturing facilities since 1995 and the development of specialty process technology by Conexant and its predecessor, Rockwell Semiconductor. Our specialty process technology portfolio is comprised of advanced analog CMOS, RF CMOS and advanced RF CMOS, BiCMOS and SiGe BiCMOS processes. The breadth of our portfolio allows us to offer our customers a wide range of solutions to address their high performance, high density, low power and low noise requirements for analog and mixed-signal semiconductors. These semiconductors are used in products such as cellular phones, wireless local area network, or WLAN, devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives.

    We offer a specialized design platform for analog and mixed-signal ICs.  Our design engineering support team assists our customers with their advanced designs by leveraging our application knowledge and experience to help guide their technology selection and design implementation. Our design tools and services are tailored to meet specific analog and mixed-signal design needs, and include specialized device modeling and characterization features that allow us to simulate a variety of real world situations in which our customers' products operate, including different temperatures, power levels and speeds. We believe our ability to simulate the wide variety of environments in which our customers' designs operate prior to manufacture increases our first-time manufacturing success rates and reduces the need for costly circuit redesign prior to volume production, resulting in faster time to market for our customers' products.

    We are a leader in advanced, high performance SiGe technology.  We have demonstrated production capability in high performance 150 GHz 0.18 micron SiGe BiCMOS technology, one of the most advanced SiGe processes available today. By utilizing our SiGe technology, fabless semiconductor companies and IDMs are able to design analog and mixed-signal ICs that are well suited for applications in a number of attractive end markets such as wireless and wireline communications, consumer electronics, storage and computing. Analog and mixed-signal semiconductors manufactured with SiGe BiCMOS process technologies can be smaller, require

54


      lower power and provide higher performance than those manufactured with standard CMOS processes. In addition, semiconductors manufactured using SiGe BiCMOS processes typically operate at significantly higher speeds than those manufactured using comparable geometry RF CMOS and pure silicon BiCMOS processes. Moreover, SiGe BiCMOS process technologies allow for higher levels of integration of analog and mixed-signal functions with digital CMOS functions on the same chip. According to Semico Research, the SiGe BiCMOS market is expected to grow from $0.7 billion in 2003 to $2.7 billion in 2006, which represents a compound annual growth rate of approximately 57%.

    We offer scalable, cost effective manufacturing capacity in the United States and China.  We currently provide cost effective manufacturing capacity to our customers from our fab located in Newport Beach, California, which was contributed to us at our formation by Conexant. Additionally, our manufacturing partnerships with ASMC and HHNEC, two of China's leading foundries, provide us with guaranteed capacity at specified pricing. We believe that these manufacturing partnerships allow us to increase our production capacity cost effectively and provide us with dual fab sourcing for our customers.

Our Strategy

        Our objective is to be the world's leading independent wafer foundry focused on delivering specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. We believe that by providing dedicated specialty foundry services, we will accelerate the specialty process outsourcing trend by IDMs and address the growing demand from fabless semiconductor companies for dedicated specialty process manufacturing capacity. Key elements of our strategy are as follows:

    Further strengthen our leadership position in specialty process technologies.  We intend to build on our heritage as a provider of specialty process technologies for the manufacture of high performance analog and mixed-signal ICs, and to continue to invest in developing specialty process technologies to address the key product attributes that make our customers more competitive. We plan to strengthen our leadership position in specialty process technologies by customizing our solutions for high volume market applications.

    Target large and growing communications, consumer electronics, storage and computing markets.  We plan to target markets characterized by high growth, high performance or large unit volume where we believe our specialty technologies have a high value proposition, including wireless and wireline communications, consumer electronics, storage and computing. As compared to current legacy solutions, we believe that products manufactured with our specialty process technologies provide attractive alternatives for next generation designs in certain applications, and offer opportunities for us to increase our penetration in these end markets. For example, SiGe BiCMOS transceivers can provide performance and cost advantages over current BiCMOS transceiver solutions in cellular phones.

    Increase the percentage of our business that is derived from higher margin specialty process technologies.  We believe our specialty process technologies enable our customers to produce higher value-added analog and mixed-signal semiconductors. In addition, semiconductors made with our specialty process technologies are generally complex to design and manufacture and often require substantial circuit redesign if they are moved to another foundry. Therefore, we are often the sole source provider for these semiconductors. Analog and mixed-signal semiconductors made with specialty process technologies typically have longer life cycles and more stable pricing than digital semiconductors. We generally derive higher margins on sales derived from our specialty process technologies than from our standard CMOS process technologies.

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    Diversify our customer base.  At the time of our formation, our primary customer was Conexant. We have since secured Skyworks, formed through the spin-off of Conexant's wireless division and subsequent merger with Alpha Industries, Inc., as a major customer that relies on us for the majority of its specialty silicon manufacturing needs. In addition to these legacy customers, we have secured RF Micro Devices as a customer and strategic partner and will be a primary source for its silicon manufacturing needs. We have secured over 100 design wins from over 40 customers, including Texas Instruments, UTStarcom and ESS Technology. We intend to continue to focus our sales and marketing efforts on the expansion of our customer base.

    Maintain capital efficiency by leveraging our flexible capacity and manufacturing model.  We can expand our specialty process manufacturing capacity by purchasing lower-cost digital CMOS manufacturing equipment because we are able to meet our customers' performance requirements using adapted digital CMOS equipment sets that are typically one or two generations behind leading-edge digital CMOS process equipment. We are also able to access and adapt existing capacity cost effectively through strategic alliances, such as those with ASMC and HHNEC. This approach is also designed to enable us to maximize the utilization rate of our own fab and use our partners' manufacturing facilities to meet increased capacity requirements. We intend to replicate this model and add capacity without incurring significant capital expenditures.

    Capitalize on our presence in China to address the domestic Chinese semiconductor market.   In addition to providing us with additional foundry capacity on a cost effective basis, our strategic relationships in China position us to penetrate the large and growing domestic demand for semiconductors in China. The growth in China's demand for semiconductors is largely driven by growth in communications applications such as mobile phones, broadband access, wireline and wireless networking and voice applications. Our broad range of high performance specialty process technologies, such as SiGe BiCMOS, specifically address these applications. We believe that our relationships with ASMC and HHNEC will allow us to be the first to offer semiconductors produced in mainland China using SiGe process technologies. In addition, products manufactured in mainland China through our manufacturing partners may enjoy certain financial benefits, including tax advantages if sold within mainland China.

Process Technologies

        Process technologies are the set of design rules, electrical specifications and process steps that we implement for the manufacturing of ICs on silicon wafers. While we offer standard process technologies, we believe that our heritage in analog and mixed-signal semiconductor manufacturing provides strength in advanced analog, RF CMOS and advanced RF CMOS, BiCMOS and SiGe BiCMOS process technologies for wireless and wireline communications, consumer electronics, storage and computing applications.

    Our Standard Processes

        We refer to our digital CMOS and standard analog processes as standard process technologies. Digital CMOS is the most widely used process technology in the semiconductor industry because it requires less power than other technologies for digital functions and allows for the dense placement of digital circuits onto a single semiconductor.

        Standard analog processes have features that make them suitable for the design of low-frequency analog and mixed-signal building blocks such as data converters and voltage regulators. Though there is significant variation in analog performance throughout the industry, these processes are generally characterized as offering integrated capacitors, resistors, and additional components with a relatively small deviation from the digital CMOS process. We currently have standard analog processes in 0.5

56



micron, 0.25 micron and 0.18 micron technologies that form the base for our more advanced technologies.

    Our Specialty Processes

        We refer to our advanced analog CMOS, RF CMOS, advanced RF CMOS, BiCMOS and SiGe BiCMOS, processes as specialty process technologies. Most of our specialty manufacturing processes are based on CMOS-related processes with features added that are designed to obtain superior size, power, feature and cost characteristics. Products made with our specialty process technologies are typically more complex to manufacture than products made using standard CMOS process technologies employing similar line widths. Sales derived from these process technologies typically provide us with higher margins than our standard processes, particularly with respect to sales to non-legacy customers. Generally, customers are not easily able to move designs based upon these process technologies from foundry to foundry because the analog characteristics of the design are dependent upon our implementation of the applicable process technology. The relatively small engineering community with specialty process know-how has also limited the number of foundries capable of offering high-performance specialty process technology.

        RF CMOS technology is comprised of process features and RF modeling capabilities. By adding integrated inductors and engineered substrates to standard analog processes, the RF CMOS process provides for higher levels of integration and improved noise characteristics. We also provide an integrated design platform with RF models, physical layout and design verification files that is designed to enable our customers' rapid time-to-market for their analog and RF products. Our advanced 0.18 micron RF CMOS process adds higher quality inductors and capacitors, as well as higher voltage CMOS options to provide functional scaling for analog and RF circuits as compared to digital CMOS. We believe that the die sizes that can be achieved with these advanced features in 0.18 micron RF CMOS make it possible to design highly integrated wireless transceivers for WLAN and cell phones that are currently lower cost to our customers than standard 0.13 micron CMOS implementations. We currently have 0.25 micron and 0.18 micron RF CMOS process technologies that use proprietary processes on standard fabrication equipment, and are working toward production release of a 0.13 micron RF CMOS process.

        BiCMOS process technology has become a widely-adopted RF technology because it combines bipolar's attribute of high speed with higher density and lower power digital CMOS functions. High volume wireless transceiver products using our 0.35 micron BiCMOS technology compete with products manufactured using smaller line-width RF CMOS technologies. There are typically several additional manufacturing steps in BiCMOS, which are required to integrate a bipolar transistor with the CMOS process. These proprietary steps require specialized manufacturing equipment sets that are not typical of standard CMOS fabrication, but are readily available in the industry for the manufacture of raw wafers and memory ICs.

        Silicon germanium processes are built on established CMOS and BiCMOS semiconductor process capabilities by depositing a thin layer of silicon germanium within a bipolar transistor. The resulting compound semiconductor device has a switching speed that is greater than standard silicon, while maintaining the relatively low cost of standard silicon CMOS processing and materials. SiGe BiCMOS processing provides devices with low-power RF operation, less low-frequency noise, high output power efficiency, and significant potential for integration of analog, RF and digital functions. It is also possible to achieve switching speeds using SiGe BiCMOS that are equivalent to those demonstrated in CMOS processes that are two generations smaller in line-width. For example, 0.35 micron SiGe BiCMOS is able to achieve switching speeds comparable to 0.18 micron RF CMOS. This makes it possible to create analog products with medium-scale-integration at a lower cost using SiGe BiCMOS. We provide two generations of SiGe BiCMOS processes at 0.35 micron and 0.18 micron, with a number of variants that enable optimization of features and cost for applications that include: high-speed physical layer ICs

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for optical networks, pre-amplifiers for hard disk drives, WLAN transceivers with integrated power amplifiers, Bluetooth integrated with WLAN, single-chip GSM radios and multi-band WCDMA transceivers. The equipment requirements for SiGe BiCMOS manufacturing are similar to the specialized equipment requirements for BiCMOS. We have developed enhanced tool capability in conjunction with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. We believe this equipment and related process expertise makes us one of few silicon manufacturers with demonstrated ability to deliver SiGe BiCMOS products.

        We are targeting the scaling of analog and RF functions by reducing the footprint of passive components and integrating new features that eliminate the need for external components. We are working to extend our analog and RF technology platform to 0.13 micron advanced RF CMOS and SiGe BiCMOS.

Manufacturing

        We have placed significant emphasis on achieving and maintaining a high standard of manufacturing quality. We seek to enhance our production capacity for our high-demand specialty process technologies and to design and implement manufacturing processes that produce consistently high manufacturing yields. Our production capacity in each of our specialty process technologies enables us to provide our customers with volume production, flexibility and quick-to-market manufacturing services. All of our process research and development is performed in our manufacturing facility in Newport Beach, California. Our strategy is to leverage our process technology developed in our Newport Beach facility to attract strategic manufacturing partners who can provide us with additional manufacturing capacity without incurring significant capital expenditures.

    Capacity

        Our Newport Beach, California fab, has the capacity to produce up to 17,500 200-millimeter diameter wafer starts per month, depending on process technology mix. Our fab generally operates 24 hours per day, seven days per week and substantially all maintenance at the fab is performed concurrently with production. We provide a variety of services in Newport Beach from full scale production to small engineering qualification lot runs to probe services. We have the ability rapidly to change the mix of production processes in use in order to respond to changing customer needs and maximize utilization of the fab. To date, the majority of production in our Newport Beach fab has used standard CMOS process technologies. We have made, and are continuing to make, capital investments in our Newport Beach fab to shift capacity from standard CMOS process technologies to specialty process technologies. Our strategy is to add capacity outside of this facility through strategic relationships, to allow us to provide multiple fab sources for high volume production processes at other facilities. We presently plan to continue to add manufacturing capacity through strategic relationships with other manufacturers rather than making significant investments in building additional facilities.

        We have entered into the following key relationships with manufacturers:

        Advanced Semiconductor Manufacturing Corporation.    In September 2002, we entered into a strategic relationship with ASMC, a joint venture between the Chinese government and Royal Philips Electronics NV, in Shanghai, China. ASMC is a leading silicon wafer foundry in China based on bipolar and CMOS technologies and generally manufactures for IDMs using such IDMs' own process technologies.

        Under this agreement, as amended, ASMC agreed to manufacture wafers for us utilizing our processes at specified prices and initiated production in the fourth quarter of 2003. ASMC guaranteed us minimum production capacity of at least 5,000 wafer starts per month between September 2003 and March 2004 and at least 10,000 wafer starts per month between April 2004 and December 2006 with respect to the manufacture of specified wafers using SiGe BiCMOS processes. While we are obligated

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to purchase capacity that we forecast from time to time under certain circumstances, we do not have a minimum purchase obligation with ASMC. On April 1, 2004, the prices for all wafers supplied by ASMC will decrease by a specified percentage, and ASMC has agreed to exercise commercially reasonable efforts to decrease wafer prices by additional amounts in each subsequent year. Either party may, however, request to renegotiate pricing based on changing market conditions.

        Shanghai Hua Hong NEC Electronics Co., Ltd.    In August 2003, we entered into a strategic relationship with HHNEC, a joint venture formed in 1997 under the laws of China by Shanghai Hua Hong (Group) Co., Ltd., NEC Corporation, NEC (China) Co., Ltd. and Shanghai Hua Hong International, Inc. HHNEC is one of China's leading silicon wafer foundries using CMOS technologies. This relationship provides us with access to additional production capacity for CMOS, RF CMOS, advanced RF CMOS, BiCMOS and SiGe BiCMOS wafers. We expect to begin using this additional capacity by the end of 2004.

        HHNEC has guaranteed us capacity for the manufacture of up to 8,000 wafers per month, commencing in October 2004, and up to 10,000 wafers per month commencing in January 2005, provided we give them forecasts with six months' advance notice. If HHNEC qualifies the manufacturing process of wafer products by required milestone dates, we will be required to order a minimum of $30.2 million of wafers between October 2004 and the end of 2005. Commencing January 2006, HHNEC will be obligated to manufacture all wafers ordered by us upon advance notice for fixed six-month periods, provided that HHNEC will not be obligated to manufacture a number of wafers that exceeds the average number of wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. In addition, we will be required to purchase a minimum of 50% of the wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. The prices for wafers purchased by us will be at commercially competitive prices, not to exceed specified amounts fixed through 2006. We and HHNEC will review wafer pricing annually and adjust the pricing downward consistent with market price declines, but not less than a specified percent decline in any year.

        HHNEC has additional obligations with respect to the production and qualification of certain process technologies. By September 30, 2004, HHNEC must qualify our 0.18 RF CMOS/SiGe BiCMOS wafers and have the necessary equipment installed to support the manufacture of 0.18 micron CMOS/SiGe BiCMOS wafers. HHNEC must also have the necessary equipment installed to support 0.18 micron CMOS wafer production capacity for a minimum of 5,000 wafer starts per month by December 2004, and an additional 5,000 wafer starts per month by the end of June 2005, for a total of 10,000 wafer starts per month. In addition to the minimum number of wafers that it is obligated to manufacture, HHNEC has agreed to use its commercially reasonable best efforts to provide additional production capacity to us if we provide adequate notice of such need.

    Equipment

        Our policy is to purchase equipment from a small number of qualified vendors to assure process consistency, reduce consumable inventories, combine equipment support resources and maximize supplier leverage. The principal equipment we use to manufacture semiconductor devices are scanners, steppers, track equipment, etchers, furnaces, automated wet stations, implanters and metal sputtering, chemical vapor deposition and chemical mechanical planarization equipment. We can expand our specialty process manufacturing capacity by purchasing lower-cost equipment because we are able to meet our customers' performance requirements using adapted digital CMOS equipment sets that are typically one or two generations behind leading-edge digital CMOS process equipment.

        Our fab is organized into bays based on function with manufacturing operations performed in clean rooms in order to maintain the quality and integrity of wafers that we produce. Clean rooms have historically been rated on the number of 0.5 millimeter particles allowable within a cubic foot of air

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and we generally referred to them as class-1, 10, 100, 1,000, 10,000, or 100,000 on that basis. A significant majority of our current clean rooms operate at a class-10 level.

    Raw Materials

        Our manufacturing processes use highly specialized materials, including semiconductor wafers, chemicals, gases, and photomasks. These raw materials are generally available from several suppliers. However, we often select one vendor to provide us with a particular type of material in order to obtain preferred pricing. In those cases, we generally also seek to identify, and in some cases qualify, alternative sources of supply.

        We generally maintain sufficient stock of principal raw material for two-weeks' production based on historical usage at our Newport Beach fab. Although some of our blanket purchase order contracts contain price and capacity commitments, these commitments tend to be short term in nature. However, we have agreements with several key material suppliers under which they hold similar levels of inventory at our warehouse and fab for our use. We are not under any obligation under these agreements to purchase raw material inventory that is held by our vendors at our site until we actually use it, unless we hold the inventory beyond specified time limits.

        Some of our material providers are our sole source for those materials. The most important raw material used in our production processes is silicon wafers, which is the basic raw material from which integrated circuits are made. The sole supplier of our wafers is Wacker Siltronic Corporation. Wacker supplies our wafer requirements from three separate facilities, providing redundancy in the event a facility's operations are interrupted. In addition, Wacker maintains an approximately six week supply of inventory at our fab. Through Conexant and Rockwell, we have had a long-term supply relationship with Wacker. We believe that qualification of a second wafer supplier could take from six months to one year.

        Photronics is the sole-source supplier of our photomasks. We have entered into a supply agreement with Photronics that provides us with guaranteed pricing for photomasks through 2008, but allows us to negotiate with Photronics annually to obtain reductions in the base price of the masks. Photronics maintains manufacturing facilities in the United States, Singapore and Taiwan.

        We receive one of our liquid chemicals, EKC 652, which is used in the etch process from Dupont. Dupont is the sole source supplier of this chemical and its chemistry is unique. We believe that it would take between four and six months to replace this chemical in the event Dupont were unable or unwilling to continue as a supplier.

        We use a large amount of water in our manufacturing process. We obtain water supplies from the local municipality. We also use substantial amounts of electricity supplied by Southern California Edison in the manufacturing process. We maintain back-up generators that are capable of providing adequate amounts of electricity to maintain vital life safety systems, such as toxic gas monitors, fire systems, exhaust systems and emergency lighting in case of power interruptions, which we have experienced from time to time.

    Quality Control

        We seek to attract and retain leading international and domestic semiconductor companies as customers by establishing and maintaining a reputation for high quality and reliable services and products. Our fab has achieved ISO9001:2000 certification and has also been certified as meeting the standards of ISO 14001. ISO9001:2000 sets the criteria for developing a fundamental quality management system. This system focuses on continuous improvement, defect prevention and the reduction of variation and waste. ISO 14001 consists of a set of standards that provide guidance to the management of organizations to achieve an effective environmental management system.

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        Our policy is to implement quality control measures that are designed to ensure high yields at our facilities. We test and monitor raw materials and production at various stages in the manufacturing process before shipment to customers. Quality assurance also includes on-going production reliability audits and failure tracking for early identification of production problems.

        We also conduct routine quality audits of ASMC and HHNEC with respect to the manufacture of semiconductors for us. These quality audits involve our engineers and management meeting with representatives of ASMC and HHNEC, reviewing and assessing their quality controls and procedures and implementing changes and enhancements designed to ensure that each entity has adopted quality control standards similar to ours.

Our Services

        We primarily manufacture semiconductor wafers for our customers. We focus on providing a high level of customer service in order to attract customers, secure production from them and maintain their continued loyalty. We emphasize responsiveness to customer needs, flexibility, on-time delivery, speed to market and accuracy. Our customer-oriented approach is especially evident in two prime functional areas of customer interaction: customer design development and manufacturing services. Throughout the customer engagement process, we offer services designed to provide our customers with a streamlined, well supported, easy to monitor product flow. We believe that this process enables our customers to get their products to market quickly and efficiently.

        Wafer manufacturing requires many distinct and intricate steps, each of which must be completed accurately in order for finished semiconductor devices to work as intended. After a design moves into production, we continue to provide ongoing customer support through all phases of the manufacturing process.

        The processes required to take raw wafers and turn them into finished semiconductor devices are generally accomplished through five steps: circuit design, mask making, wafer fabrication, probe, and assembly and test. The services we offer to our customers in each of the five steps are described below.

    Circuit Design

        We interact closely with customers throughout the design development and prototyping process to assist them in the development of high performance and low power consumption semiconductor designs and to lower their final die, or individual IC, costs through die size reductions and integration. We provide engineering support and services as well as manufacturing support in an effort to accelerate our customers' design and qualification process so that they can acheive faster time to market. We have entered into alliances with Cadence Design Systems, Inc. and Mentor Graphics Corp., leading suppliers of electronic design automation tools, and Artisan Components, Inc., a leading provider of physical intellectual property components for the design and manufacture of integrated circuits. Through these alliances we provide our customers with the ability to simulate the behavior of our processes in standard electronic design automation, or EDA, tools. To provide additional functionality in the design phase, we offer our customers standard and proprietary models within design kits that we have developed. These design kits, which collectively compose our design library, or design platform, allow our customers quickly to simulate the performance of a semiconductor design in our processes, enabling them to refine their product design before actually manufacturing the semiconductor.

        The applications for which our specialty process technologies are targeted present challenges that require an in-depth set of simulation models. We provide these models as an integral part of our design platform. At the initial design stage, our customers' internal design teams use our proprietary design kits to design ICs that can be successfully and cost effectively manufactured using our specialty process technologies. Our engineers, who typically have significant experience with analog and mixed-signal IC design and production, work closely with our customers' design team to provide design advice and help

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them optimize their designs for our processes and their performance requirements. After the initial design phase, we provide our customers with a multi-project wafer service to facilitate the early and rapid use of our specialty process technologies which allows them to gain early access to actual samples of their designs. Under this multi-project wafer service, we schedule a bimonthly multi-project wafer run in which we manufacture several customers' designs in a single mask set, providing our customers with an opportunity to reduce the cost and time required to test their designs. We believe our circuit design expertise and our ability to accelerate our customers' design cycle while reducing their design costs represents one of our competitive strengths.

    Mask Making

        Our engineers generally assist our customers to design or obtain masks that are optimized for our specialty process technologies and equipment. Actual mask production is usually provided by independent third parties that specialize in mask making.

    Wafer Fabrication

        We provide wafer fabrication services to our customers using advanced process technologies, including advanced analog CMOS, RF CMOS, advanced RF CMOS, BiCMOS and SiGe BiCMOS processes, as well as using standard CMOS process technologies. During the wafer fabrication process, we perform procedures in which a photosensitive material is deposited on the wafer and exposed to light through a mask to form transistors and other circuit elements comprising a semiconductor. The unwanted material is then etched away, leaving only the desired circuit pattern on the wafer. By using our ebiz web site, customers are able to access their lot status and work-in-process information via the Internet.

    Probe

        After a visual inspection, individual die on a wafer are tested, or "probed," electrically to identify die that fail to meet required standards. Die that fail this test are marked to be discarded. We generally offer wafer probe services at the customer's request and conduct those services internally in order more quickly to obtain accurate data on manufacturing yield rates. At times when wafers are ordered in excess of our probe capacity in our Newport Beach, California fab, we may offer to coordinate shipping of completed wafers to third-party vendors for probe services.

    Assembly and Test

        We offer our customers turnkey services by providing the option to purchase finished semiconductor products that have been assembled and tested. We outsource all of our assembly and test services to leading mixed-signal testing and integrated circuit assembly service providers, including Advanced Semiconductor Engineering, Inc. and ST Assembly Test Services Ltd. (STATS). After final testing, the semiconductors are returned to the customer or shipped by the assembly and test companies according to our customers' instructions.

Sales and Marketing

        We seek to establish and maintain relationships with our customers by providing differentiating technologies, effective technical services and support and flexible manufacturing. Our sales process is a highly technical and lengthy process. The entire cycle from design win to production typically takes between eight and 26 months. During this cycle our customers typically dedicate anywhere from three to 12 engineers to support the design, prototype and evaluation phases of their products.

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    Our Sales Process

        The following chart portrays our sales process.

CHART

        Design Win Acquisition Phase.    Our sales personnel work closely with current and potential customers to identify opportunities for them to pursue product designs using our processes. The customer's decision to design an IC for our processes is based upon several technical and economic factors, including choosing the optimal process technology to achieve a cost-effective solution for their semiconductor devices. This decision process typically takes between one and 12 months and represents a significant commitment by the customer, often involving the customer's product architects, design engineers, purchasing personnel and executive management. Our customers will often install our proprietary design platform, which runs on industry standard EDA tools. The customer will often design a test circuit for our process in order to evaluate how the circuit performs in an actual silicon implementation. We refer to a potential customer's decision to design a specific IC using one of our processes as a design win. If we have not previously achieved a design win with that potential customer, we also count them as a new customer. We currently have over 100 design wins from over 40 customers.

        Design Phase.    A design win commences the design phase. The design phase typically involves from three to 12 of our customer's design engineers and a Jazz technical support engineer. This phase generally takes from four to eight months, after which time the customer provides a circuit data file so that we can commence the prototype phase.

        Prototype Phase.    During the prototype phase, we manufacture the customer's prototype IC and the customer packages and tests the prototype semiconductor device. Once the customer tests its product design in an actual silicon implementation, the customer may need to make modifications to its design in order to increase performance, add features or correct a design error. The prototype phase typically requires two to six months, depending on the number of design modifications required.

        Evaluation Phase.    After the customer receives functioning ICs, they typically provide them to their own end customers for evaluation. These ICs are generally application specific devices targeted for system level products such as cell phones, WLAN devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives. If our customer successfully wins a system level design with its customers, which typically takes from two months to 12 months, they in turn place orders with us to satisfy their customer's requirements and production manufacturing commences. At this time, the design win becomes a design in volume production and is no longer considered a current design win.

        Of our design wins as of December 31, 2003, approximately 13% are in the design phase, approximately 50% are in the prototype phase, and approximately 37% are in the evaluation phase. At any time in the sales process a customer may decide to abandon the design effort. Consequently, achieving design wins does not necessarily mean that we will realize any or significant production revenue from a customer.

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        The following table sets forth the design wins we had achieved as of each date reflected:

 
  March 31,
2002

  June 30,
2002

  September 30,
2002

  December 31,
2002

  March 31,
2003

  June 30,
2003

  September 30,
2003

  December 31,
2003

Number of Design Wins   5   13   19   37   48   73   98   105

        In addition to our over 100 design wins currently in pre-volume production phases, we also currently have over 65 designs in volume production.

    Sales Contracts

        Our major customers purchase services and products from us on a contract basis. Most other customers purchase from us using purchase orders. We price our products for these customers on a per die or per wafer basis, taking into account the complexity of the technology, the prevailing market conditions, volume forecasts, the strength and history of our relationship with the customer and our capacity utilization.

        Most of our customers usually place their orders only two or three months before shipment, however our major customers are obligated to provide us with longer forecasts of their wafer needs.

    Marketing

        We advertise in trade journals, organize technology seminars, hold a variety of regional and international sales conferences and attend a number of industry trade fairs to promote our products and services. We discuss advances in our process technologies and progress on specific relevant programs with our prospective customers and major customers on a regular basis.

Customers, Markets and Applications

        Our customers use our processes to design and market a broad range of digital, analog and mixed-signal semiconductors for diverse end markets including wireless and wireline communications, consumer electronics, storage and computing. We manufacture products that are used for high-performance applications such as transceivers, baseband processors, and power management and analog semiconductors for cellular phones; transceivers and power amplifiers for WLAN products; tuners for digital televisions and set-top-boxes; modem chipsets for broadband access devices and gaming consoles; serializer/deserializer, or SerDes, chips for fiber optic transceivers; image sensors for digital cameras; and wireline interfaces for switches and routers.

        Conexant and Skyworks are our largest customers and for the fiscal year ended December 31, 2003 accounted for approximately 47.6% and 42.8% of our revenues, respectively. We are focused on developing and broadening our relationships with new customers such as RF Micro Devices, Texas Instruments, UTStarcom and ESS Technology.

    Our Major Customers

        Conexant Systems, Inc., is a leading semiconductor supplier providing system solutions that enable digital information and entertainment networks. Conexant's product portfolio includes the building blocks required for bridging cable, satellite, and terrestrial data and digital video networks. We continue to produce a large percentage of Conexant's wafer requirements. Conexant remains a large and important customer for us and we continue to work closely with Conexant to capture its new design opportunities. The products that we manufacture for Conexant include semiconductors used in:

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    cable modems and satellite set-top box tuners;

    modems for personal computers, gaming consoles, personal electronic devices and other computing platforms; and

    broadband access devices for DSL and cable systems.

        We have entered into a wafer supply agreement with Conexant. For a description of this supply agreement see "Relationships with Related Parties and Others—Wafer Supply Agreements with Related Parties—Conexant Wafer Supply and Services Agreement."

        Skyworks Solutions, Inc., is a leading wireless semiconductor company focused exclusively on RF and integrated cellular system solutions for mobile communications applications that was formed upon the spin-off of Conexant's wireless communications division and subsequent merger with Alpha Industries, Inc. We work closely with Skyworks to define the process technologies it requires to design certain of its next-generation products for its target markets. For example, using our processes, Skyworks produced a direct conversion radio, or DCR, one of the first integrated transceiver products, for which we are currently the sole source supplier. We have also entered into a wafer supply agreement with Skyworks. For a description of this supply agreement see "Relationships with Related Parties and Others—Wafer Supply Agreements with Related Parties—Skyworks Wafer Supply and Services Agreement."

        RF Micro Devices, Inc., designs, develops, manufactures and markets proprietary radio frequency integrated circuits, or RFICs, primarily for wireless communications products and applications such as cellular and PCS phones, base stations, WLANs and cable modems. RF Micro Devices offers a broad array of products, including amplifiers, mixers, modulators/demodulators, and single-chip receivers, transmitters and transceivers that represent a substantial majority of the RFICs required in wireless handsets. RF Micro Devices formed a strategic relationship with us in October 2002, which included a wafer supply agreement, a master development agreement and an equity investment in us. Our strategic relationship with RF Micro Devices has resulted in 14 design wins. These design wins are for products including cellular transceivers, power controllers and wireless infrastructure components.

    New Customer Development

        Through our focus on developing new customer relationships, we have achieved over 100 design wins with over 40 customers across a broad range of end markets. We believe our continuous focus on achieving design wins as well as on ramping up production volumes of our current design wins will

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allow us to continue to diversify and grow our revenue base. The following table provides a summary of end-user applications as well as representative products addressed by our design wins:

 
  Wireless Communications

  Consumer Electronics

  Wireline Communications

  Storage and
Computing

Representative end market products  



  Cellular
phones
WLAN products
Ultra Wide
Band products
 






  Digital cameras
Personal digital
assistants
Digital TVs
DVD players
Cordless phones
GPS devices
Gaming consoles
 







 
  Switches and
routers
Optical
transceivers
Set-top-boxes
Broadband
modems
Analog
modems
    Hard disk drives

Representative semiconductors

 









 

 

Single and
multimode
transceivers
WLAN
transceivers
Power
amplifiers
image
sensors

 











 

DSL and cable
modem chipsets
Digital TV
tuners
DVD laser
drivers
RF transceivers
GPS transceivers
image
sensors

 








 

 

SerDes for
transceiver
modules
Baseband
processors
Analog to
digital
converters

 


 

 

Hard disk drive pre-
amplifiers

Representative publicly-announced customers

 







 

Skyworks
RF Micro
Devices
Texas
Instruments
UTStarcom

 



 

Conexant
ESS Technology

 



 

Mindspeed
Conexant

 

 

 

 

Competition

        We compete internationally and domestically with dedicated foundry service providers as well as with IDMs, which have in-house semiconductor manufacturing capacity or foundry operations. Most of our competitors have substantially greater production, financial, research and development and marketing resources than our company. As a result, these companies may be able to compete more aggressively over a longer period of time than we can. In addition, several new dedicated foundries have commenced operations and may compete directly with us.

        IBM competes actively in both the standard CMOS segment and in specialty process technologies. In addition, there are a number of smaller participants in the specialty process arena. We believe that the largest independent participants in the foundry services market, Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation and Chartered Semiconductor Manufacturing Ltd. compete primarily in the standard CMOS segment, but they have some capacity for specialty process technologies. Prior to our separation, Conexant licensed certain intellectual property rights in 0.35 micron and 0.18 micron SiGe BiCMOS process technology to Taiwan Semiconductor Manufacturing Company. The principal elements of competition in the semiconductor wafer foundry industry include:

    technical competence;

    production speed and cycle time;

    time-to-market;

    research and development quality;

    available capacity;

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    fab and manufacturing yields;

    customer service;

    price;

    management expertise; and

    strategic relationships.

        Our ability to compete successfully also depends on factors outside of our control, including industry and general economic trends. Any significant increase in competition may erode our profit margins, weaken our earnings or increase losses. If we cannot compete successfully in our industry, our business and results of operations will be harmed.

Research and Development

        The semiconductor industry is characterized by rapid changes in technology. As a result, effective research and development is essential to our success. We invested approximately $12.3 million from March 12, 2002 (inception) to December 31, 2002 and $18.6 million in the year ended December 31, 2003 in research and development, which represented 10.0% of our revenues in each period. We plan to continue to invest a significant amount of capital in research and development activities to develop advanced process technologies for new applications. We expect research and development expenses to increase in absolute dollars. As of December 31, 2003, we employed 57 professionals in our research and development department, approximately 40% of whom hold Ph.D. degrees.

        Our research and development activities seek to upgrade and integrate manufacturing technologies and processes. Although we emphasize firm-wide participation in the research and development process, we maintain a central research and development team primarily responsible for developing cost-effective technologies that can serve the manufacturing needs of our customers. A substantial portion of our research and development activities are undertaken in cooperation with our customers and equipment vendors.

Intellectual Property

        Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering and relating to wafer manufacturing and production processes, semiconductor structures and other structures fabricated on wafers. To that end, we have acquired certain patents and patent licenses and intend to continue to seek patents covering and relating to wafer manufacturing and production processes, semiconductor structures and other structures fabricated on wafers. As of December 31, 2003, we had 55 pending patent applications in the U.S., seven pending patent applications in foreign countries and seven pending patent applications in the Patent Cooperation Treaty system. We further had 86 patents in force in the U.S. and two patents in force in foreign countries. These issued patents have expiration dates ranging from January 27, 2004 to June 4, 2022.

        We have entered into patent licenses. For example, we entered into a technology license agreement under which we licensed, without the right to sublicense, CMOS, RF CMOS, BiCMOS and SiGe BiCMOS process technology and engineering assistance, to ASMC for use in connection with the manufacture of wafers for us. We also licensed our process technologies, patents and know how relating to the production of certain CMOS and RF CMOS wafers to HHNEC for its own use and certain advanced RF CMOS and SiGe BiCMOS process technologies for use solely in connection with the manufacture of wafers for us, in each case without the right to sublicense.

        We may choose to obtain additional patent licenses or enter into patent cross-licenses in the future. We are currently in discussions regarding a potential intellectual property cross license and release agreement with an unrelated third party. Under terms being discussed, we would agree to make

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certain payments in exchange for the license and the release. However, we cannot assure you as to whether an agreement will be reached or as to the terms of any agreement that is consummated. As a result, we are currently unable to estimate the timing or amount of payments that may be negotiated and no related amounts have been recorded in the consolidated financial statements.

        In connection with our separation from Conexant, Conexant contributed to us a substantial portion of our intellectual property, including software licenses, patents, and intellectual property rights in know-how related to our business. We agreed to license intellectual property rights relating to the owned intellectual property contributed to us by Conexant back to Conexant and its affiliates. Conexant may use this license to have Conexant products produced by third-party manufacturers and to sell such products, but must obtain our prior consent to sublicense these rights for the purpose of enabling that third party to provide semiconductor fabrication services to Conexant.

        In connection with our formation, Conexant granted to us non-exclusive, royalty-free licenses:

    in patents and process technology materials for use at our facilities in order to produce, sell, develop and improve semiconductor wafers and devices;

    to use the design kits that we offer to our customers; and

    to certain other intellectual property used in our business.

        The agreement provides that in no event will the parties' aggregate liability exceed a specified cap, nor will they be liable for consequential or incidental damages. Because the amount of Conexant's indemnity obligation to us is capped, it may not be sufficient to cover all damages we might have to pay, or other costs we may incur in connection with the agreement.

        Prior to our separation from Conexant, Conexant licensed certain intellectual property rights in 0.35 micron and 0.18 micron SiGe BiCMOS process technology to Taiwan Semiconductor Manufacturing Company under a license agreement.

        You may find a more complete description of the intellectual property contributed and licensed to us by Conexant under "Relationships with Related Parties and Others."

        Our ability to compete depends on our ability to operate without infringing the proprietary rights of others. The semiconductor industry is generally characterized by frequent litigation regarding patent and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting that their patents cover certain of our technologies or alleging infringement of their other intellectual property rights. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and devote significant management resources to the defense of these claims, which could seriously harm our company. There is no material litigation involving an infringement claim currently pending against us.

        In order to minimize our risks from claims based on our manufacture of semiconductor devices or end-use products whose designs infringe on others' intellectual property rights, we in general accept orders only from companies that we believe have a satisfactory reputation and for products that are not identified as risky for potential infringement claims.

Environmental Matters

        Semiconductor manufacturing processes generate solid, gaseous, liquid and other industrial wastes in various stages of the manufacturing process. We have installed various types of pollution control equipment in our fab to reduce, treat and, where feasible, recycle the wastes generated in our manufacturing process. Our operations are subject to strict regulation and periodic monitoring by the

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United States Environmental Protection Agency along with several state and local environmental agencies.

        We have implemented an environmental management system that assists us in identifying applicable environmental regulations, evaluating compliance status and establishing timely waste preventive measures. The systems we implemented have been certified as meeting the ISO 14001 standard. ISO 14001 consists of a set of standards that provide guidance to the management of organizations to achieve an effective environmental management system.

        We believe that we have adopted pollution measures for the effective maintenance of environmental protection standards consistent with U.S. federal, state and local environmental regulations. We also believe that we are in material compliance with applicable environmental laws and regulations.

Litigation

        We are not currently involved in material litigation or other proceedings. As is the case with many companies in the semiconductor industry, we have from time to time received notices alleging infringement of intellectual property rights of others and breach of warranties.

Employees

        As of December 31, 2003, we had 765 employees, which included 660 employees in manufacturing, 57 employees in research and development and 48 employees performing sales, marketing and administrative functions.

        334 of our employees are covered by a collective bargaining agreement and are members of the International Brotherhood of Electrical Workers. We believe that we have a good relationship with all of our employees.

Risk Management and Insurance

        As part of our risk management program, we surveyed our buildings and fab for resistance to potential earthquake damage. As a result of this survey, additional measures have been implemented to minimize our fab's exposure to potential damage caused by future earthquakes, seismically qualifying our fab for a high magnitude earthquake.

        We maintain industrial special risk insurance for our facilities, equipment and inventories that covers physical damage and consequential losses from natural disaster and certain other risks up to the policy limits and except for exclusions as defined in the policies. We also maintain public liability insurance for losses to others arising from our business operations and carry insurance for business interruption resulting from such events and if our suppliers are unable to provide us with supplies. While we believe that our insurance coverage is adequate and consistent with industry practice, significant damage to any of our or our manufacturing partners' production facilities, whether as a result of fire or other causes, could seriously harm our business and results of operations.

Properties

        Our headquarters and manufacturing facilities are located in Newport Beach, California. We lease the use of these facilities from Conexant under leases that expire March 12, 2017 and we have the option to extend each lease for two consecutive five-year periods after March 12, 2017. We also lease from third-parties warehouse facilities in Irvine, California and office facilities in Shanghai, China. The

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following table provides certain information as to our principal general offices, manufacturing and warehouse facilities:

Property Location

  Use
  Floor Space
Newport Beach, California   Headquarters office, including sales and engineering   45,000 square feet
Newport Beach, California   Manufacturing facility   268,000 square feet
Irvine, California   Warehouse   10,064 square feet
Shanghai, China   Representative sales office   2,000 square feet

        We do not anticipate any difficulty in retaining occupancy of any of our sales, engineering or manufacturing facilities through lease renewals prior to expiration or through month-to-month occupancy. We expect these office and warehouse facilities to be adequate for our business purposes through 2005 and we expect additional space to be available to use on commercially reasonable terms at that time. Consistent with our manufacturing strategy, we expect that any required additional manufacturing capacity will be obtained through strategic relationships.

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MANAGEMENT

Executive Officers, Directors and Key Employees

        The following table sets forth certain information about our executive officers, members of our board of directors and key employees, as expected to be in office upon completion of this offering.

Name

  Age
  Position
Shu Li   45   President, Chief Executive Officer and Director
Mark S. Becker   46   Vice President, Finance, Chief Financial Officer, Treasurer and Secretary
Paul H. G. Kempf   42   Chief Marketing and Technology Officer
Daniel T. Lynch   56   Vice President, Human Resources
Jeffrey R. McHenry*   42   Vice President, Customer Solutions and Supply Chain Management
Scott W. Silcock   42   Vice President, Operations
Theodore Zhu   44   Vice President, Sales, Strategy and Business Development
Claudius E. Watts, IV(2)(3)   42   Chairman of the Board, Director
Donald R. Beall(3)   65   Director
Dwight W. Decker(2)(3)   53   Director
Allan M. Holt   51   Director
Jerry D. Neal(1)(3)   59   Director
Todd R. Newnam(1)(3)   33   Director
Donald E. Schrock(2)   58   Director

*
Not an executive officer.

(1)
Member of Audit Committee effective upon the completion of this offering.

(2)
Member of Compensation Committee effective upon the completion of this offering.

(3)
Member of Governance and Nominating Committee effective upon the completion of this offering.

        Shu Li, 45, President, Chief Executive Officer and Director.    Dr. Li has served as President and Director since March 2002, and as Chief Executive Officer since May 2002. Before joining us, Dr. Li served as Senior Vice President of Platform Technologies, Quality and Supply Chain Management for Conexant Systems, Inc., which designs, develops and sells semiconductor system solutions for communications applications, from January 2002 to February 2002. While there, he directed Conexant's fabless initiatives, as well as the development of a company-wide quality and supply chain management strategy. Dr. Li also led the effort to transition us from a captive wafer manufacturing division of Conexant into an independent specialty semiconductor wafer foundry. Before joining Conexant, Dr. Li held various positions with AlliedSignal/Honeywell, an international controls company, from January 1994 to December 1999, serving as Divisional Vice President and General Manager of Semiconductor Packaging, Divisional Vice President and General Manager of Commercial Spares and Logistics Services, Vice President of Operations, and Vice President of Engineering. Prior to joining AlliedSignal/Honeywell, Dr. Li also worked for Motorola, Inc., a provider of integrated communications and embedded electronic solutions for communications, networking, transportation, industrial, computing and portable energy systems markets, as Senior Operations Manager, Advanced Custom Technologies, and held senior level operations positions at Intel Corporation, the world's largest semiconductor chip maker. In connection with our investment in HHNEC, Dr. Li became a member of its board of directors. Dr. Li received his doctorate in operations research from Harvard University, earned his master's degree in electrical engineering and computer sciences from the University of Illinois, and received his bachelor's degree in electrical engineering in China.

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        Mark S. Becker, 46, Vice President, Finance, Chief Financial Officer, Treasurer and Secretary.    Mr. Becker has served as Vice President, Finance and Chief Financial Officer since March 2002, and as Treasurer and Secretary since May 2002. Before joining us, Mr. Becker was Vice President and Controller for Conexant from May 2001 to February 2002. While there, Mr. Becker was in charge of Conexant's financial management, reporting and control functions and was team leader for all financial activities related to our transition from an in-house wafer manufacturing business to an independent specialty semiconductor wafer foundry. Prior to joining Conexant, Mr. Becker served as Corporate Controller of Burr-Brown Corporation, a developer, manufacturer and marketer of electronic components, from October 1997 to July 2000, where he was responsible for cost accounting, SEC reporting, general accounting, and planning and budgeting activities. Upon its acquisition by Texas Instruments, Inc. in August 2000 until April 2001, Mr. Becker led the integration of Burr-Brown's financial systems into Texas Instruments' financial systems. Prior to joining Burr-Brown, Mr. Becker held a number of senior financial management positions at Crystal Semiconductor Corporation, a semiconductor and integrated circuits company, and Texas Instruments, Inc., a designer and supplier of digital signal processors and analog integrated circuits. Mr. Becker received his master's degree in finance from the University of Pittsburgh and his bachelor's degree in accounting/political science from American University. He is a certified public accountant.

        Paul H. G. Kempf, 42, Chief Marketing and Technology Officer.    Mr. Kempf has served as Chief Marketing and Technology Officer since December 2003. Mr. Kempf also served as Chief Technology Officer and Vice President of Engineering from March 2002 to December 2003. Before joining us, Mr. Kempf held various positions at Conexant from January 1999 to February 2002, serving as Vice President of the silicon RF platform group and Executive Director, Device Technology. While at Conexant, he was responsible for the technical and commercial progression of SiGe BiCMOS technologies for wireless and optical networking applications and led the development of advanced analog and RF CMOS processes. Prior to Conexant's spin-off from Rockwell Semiconductor Systems in January 1999, Mr. Kempf served as Director, RF & Analog Process Technology at Rockwell from March 1997 and as Manager, Integrated RF Technology from November 1995 to February 1997. Prior to joining Rockwell, Mr. Kempf spent 11 years with Nortel Ltd., a supplier of products and services for the Internet and other public and private data, voice and multimedia communications networks using wireline and wireless technologies, as a Senior Manager from June 1993 to October 1995, Senior Member of Scientific Staff from October 1989 to May 1993 and Member of Scientific Staff from June 1984 to September 1989. Mr. Kempf's responsibilities in these positions included device design, process integration and program management. Mr. Kempf holds bachelor's and master's degrees in engineering physics from McMaster University in Canada.

        Daniel T. Lynch, 56, Vice President, Human Resources.    Mr. Lynch has served as Vice President, Human Resources since March 2002. Before joining us, Mr. Lynch was Executive Director of Employee Relations for Conexant from January 1999. At Conexant, Mr. Lynch was responsible for all employee and labor relations activity, as well as health, safety, and workers' compensation initiatives. Before joining Conexant in January 1999, Mr. Lynch spent 23 years at Rockwell International, most recently as Executive Director, Employee Relations. During his time at Rockwell, Mr. Lynch was responsible for all major elements of human resources including staffing, compensation, training, performance management systems and employee communications. Mr. Lynch received his bachelor's degree in English from University of California, Los Angeles, and earned a master's degree in industrial relations from George Washington University.

        Jeffrey R. McHenry, 42, Vice President, Customer Solutions and Supply Chain Management.    Mr. McHenry has served as Vice President, Customer Solutions and Supply Chain Management since December 2003. Mr. McHenry also served as Executive Director, Marketing from March 2002 to December 2003. Before joining us, Mr. McHenry was with Conexant from January 1999 to February 2002, most recently serving as the Director of Foundry Services. Prior to his role as Director

72



of Foundry Services, he held various positions in business planning and product marketing, and served as director of supply chain management, where he was responsible for driving company-wide forecasts, balancing supply/demand requirements for both internal and external customers, and achieving customer delivery performance metrics. Mr. McHenry also played a key role in the development of our initial business plan and strategy and the establishment of initial customer engagements and directed the implementation of our infrastructure to support the new foundry model. Before joining Conexant, Mr. McHenry began his career in 1984 at Rockwell Semiconductor, where he held a variety of positions encompassing supply chain and operations management, business planning and product marketing. Mr. McHenry holds a bachelor's degree in economics and a master's degree in business administration from the University of California, Irvine.

        Scott W. Silcock, 42, Vice President, Operations.    Mr. Silcock has served as Vice President, Operations since March 2002. Before joining us, Mr. Silcock served as Executive Director of the Newport Beach wafer fabrication facility of Conexant from September 2001 to February 2002 and Director of Photomask Operations for Conexant from January 1999 to October 2001. Before joining Conexant, Mr. Silcock held the positions of Manager of Production from April 1991 to January 1999, Superintendent of Production from April 1989 to April 1991 and Supervisor of Production Operations from April 1984 to April 1989 with Rockwell Semiconductor. Mr. Silcock holds a bachelor's degree in communications from California State University, Fullerton and a master's degree in business administration from the University of Redlands.

        Theodore Zhu, 44, Vice President, Sales, Strategy and Business Development.    Dr. Zhu has served as Vice President, Sales, Strategy and Business Development since March 2002. Before joining us, Dr. Zhu served as Executive Director of Foundry Services for Conexant from April 2001 to February 2002. While at Conexant, he was responsible for technical marketing, business development and customer support, including securing customer commitments in support of our transition from Conexant to an independent specialty semiconductor wafer foundry. Before joining Conexant, Dr. Zhu served as the Technical Director of Magnetic Random Access Memory Technology (MRAM) and Chief Engineering Fellow for the Honeywell Solid State Electronics Center from April 1998 to April 2001, where he was responsible for the technical, operational and financial aspects of this self-supported research and business development group. Dr. Zhu also spent eight years with Motorola, including four years as a chief technologist charged with technical responsibility for its magnetic devices laboratory. Dr. Zhu received his doctorate in solid state physics from Purdue University, and earned his bachelor's degree in physics in China.

        Claudius E. Watts, IV, 42, Chairman of the Board, Director.    Mr. Watts was elected as our chairman of the board and director in February 2002. Mr. Watts is currently a managing director with The Carlyle Group, one of the world's largest private equity firms. He is focused on U.S. buyout opportunities in the information technology, aerospace and defense industries. Prior to joining Carlyle, Mr. Watts was a Managing Director in the mergers and acquisitions group of First Union Securities, Inc., an investment banking firm, now Wachovia Securities, from May 1998 to April 2000, where he led the firm's defense, aerospace, and technical services mergers and acquisitions efforts. Mr. Watts joined First Union in conjunction with First Union's 1998 acquisition of Bowles Hollowell Conner & Co., an investment banking firm, where Mr. Watts had been employed since June 1994. Mr. Watts earned a bachelor's degree in electrical engineering, cum laude, from The Citadel in Charleston, South Carolina and a master's degree in business administration from The Harvard Graduate School of Business Administration.

        Donald R. Beall, 65, Director.    Mr. Beall was elected as a director in November 2002. Mr. Beall is currently an advisor to and a director of Rockwell Collins, an avionics and communications company. He retired from Rockwell in 1998 after serving as Chairman, Chief Executive Officer and/or President for nearly 20 years. He is also currently a director of Conexant Systems, Inc., Skyworks Solutions, Inc., a wireless semiconductor company formed upon the spin-off of Conexant's wireless division and a

73



subsequent merger with Alpha Industries, Inc. in June 2002, Mindspeed Technologies, Inc., a networking semiconductor company spun out from Conexant in June 2003, and CT Realty, a real estate investment company, and a former director of Amoco, a petroleum and chemical corporation, ArvinMeritor, a supplier of integrated systems, modules and components for trucks, specialty original equipment manufacturers and certain aftermarkets, Times Mirror, a publishing and media company, Procter & Gamble, a consumer product conglomerate, and Rockwell. He is a trustee of the California Institute of Technology, a member of various University of California, Irvine supporting organizations and an overseer of the Hoover Institution at Stanford University. He is an investor, director and or advisor with several venture capital groups, private companies and investment partnerships.

        Dwight W. Decker, 53, Director.    Dr. Decker has served as a director since March 2002. Dr. Decker has been Chairman and Chief Executive Officer of Conexant since November 1998. Prior to Conexant's spin-off from Rockwell International Corporation, Dr. Decker served as Senior Vice President of Rockwell International Corporation, an electronic controls and communications company now named Rockwell Automation, Inc., and President, Rockwell Semiconductor Systems from July 1998 to December 1998; and Senior Vice President of Rockwell and President, Rockwell Semiconductor Systems and Electronic Commerce prior to July 1998. Dr. Decker serves as the non-executive Chairman and a director of Skyworks Solutions, Inc., and is also a director of Pacific Mutual Holding Company, a life insurance holding company, and Mindspeed Technologies, Inc. He is also a director or member of numerous professional and civic organizations. Dr. Decker received his bachelor's degree in mathematics and physics from McGill University and his doctorate in applied mathematics from the California Institute of Technology.

        Allan M. Holt, 51, Director.    Mr. Holt has served as a director since March 2002. Mr. Holt has been a managing director of The Carlyle Group since June 1992, primarily focused on U.S. investment opportunities in the aerospace, defense, government services and information technology industries. Mr. Holt is currently a member of the boards of directors of Aviall, Inc., an aerospace parts and supply chain management company, United Defense Industries, Inc., a military equipment manufacturing company, and several private companies. Mr. Holt is a graduate of Rutgers University and received his master's degree in business administration from the University of California, Berkeley.

        Jerry D. Neal, 59, Director.    Dr. Neal was elected a director in November 2002. Dr. Neal is a co-founder and Executive Vice President of Marketing and Strategic Development for RF Micro Devices, a company that designs, develops, manufactures and markets radio frequency integrated circuits primarily for wireless communications products and applications. Before co-founding RF Micro Devices in 1991, Dr. Neal held various positions with Analog Devices, Inc., a company that designs, manufactures and markets analog, mixed-signal and digital signal processing integrated circuits, and Hewlett-Packard. Dr. Neal also founded Moisture Control Systems for the production of his patented electronic sensor for measurement of soil moisture for research, which was later sold to Hancor, Inc. Dr. Neal received his ASEE degree from Gaston Technical Institute and North Carolina State University and his doctor of business management degree from Southern Wesleyan University.

        Todd R. Newnam, 33, Director.    Mr. Newnam was elected a director in March 2002. Mr. Newnam is currently a Principal with The Carlyle Group. He is focused on U.S. buyout opportunities in the information technology, aerospace and defense industries. Prior to joining Carlyle, Mr. Newnam was a Vice President in the Defense, Aerospace, and Technical Services Group in the mergers and acquisitions group of First Union Securities, Inc., now Wachovia Securities, from May 1998 to April 2000. Mr. Newnam joined First Union in conjunction with First Union's acquisition of Bowles, Hollowell, Conner & Co., where Mr Newnam had been employed since June 1996. From July 1993 to July 1994, Mr. Newnam served as an investment banker with Salomon Brothers, Inc. and from June 1992 to July 1993 as an investment banker with PaineWebber Inc. Mr. Newnam earned a bachelor's degree in political science from Davidson College and received a master's degree in business administration with distinction from The Harvard Graduate School of Business Administration.

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        Donald E. Schrock, 58, Director.    Mr. Schrock was elected a director in August 2003. Mr. Schrock recently retired as Executive Vice President and Group President of QUALCOMM Incorporated, a wireless communications company, on August 1, 2003. Prior to that, Mr. Schrock served as Senior Vice President of QUALCOMM from February 1997 and President of its CDMA Technologies division from October 1997. He joined QUALCOMM in January 1996 as Corporate Vice President and in June 1996 was promoted to General Manager, QCT Products Division. Prior to joining QUALCOMM, he was Group Vice President and Division Manager with Hughes Aircraft Company. Mr. Schrock's extensive background includes more than 35 years experience in the semiconductor industry. Mr. Schrock holds a bachelor's degree in electrical engineering with honors from the University of Illinois, as well as a master's degree in electrical engineering and advanced business administration degrees from Arizona State University.

Composition of the Board of Directors

        Our board of directors has responsibility for our overall corporate governance and meets regularly throughout the year.

        Our bylaws provide that our board of directors may consist of up to 11 members, with the exact number of directors to be determined by resolution of the board of directors. Upon the completion of this offering we will have nine authorized directors, consisting of Messrs. Watts, Beall, Decker, Holt, Li, Neal, Newnam, Schrock and an outside director to be determined.

        We have entered into board representation agreements with each of The Carlyle Group, Conexant and RF Micro Devices, which permit each of them to appoint designated directors to serve as members of our board. Each designated director will remain a member of the board following the completion of this offering until his or her successor is duly elected and qualified or until his or her death, disability, resignation or removal. Of our directors who will serve following the completion of the offering, The Carlyle Group has designated Messrs. Holt, Newnam and Watts; Conexant has designated Messrs. Beall and Decker; and RF Micro Devices has designated Dr. Neal. These board representation agreements will terminate upon the completion of this offering.

        Upon completion of this offering, our board of directors will be divided into three classes. One class will be elected at each annual meeting of stockholders for a term of three years. The Class I directors, whose term will expire at the 2005 annual meeting of stockholders, are Messrs. Li and Holt. We expect to appoint one more Class I director prior to the completion of this offering who will be independent under the listing standards of the NASDAQ Stock Market and the rules of the Securities and Exchange Commission. The Class II directors, whose term will expire at the 2006 annual meeting of stockholders, are Messrs. Beall, Newnam and Schrock. The Class III directors, whose term will expire at the 2007 annual meeting of stockholders are Messrs. Decker, Neal and Watts. At each annual meeting of stockholders, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or special meeting held in lieu thereof and until their successors are duly elected and qualified. Executive officers are elected by and serve at the direction of our board of directors. There are no family relationships between any of our directors or executive officers.

        Effective upon the completion of this offering, we, affiliates of The Carlyle Group, Conexant and RF Micro Devices will enter into an amended and restated stockholders agreement under which we will agree to nominate, and those stockholders will agree to vote all shares of capital stock held by them in favor of, three persons designated by the Carlyle stockholders, two persons designated by Conexant and one person designated by RF Micro Devices to serve on our board of directors. Since affiliates of The Carlyle Group, Conexant and RF Micro Devices together own more than 50% of our outstanding voting power, we are a "controlled company" within the meaning given to that term under the rules of the NASDAQ Stock Market. As a controlled company, we are exempt from the requirements that our board of directors be comprised of a majority of independent directors or that

75



our compensation committee and governance and nominating committee be comprised of independent directors. For a description of the amended and restated stockholders agreement, please refer to "Description of Capital Stock—Stockholders Agreement."

Committees of the Board of Directors

        We are managed under the direction of our board of directors. Upon completion of this offering, our board of directors will have an audit committee, compensation committee and governance and nominating committee. We will adopt new charters for the audit committee, compensation committee and nominating/corporate governance, as well as corporate governance guidelines prior to the completion of this offering.

    Audit Committee

        Upon completion of this offering, the audit committee will consist of Messrs. Newnam and Neal, and a new director meeting the independence standards of The NASDAQ Stock Market and the Securities and Exchange Commission. The functions of this committee will include:

    meeting with our management periodically to consider the adequacy of our internal controls and the objectivity of our financial reporting;

    appointing the independent auditors, determining the compensation of the independent auditors and pre-approving the engagement of the independent auditors for audit or non-audit services;

    having oversight of our independent auditors, including reviewing the independence and quality control procedures and the experience and qualifications of our independent auditors' senior personnel that are providing us audit services;

    meeting with the independent auditors and reviewing the scope and significant findings of the audits performed by them, and meeting with management and internal financial personnel regarding these matters;

    reviewing our financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the activities and recommendations of our auditors and our reporting policies and practices, and reporting recommendations to our full board of directors for approval;

    establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls, or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and

    following the completion of this offering, preparing the reports required by the rules of the Securities and Exchange Commission to be included in our annual proxy statement.

        Each of our independent auditors and our financial personnel will have regular private meetings with this committee and will have unrestricted access to this committee.

    Compensation Committee

        Upon completion of this offering, the compensation committee will consist of Messrs. Decker, Watts and Schrock. The functions of this committee will include:

    establishing overall employee compensation policies and recommending to our board major compensation programs;

    reviewing and approving the compensation of our corporate officers and directors, including salary and bonus awards;

    administering our various employee benefit, pension and equity incentive programs;

76


    reviewing executive officer and director indemnification and insurance matters;

    managing and reviewing any employee loans; and

    following the completion of this offering, preparing an annual report on executive compensation for inclusion in our proxy statement.

    Governance and Nominating Committee

        Upon completion of this offering, the governance and nominating committee will consist of Messrs. Watts, Beall, Decker, Neal and Newnam. The functions of this committee will include:

    recommending to our board qualified candidates for election to our board of directors;

    evaluating and reviewing the performance of existing directors;

    making recommendations to our board regarding governance matters, including our certificate of incorporation, bylaws, and charters of our committees; and

    developing and recommending to our board governance and nominating guidelines and principles applicable to us.

        We will adopt charters for the audit committee, compensation committee and nominating committees, as well as corporate governance guidelines. Prior to the completion of this offering, we will make each of these documents available on our web site at www.jazzsemi.com.

Compensation Committee Interlocks and Insider Participation

        During our year ended December 31, 2003, Messrs. Watts and Decker served on the compensation committee of our board of directors from the time the board approved the committee's formation on May 7, 2002. Other than Mr. Watts, who served as our President until March 2002 and Vice President until December 2003, no member of our compensation committee has at any time served as an officer or been employed by us or any of our subsidiaries. We did not compensate Mr. Watts in his capacity as one of our officers. None of our executive officers serves, or in the past year has served, as a member of the board of directors or compensation committee of any other entity that has executive officers who have served on our board of directors or compensation committee. Dr. Decker is the Chairman of the Board of Directors and Chief Executive Officer of Conexant Systems, Inc. Dr. Neal is a co-founder and Executive Vice President of Marketing and Strategic Development for RF Micro Devices, Inc. For a description of transactions between us and each of Conexant and RF Micro Devices, see "Relationships with Related Parties and Others."

Director Compensation

        Our directors receive an annual cash fee of $30,000. We pay the fees for Messrs. Holt, Watts and Newnam, the directors designated by The Carlyle Group, directly to The Carlyle Group. We reimburse our non-employee directors for expenses incurred in connection with attending board and committee meetings. We intend to adopt an overall board cash compensation plan that is aligned with industry practice upon completion of this offering.

        Our board has the discretion to grant stock options to all directors as compensation for their services. In December 2002, the board granted each of Messrs. Beall, Decker, Neal and Schrock, options to purchase 125,000 shares of our common stock. These options have an exercise price of $0.20 per share under our 2002 equity incentive plan. In December 2003, the board granted each of Messrs. Beall, Decker, Holt, Neal, Newnam, Schrock and Watts, options to purchase 40,000 shares of our common stock. Half of each option grant is exercisable at $1.50 per share and the remainder of the options are exercisable at $2.50 per share. These options are immediately exercisable, provided that until vested, at a rate of 25% on each anniversary of the date of grant, the shares issued upon the exercise of these options are not transferrable and are subject to a right of repurchase in our favor that

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allows us to repurchase these shares at the per share exercise price of the stock option if the recipient ceases to be a director. The terms of our 2002 equity incentive plan are described in more detail under "—Employee Benefit Plans."

Limitation on Liability and Indemnification Matters

        Our amended and restated certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages to the fullest extent permitted by law, and provides discretionary authority to indemnify our officers, directors and employees for any damages they may incur in connection with the performance of their services for the company. Our bylaws provide that we will indemnify our directors, officers and employees, and those who serve as directors, officers and employees of other entities at our request, to the fullest extent permitted by Delaware law. Under current Delaware law, a director's liability to us or our stockholders may not be limited:

    with respect to any breach of the director's duty of loyalty to us or our stockholders;

    for acts or omissions not in good faith or involving intentional misconduct;

    for knowing violations of law;

    for any transaction from which the director derived an improper personal benefit;

    for improper transactions between the director and us; and

    for improper distributions to stockholders and loans to directors and officers.

        We have entered into agreements to indemnify Messrs. Li, Becker, Kempf, Lynch, Silcock, Zhu, Watts, Decker and Newnam, in addition to indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person's services as our director or executive officer. These provisions are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and may provide additional procedural protection. The indemnification agreements require us, among other things, to advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. Currently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

        We currently have directors' and officers' liability insurance.

Executive Compensation

        The following table sets forth all compensation awarded to, earned by or paid to our chief executive officer and our four other most highly compensated executive officers whose annual salary and bonus exceeded $100,000 for services rendered in all capacities to us during the year ended

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December 31, 2003. These five executive officers are referred to as the named executive officers in this prospectus.

Summary Compensation Table

 
   
   
   
  Long-Term
Compensation Awards

 
 
   
  Annual Compensation
 
Name and principal position

   
  Securities underlying
options/SARs(2)

 
  Year
  Salary
  Bonus
 
Shu Li
President and Chief Executive Officer
  2003
2002

(1)
$
325,000
254,125
  $
253,463
91,500
  1,872,719
1,878,149
(3)
(4)

Mark S. Becker
Vice President, Finance, Chief Financial Officer, Treasurer and Secretary

 

2003
2002


(1)

 

200,000
159,231

 

 

109,527
30,000

 

305,984
316,489

(5)
(6)

Paul H. G. Kempf
Chief Marketing and Technology Officer

 

2003
2002


(1)

 

205,555
160,728

 

 

87,602
19,445

 

560,190
661,187

(7)
(8)

Theodore Zhu
Vice President, Sales, Strategy and Business Development

 

2003
2002


(1)

 

200,000
148,923

 

 

91,059
25,000

 

333,517
333,726

(9)
(10)

Scott W. Silcock
Vice President, Operations

 

2003
2002


(1)

 

155,000
123,404

 

 

84,926
30,000

 

251,694
272,015

(11)
(12)

(1)
Reflects actual amounts paid for the period from March 12, 2002 (inception) to December 31, 2002.

(2)
Granted under our Stock Appreciation Rights Plan. See "Employee Benefit Plans—Stock Appreciation Rights Plan."

(3)
Includes 1,000,000 Jazz options, 640,332 Conexant stock appreciation rights and 232,387 Mindspeed stock appreciation rights. The Conexant stock appreciation rights reflect a repricing of previously issued Conexant stock appreciation rights made in connection with the spin-off of Mindspeed from Conexant. The balance of the previously issued Conexant stock appreciation rights were cancelled in connection with the repricing.

(4)
Includes 1,000,000 Jazz options, 650,000 Conexant stock appreciation rights and 228,149 Skyworks stock appreciation rights.

(5)
Includes 225,000 Jazz options, 59,420 Conexant stock appreciation rights and 21,564 Mindspeed stock appreciation rights. The Conexant stock appreciation rights reflect a repricing of previously issued Conexant stock appreciation rights made in connection with the spin-off of Mindspeed from Conexant. The balance of the previously issued Conexant stock appreciation rights were cancelled in connection with the repricing.

(6)
Includes 235,000 Jazz options, 60,318 Conexant stock appreciation rights, and 21,171 Skyworks stock appreciation rights.

(7)
Includes 400,000 Jazz options, 117,535 Conexant stock appreciation rights and 42,655 Mindspeed stock appreciation rights. The Conexant stock appreciation rights reflect a repricing of previously issued Conexant stock appreciation rights made in connection with the spin-off of Mindspeed from Conexant. The balance of the previously issued Conexant stock appreciation rights were cancelled in connection with the repricing.

(8)
Includes 500,000 Jazz options, 119,310 Conexant stock appreciation rights, and 41,877 Skyworks stock appreciation rights.

(9)
Includes 300,000 Jazz options, 24,592 Conexant stock appreciation rights and 8,925 Mindspeed stock appreciation rights. The Conexant stock appreciation rights reflect a repricing of previously issued Conexant stock appreciation rights made in connection with the spin-off of Mindspeed from Conexant. The balance of the previously issued Conexant stock appreciation rights were cancelled in connection with the repricing.

(10)
Includes 300,000 Jazz options, 24,964 Conexant stock appreciation rights, and 8,762 Skyworks stock appreciation rights.

(11)
Includes 200,000 Jazz options, 37,929 Conexant stock appreciation rights and 13,765 Mindspeed stock appreciation rights. The Conexant stock appreciation rights reflect a repricing of previously issued Conexant stock appreciation rights made in connection with the spin-off of Mindspeed from Conexant. The balance of the previously issued Conexant stock appreciation rights were cancelled in connection with the repricing.

(12)
Includes 220,000 Jazz options, 38,502 Conexant stock appreciation rights, and 13,513 Skyworks stock appreciation rights.

        In accordance with the rules of the Securities and Exchange Commission, the compensation described in this table does not include medical, group life insurance or other benefits received by the named executive officers that are available generally to all of our salaried employees and certain

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perquisites and other personal benefits received by the named executive officers, which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table.

Option/Stock Appreciation Rights Grants in 2003

        The following table sets forth information regarding grants of stock options and stock appreciation rights that we granted during the year ended December 31, 2003 to the named executive officers. All stock option grants vest at the rate of 25% per year, starting with the first anniversary of the date of grant. The stock appreciation rights vest at the rate of 25% for each six month period from March 12, 2002, and will be fully vested in March 2004.

 
  Individual grants in 2003
  Potential realizable value at assumed annual rates of stock price appreciation for option term(3)
 
  Number of
securities
underlying
options/SARs
granted(1)

   
   
   
 
  Percent of
total options/SARs
granted to
employees in fiscal year

   
   
Name

  Exercise
or base
price per share(2)

  Expiration
date

  5%
  10%
Shu Li                              
  President and Chief Executive Officer                              
    Jazz options   400,000
600,000
  4.7
7.0
%
$
1.50
2.50
  December 8, 2013
December 8, 2013
  $     $  
    Conexant stock appreciation rights   640,332   22.1     3.76   December 31, 2004     211,149     402,769
    Mindspeed stock appreciation rights   232,387   22.2     2.57   December 31, 2004     53,042     100,624

Mark S. Becker

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Finance, Chief Financial Officer, Treasurer and Secretary                              
    Jazz options   90,000
135,000
  1.1
1.6
%
$
1.50
2.50
  December 8, 2013
December 8, 2013
  $     $  
    Conexant stock appreciation rights   59,420   2.0     3.76   December 31, 2004     19,594     37,375
    Mindspeed stock appreciation rights   21,564   2.1     2.57   December 31, 2004     4,922     9,337

Paul H. G. Kempf

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Chief Marketing and Technology Officer                              
    Jazz options   160,000
240,000
  1.9
2.8
%
$
1.50
2.50
  December 8, 2013
December 8, 2013
  $     $  
    Conexant stock appreciation rights   117,535   4.1     3.76   December 31, 2004     38,757     73,930
    Mindspeed stock appreciation rights   42,655   4.1     2.57   December 31, 2004     9,736     18,470

Theodore Zhu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Sales, Strategy and Business Development                              
    Jazz options   120,000
180,000
  1.4
2.1
%
$
1.50
2.50
  December 8, 2013
December 8, 2013
  $     $  
    Conexant stock appreciation rights   24,592   0.8     3.76   December 31, 2004     8,109     15,468
    Mindspeed stock appreciation rights   8,925   0.9     2.57   December 31, 2004     2,037     3,865

Scott W. Silcock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Operations                              
    Jazz options   80,000
120,000
  0.9
1.4
%
$
1.50
2.50
  December 8, 2013
December 8, 2013
  $     $  
    Conexant stock appreciation rights   37,929   1.3     3.76   December 31, 2004     12,507     23,857
    Mindspeed stock appreciation rights   13,765   1.3     2.57   December 31, 2004     3,142     5,960

(1)
The number of Conexant stock appreciation rights shown is the number of previously issued Conexant stock appreciation rights repriced in connection with Conexant's spin-off of Mindspeed in June 2003. All other Conexant stock appreciation rights held by the named executive officers were cancelled in connection with the repricing.

(2)
There was no public trading market for our common stock as of December 31, 2003. Accordingly, the exercise price per share of each option granted was equal to the fair market value of the common stock as determined by the board of directors on the date of the grant. The reference price of the Conexant stock appreciation rights was initially $13.05 per share and was subsequently adjusted to reflect the economic effect of Conexant's spin-off of Skyworks in June 2002 and spin-off of Mindspeed in June 2003. The

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    reference price of the Mindspeed stock appreciation rights was determined based on the Conexant reference price and changes in the prices of the Conexant and Mindspeed common stock before and after the spin-off of Mindspeed.

(3)
Potential realizable values for stock options are computed by (1) multiplying the number of shares of common stock subject to a given option by an assumed initial offering price of $             per share; (2) assuming that the aggregate stock value derived from that calculation compounds at an annual 5% or 10% rate shown in the table for the entire ten-year term of the option; and (3) subtracting from that result the aggregate option exercise price. Potential realizable values for stock appreciation rights are computed by (1) multiplying the number of shares of common stock corresponding to a given stock appreciation right by the market value of the underlying share as of June 27, 2003, immediately after the completion of the spin-off of Mindspeed, which was $3.80 for Conexant common stock and $2.60 for Mindspeed common stock; (2) assuming that the aggregate stock value derived from that calculation compounds at an annual 5% or 10% rate shown in the table for the approximately 18-month term of the stock appreciation right; and (3) subtracting from that result the aggregate stock appreciation right exercise price. The 5% or 10% assumed annual rates of the stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.

2003 Year-End Option Values

        The following table sets forth, as to the named executive officers, information concerning the number of shares of common stock acquired upon the exercise of options to purchase shares of our common stock during fiscal 2003 and the number and value of unexercised options and stock appreciation rights held by each of the named executive officers at December 31, 2003. The value realized and the value of unexercised in-the-money options at December 31, 2003 is calculated based on the initial public offering price of $            per share of our common stock less the per share exercise price multiplied by the number of shares issued upon exercise of the options. The value of unexercised in-the-money stock appreciation rights at December 31, 2003 is calculated based on the price per share of the Conexant, Skyworks or Mindspeed common stock underlying the stock appreciation rights as of December 31, 2003, less the per share reference price for the stock appreciation rights multiplied by the number of shares underlying the stock appreciation rights. The closing price of Conexant common stock on December 31, 2003 was $5.02, the closing price of Skyworks common stock on December 31, 2003 was $8.41, and the closing price of Mindspeed common stock on December 31, 2003 was $6.75. Options shown as unexercisable in the table below are immediately exercisable, but we have the right to purchase any unvested shares of common stock underlying these options upon termination of the holder's employment with us.

 
   
   
  Number of securities underlying unexercised options/SARs at
December 31, 2003

  Value of unexercised in-the-money options/SARs at December 31, 2003
Name

  Shares
acquired
on exercise

  Value realized
  Exercisable
  Unexercisable
  Exercisable
  Unexercisable
Shu Li                              
  President and Chief Executive Officer                              
    Jazz options   0   $ 0   0   1,000,000   $     $  
    Conexant stock appreciation rights   0     0   480,249   160,083     605,114     201,705
    Skyworks stock appreciation rights   0     0   171,112   57,037     0     0
    Mindspeed stock appreciation rights   0     0   174,290   58,097     728,532     242,845

Mark S. Becker

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Finance, Chief Financial Officer, Treasurer and Secretary                              
    Jazz options   0   $ 0   0   342,500   $     $  
    Conexant stock appreciation rights   44,565     78,540   0   14,855     0     18,717
    Skyworks stock appreciation rights   0     0   15,879   5,292     0     0
    Mindspeed stock appreciation rights   16,173     51,517   0   5,391     0     22,534

Paul H. G. Kempf

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Chief Marketing and Technology Officer                              
    Jazz options   0   $ 0   0   650,000   $     $  
    Conexant stock appreciation rights   21,086     47,085   67,065   29,384     84,502     37,024
    Skyworks stock appreciation rights   0     0   31,408   10,469     0     0
    Mindspeed stock appreciation rights   31,991     67,051   0   10,664     0     44,576

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Theodore Zhu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Sales, Strategy and Business Development                              
    Jazz options   0   $ 0   0   300,000   $     $  
    Conexant stock appreciation rights   0     0   18,444   6,148     23,239     7,746
    Skyworks stock appreciation rights   0     0   6,572   2,190     0     0
    Mindspeed stock appreciation rights   0     0   6,693   2,232     27,977     9,330

Scott W. Silcock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Vice President, Operations                              
    Jazz options   0   $ 0   45,000   365,000   $     $  
    Conexant stock appreciation rights   0     0   28,446   9,483     35,842     11,949
    Skyworks stock appreciation rights   0     0   10,135   3,378     0     0
    Mindspeed stock appreciation rights   6,000     23,732   10,323   3,442     43,150     14,388

Employment Agreements

        Each of Messrs. Li, Becker, Kempf, Zhu, Lynch, Silcock, and McHenry have entered into an employment agreement with us effective March 8, 2002. Each of the agreements extend through March 8, 2004. Under each agreement, the executive receives a stated annual base salary, which is reviewed annually by our compensation committee, and is eligible to participate in our discretionary bonus program. Each agreement provides for our board of directors to determine, on an annual basis, the amount of the executive's bonus, if any. Under each agreement, the executive may also earn an annual retention bonus, which is based upon the executive's completion of annual periods of continuous employment. The annual retention bonus for each year is not earned, accrued or vested on any pro rata or other partial basis unless and until the executive has been actively and continuously employed through the anniversary date of the executive's starting date with us.

        Each of these employment agreements provides that upon termination of employment, either by us without cause or by the executive for good reason:

    each named executive officer will be entitled to an amount equal to (a) the sum of, in the case of the named executive officers other than Dr. Li, the executive's annual base salary, and in the case of Dr. Li, two times Dr. Li's annual base salary, plus the annual retention bonus that the executive would have been entitled to receive if the executive had continued the executive's employment for a period of, in the case of the named executive officers other than Dr. Li, one year following the date of termination, and in the case of Dr. Li, two years following the date of termination and (b) in the case of the named executive officers other than Dr. Li, one time the executive's target annual bonus and in the case of Dr. Li, two times his target annual bonus;

    each executive will have the right to continue to participate in our health benefits plans for one year after the date of termination; and

    any unvested stock options held by the executive will become exercisable in accordance with the terms of the governing plan throughout the severance period.

Employee Benefit Plans

    2002 Equity Incentive Plan

        Purpose.    Our board of directors adopted our 2002 equity incentive plan in June 2002 and our stockholders approved it on June 26, 2002. The equity incentive plan provides for grants of incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, to our employees, as well as non-qualified stock options, stock bonuses and rights to acquire restricted stock to our

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employees, directors and consultants. The equity incentive plan is intended to facilitate the retention of current employees, consultants or directors as well as to secure and retain the services of new employees, consultants and directors and to provide incentives for such persons to exert maximum efforts for our success.

        Administration.    The equity incentive plan is administered by the board of directors unless the board of directors delegates administration to a committee comprised of one or more members of the board of directors. The board of directors, or the committee if so empowered, has the power to interpret the equity incentive plan and to adopt such rules for the administration, interpretation and application of the equity incentive plan according to its terms. The board of directors may also delegate to one or more officers of the company the power to designate which non-officer employees of the company shall receive stock awards, and the number of shares of common stock that will be subject to each award, subject to a maximum aggregate number of shares specified by the board of directors at the time the delegation to the officers is made. However, the board of directors may not delegate to a committee or otherwise, the power to grant stock awards to independent directors.

        Securities Reserved.    The aggregate number of shares of our common stock issuable under the equity incentive plan is 17,647,000.

        Grant of Awards.    Certain employees, consultants and directors are eligible to be granted awards under the equity incentive plan. The board of directors, or the committee if so empowered, determines:

    which employees, consultants, and directors are to be granted awards;

    the type of award that is granted;

    the number of shares subject to the awards; and

    terms and conditions of such award, consistent with the equity incentive plan. The board of directors, or the committee if so empowered, has the discretion, subject to the limitations of the equity incentive plan and applicable laws, to grant incentive stock options, non-qualified stock options, stock bonuses and rights to acquire restricted stock (except that only our employees may be granted incentive stock options).

        Limitation on Incentive Stock Option Treatment.    Even if an option is designated as an incentive stock option, no option will qualify as an incentive stock option if the aggregate fair market value of the stock (as determined as of the date of grant) with respect to all of a holder's incentive stock options exercisable for the first time during any calendar year under the equity incentive plan exceeds $100,000. Any option failing to qualify as an incentive stock option will be deemed to be a non-qualified stock option.

        Exercise Price.    The board of directors, or the committee if so empowered, shall set the per share exercise price, subject to the following rules:

    in the case of incentive stock options, the per share exercise price shall not be less than 100% of the fair market value of shares of our common stock on the grant date;

    in the case of non-qualified stock options, the exercise price shall not be less than 85% of the fair market value of shares of our common stock on the grant date; and

    for the persons owning (within the meaning of Section 424(d) of the Internal Revenue Code of 1986) more than 10% of the total combined voting power of all classes of our capital stock or of any of our subsidiaries, the per share exercise price shall be not less than 110% of the fair market value of the shares of our common stock on the grant date. The fair market value of a share of our common stock as of a given date will be determined in good faith by the board of directors.

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        Expiration of Awards.    The term of an award is set by the board of directors, or the committee if so empowered, subject to the following conditions: (1) that no award term shall be longer than ten years from the date of grant; and (2) the award term for an incentive stock option granted to a person owning more than 10% of the total combined voting power of all classes of our capital stock shall not exceed five years from the date of grant. Upon termination of an outstanding option holder's status as our employee or consultant, the holder may exercise his or her options within the period of time specified in the option grant, to the extent that the options were vested at the time of termination. If no time period was specified in the notice of grant, the option shall remain exercisable for three months following the holder's termination of status as an employee or consultant, or until the date of expiration of the option as set forth in the option agreement, whichever is earlier. Options granted under the plan must be exercised within six months if the holder's employment ends due to disability, within three years if the holder's employment ends due to the holder's death, or by the date of expiration of the option as set forth in the option agreement, whichever is earlier.

        Adjustments of Awards.    If the board of directors, or the committee if so empowered, determines that there is a corporate event, defined as a dividend or other distribution, recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolutions, or sale, transfer, exchange or other disposition of all or substantially all of our assets, or other similar corporate transaction that affects our common stock which causes dilution or enlargement of benefits under the equity incentive plan, then the board of directors, or the committee if so empowered, may appropriately adjust:

    the aggregate number of shares of our common stock subject to the equity incentive plan;

    the number of shares of our common stock subject to the outstanding awards;

    the price per share of our common stock upon exercise of outstanding awards to counter the dilution or enlargement of benefits; and

    the financial or other targets specified in each option agreement for determining the exercisability of options.

        Change of Control.    In its sole discretion, the board of directors, or the committee if so empowered, may provide, either by the terms of the applicable option agreement or by action taken prior to the occurrence of a merger or the sale of substantially all of our assets, that upon such event, each outstanding award shall be assumed or substituted for an equivalent option by the successor corporation.

        Amendment and Termination.    The board of directors, or the committee if so empowered, may amend, modify, suspend or terminate the equity incentive plan at any time, except the board of directors, or the committee if so empowered, must obtain approval of our stockholders within twelve months before or after such action:

    to increase the number of shares of our common stock that may be issued under the equity incentive plan;

    to reduce the minimum option price requirements;

    to extend the limit on the period during which options may be granted; or

    if required by applicable law.

        Certain Restrictions on Resale.    The board of directors, or the committee if so empowered, may require any person, as a condition of exercise or acquiring common stock under a granted award to give written assurances (1) as to the person's knowledge and experience in financial and business matters and/or to employ a representative who is knowledgeable and experienced in financial and business matters; (2) that the person is capable of evaluation, along or together with the representative,

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the merits and risk of exercising the award; and (3) that the person is acquiring common stock subject to the award for the person's own account and not with any present intention of selling or otherwise distributing the common stock.

        Early Exercise.    Some of our option grants to date have permitted the option holder to exercise the option prior to vesting. However, until vested in accordance with their original vesting schedule, the shares issued upon early exercise of options may not be resold by the holder and remain subject to a repurchase right that allows us to repurchase these shares at the per share exercise price of the stock option if the holder ceases to be our employee, officer, director or consultant.

    Stock Appreciation Rights Plan

        Purpose.    Our board of directors adopted the Stock Appreciation Rights Plan on March 12, 2002, to motivate and retain former Conexant employees who were employed by us upon our formation. We adopted the plan to provide these employees with the ability to retain the economic value of their prior options to purchase shares of Conexant common stock that would otherwise have terminated in connection with the termination of their employment with Conexant, in the form of cash payments based on the appreciation in value of the common stock of Conexant from the date of our inception. Upon our inception our board granted to these employees cash only stock appreciation rights tied to the market value of Conexant common stock. As a result of Conexant's subsequent spin-out transactions involving Skyworks and Mindspeed, additional stock appreciation rights have been issued to these employees that are tied to the appreciation in value of the common stock of Skyworks and Mindspeed from the date of the spin-off of these companies from Conexant. The Conexant stock appreciation rights have been adjusted to reflect changes in value of the Conexant common stock as a result of those transactions. The exercise price of the Conexant stock appreciation rights has been reduced to reflect decreases in the market value of Conexant common stock as a result of the spin-off transactions. In addition, the number of Conexant stock appreciation rights was reduced in connection with the Mindspeed spin-off transaction to preserve the relative value of the Conexant and Mindspeed stock appreciation rights. No additional stock appreciation rights will be issued under the plan, except in connection with changes in the capital structure of Conexant, Skyworks or Mindspeed.

        Administration.    The board of directors is responsible for the general administration of the plan and may delegate its authority to a committee comprised of one or more members of the board of directors. The board of directors, or the committee if so empowered, has the authority to implement, and interpret and construe the stock appreciation rights plan and any rights granted under the plan and to adopt and amend rules to administer the plan that are consistent with the terms of the plan.

        Grant of Awards.    Only former employees of Conexant who were employed by us upon our formation were eligible to be granted stock appreciation rights under the plan. The board of directors determined which transferred employees received a grant of stock appreciation rights and the number of rights each eligible transferred employee received.

        Stock Appreciation Rights Granted.    The following table states the number of outstanding stock appreciation rights, the common stock to which they relate and the per share reference price thereof as of December 31, 2003:

Associated Common Stock

  Stock Appreciation Rights
  Exercise/Reference Price Per Share
Conexant   2,713,346   $ 3.76
Skyworks   1,027,285   $ 24.02
Mindspeed   852,784   $ 2.57

        Vesting of Stock Appreciation Rights.    The Conexant, Skyworks and Mindspeed stock appreciation rights vest and become exercisable at a rate of 25% on each six month anniversary of the grant date of

85


the Conexant stock appreciation rights and will fully vest on March 12, 2004. Upon exercise, a holder of a stock appreciation right will be eligible to receive a payment in cash, minus any applicable tax withholding, equal to the difference between the reference price per share and the value of the securities underlying the stock appreciation right on the exercise date.

        Expiration of Awards.    Unless terminated sooner, the stock appreciation rights terminate on the date, referred to in the plan terms and conditions as the expiration date, that is the earlier of December 31, 2004 or 20 days after any transaction, occurrence or event in connection with which, all outstanding stock appreciation rights granted under the plan become fully vested and exercisable. All stock appreciation rights will become fully vested and immediately exercisable upon the dissolution or liquidation of the company. The stock appreciation rights will also become fully vested and immediately exercisable in the event (1) the company sells all or substantially all of its assets or (2) the company merges with another company and the surviving company or acquiring company does not assume any outstanding stock appreciation rights or substitute similar awards for any outstanding stock appreciation rights. Any vested but unexercised stock appreciation rights will automatically be deemed to be exercised on the expiration date. Upon an employee's termination of employment, including in the case of death or disability, any non-vested stock appreciation rights held by the employee will be forfeited. Upon termination of employment, except in the case of death or disability, any unexercised vested stock appreciation right will automatically be deemed to be exercised three months after termination of employment or, if earlier, upon termination of the plan. In the case of death or disability, any vested stock appreciation rights may be exercised by the employee or his representative within twelve months following the employee's death or disability, but in no event later than the termination of the plan. The board of directors has the authority to continue the vesting through any severance period or accelerate the vesting of any stock appreciation right upon termination of the employee's employment with the company.

        Adjustments of Awards.    If there is a corporate event that affects the capital structure of any of Conexant, Skyworks or Mindspeed, then the board of directors, or the committee if so empowered, may take action and make such adjustments to the plan and the applicable outstanding stock appreciation rights as it deems appropriate. These actions may include, among other things, adjustments to (1) the aggregate number of stock appreciation rights; (2) the reference price of outstanding stock appreciation rights; or (3) the grant of additional stock appreciation rights based on another security.

        Amendment and Termination.    The board of directors may amend, modify, suspend or terminate the stock appreciation rights plan at any time, and may alter or amend any outstanding stock appreciation rights, except that no alteration or amendment may impair the rights of a holder of a stock appreciation right without the holder's consent, except for adjustments to reflect any change in the capital structure of Conexant, Skyworks or Mindspeed.

    401(k) Plan

        We maintain an employee savings and retirement plan, that is intended to qualify under Section 401(k) of the Internal Revenue Code, in which all of our employees may participate. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of the reduction contributed to the 401(k) plan. We may make matching or additional contributions to the 401(k) plan in amounts to be determined by our board of directors.

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RELATIONSHIPS WITH RELATED PARTIES AND OTHERS

Transactions Relating to Our Formation

        Prior to March 12, 2002, our business was the Newport Beach, California semiconductor fabrication operations of Conexant Systems, Inc. Our business was formed upon the contribution of those fabrication operations by Conexant to its wholly-owned subsidiary, Newport Fab, LLC and the contribution of Newport Fab by Conexant to us, together with a cash investment in us by entities affiliated with The Carlyle Group. Conexant and affiliates of The Carlyle Group continue to be our largest stockholders. Forms of the material agreements relating to these transactions and the other transactions summarized below will be filed as exhibits to the registration statement of which this prospectus forms a part and the following summaries of such agreements are qualified in their entirety by reference to the full text of such agreements.

Separation of our Business from Conexant

        Conexant entered into several agreements with Newport Fab that governed the separation of our business from Conexant and the allocation of liabilities for pre-separation events between Newport Fab and Conexant including a contribution agreement and a patent assignment agreement.

    Contribution and Patent Assignment Agreements

        Pursuant to the contribution agreement and patent assignment agreements, Conexant contributed to Newport Fab effectively all of the assets and liabilities related to its fabrication and manufacturing operations, including:

    the semiconductor wafer fabrication and probing operations in its Newport Beach, California fab;

    research and development operations;

    patents and other intellectual property rights related to our business; and

    assumed liabilities, including those under transferred contracts, employment related liabilities and liabilities under a collective bargaining agreement.

        In exchange, Conexant received all of the membership interests in Newport Fab and became the sole member of Newport Fab under its operating agreement.

Investment by The Carlyle Group

        Following Conexant's contribution of our business to Newport Fab, we were capitalized through a contribution to us by Conexant of Newport Fab and a cash investment by entities affiliated with The Carlyle Group pursuant to the terms of a contribution agreement.

    Contribution Agreement

        Under the contribution agreement between us, Conexant and an entity affiliated with The Carlyle Group, as amended:

    Conexant contributed all of its membership interests in Newport Fab and a warrant to purchase 2,900,000 shares of Conexant's common stock with a per share exercise price equal to the then fair market value of Conexant common stock, in exchange for 4,500,000 shares of our class B common stock;

    entities affiliated with The Carlyle Group contributed cash in the amount of approximately $52 million in exchange for 5,500,000 shares of our class A common stock;

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        Under the contribution agreement, we also distributed approximately $19.3 million in cash to Conexant. We are also required to pay Conexant royalty payments during our first 10 years of operation, based on our gross revenues derived from our manufacture of SiGe products for parties other than Conexant and its spun-off entities during this period of time. The royalty percentage begins at 5% and declines over the term of the royalty.

        Under a separate guarantee, we also guaranteed the discharge of the liabilities assumed by Newport Fab under its contribution agreement with Conexant.

        In connection with the contribution agreement, we entered into several ancillary agreements with Conexant, The Carlyle Group and affiliates of The Carlyle Group that govern the contribution by Conexant, the investment by affiliates of The Carlyle Group, the rights of Conexant and affiliates of The Carlyle Group as holders of our stock, and our corporate governance. The material agreements include a registration rights agreement, a stockholders agreement, board representation agreements, management agreements and review agreements.

        We also entered into several ancillary agreements with Conexant that govern the separation of our business from Conexant, the support of our business operations by Conexant for a defined period of time thereafter, and the allocation of liabilities for pre-separation events between us and Conexant, including:

    a transferred intellectual property license agreement;

    an intellectual property license agreement;

    a transition services agreement;

    an information technology services agreement;

    an employee matters agreement; and

    lease agreements for our headquarters office and Newport Beach, California fab.

        Unless specifically discussed below, we did not pay or receive any further consideration under these ancillary documents. We amended and restated our stockholders agreement, registration rights agreement and board representation agreement in connection with our sale of series B preferred stock to RF Micro Devices in October 2002. The board representation agreements will terminate upon completion of this offering. We, affiliates of The Carlyle Group, Conexant and RF Micro Devices will enter into an amended and restated stockholder agreement and an amended and restated registration rights agreement effective upon the completion of this offering. Further details regarding the amended and restated stockholders agreement and amended and restated registration rights agreement that will be in effect upon the completion of this offering may be found under "Description of Capital Stock—Registration Rights Agreement" and "Description of Capital Stock—Stockholders Agreement."

    Management Agreements

        Under the management agreements, Conexant and Carlyle render advisory and consulting services to us.

        We paid each of Conexant and The Carlyle Group a fee of $0.2 million and $0.3 million for consulting services for the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003, respectively. We will continue to pay each of them $0.3 million per fiscal year until their respective agreements terminate, which will occur upon a decrease of their respective ownership in us to less than 10% of our voting power. We paid The Carlyle Group approximately $4.5 million under the terms of its management agreement for the performance of investment banking services and due diligence associated with the contribution agreement and agreed to pay The Carlyle Group additional reasonable compensation for future investment banking services. We also paid

88



Conexant approximately $1.0 million under the terms of its management agreement as a reimbursement of its costs incurred in connection with the contribution agreement.

    Review Agreements

        Under the review agreements, as amended, Conexant and affiliates of Carlyle have the right to consult with our management regarding our operations and to review our financial and operating data. We have reserved the right to exclude these parties from access to any material or meeting if we believe such exclusion is necessary or appropriate to preserve or protect our confidential or privileged information that we reasonably believe may be used in a manner adverse to us, our other stockholders or our customers.

    Transferred Intellectual Property License Agreement

        We entered into a transferred intellectual property agreement with Newport Fab and Conexant. Under this agreement, as amended, we agreed to license back to Conexant and Conexant affiliates that agree in writing to be bound by the terms of this agreement the intellectual property rights relating to the wafer fabrication operations that we received from Conexant pursuant to the contribution agreement between us and Conexant, such that Conexant and its affiliates that agree in writing to be bound by the terms of this agreement received a non-exclusive, worldwide, irrevocable, royalty-free, and fully-paid license to the transferred patents and the transferred intellectual property rights in the know-how to make Conexant products.

        Conexant may use this license to have Conexant products produced by third-party manufacturers and to sell such products but must obtain our prior consent to sublicense these rights and may only sublicense them to a third party for the purpose of enabling that third party to provide semiconductor fabrication services to Conexant or Conexant affiliates.

        Prior to our separation, Conexant licensed certain intellectual property rights in 0.35 micron and 0.18 micron SiGe BiCMOS process technology to Taiwan Semiconductor Manufacturing Company, or TSMC, under a license agreement.

    Intellectual Property License Agreement

        We also entered into an intellectual property license agreement with Conexant. Under this agreement, as amended, Conexant granted to us a non-exclusive, worldwide, irrevocable, royalty-free and fully-paid up license to:

    certain patents and process technology materials for use at our facilities in order to produce, sell, develop and improve semiconductor wafers and devices;

    use design kits to provide design services, distribute design kits to customers and grant customers the right to use kits to design devices to be fabricated by us or a secondary source;

    certain patents licensed to Conexant at its formation under the distribution agreement with Rockwell International Corporation; and

    the intellectual property rights under which Conexant is licensed under an automotive supplier agreement between Rockwell and Lemelson Medical, Education and Research Foundation.

        The license for the process technology material and design kit intellectual property is for a perpetual term. The patent license expires upon the expiration of the last covered patent. The Rockwell and Lemelson intellectual property rights were part of the assets distributed to Conexant upon its spin-off from Rockwell. These licenses will remain in effect until the expiration of the licenses granted to Conexant, which in the case of covered patents is the expiration of such patents. We may grant sublicenses to the patents, the process technology materials and design kits to our affiliates and in

89


connection with the sale of all or any part of any business, business unit, division, or operation of us, provided such parties agree to be bound by the terms thereof. In no event will either party's aggregate liability to the other party under the intellectual property license agreement exceed a specified cap. Because the amount of Conexant's indemnity obligation to us is capped, it may not be sufficient to cover all damages we might have to pay, or other costs we may incur in connection with the intellectual property license agreement. In addition, neither party will be liable for consequential or incidental damages.

    Transition Services Agreement

        To allocate support services between Conexant and our business as a separate company following our separation from Conexant, we entered into a transition services agreement with Conexant. Under this agreement, Conexant and we agreed to provide each other with certain short term and ongoing administrative and operational support and related services. The term of this agreement is for three years, however, substantially all services provided to us by Conexant under the transition services agreement, other than information technology, as described below, mail, reprographics and cafeteria, have been terminated. Either party may terminate one, some or all of the remaining services at any time upon the written consent of both parties, or by either party upon specified notice. The parties agreed to fixed charges for these services.

    Information Technology Service Agreement

        We also entered into an information technology service agreement with Conexant. Under this agreement, as amended, we are obligated to pay Conexant a monthly base service fee.

        Conexant has exercised its right to terminate this agreement effective in December 2004. We have begun a process to identify and qualify a replacement information technology service provider. Based on discussions with third-party information technology service providers, we believe that we can qualify and transition to a new information technology service provider without significant disruption to our existing information technology systems or our operations.

        As of December 31, 2003, the services provided by each party pursuant to this agreement and the transition services agreement are:

 
  March 12, 2002
(inception)
to
December 31,
2002

  Year
Ended
December 31,
2003

 
  (in thousands)

             
Services provided by Conexant to Jazz   $ 6,667   $ 6,589
Services provided by Jazz to Conexant   $ 7,668   $ 4,588

    Employee Matters Agreement

        We entered into an employee matters agreement with Conexant and Carlyle, under which we offered employment to certain employees of Conexant, each of whose services were related to the wafer fabrication operations. Under this agreement, as amended, we agreed to:

    offer the transferred employees employment with us on the same aggregate level of salaries, wages and commissions in effect at Conexant prior to their transfer;

    assume obligations and liabilities under the Conexant retirement plan for hourly employees and assume Conexant's obligations and liabilities under the collective bargaining agreement relating to those employees; and

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    to establish a 401(k) plan, an equity incentive plan, welfare and fringe benefit plans, and a stock appreciation rights plan.

        In connection with this agreement, we adopted our stock appreciation rights plan to provide the transferred employees with the opportunity to receive incentive compensation based on the appreciation in value of Conexant's common stock. This plan is discussed in more detail under "Management's Discussion and Analysis of Results of Operation—Stock Compensation Expense" and "Management—Employee Benefit Plans—Stock Appreciation Rights Plan."

    Lease Agreements

        We entered into two lease agreements with Conexant, under which we currently lease two buildings, one consisting of approximately 268,000 rentable square feet that contains our Newport Beach, California semiconductor wafer fabrication and probing facility and the other consisting of approximately 45,000 rentable square feet that contains our headquarters. We are permitted to use our leased facilities for the operation of a semiconductor wafer fabrication facility and related uses, including for warehousing, offices, research and development, probing, packaging and a machine shop. These leases will expire on March 12, 2017. We have the option to extend each of their terms for two consecutive five-year periods. Our rent under these leases consists of our pro rata share of the expenses incurred by Conexant in the ownership of these buildings, including property taxes, building insurance, depreciation and common area maintenance. We are not permitted to sublease space that is subject to these leases without Conexant's prior consent.

        For the period from March 12, 2002 (inception) to December 31, 2003, we have incurred $5.3 million of aggregate rent expense under these leases.

Transactions Relating to Our Recapitalization

        In July 2002, we entered into a series of agreements with Conexant and affiliates of The Carlyle Group under which we recapitalized our capital structure and amended certain agreements relating to the ownership of our stock. Under the recapitalization agreement, we exchanged:

    4,500,000 shares of class B common stock held by Conexant for 45,000,000 shares of our new series B preferred stock; and

    5,500,000 shares of class A common stock held by affiliates of The Carlyle Group for 55,000,000 shares of our new series A preferred stock.

        The shares of series A preferred stock and the shares of series B preferred stock will automatically convert to our class B common stock immediately prior to the completion of this offering. Outstanding shares of class A common stock will also automatically convert into class B common stock immediately prior to the completion of this offering. Our amended and restated certificate of incorporation will provide that our class B common stock will be recapitalized into common stock upon the completion of this offering. The rights of holders of our common stock are discussed in further detail in the section "Description of Capital Stock—Common Stock."

Transactions Relating to the Sale of Series B Preferred Stock to RF Micro Devices

    Purchase Agreement

        We entered into a stock purchase agreement with RF Micro Devices in October 2002. Under this agreement, as amended, RF Micro Devices purchased 13,071,888 shares of our series B preferred stock for an aggregate purchase price of $60.0 million. RF Micro Devices paid us cash in the amount of $30.0 million and issued us a promissory note for the remaining $30.0 million. This promissory note carried no interest and was secured by the shares of our preferred stock acquired by RF Micro

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Devices. RF Micro Devices paid all amounts due under the promissory note on October 15, 2003. In connection with this transaction, Conexant and affiliates of The Carlyle Group each waived their preemptive rights to acquire additional shares of our stock.

    RF Micro Devices Wafer Supply Agreement

        In connection with its investment in our series B preferred stock, we entered into a wafer supply agreement with RF Micro Devices for the purchase of semiconductor wafers and related foundry manufacturing services. Under this agreement, RF Micro Devices received deferred credits to offset the cost of wafers manufactured by us for RF Micro Devices. This agreement is described below under "—Wafer Supply Agreements with Related Parties—RF Micro Devices Wafer Supply Agreement."

    Registration Rights, Stockholders Agreement and Board Representation Agreements

        We amended and restated our registration rights agreement and stockholders agreement in October 2002 to admit RF Micro Devices as a party to these agreements. We also amended and restated the Conexant and Carlyle board representation agreements and the operating agreement of Newport Fab, and entered into a board representation agreement with RF Micro Devices. Under the stockholders agreement and board representation agreements, Conexant has the right to designate two members, affiliates of The Carlyle Group have the right to designate five members and RF Micro Devices has the right to designate one member to our board of directors and the board of managers of Newport Fab.

    Conexant has designated Mr. Beall and Dr. Decker to serve on our board of directors;

    affiliates of The Carlyle Group have designated Messrs. Watts, Holt and Newnam, as well as Messrs. Campbell Dyer and Parker Hayden to serve on our board of directors (effective upon the completion of this offering, Messrs. Dyer and Hayden will resign from our board of directors); and

    RF Micro Devices has designated Dr. Neal to serve on our board of directors.

        The board representation agreements will terminate upon completion of this offering. We, affiliates of The Carlyle Group, Conexant and RF Micro Devices will enter into an amended and restated stockholder agreement effective upon the completion of this offering. Further details regarding the registration rights agreement and the amended and restated stockholders agreement that will be in effect upon the completion of this offering may be found under "Description of Capital Stock—Registration Rights Agreement" and "Description of Capital Stock—Stockholders Agreement."

    RF Micro Devices Master Joint Technology Development Agreement

        In connection with the purchase of series B preferred stock by RF Micro Devices, we entered into a master joint technology development agreement with RF Micro Devices. Under this agreement, we agreed to cooperate with each other on future development projects jointly to design and develop advanced silicon integrated circuit devices and new silicon wafer manufacturing processes for wireless and wireline communications applications.

        The agreement provides that the parties will continue to own their respective intellectual property used under the agreement. We will own all process intellectual property arising from development projects under statements of work governed by this agreement. For all process intellectual property, other than CMOS and SiGe process intellectual property, arising from development projects funded in whole or in part by RF Micro Devices, RF Micro Devices will have certain use and access rights. RF Micro Devices will own all non-process intellectual property arising from development projects under statements of work governed by this agreement.

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        We granted RF Micro Devices a worldwide, nonexclusive, nontransferable, irrevocable, royalty-free license to use our non-process intellectual property to perform its obligations under this agreement and any applicable statement of work. RF Micro Devices may sublicense this non-process intellectual property to subsidiaries and other subcontractors to make ICs on its behalf, and to customers and their end-users in order to incorporate RF Micro Devices' ICs into their products. We have not granted RF Micro Devices the right to use process intellectual property, except in conjunction with the fabrication of ICs designed by RF Micro Devices at our fab. RF Micro Devices granted to us a worldwide, nonexclusive, nontransferable, irrevocable, royalty-free license to use its process intellectual property to perform our obligations under this agreement and any applicable statement of work. We may sublicense this process intellectual property to our subsidiaries, to third-party subcontractors to make ICs on behalf of our customers, and to customers and their end-users to permit such end-users to use such products. The term of this agreement will continue until October 15, 2007 and will automatically renew for subsequent one-year terms unless either party gives sufficient notice of intent not to renew. We have not derived revenues or made payments under this agreement.

Wafer Supply Agreements with Related Parties

Conexant Wafer Supply and Services Agreement

        We entered into a wafer supply and services agreement with Conexant in connection with our separation from Conexant in March 2002. Under this agreement, as amended, Conexant agreed to purchase and we agreed to provide semiconductor wafers and related foundry, manufacturing and probe services.

        Under this agreement, Conexant must submit purchase orders in an amount sufficient to meet minimum wafer volume commitments that decline to zero over the initial three years of the agreement. If Conexant does not order wafers in an amount at least equal to its volume commitment, it is obligated to pay for the shortfall.

        Upon Conexant's request and under certain conditions, we may also be obligated to increase the capacity available to Conexant up to the maximum capacity of our Newport Beach fab provided that:

    we will have at least six months to prepare for such increase;

    in no event will we be required to increase capacity by more than 50 wafer starts per day in any six-month period or make additional equipment purchases; and

    at the time of Conexant's request, Conexant must submit binding purchase orders for a total number of wafers sufficient to utilize the requested increase in capacity for the period of the desired increase.

        Provided we have sufficient uncommitted available capacity, Conexant is required to submit to us its requirements for certain non-specialty wafers in excess of its wafer volume commitment during the initial four years of the agreement, and in the case of the fourth year, only if we are competitive on cost, service, yield and technology.

        We are generally required to use commercially reasonable efforts to provide additional wafers to Conexant over and above the amounts set forth in its purchase orders upon two weeks notice.

        We must reserve capacity for Conexant SiGe wafers, but we may utilize this reserved capacity for other customers if we receive an order from such customers for SiGe wafers and Conexant does not issue a purchase order for its reserved SiGe wafers.

        The initial price for wafers, which includes probe services for wafers up to the aggregate minimum volume commitment, under the agreement, is fixed at an amount that is based on the historical cost to manufacture wafers at the fab through March 2002. Beginning in April 2004, prices for non-specialty

93



wafers in excess of Conexant's volume commitment may, depending on market conditions, be increased at incremental rates until April 2005, at which time the contract price for all wafers will be adjusted to the best price we provide to any customer for similar volumes and schedules or, if lower, the price offered by leading foundries for similar technologies, volumes and schedules. Beginning in April 2004, we will review and update the pricing every six months.

        We provided Conexant with credits to be applied against any increase in the price of wafers for each wafer purchased by Conexant after the second year of the agreement. Conexant may also apportion these credits towards purchases by entities that it spins-off, though it is not obligated to do so. If Conexant guarantees it will meet certain volume commitments, it may apply a specified portion of any unused wafer credits to its wafer purchases for two years following the expiration of the agreement.

        Conexant may place orders for any entity that has been spun-off from Conexant or any Conexant affiliate and may partition its volume commitment between itself and any such spin-off or affiliate. Such Conexant spin-offs may also enter into separate wafer supply and services agreements with us containing substantially similar terms as this agreement with Conexant. Under these provisions we entered into an agreement with Mindspeed which contains certain terms that vary from the Conexant agreement. We are obligated to apply any purchase orders by such entities towards Conexant's volume commitment.

        The term of the agreement expires on March 30, 2007, but may be renewed by the parties for additional one-year terms upon agreement of the parties. We must also provide Conexant with sufficient notice if we intend to terminate from the scope of the agreement a process technology that was available at our fab in March 2002, and may add new processes in the future upon mutual consent. For the period from March 12, 2002 (inception) to December 31, 2003, we have derived aggregate revenues of $182.3 million from Conexant under this agreement. Donald R. Beall and Dwight W. Decker, members of our board of directors, also serve as directors of Conexant. In addition, Dr. Decker also serves as the Chief Executive Officer of Conexant.

Skyworks Wafer Supply and Services Agreement

        In June 2002, Conexant spun-off its wireless communications division and merged it with Alpha Industries, Inc. to form Skyworks Solutions, Inc. We entered into a direct wafer supply and services agreement with Skyworks in May 2003 upon substantially the same terms and conditions contained in the Conexant wafer supply agreement.

        Under this agreement, as amended, we have the following additional obligations:

    we agreed to use commercially reasonable efforts to meet Skyworks' rolling forecast for each month for specified wafer types, either at our Newport Beach fab or, subject to certain conditions, through capacity provided by our manufacturing partners;

    we committed to manufacture specified designs at set prices; and

    we agreed to certain guaranteed probe yield and related pricing.

        Under this agreement, as amended, Skyworks has the following additional obligations:

    Skyworks must submit purchase orders for certain minimum annual wafer volumes, which apply towards Conexant's wafer volume commitments;

    Skyworks must provide us with rolling forecasts of its projected requirements for specified wafer types. Skyworks must purchase a specified percentage of its forecast over the term of the rolling forecast, but in no event less than a minimum annual volume of wafers, which declines to zero from 2002 to 2005;

94


    provided we are competitive in price, technology, time of delivery, performance, meeting qualification requirements, cycle times, quality and comparable yield performance, Skyworks is obligated to allow us the opportunity to fabricate certain of its wafer needs, subject to certain limitations and exclusions; and

    Skyworks agreed, subject to conditions, to use us to manufacture specified products for the life of these products if Skyworks launches their development.

        Prior to November 2005, we will manufacture wafers incorporating specified product designs that were in production in May 2003 for Skyworks at set prices. Prior to November 2005, for all wafers incorporating product designs that were not in production in May 2003, and beginning in November 2005 for specified wafers incorporating product designs that were in production on that date, prices will equal the lower of specific contract prices or the best price we provide to any customer for similar technologies and volumes or, if lower, the price offered by leading foundries for similar technologies and volumes. We will review and update the prices offered by leading foundries quarterly.

        In addition, after March 2005, Skyworks may, upon six-months' written notice, remove from our facilities certain testing devices owned by it and used by us.

        For the period from March 12, 2002 (inception) to December 31, 2003, we have derived aggregate revenues of $104.7 million under this agreement. Donald R. Beall and Dwight W. Decker, members of our board of directors also serve as members of the board of directors of Skyworks.

RF Micro Devices Wafer Supply Agreement

        In connection with their investment in us, we entered into a wafer supply agreement with RF Micro Devices in October 2002. Under this agreement, RF Micro Devices must provide us each month with rolling forecasts setting forth its wafer needs for each month covered by the forecast. RF Micro Devices is required to purchase a specified percentage of its forecasts and we are obligated to meet a baseline commitment. We must use commercially reasonable efforts to satisfy any excess demand that does not exceed two times our baseline.

        Prices for wafers supplied by us under this agreement are the lower of specified fixed prices that decrease over time or the average global market price for substantially similar wafers, or if no such price is available, the average price offered by us to our other customers, excluding Conexant, its affiliates and spun-off entities. Subject to certain allowances, if RF Micro Devices does not order wafers in an amount equal to its volume commitment, it must pay us for the shortfall. RF Micro Devices also received deferred credits to offset the base price of wafers manufactured by us for RF Micro Devices.

        This agreement remains in effect until October 15, 2007 and may be renewed for additional one-year terms upon agreement of the parties. At RF Micro Devices' request, we may also negotiate terms for the provision of non-recurring engineering services related to the development of new wafers. For the period from March 12, 2002 (inception) to December 31, 2003, we have derived aggregate revenues of $1.5 million under this agreement. Jerry D. Neal, a member of our board of directors, also serves as an executive officer of RF Micro Devices.

Other Agreements with Related Parties

        In June 2003, we purchased certain assets related to our semiconductor wafer fabrication operations from Conexant for a purchase price of approximately $1.1 million, payable in four quarterly payments. Related to this purchase, we signed an agreement in July 2003 under which Conexant agreed to reduce its service charge under the information technology agreement by an amount equal to our payment obligations under the asset purchase agreement.

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        In December 2002, we granted options to purchase up to 375,000 shares of our common stock at a purchase price of $0.20 per share to The Carlyle Group for services rendered to us by The Carlyle Group.

        In December 2002, Shu Li, our Chief Executive Officer, borrowed $200,000 from us to pay the exercise price of options exercised by him. The loan carried interest at 7.25% per annum. Dr. Li repayed this loan in full in January 2003.

Agreements with Manufacturing Partners

Advanced Semiconductor Manufacturing Corporation

        In September 2002, we entered into a technology license and supply agreement with ASMC, as amended. Under this relationship, we licensed, without the right to sublicense, CMOS and specialty process technologies and engineering assistance to ASMC for use in connection with the manufacture of wafers for us at specified prices. ASMC initiated the manufacture of wafers for us in its new 200 millimeter wafer QS9000-certified foundry in Shanghai, China during the fourth quarter of 2003. ASMC guaranteed us minimum production capacity of at least 5,000 wafer starts per month between September 2003 and March 2004, and at least 10,000 wafer starts per month between April 2004 and December 2006 with respect to the manufacture of specified wafers using specialty processes. While we are obligated to purchase capacity that we forecast from time to time under certain circumstances, we do not have a minimum purchase obligation with ASMC.

        The prices for wafers purchased by us will not exceed a specific agreed upon amount. On April 1, 2004, the price for wafers supplied by ASMC will decrease by a specified percentage, and ASMC has agreed to exercise commercially reasonable efforts to decrease wafer prices by additional amounts in each subsequent year. The term of the agreement is through September 2007 and is automatically renewed for successive one year periods.

Shanghai Hua Hong NEC Electronics Co., Ltd. (HHNEC)

        In August 2003, we entered into a strategic relationship with HHNEC, a leading silicon wafer producer in China. This relationship provides us with access to additional production capacity for CMOS, RF CMOS, advanced RF CMOS, BiCMOS and SiGe BiCMOS wafers. As part of our relationship with HHNEC, we acquired an equity interest in HHNEC of approximately 11% in return for the license of certain process technologies and a cash investment of $10.0 million in HHNEC. We paid $1.5 million of the investment in December 2003 and $4.25 million is due in each of November 2004 and November 2005. Upon mutual agreement, the payments due in 2004 and 2005 may be accelerated. Our interest in HHNEC may be diluted in the future upon the completion of a proposed investment in HHNEC by Shanghai Belling Co., Ltd. and Shanghai ZhangJiang (Group) Co., Ltd., but will not be less than 10% as a result of this anticipated investment. These companies will contribute factory buildings, equipment and land use rights in China to HHNEC upon approval by the relevant Chinese governmental authorities.

        As part of the relationship, we agreed to license our process technologies, patents and know-how relating to the production of certain CMOS and RF CMOS wafers to HHNEC for its own use and certain advanced RF CMOS and SiGe BiCMOS process technologies for use solely in connection with the manufacture of wafers for us, in each case without the right to sublicense. If we are not able to meet certain milestones with regard to our license of certain process technologies to HHNEC by December 31, 2005, we have the option to contribute an additional $10 million in cash to HHNEC or reduce our equity in HHNEC by a corresponding amount. We also entered into wafer supply agreements under which HHNEC will manufacture the specified wafers using the process technology licensed to it by us.

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        HHNEC has guaranteed us capacity for the manufacture of up to 8,000 wafers per month commencing in October 2004, and up to 10,000 wafers per month commencing in January 2005, provided we give them forecasts with six months' advance notice. If HHNEC qualifies the manufacturing process of wafer products by required milestone dates, we will be required to order a minimum of $30.2 million of wafers between October 2004 and the end of 2005. Commencing January 2006, HHNEC will be obligated to manufacture all wafers ordered by us upon advance notice for fixed six-month periods, provided that HHNEC will not be obligated to manufacture a number of wafers that exceeds the average number of wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. In addition, we will be required to purchase a minimum of 50% of the wafers manufactured in the three-month period prior to the commencement of the relevant six-month period. The prices for wafers purchased by us will be at commercially competitive prices, not to exceed specified amounts fixed through 2006. We and HHNEC will review wafer pricing annually and adjust the pricing downward consistent with market price decline, but not less than a specific percent decline in any year.

        HHNEC has additional obligations with respect to the production and qualification of certain process technologies. By September 30, 2004, HHNEC must qualify our 0.18 RF CMOS/SiGe wafers and have the necessary equipment installed to support the manufacture of 0.18 micron CMOS/SiGe wafers. HHNEC must also have the necessary equipment installed to support 0.18 micron CMOS wafer production capacity for a minimum of 5,000 wafer starts per month by December 2004, and an additional 5,000 wafer starts per month by the end of June 2005, for a total of 10,000 wafer starts per month. In addition to the minimum number of wafers that it is obligated to manufacture, HHNEC has agreed to use its commercially reasonable best efforts to provide additional production capacity to us if we provide adequate notice of such need.

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PRINCIPAL AND SELLING STOCKHOLDERS

        The following table sets forth certain information with respect to the beneficial ownership of our common stock as of January 15, 2004 and as adjusted to reflect the sale of our common stock offered by this prospectus by:

    each of our named executive officers;

    each of our directors;

    all of our directors and executive officers as a group;

    each person, or group of affiliated persons, who is known by us to own beneficially more than 5% of our common stock; and

    each selling stockholder.

        Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all capital stock shown to be held by that person. The table below assumes the conversion of all of our preferred stock into common stock, which will occur immediately prior to the completion of the offering.

        The number of shares of common stock outstanding, on an as converted basis, used in calculating the percentage for each listed person or entity includes common stock underlying options held by the person or entity that are exercisable within 60 days of January 15, 2004 or upon completion of this offering, but excludes common stock underlying options or warrants held by any other person or entity. Percentage of beneficial ownership is based on an assumed 117,311,422 shares of common stock outstanding as of January 15, 2004.

        This following table assumes no exercise of the underwriters' over-allotment option. Unless otherwise indicated in the footnotes, the address of each of the individuals named below is: c/o Jazz Semiconductor, Inc., 4321 Jamboree Road, Newport Beach, California, 92660.

 
  Shares Beneficially
Owned Prior to
Offering

  Shares
Being
Offered

  Shares
Beneficially Owned
After Offering

Name of beneficial owner

  Number
  Percent
 
  Number
  Percent
Five percent stockholders:                    
TCG Holdings, L.L.C.(1)
c/o The Carlyle Group
Suite 220 South
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
  55,093,750   46.9            
Conexant Systems, Inc.(2)
4311 Jamboree Road
Newport Beach, California 92660
  45,000,000   38.4            
RF Micro Devices, Inc.(3)
7628 Thorndike Road
Greensboro, North Carolina 27409
  13,071,888   11.1            

Directors and executive officers:

 

 

 

 

 

 

 

 

 

 
Shu Li(4)   2,000,000   1.7            
Mark S. Becker(5)   460,000   *            

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Paul H. G. Kempf(6)   900,000   *            
Scott W. Silcock(7)   420,000   *            
Theodore Zhu(8)   600,000   *            
Claudius E. Watts IV(9)   40,000   *            
Donald R. Beall(10)(11)   165,000   *            
Dwight W. Decker(11)(12)   165,000   *            
Allan M. Holt(9)   40,000   *            
Jerry D. Neal(12)(13)   165,000   *            
Todd Newnam(9)   40,000   *            
Donald Schrock(14)   165,000   *            
Executive officers and directors as a group(15)   5,485,000   4.6            

*
Less than 1% of the outstanding shares of common stock.

(1)
Includes 50,254,440 shares held by Carlyle Partners III, L.P., 2,750,000 shares held by Carlyle High Yield Partners, L.P., and 1,995,560 shares held by CP III Coinvestment, L.P. Also includes 93,750 shares issuable upon exercise of stock options granted to TC Group, L.L.C. TC Group, L.L.C. (which generally does business under the name of The Carlyle Group) is the sole member of TC Group III, L.L.C., which itself is the sole general partner of TC Group III, L.P., the sole general partner of Carlyle Partners III, L.P. and CPIII Coinvestment, L.P. In such capacity, TC Group, L.L.C. exercises investment discretion and control over the shares held by Carlyle Partners III, L.P. and CPIII Coinvestment, L.P. TC Group, L.L.C. is also the sole member of TCG High Yield Holdings, L.L.C., which is itself the sole member of TCG High Yield, L.L.C., the sole general partner of Carlyle High Yield Partners, L.P. In such capacity, TC Group, L.L.C. exercises investment discretion and control over the shares held by Carlyle High Yield Partners, L.P. TCG Holdings, L.L.C. is the sole managing member of TC Group, L.L.C. and, in such capacity, exercises investment discretion and control of the shares beneficially owned by TC Group, L.L.C.

(2)
Dr. Decker serves on our board of directors and is the Chief Executive Officer and a director of Conexant Systems, Inc. Mr. Beall, a director of Jazz Semiconductor, is a director of Conexant.

(3)
Dr. Neal serves on our board of directors and is the Executive Vice President of Marketing and Strategic Development of RF Micro Devices, Inc.

(4)
Includes 750,000 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 1,000,000 shares issuable upon the early exercise of unvested options, which shares, if acquired within 60 days of January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(5)
Includes 58,750 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 342,500 shares of common stock issuable upon early exercise of unvested options, which shares, if acquired within 60 days of January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

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(6)
Includes 125,000 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 650,000 shares of common stock issuable upon the early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(7)
Includes 10,000 shares of common stock. Also includes 45,000 shares of common stock issuable upon exercise of vested options and 365,000 shares issuable upon the early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(8)
Includes 225,000 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 300,000 shares issuable upon the early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(9)
Includes 40,000 shares of common stock issuable upon early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(10)
Includes 133,750 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(11)
Excludes 45,000,000 shares held by Conexant Systems (See Note 2).

(12)
Includes 93,750 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 40,000 shares of common stock issuable upon early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(13)
Excludes 13,071,888 shares held by RF Micro Devices (see Note 3).

(14)
Includes 125,000 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 40,000 shares of common stock issuable upon early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

(15)
Includes 1,648,750 shares of common stock that are not transferable and are subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004. Also includes 45,000 shares issuable upon exercise of vested options and 3,135,000 shares issuable upon the early exercise of unvested options, which shares, if acquired within 60 days after January 15, 2004, would not be transferable and would be subject to a repurchase right in favor of the company, which restrictions lapse more than 60 days after January 15, 2004.

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DESCRIPTION OF CAPITAL STOCK

        The following description of the material terms of our capital stock is qualified by reference to our amended and restated certificate of incorporation, our amended and restated investors' rights agreement and applicable law. The descriptions of our common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

General

        Immediately prior to the closing of this offering, all outstanding shares of series A preferred stock, series B preferred stock and class A common stock will convert into class B common stock, and the class A and class B common stock will be redesignated as common stock. Upon completion of this offering, our authorized capital stock will consist of 255,000,000 shares of common stock, par value $0.001 per share and 200,000,000 shares of preferred stock, par value $0.001 per share, of which shares of preferred stock none will be outstanding and 86,928,112 will remain eligible for future issuance.

Common Stock

        As of January 15, 2004, there were 4,239,534 shares of common stock outstanding held of record by 136 stockholders.

        The holders of common stock are entitled to one vote per share, in person or by proxy, in connection with the election of members of our Board of Directors and on all other matters to be voted upon by stockholders. The holders of common stock are not entitled to cumulate their votes in election of directors. All shares of common stock rank equally as to voting and all other matters. Subject to the prior rights of holders of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for payment and to receive other distributions when and as declared by the board of directors. Such dividends may be paid in cash, property, or shares of common stock. Upon our liquidation, dissolution or winding-up, subject to the rights of any shares of preferred stock then outstanding, the remaining assets of the corporation available for distribution will be distributed to the holders of the common stock on a pro rata basis based on the number of shares of common stock held. The shares of our common stock have no preemptive rights, no redemption or sinking fund provisions and are not liable for further call or assessment. The outstanding shares of our common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, validly issued fully paid and non-assessable.

Preferred Stock

        Upon the closing of this offering, the board of directors will be authorized, without further stockholder approval, to issue from time to time up to an aggregate of 86,928,112 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of Jazz. We have no present plans to issue any shares of preferred stock.

Registration Rights Agreement

        Upon the completion of this offering, The Carlyle Group, Conexant and RF Micro Devices, holders of                         shares of common stock, or              shares if the underwriters exercise their over-allotment option in full, will be entitled to rights to demand registration of shares of common

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stock held by them and rights to include these shares for registration in certain registration statements that we may file under the Securities Act of 1933 after the completion of this offering. Demand registration rights may be exercised by the holders of more than 10% of our outstanding shares of common stock, and require us to prepare and file a registration statement covering the shares subject to the demand. The number of demands that may be made is limited to six, of which stockholders affiliated with The Carlyle Group may exercise three, stockholders affiliated with Conexant may exercise two and stockholders affiliated with RF Micro Devices may exercise one. The demand rights are also subject to our right to delay registration for a limited time based on our circumstances.

        If we propose to register our securities under the Securities Act, either for our own account or for the account of other security holders, the holders of these shares will generally be entitled to notice of the registration and will be entitled to include, at our expense, their shares of common stock. These registration rights shall terminate when a holder, together with its affiliates, holds less than one percent of our outstanding common stock and is able to sell all of its shares pursuant to Rule 144 under the Securities Act in any 90-day period. Attached to these registration rights are conditions and limitations, including the right of any underwriters to limit the number of shares included in the registration statement. All holders of registrable securities have agreed not to exercise their registration rights without the prior written consent of Credit Suisse First Boston LLC and Lehman Brothers Inc. for a period of 180 days after the date of this prospectus.

Stockholders Agreement

        Upon completion of this offering, we, entities affiliated with The Carlyle Group, Conexant and RF Micro Devices, will be parties to a stockholders agreement that provides that we will use reasonable efforts to ensure that three members of our board of directors will be designated by affiliates of The Carlyle Group, two members of our board of directors will be designated by Conexant and one member of our board of directors will be designated by RF Micro Devices. The number of directors designated by The Carlyle Group will reduce to two if the aggregate share holdings of entities affiliated with The Carlyle Group ceases to be in excess of 25% of our outstanding common stock. The number of directors designated by The Carlyle Group and Conexant, respectively, will be reduced to one if the aggregate share holdings of entities affiliated with The Carlyle Group or Conexant, respectively, ceases to be in excess of 15% of our outstanding common stock. So long as the stockholders agreement remains in effect, the parties agree to vote their shares in favor of the other parties' designees for director. In addition, so long as the stockholders agreement remains in effect, each of The Carlyle Group, Conexant and RF Micro Devices will have the same rights as those held under the review agreements entered into between us, The Carlyle Group and Conexant. See "Relationships With Related Parties and Others—Transactions Relating to Our Formation—Review Agreements."

        The rights and obligations of any stockholder under the stockholders agreement will terminate automatically at such time as the shares of our common stock held by the stockholder represents less than 5% of the outstanding shares of our common stock, or at the option of the stockholder exercisable at any time when the stockholder holds less than 10% of the outstanding shares of our common stock but more than 5% of the outstanding shares of our common stock. At any time when a stockholder's right to designate one or more nominees to the board of directors terminates, at our request the stockholder will use reasonable efforts to cause its nominee to resign from the board of directors.

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Anti-takeover Effects of Certain Provisions of Delaware Law and Charter Provisions

        In general, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless:

    prior to the date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

    upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced,

    excluding those shares owned by persons who are directors and also officers, and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or

    on or subsequent to the date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

        Section 203 defines "business combination" to include:

    any merger or consolidation involving the corporation and the interested stockholder;

    any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;

    in general, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or

    the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

        In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

        Our amended and restated certificate of incorporation and bylaws will include a number of provisions that may have the effect of deterring hostile takeovers or discouraging or delaying or preventing changes in control. Such provisions include:

    our board of directors will be authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock;

    advance notice requirements for nominations to serve on our board of directors or for proposals that can be acted upon at stockholder meetings;

    our board will be classified so not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

    stockholder action by written consent will be prohibited;

    special meetings of the stockholders will be permitted to be called only by the chairman of our board of directors, our president or by a majority of our board of directors;

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    stockholders will not be permitted to cumulate their votes for the election of directors;

    vacancies on our board of directors will be filled only by majority vote of incumbent directors;

    our board of directors will be expressly authorized to make, alter or repeal our bylaws; and

    stockholders will be permitted to amend our bylaws only upon receiving at least 75% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

NASDAQ National Market Listing

        We intend to apply to have our common stock approved for quotation on The NASDAQ Stock Market's National Market under the symbol "JAZZ."

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is                        .

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SHARES ELIGIBLE FOR FUTURE SALE

        Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise capital in the future.

        We will have             shares of our common stock outstanding after the completion of this offering. Of those shares, the             shares of common stock sold in the offering, or             shares if the underwriters' over-allotment option is exercised in full, will be freely transferable without restriction, unless purchased by persons deemed to be our "affiliates" as that term is defined in Rule 144 promulgated under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144. The remaining             shares of common stock to be outstanding immediately following the completion of this offering are "restricted," which means they were originally sold in offerings that were not registered under the Securities Act. These restricted shares may only be sold through registration under the Securities Act or under an available exemption from registration, such as those provided through Rules 144 and 701 promulgated under the Securities Act.

        As of the effective date of this offering, all of our officers and directors, and holders of substantially all of our equity securities, including the selling stockholders, and certain other security holders have entered into lock-up agreements described in "Underwriting." These stockholders hold an aggregate of             shares of common stock that are subject to these lock-up restrictions. After the 180-day lock-up period, these shares may be sold in accordance with Rule 144 or Rule 701.

        After the offering, some holders of shares of our common stock will be entitled to registration rights. For more information on these registration rights, see "Description of Capital Stock—Registration Rights Agreement."

        In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares of our common stock for one year or more, may sell in the open market within any three-month period a number of shares that does not exceed the greater of:

    one percent of the then outstanding shares of our common stock (approximately            shares immediately after the offering); or

    the average weekly trading volume in the common stock on the NASDAQ National Market during the four calendar weeks preceding the sale.

        Sales under Rule 144 are also subject to certain limitations on the manner of sale, notice requirements and the availability or our current public information. A person (or persons whose shares are aggregated) who is deemed not to have been our affiliate at any time during the 90 days preceding a sale by him and who has beneficially owned his shares for at least two years, may sell the shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, notice requirements or the availability of current public information we refer to above.

        Any of our employees, officers, directors or consultants who purchased his or her shares through the exercise of stock options before the date of completion of this offering or who holds options as of that date pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public-information, holding-period, volume-limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding-

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period restrictions, in each case commencing 90 days after completion of this offering. However, 9,315,746 outstanding shares of common stock issued upon exercise of stock options were issued pursuant to early exercise provisions that permitted exercise prior to vesting and remained unvested as of January 15, 2004. Until vested in accordance with their original vesting schedule, these shares may not be resold by the holder and remain subject to a repurchase right that allows us to repurchase these shares at the per share exercise price of the stock option if the holder ceases to be our employee, officer, director or consultant. Once vested, these shares will be eligible for resale in accordance with Rule 701.

        As of January 15, 2004, options to purchase 11,522,380 shares of common stock were issued and outstanding. Upon the expiration of the lock-up agreements described above, at least 4,271,050 shares of common stock will be subject to vested options, based on options outstanding as of January 15, 2004. Immediately after the completion of this offering, we intend to file a registration statement under the Securities Act covering shares of common stock to be issued upon exercise of outstanding stock options or reserved for issuance under our equity incentive plan. This registration statement is expected to be filed and become effective as soon as practicable after completion of this offering. Accordingly, shares registered under this registration statement will, subject to vesting provisions and Rule 144 volume limitation, manner of sale, notice and public information requirements applicable to our affiliates, be available for sale in the open market immediately after the 180 day lock-up agreements expire.

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS

        The following is a summary of the material United States federal income tax consequences of the ownership and disposition of our common stock to non-United States holders, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in United States federal income tax consequences different from those set forth below. We have not sought any ruling from the Internal Revenue Service (the "IRS") with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions.

        This summary also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction. In addition, this discussion does not address tax considerations applicable to an investor's particular circumstances or to investors that may be subject to special tax rules, including, without limitation:

    banks, insurance companies, or other financial institutions;

    persons subject to the alternative minimum tax;

    tax-exempt organizations;

    dealers in securities or currencies;

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

    persons who own, or are deemed to own, more than five percent of our Company (except to the extent specifically set forth below);

    certain former citizens or long-term residents of the United States;

    persons who hold our common stock as a position in a hedging transaction, "straddle," "conversion transaction" or other risk reduction transaction; or

    persons deemed to sell our common stock under the constructive sale provisions of the Code.

        In addition, if a partnership holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock and partners in such partnerships should consult their tax advisors.

        YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

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Non-United States Holder Defined

        For purposes of this discussion, you are a non-United States holder if you are a holder that, for United States federal income tax purposes, is not a United States person. For purposes of this discussion, you are a United States person if you are:

    an individual citizen or resident of the United States;

    a corporation or other entity taxable as a corporation or a partnership or entity taxable as a partnership created or organized in the United States or under the laws of the United States or any political subdivision thereof;

    an estate whose income is subject to United States federal income tax regardless of its source; or

    a trust (x) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (y) which has made an election to be treated as a United States person.

Distributions

        We have not made any distributions on our common stock, and we do not plan to make any distributions for the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for United States tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock.

        Any dividend paid to you generally will be subject to United States withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, you must provide us with an IRS Form W-8BEN or other appropriate version of IRS Form W-8 certifying qualification for the reduced rate.

        Dividends received by you that are effectively connected with your conduct of a United States trade or business are exempt from such withholding tax. In order to obtain this exemption, you must provide us with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to United States persons, net of certain deductions and credits. In addition, if you are a corporate non-United States holder, dividends you receive that are effectively connected with your conduct of a United States trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.

        If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may obtain a refund of any excess amounts currently withheld if you file an appropriate claim for refund with the IRS.

Gain on Disposition of Common Stock

        You generally will not be required to pay United States federal income tax on any gain realized upon the sale or other disposition of our common stock unless:

    the gain is effectively connected with your conduct of a United States trade or business;

    you are an individual who holds our common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods

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      aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or

    our common stock constitutes a United States real property interest by reason of our status as a "United States real property holding corporation" for United States federal income tax purposes (a "USRPHC") at any time within the shorter of the five-year period preceding the disposition or your holding period for our common stock.

        We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as United States real property interests only if you actually or constructively hold more than 5 percent of such regularly traded common stock.

        If you are a non-United States holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under regular graduated United States federal income tax rates, and corporate non-United States holders described in the first bullet above may be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-United States holder described in the second bullet above, you will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by United States source capital losses. You should consult any applicable income tax treaties that may provide for different rules.

Backup Withholding and Information Reporting

        Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address, and the amount of tax withheld, if any. A similar report is sent to you. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in your country of residence.

        Payments of dividends or of proceeds on the disposition of stock made to you may be subject to information reporting and backup withholding unless you establish an exemption, for example by properly certifying your non-United States status on a Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a United States person.

        Backup withholding is not an additional tax. Rather, the United States income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is furnished to the IRS in a timely manner.

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UNDERWRITING

        Under the terms and subject to the conditions contained in an underwriting agreement to be filed as an exhibit relating to this prospectus, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston LLC and Lehman Brothers Inc. are acting as representatives, the following respective numbers of shares of common stock:

Underwriter

  Number
of Shares

Credit Suisse First Boston LLC    
Lehman Brothers Inc.    
SG Cowen Securities Corporation    
Wachovia Capital Markets, LLC    
Thomas Weisel Partners LLC    
Needham & Company, Inc.    
   
  Total    
   

        The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

        The selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to an aggregate of                         additional outstanding shares at the initial public offering price, less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

        The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $    per share. The underwriters and selling group members may allow a discount of $            per share on sales to other broker/dealers. After the initial public offering, the representatives may change the public offering price and concession and discount to broker/dealers.

        The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:

 
  Per Share
  Total
 
  Without
Over-allotment

  With
Over-allotment

  Without
Over-allotment

  With
Over-allotment

Underwriting Discounts and Commissions paid by us   $     $     $     $  
Expenses payable by us   $     $     $     $  
Underwriting Discounts and Commissions paid by selling stockholders   $     $     $     $  

        The representatives have informed us that the underwriters do not expect discretionary sales to exceed 5% of the shares of common stock being offered.

        We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended (the "Securities Act") relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior

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written consent of Credit Suisse First Boston LLC and Lehman Brothers Inc. for a period of 180 days after the date of this prospectus, other than:

    the filing of a registration statement on Form S-8;

    grants of stock options or restricted stock to employees, consultants or directors pursuant to the terms of an employee benefit plan, qualified stock option plan or other employee compensation plans currently in effect as of the date of the underwriting agreement;

    issuances of our common stock pursuant to the exercise of any employee stock options outstanding as of the date of the underwriting agreement; or

    issuances of up to                 shares of our common stock or securities convertible into or exchangeable for such number of shares of common stock in connection with acquisitions of other entities and the registration on Form S-4 of such securities.

        Our officers, directors, and holders of substantially all of our equity securities have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston LLC and Lehman Brothers Inc. for a period of 180 days after the date of this prospectus other than:

    bona fide gifts or pledges, dispositions to any trust for the direct or indirect benefit of the officer, director or stockholder, provided that the recipient or recipients thereof agree in writing to be bound by the same lock-up restrictions;

    sales, dispositions or other transfers to members of the officer's, director's or stockholder's family or affiliates of the officer, director or stockholder, including its partners (if a partnership) or members (if a limited liability company), provided that, in each case, the recipient or recipients thereof agree in writing to be bound by the same lock-up restrictions; or

    transactions in shares acquired in open-market transactions following the completion of this offering;

provided, in each case, no filing by any officer, director or holder of equity, other than a selling stockholder, under the Securities and Exchange Act of 1934, as amended, shall be required or shall be voluntarily made in connection with such transfer or distribution (other than a filing on a Form 5 made after the expiration of the lock-up period).

        The underwriters have reserved for sale at the initial public offering price up to                         shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.

        We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

        We intend to apply to list the shares of common stock on The NASDAQ National Market, under the symbol "JAZZ."

111



        Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation among us, the selling shareholders and the representatives and such offering price will not necessarily reflect the market price of the common stock following the offering. The principal factors that will be considered in determining the public offering price will include:

    the information in this prospectus and otherwise available to the underwriters;

    market conditions for initial public offerings;

    the history and the prospects for the industry in which we compete;

    our past and present operations;

    our past and present earnings and current financial position;

    the ability of our management;

    the prospects for our future earnings;

    the present state of our development and our current financial condition;

    the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and

    the general condition of the securities markets at the time of this offering.

        We cannot assure you that prices at which our shares sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market for the common stock will develop and continue after this offering.

        In connection with this offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

    Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

112


    Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The NASDAQ National Market or otherwise and, if commenced, may be discontinued at any time.

        A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.

113



NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

        The distribution of our common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of the securities are made. Any resale of the common stock in Canada must be made under applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.

Representations of Purchasers

        By purchasing the common stock in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling stockholders and the dealer from whom the purchase confirmation is received that:

    the purchaser is entitled under applicable provincial securities laws to purchase the securities without the benefit of a prospectus qualified under those securities laws,

    where required by law, that the purchaser is purchasing as principal and not as agent, and

    the purchaser has reviewed the text above under Resale Restrictions.

Rights of Action—Ontario Purchasers Only

        Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us and the selling stockholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling stockholders. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling stockholders will have no liability. In the case of an action for damages, we and the selling stockholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

        All of our directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

114



Taxation and Eligibility for Investment

        Canadian purchasers of the securities should consult their own legal and tax advisors with respect to the tax consequences of an investment in the securities in their particular circumstances and about the eligibility of the securities for investment by the purchaser under relevant Canadian legislation.


LEGAL MATTERS

        The validity of the shares of common stock offered hereby will be passed upon for us by Latham & Watkins LLP, Costa Mesa, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP, San Francisco, California.


EXPERTS

        The consolidated financial statements of Jazz Semiconductor, Inc. at December 31, 2002 and 2003, and for the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.


WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information regarding us, the selling stockholders and the shares of common stock to be sold in this offering, please refer to the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.

        You may read and copy all or any portion of the registration statement or any other information that we file at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Our Securities and Exchange Commission filings, including the registration statement, are also available to you on the Securities and Exchange Commission's website. The address of this website is www.sec.gov.

        As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission.

115




GLOSSARY OF TERMS

Baseband   Logic circuitry that responds to and processes the instructions that drive electronic systems, such as a cellular phone.

BiCMOS

 

IC fabrication technology that combines both bipolar transistors and CMOS transistors on one chip.

Bipolar

 

A manufacturing process that uses semiconductor junctions of opposite type to build transistors commonly used for analog functions.

CMOS

 

Complementary Metal Oxide Silicon. Currently the most common integrated circuit fabrication process technology.

Chemical vapor deposition

 

A process in which gaseous chemicals react on a heated surface to form solid crystalline materials.

Chip

 

Usually refers to a single integrated circuit die, but also used as a generic term for semiconductor devices.

Die

 

A piece of a semiconductor wafer containing the circuitry of a single semiconductor.

Fab

 

The facility that manufactures the wafer.

Fabless semiconductor company

 

A class of semiconductor company that designs, tests, markets and sells semiconductors, but subcontracts wafer manufacturing to silicon wafer manufacturers.

Foundry

 

A wafer fabrication facility that manufactures semiconductors for other businesses.

GSM

 

Global System for Mobile Communications. GSM is a wireless access standard used in many parts of the world that offers two-way paging, short messaging, and two-way radio in addition to cellular telephony.

Integrated circuit, or IC

 

A combination of two or more transistors on a base material, usually silicon. All semiconductor chips are complicated integrated circuits with thousands of transistors.

Integrated Device Manufacturer, or IDM

 

A semiconductor device manufacturer that has its own semiconductor manufacturing facilities.

LAN

 

Local Area Network. A local area network links nearby computers so that they may communicate and share information.

Mask

 

A piece of glass on which an IC circuitry design is laid out in an opaque layer. Integrated circuits may require up to 20 different layers of design, each with its own mask. In the integrated circuit production process, a light shines through the mask leaving an image of the design on the wafer. Also known as a reticle.

Micron

 

A unit of spatial measurement that is one millionth of a meter.

116



Packaging

 

A process whereby a wafer is diced into individual die which are then separated from the wafer and attached to a substrate via an epoxy adhesive. Leads on the substrate are then connected by extremely fine gold wires to the input/output, or "I/O" terminals on the chips through the use of automated machines known as "wire bonders". Each die is then encapsulated in a plastic molding compound, thus forming the package. Semiconductor packaging serves to protect the chip, facilitate integration into electronic systems, and enable the dissipation of heat from the devices.

Process Geometry

 

Refers to the line width of key physical features in a semiconductor device, usually measured in microns.

Radio Frequency

 

A frequency in the range within which radio waves may be transmitted, which in the context of this prospectus, generally means the frequencies in the range of 30 Megahertz (Mhz), or 30 million cycles per second, to 5.8 GHz.

Reticle

 

See "Mask."

Scanner

 

A machine used in the photolithography process in making wafers. A scanner, like a conventional stepper, aligns a small portion of the wafer with the mask upon which the circuitry design is laid out and exposes that portion of the wafer to a laser beam, transferring the circuit design on to the wafer. The machine then steps to the next area, repeating the process until the entire wafer has been completed. Exposing only a small area of a wafer at a time allows the laser to focus more intensely, which improves the resolution of the circuitry design. A scanner also combines this stepper technology with a photoscanning method that permits the exposure of a larger segment of the wafer than a stepper.

Semiconductor or Semiconductor Device

 

A material with electrical conducting properties between those of metals and insulators. Essentially, semiconductors transmit electricity only under certain circumstances, such as when given a positive or negative electric charge. Therefore, a semiconductor's ability to conduct can be turned on or off by manipulating those charges, which allows the semiconductor to act as an electric switch. The most common semiconductor material is silicon, used as the base of most semiconductor chips today because it is relatively inexpensive and easy to create.

Silicon germanium or SiGe

 

A material used to substitute for silicon in semiconductor manufacturing that has superior performance results.

Stepper

 

A machine used in the photolithography process in making wafers. With a stepper, a small portion of the wafer is aligned with the mask upon which the circuitry design is laid out and is then exposed to strong light. The machine then "steps" to the next area repeating the process until the entire wafer has been done. Exposing only a small area of the wafer at a time allows the light to be focused more intensely which gives better resolution of the circuitry design.

117



Substrate

 

The underlying material upon which a device or circuit is fabricated, normally a silicon wafer.

Transistor

 

An individual circuit that can amplify or switch electric current. This is the building block of all integrated circuits.

Transceiver

 

A transceiver is a combination transmitter/receiver in a single package. The term applies to wireless communications devices such as cellular telephones, cordless telephone sets, handheld two-way radios and mobile two-way radios. Occasionally the term is used in reference to transmitter/receiver devices in cable or fiber-optic systems.

Wafer

 

Thin, round, flat piece of silicon that is the base of most integrated circuits.

Wafer Fabrication

 

The sequence of oxidation, diffusion, deposition and photolithographic process steps by which semiconductor devices are batch fabricated on wafers.

WCDMA

 

Wideband Code-Division Multiple Access. WCDMA is a third-generation (3G) mobile wireless technology offering much higher data speeds to mobile and portable wireless devices than commonly offered in today's market.

WLAN

 

Wireless Local Area Network. A wireless LAN is one in which a mobile user can wirelessly connect to a LAN. A standard, IEEE 802.11, specifies the technologies for wireless LANs.

118



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT AUDITORS   F-2

CONSOLIDATED FINANCIAL STATEMENTS

 

 
 
CONSOLIDATED BALANCE SHEETS

 

F-3
 
CONSOLIDATED STATEMENTS OF OPERATIONS

 

F-4
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

F-5
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

F-6
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

F-7

FINANCIAL STATEMENT SCHEDULE—VALUATION AND QUALIFYING ACCOUNTS

 

S-1

F-1



Report of Independent Auditors

The Board of Directors and Stockholders
Jazz Semiconductor, Inc.

        We have audited the accompanying consolidated balance sheets of Jazz Semiconductor, Inc. as of December 31, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 16(b). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jazz Semiconductor, Inc. at December 31, 2002 and 2003, and the consolidated results of its operations and its cash flows for the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

                        /s/ Ernst & Young LLP

Orange County, California
January 16, 2004

F-2



Jazz Semiconductor, Inc.

Consolidated Balance Sheets

(in thousands)

 
  December 31,
  Pro Forma as of
December 31, 2003
(unaudited)
(see Note 2)

 
 
  2002
  2003
 
Assets                    
Current assets:                    
  Cash and cash equivalents   $ 54,552   $ 65,591        
  Restricted cash         1,197        
  Receivables from related parties     16,950     21,362        
  Receivables, net of allowance for doubtful accounts of $37 and $390 at December 31, 2002 and 2003, respectively     333     3,610        
  Inventories     11,161     16,465        
  Other current assets     2,940     3,492        
   
 
       
Total current assets     85,936     111,717        
Property, plant and equipment, net     52,844     50,936        
Investments     1,614     11,957        
Intangible assets, net     3,608     3,123        
   
 
       
Total assets   $ 144,002   $ 177,733        
   
 
       
Liabilities and stockholders' equity                    
Current liabilities:                    
  Payables to related parties   $ 2,800   $ 539        
  Accounts payable     14,667     10,869        
  Accrued compensation, benefits and other     4,242     4,314        
  Deferred revenue     1,481     2,979        
  Other current liabilities     1,850     5,881        
   
 
       
Total current liabilities     25,040     24,582        

Deferred revenue—wafer credits

 

 

12,190

 

 

12,167

 

 

 

 
Stock appreciation rights, net     629     9,335        
Pension and retirement medical plan obligations     8,315     8,951        
   
 
       
Total liabilities     46,174     55,035        

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 
  Preferred stock, $.001 par value
Authorized shares—200,000
Issued and outstanding shares—113,072 in 2002, 113,072
    in 2003 and zero pro forma (unaudited)
    113     113   $  
    Liquidation preference $128,683 at December 31, 2003 and zero pro forma (unaudited)                    
  Common stock, $.001 par value                    
    Authorized shares—255,000                    
    Issued and outstanding shares—2,373 in 2002, 4,200 in
2003 and 117,272 pro forma (unaudited)
    2     4     117  
  Additional paid in capital     142,692     145,463     145,463  
  Notes receivable from stockholders     (30,200 )        
  Deferred stock compensation     (83 )   (2,348 )   (2,348 )
  Accumulated other comprehensive loss     (160 )        
  Accumulated deficit     (14,536 )   (20,534 )   (20,534 )
   
 
 
 
Total stockholders' equity     97,828     122,698   $ 122,698  
   
 
 
 
Total liabilities and stockholders' equity   $ 144,002   $ 177,733        
   
 
       

See accompanying notes.

F-3



Jazz Semiconductor, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 
  For the
Period From
March 12, 2002
(Inception) to
December 31, 2002

  For the
Year Ended
December 31, 2003

 
Revenues from related parties   $ 119,762   $ 169,875  
Revenues from third parties     3,315     15,310  
   
 
 
Total revenues     123,077     185,185  
Cost of goods sold(1)     102,744     158,351  
   
 
 
Gross profit     20,333     26,834  
Operating expenses:              
  Research and development(1)     12,333     18,572  
  Selling, general and administrative (1)     9,515     13,173  
  Amortization of intangible assets     243     741  
  Loss on disposal of equipment         751  
  Stock compensation expense     629     9,778  
   
 
 
Total operating expenses     22,720     43,015  
   
 
 
Operating loss     (2,387 )   (16,181 )
Interest income     514     513  
Gain (loss) on investments     (12,651 )   9,682  
   
 
 
Loss before income taxes     (14,524 )   (5,986 )
Income tax provision     12     12  
   
 
 
Net loss     (14,536 )   (5,998 )
Preferred stock dividends     (4,335 )   (11,276 )
   
 
 
Net loss attributable to common stockholders   $ (18,871 ) $ (17,274 )
   
 
 
Net loss per common share, basic and diluted         $ (31.64 )
         
 
Weighted-average number of shares used in per common share calculations           546  
         
 
Pro forma net loss per common share, basic and diluted (unaudited)   $ (0.14 ) $ (0.05 )
   
 
 
Weighted-average number of shares used in pro forma per common share calculations (unaudited)     102,979     113,618  
   
 
 

(1) Amounts exclude stock-based compensation relating to stock options and stock appreciation rights, as follows (See Note 2):

 

 

 

 

 

 

 
      Cost of goods sold   $ 149   $ 2,298  
      Research and development   $ 273   $ 4,243  
      Selling, general and administrative   $ 207   $ 3,237  

See accompanying notes.

F-4


Jazz Semiconductor, Inc.

Consolidated Statements of Stockholders' Equity

(in thousands)

 
  Preferred stock
  Common stock
   
   
   
  Accumulated
other
comprehensive
income (loss)

   
   
 
 
  Additional
paid in
capital

  Notes
receivable from
stockholders

  Deferred
stock
compensation

  Accumulated
deficit

  Total
stockholders'
equity

 
 
  Shares
  Amount
  Shares
  Amount
 
Balance at March 12, 2002 (inception)     $     $   $   $   $   $   $   $  
Issuance of Class A Common Stock upon formation         5,500     6     51,994                     52,000  
Issuance of Class B Common Stock upon formation         4,500     5     42,540                     42,545  
Issuance of Series A Preferred Stock upon recapitalization of Class A Common Stock   55,000     55   (5,500 )   (6 )   (49 )                    
Issuance of Series B Preferred Stock upon recapitalization of Class B Common Stock   45,000     45   (4,500 )   (5 )   (40 )                    
Sale of Series B Preferred Stock, net of offering costs of $105   13,072     13           47,692     (30,000 )               17,705  
Exercise of employee stock options         2,373     2     472     (200 )               274  
Deferred stock compensation                 83         (83 )            
Comprehensive income (loss):                                                          
  Minimum pension liability                             (160 )       (160 )
  Net loss                                 (14,536 )   (14,536 )
                                                     
 
  Total comprehensive loss                                                       (14,696 )
   
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2002   113,072     113   2,373     2     142,692     (30,200 )   (83 )   (160 )   (14,536 )   97,828  
  Repayment of notes                     30,200                 30,200  
  Exercise of employee stock options         1,827     2     365                     367  
  Deferred stock compensation                 2,406         (2,406 )            
  Amortization of deferred stock compensation                         141             141  
  Comprehensive income (loss):                                      
    Minimum pension liability                             160         160  
    Net loss                                 (5,998 )   (5,998 )
                                                     
 
    Total comprehensive loss                                                       (5,838 )
   
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2003   113,072   $ 113   4,200   $ 4   $ 145,463   $   $ (2,348 ) $   $ (20,534 ) $ 122,698  
   
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F-5



Jazz Semiconductor, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 
  For the
Period From
March 12, 2002
(Inception) to
December 31, 2002

  For the Year Ended
December 31, 2003

 
Operating activities:              
Net loss   $ (14,536 ) $ (5,998 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:              
  Unrealized loss (gain) on investments     12,651     (8,843 )
  Depreciation and amortization     11,584     15,170  
  Non-cash stock appreciation rights compensation expense     629     8,706  
  Non-cash stock compensation expense         141  
  Gain on sale of shares received upon exercise of warrants         (931 )
  Loss on disposition of equipment         751  
  Provision for doubtful accounts     37     417  
  Changes in operating assets and liabilities, net of effects of assets and liabilities acquired upon formation:              
    Restricted cash         (1,197 )
    Accounts receivable     (17,320 )   (8,106 )
    Inventories     (3,731 )   (5,304 )
    Other current assets     (2,940 )   (552 )
    Accounts payable     17,467     (6,059 )
    Accrued compensation, benefits and other     2,156     72  
    Deferred revenue     13,671     1,475  
    Other liabilities     350     4,031  
    Pension and retirement medical plan obligations     164     796  
   
 
 
Net cash provided by (used in) operating activities     20,182     (5,431 )

Investing activities:

 

 

 

 

 

 

 
Capital expenditures     (10,742 )   (14,249 )
Proceeds from sale of equipment         977  
Investments         (1,756 )
Proceeds from sale of shares received upon exercise of warrants         931  
   
 
 
Net cash used in investing activities     (10,742 )   (14,097 )

Financing activities:

 

 

 

 

 

 

 
Initial formation and capital contributions     27,133      
Net proceeds from sale of Series B Preferred Stock     17,705      
Exercise of employee stock options     274     567  
Payment of note receivable from RF Micro Devices         30,000  
   
 
 
Net cash provided by financing activities     45,112     30,567  
   
 
 
Net increase in cash and cash equivalents     54,552     11,039  
Cash and cash equivalents at beginning of period         54,552  
   
 
 
Cash and cash equivalents at end of period   $ 54,552   $ 65,591  
   
 
 

See accompanying notes.

F-6



Jazz Semiconductor, Inc.

Notes to Consolidated Financial Statements

December 31, 2003

1. Description of Business and Formation

        Jazz Semiconductor, Inc. (the Company) is an independent wafer foundry focused primarily on specialty process technologies for the manufacture of analog and mixed-signal semiconductor devices. These semiconductor devices are used in products such as cellular phones, wireless local area network devices, digital cameras, personal digital assistants, switches and routers, broadband modems and hard disk drives. While the Company provides standard complimentary metal oxide semiconductor, or CMOS, process technologies, through its heritage of developing processes for the manufacture of analog and mixed-signal semiconductors, it is a leader in specialty process technologies, including silicon germanium bipolar CMOS, or SiGe BiCMOS.

        In March 2002, the Company (incorporated in Delaware in February 2002) became an independent, privately held company upon the contribution by Conexant Systems, Inc. (Conexant) of $67.3 million of net assets in exchange for $19.3 million in cash and 4,500,000 shares of common stock and the contribution by affiliates of The Carlyle Group (Carlyle) of approximately $52 million in cash in exchange for 5,500,000 shares of common stock. The aggregate value of the transaction, determined based upon the cash consideration paid by affiliates of Carlyle, was $94.5 million. Included in the aggregate value are direct costs incurred related to the transaction of approximately $5.5 million (Note 9).

        The Company accounted for this transaction using the purchase method of accounting. The consolidated financial statements include the results of operations of the Company subsequent to the date of inception of March 12, 2002. The Company obtained independent appraisals of the value of long-lived tangible and intangible assets contributed by Conexant in order to allocate the purchase price. Based on the appraisals, the purchase price was allocated as follows (in thousands):

Working capital   $ 31,041  
Property, plant and equipment     53,442  
Conexant warrant investment     14,200  
Intangible assets     3,851  
Pension and retirement medical plan obligations     (7,991 )
   
 
Total   $ 94,543  
   
 

        In July 2002, the Company recapitalized 10,000,000 shares of common stock, representing all of the then outstanding shares of common stock of the Company, into 100,000,000 shares of preferred stock. All share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the recapitalization.

2. Summary of Significant Accounting Policies

Basis of Presentation

        The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

        Prior to the Company's formation, the Company's fab was a manufacturing cost center of Conexant and was not a segment, division or other separately identifiable line of business. The cost

F-7



center did not sell or market its products. Rather, it manufactured products for use by Conexant based on its demand requirements. The semiconductors produced by the fab were only one component in the end semiconductor products sold by Conexant. Conexant did not provide a transfer pricing mechanism between its Newport Beach, California fab operations and its business units and did not allocate general functional expenses to the fab because it was only one of multiple elements of the cost of producing the products it sold to its customers. The fab participated in Conexant's cash management system wherein all cash disbursements associated with fab activities were funded by Conexant. As a result, the Company's business did not have revenues prior to its separation from Conexant, and the Company is unable to determine actual historical costs that would have been incurred by the Company if services performed by Conexant had been purchased from independent third parties. For this reason, the Company is unable to present historical financial information for periods prior to March 12, 2002, the inception of the Company's business as a stand-alone entity.

Unaudited Pro Forma Stockholders' Equity as of December 31, 2003

        Immediately prior to the completion of an initial public offering, as contemplated by this prospectus, the Company's outstanding preferred stock will automatically convert into 113,071,888 shares of common stock. The pro forma effects of this transaction are unaudited and have been reflected in the accompanying consolidated balance sheet as of December 31, 2003.

Fiscal Year

        The Company maintains a 52- or 53-week fiscal year. Each of the Company's first three quarters of a fiscal year end on the last Friday in each of March, June and September and the fourth quarter of a fiscal year ends on the Friday prior to December 31. As a result, each fiscal quarter consists of 13 weeks during a 52-week fiscal year. During a 53-week fiscal year, the first three quarters consist of 13 weeks and the fourth quarter consists of 14 weeks. Fiscal year 2003 consists of 52 weeks. For simplicity of presentation, we have expressed the end of each period presented as ending on the last day of the final month in such period.

Recapitalization

        In July 2002, the Company exchanged 10,000,000 shares of common stock, representing all of the then outstanding shares of common stock of the Company, for 100,000,000 shares of preferred stock. All share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to reflect the recapitalization.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those relating to sales allowances, the allowance for doubtful accounts, inventories, long-lived assets, investments, income taxes, litigation and deferred stock compensation. On an ongoing basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those estimates.

F-8



Revenue Recognition

        Revenue is recognized when products are shipped to customers, which is when title and risk of loss transfers to the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. Advances received from customers towards future product purchases are deferred until products are shipped to the customer. The Company provides for sales allowances as a reduction to revenue at the time of shipment based on its historical experience or specific identification of an event necessitating an allowance. Estimates for sales allowances require a considerable amount of judgment. Revenues from development contracts and the procurement of photomasks are deferred and recognized upon shipment of the related products manufactured.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with insignificant interest rate risk and original maturities of three months or less from the date of purchase to be cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair values. The Company maintains cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe that as a result of this concentration, it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

Restricted Cash

        Under the terms of an insurance policy, the Company provides as security to the insurance carriers a letter of credit totaling $1,138,000. The letter of credit is secured by a certificate of deposit for $1,197,000, which has been classified as restricted cash as of December 31, 2003 in the accompanying consolidated financial statements.

Inventories

        Inventories include the costs for freight-in, materials, labor and manufacturing overhead and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

        Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from two to thirteen years. Significant renewals and betterments are capitalized and replaced units are written off. Maintenance and repairs are charged to expense as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation or amortization is removed from the consolidated balance sheet and the resulting gain or loss is reflected in the consolidated statement of operations.

Investments

        In connection with the formation of Jazz, Conexant issued warrants to Jazz to purchase up to 2,900,000 shares of Conexant common stock. The warrants are subject to adjustment for subsequent distributions to shareholders by Conexant. In June 2002 and July 2003, Conexant completed distributions to its shareholders resulting in the creation of Skyworks Solutions, Inc. (Skyworks) and

F-9



Mindspeed Technologies, Inc. (Mindspeed), respectively. As a result, the Company holds warrants with exercise prices as follows at December 31, 2003.

Company

  Number of
Shares
(in thousands)

  Exercise Price
per Share

Conexant   2,679   $ 3.76

Skyworks

 

1,018

 

$

24.02

Mindspeed

 

843

 

$

2.57

        The warrants are fully-vested, subject to certain exercise restrictions, and expire in January 2005.

        In connection with the issuance of the warrants, the Company established a stock appreciation rights plan (SARs) that provided for the issuance of 2,979,456 SARs, for the benefit of employees that transferred employment from Conexant and became employees of Jazz. The outstanding SARs have been adjusted for the subsequent distributions to Conexant's stockholders as described above consistent with effect on the warrants. The SARs entitle the employees to receive a cash settlement for the excess, if any, of the fair market value of the Conexant, Skyworks and Mindspeed common stock over the reference price of the SARs. The reference price of the SARs is equal to the exercise price of the related warrants with Conexant, Skyworks and Mindspeed, thereby passing any intrinsic value of the warrants through to the employees. The SARs vest at a rate of 25% per each six-month period such that they will be fully vested in March 2004. The SARs will expire in December 2004.

        In accordance with the Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, and Emerging Issues Task Force Issue 02-08, Accounting for Options Granted to Employees in Unrestricted, Publicly-Traded Shares of an Unrelated Entity, both the warrants and SARs have been accounted for as derivatives and, therefore, the fair value of each instrument (effectively equivalent amounts) has been reflected as an asset and a liability, respectively, in the Company's initial purchase price allocation. In addition, as part of the purchase price allocation, deferred compensation was recorded for the fair value of the SARs granted to the employees. The deferred compensation was offset against the SARs liability resulting in a net amount of zero for the SARs liability in the consolidated balance sheet as of the date of inception. The fair value of the instruments has been determined using the Black-Scholes pricing model using the following assumptions:

 
  December 31,
 
 
  2002
  2003
 
Remaining life (in years)   2.0   1.0  
Risk free interest rate   4.1 % 1.4 %
Dividend yield   0 % 0 %
Volatility:          
  Conexant   69 % 93 %
  Skyworks   69 % 75 %
  Mindspeed   n/a   81 %

F-10


        The decline in the risk-free interest rate from December 2002 to December 2003 is directly related to the decrease in general interest rates and a decrease in the remaining life of the SARs during the period. Subsequent adjustments as of each interim and annual reporting date in the fair value of the warrants is reflected as a gain or loss on investments in the consolidated statement of operations. Subsequent adjustments to the SARs liability and deferred compensation due to fluctuations in the fair value of the instruments and due to the amortization of the deferred compensation is reflected as stock compensation in the consolidated statements of operations. The deferred compensation is being amortized on a straight-line basis over the vesting period of the SARs. At December 31, 2002 and 2003, the fair value of the warrants was approximately $1.6 million and $10.5 million, respectively. At December 31, 2002 and 2003, the fair value of the SARs was approximately $1.6 million and $10.4 million, respectively, and the remaining deferred compensation was $985,000 and $1.1 million, respectively. The deferred compensation has been offset against the SARs liability resulting in a net SARs liability of $629,000 and $9.3 million at December 31, 2002 and 2003, respectively. For the period from March 12, 2002 (inception) to December 31, 2002, the Company recorded a $12.7 million non-cash loss on investments for the decrease in value of the warrants and compensation expense of $629,000 for the net amortization of deferred compensation. For the year ended December 31, 2003, the Company recorded an $8.9 million non-cash gain on investment for the increase in value of the warrants and non-cash compensation expense of $8.7 million for the net amortization of deferred compensation. In subsequent periods, the Company will continue to record compensation expense based on the pro-rata vesting of the then fair value of the SARs, which could result in additional expense if the fair value stays consistent or increases or would result in a gain if the fair value decreases.

        The following table summarizes SAR and warrant activity for the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003 (in thousands):

 
  Conexant
  Skyworks
  Mindspeed
 
 
  Warrants
  SARs
  Warrants
  SARs
  Warrants
  SARs
 
Granted/received, as adjusted   2,857   2,935   1,018   1,045      
Cancellations     (34 )        
Exercised              
   
 
 
 
 
 
 
Outstanding at December 31, 2002   2,857   2,901   1,018   1,045      
Granted/received June 27, 2003           1,037   1,049  
Cancellations     (10 )   (18 )   (2 )
Exercised   (178 ) (178 )     (194 ) (194 )
   
 
 
 
 
 
 
Outstanding at December 31, 2003   2,679   2,713   1,018   1,027   843   853  
   
 
 
 
 
 
 

        For the year ended December 31, 2003, 178,000 and 194,000 SARs were exercised for Conexant common stock and Mindspeed common stock, respectively, resulting in compensation to employees of approximately $931,000. To offset the effect of the exercising of the SARs, the Company exercised an equivalent number of warrants in Conexant and Mindspeed common stock. The shares of common stock of Conexant and Mindspeed were sold for a realized gain of approximately $931,000. No SARs or warrants for Skyworks have been exercised.

F-11



Long-Lived Assets

        The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Research and Development Costs

        The Company charges all research and development costs to expense when incurred.

Stock-Based Compensation

        At December 31, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 7. The Company accounts for this plan under the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. For the period from March 12, 2002 (inception) to December 31, 2002 and for the year ended December 31, 2003, the Company recorded approximately $83,000 and $2.4 million, respectively, of deferred stock compensation representing the difference between the option exercise price and estimated fair value of the Company's common stock on the dates of grant.

        Pro forma information regarding net loss is required by SFAS No. 123, Accounting for Stock-Based Compensation. This information is required to be determined as if the Company had accounted for stock-based awards to its employees under the fair value method pursuant to SFAS 123, rather than the intrinsic value method pursuant to APB 25. The fair value of these options was estimated at the date of grant based on the minimum-value method, which does not consider stock price volatility. The minimum value option valuation model requires the input of highly subjective assumptions. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options because the Company's employee stock options have characteristics different than those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate.

        The following assumptions were used in valuing the stock option grants:

 
  Period Ended
December 31,
2002

  Year Ended
December 31,
2003

 
Risk-free interest rate   4.0 % 3.0 %
Dividend yield   0 % 0 %
Expected life (in years)   4.0   4.0  

F-12


        The following table illustrates the effect on net loss and net loss per share, if the Company had applied the fair value recognition provisions of SFAS 123 to employee stock options (in thousands, except per share data):

 
  Period Ended
December 31,
2002

  Year Ended
December 31,
2003

 
Net loss, as reported   $ (14,536 ) $ (5,998 )
Add: Stock-based employee compensation expense included in the reported net loss         141  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards     (110 )   (195 )
   
 
 
Pro forma net loss     (14,646 )   (6,052 )
Preferred stock dividends     (4,335 )   (11,276 )
   
 
 
Pro forma net loss attributable to common stockholders   $ (18,981 ) $ (17,328 )
   
 
 
Net loss per common share, basic and diluted:              
  As reported         $ (31.64 )
         
 
  Pro forma         $ (31.74 )
         
 

Income Taxes

        The Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

Net Loss per Share

        Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock.

        On July 31, 2002, 5,500,000 shares of Class A common stock and 4,500,000 shares of Class B common stock, representing all of the then outstanding shares of common stock of the Company, were recapitalized into 55,000,000 and 45,000,000 shares of Series A preferred stock and Series B preferred stock, respectively. This recapitalization has been reflected as occurring as of March 12, 2002 (inception) for purposes of computing net loss per common share. The Company has not presented net loss per common share in periods where there were effectively no weighted average common shares outstanding.

F-13



        A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share follows (in thousands, except per share data):

 
  Period Ended
December 31,
2002

  Year Ended
December 31,
2003

 
Numerator:              
  Net loss, as reported   $ (14,536 ) $ (5,998 )
  Less: Preferred stock dividends     (4,335 )   (11,276 )
   
 
 
  Net loss attributable to common stockholders, basic and diluted   $ (18,871 ) $ (17,274 )
   
 
 
Denominator:              
  Weighted-average common shares outstanding     101     3,433  
  Less: Weighted-average common shares subject to repurchase     (101 )   (2,887 )
   
 
 
  Weighted-average number of shares used in computing basic and diluted net loss per common share         546  
   
 
 
Net loss per common shares, basic and diluted         $ (31.64 )
         
 

        The following outstanding options to purchase shares of common stock and shares of convertible preferred stock were excluded from the computation of diluted net loss per share as they had an antidilutive effect (in thousands):

 
  Period Ended
December 31,
2002

  Year Ended
December 31,
2003

Options to purchase common stock   5,257   11,563
Convertible preferred stock   113,072   113,072
   
 
    118,329   124,635
   
 

Unaudited Pro Forma Net Loss per Share

        Pro forma basic and diluted net loss per share gives effect to the conversion of the Company's recapitalized convertible preferred stock into common stock immediately prior to the completion of the offering contemplated by this prospectus as if the conversion occurred on the date of issuance. A

F-14



reconciliation of the numerator and denominator used in the calculation of pro forma basic and diluted net loss per common share follows (in thousands, except per share data):

 
  Period Ended
December 31,
2002

  Year Ended
December 31,
2003

 
Numerator:              
  Net loss, as reported   $ (14,536 ) $ (5,998 )
   
 
 
Denominator:              
  Weighted-average common shares outstanding     101     3,433  
  Less: Weighted-average common shares subject to repurchase     (101 )   (2,887 )
  Plus: Conversion of preferred stock into common stock     102,979     113,072  
   
 
 
Weighted-average number of shares used in computing unaudited pro forma basic and diluted net loss per common share     102,979     113,618  
   
 
 
Unaudited pro forma net loss per common share, basic and diluted   $ (0.14 ) $ (0.05 )
   
 
 

Concentrations

        Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company invests its cash balances through high-credit quality financial institutions. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history, age of the balance and the customer's current credit worthiness, as determined by a review of the customer's current credit information. The Company continuously monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. A considerable amount of judgment is required in assessing the ultimate realization of these receivables. Customer receivables are generally unsecured.

        Accounts receivable and revenues from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2002 and 2003 and net revenue for the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003 consist of two customers as follows:

 
  Period Ended
December 31, 2002

  Year Ended
December 31, 2003

 
Conexant:          
  Accounts receivable   61.3 % 26.9 %
  Revenue   76.6 % 47.6 %

Skyworks:

 

 

 

 

 
  Accounts receivable   36.8 % 54.8 %
  Revenue   20.7 % 42.8 %

F-15


        As a result of the Company's concentration of its customer base, loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to either of these customers or a change in their financial position could materially and adversely affect the Company's consolidated financial position, results of operations and cash flows.

        The Company operates a single manufacturing facility located in Newport Beach, California. A major interruption in the manufacturing operations at this facility could have a material adverse affect on the consolidated financial position and results of operations of the Company.

        The Company's manufacturing processes use highly specialized materials, including semiconductor wafers, chemicals, gases and photomasks. These raw materials are generally available from several suppliers. However, from time to time the Company prefers to select one vendor to provide it with a particular type of material in order to obtain preferred pricing. In those cases, the Company generally seeks to identify, and in some cases qualify, alternative sources of supply.

        Approximately 44% of the Company's manufacturing related employees are covered by a collective bargaining agreement negotiated with one union. The Company's current agreement expires in May 2008. Since formation, there have been no interruptions in the Company's operations due to labor disputes.

Recent Accounting Standards

        In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF Issued No. 00-21). EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The Company adopted the provisions of EITF Issue No. 00-21 as of December 31, 2002. The adoption of the provisions did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

        In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. The adoption of FIN 46 in fiscal 2003 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

        In December 2003, the FASB issued a revision of SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132R), to improve financial statement disclosures for defined benefit plans. SFAS 132R requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs, and other relevant information. In addition to expanded annual disclosures, the FASB now requires companies to report various elements of pension and other post-retirement benefit costs on a quarterly basis. Except for certain disclosures of estimated future benefit payments, effective for fiscal years ending after June 15, 2004, the disclosure requirements of

F-16



SFAS 132R are effective for financial statements for fiscal years ending after December 15, 2003. The Company adopted the disclosure requirements of SFAS 132R effective December 26, 2003.

        In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Prescription Drug Act). FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug Act that became law on December 8, 2003. If an entity elects deferral, that election may not be changed, and the deferral continues to apply until authoritative guidance on the accounting for the federal subsidy provided by the Medicare Prescription Drug Act is issued, or a significant event occurs after January 31, 2004 that ordinarily would require remeasurement of a plan's assets and obligations. The Company has elected the deferral provided by FSP 106-1 such that the accumulated benefit obligation at December 31, 2002 and 2003, and the net periodic postretirement benefit cost for the periods then ended do not reflect the effects of the Medicare Prescription Drug Act on the Company's postretirement health care plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. The adoption of new authoritative guidance, when released, is not expected to have a material effect on the Company's consolidated financial statements.

Intangibles Assets

        Intangible assets primarily result from the contribution of assets from Conexant at the inception of the Company and primarily consist of intellectual property. Intangible assets contributed by Conexant were recorded in the purchase price allocation at their estimated fair values, based upon independent appraisals. Intangible assets are stated at cost, less accumulated amortization, determined on a straight-line basis over their estimated useful lives, ranging from three to nine years.

Comprehensive Income (Loss)

        Comprehensive income (loss) is defined as the change in equity or net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The difference between net loss and comprehensive income (loss) for the period from March 12, 2002 (inception) to December 31, 2002 and the year ended December 31, 2003 was comprised entirely of the Company's minimum pension liability.

3. Supplemental Financial Statement Data

        Inventories consist of the following (in thousands):

 
  December 31,
 
  2002
  2003
Raw material   $ 250   $ 73
Work-in-process     10,626     13,546
Finished goods     285     2,846
   
 
    $ 11,161   $ 16,465
   
 

F-17


        Property, plant and equipment, net consist of the following (in thousands):

 
  December 31,
 
 
  2002
  2003
 
Building improvements   $ 19,326   $ 19,972  
Machinery and equipment