AMIS HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
September 25, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-50397

AMIS Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware		51-0309588
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2300 Buckskin Road
Pocatello, ID 83201
(Address of principal executive offices)

(208) 233-4690

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days:

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 25, 2004

Common stock, $0.01 par value		83,100,794

FORWARD-LOOKING STATEMENTS

This quarterly report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future results, prospects, developments and business strategies.

These forward-looking statements are identifiable by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions. These statements are contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including the sub-sections “Outlook” and “Factors That May Affect Our Business and Future Results.”

These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. These factors include, but are not limited to, the following:

• changes in general economic and business conditions and in the semiconductor industry in particular;

• changes in the conditions affecting our target markets;

• changes in political, social and economic conditions and local regulations, particularly outside of the United States;

• changes in technology and development of new technology;

• reductions in sales to any significant customers;

• changes in the mix of products sold, industry capacity or competition;

• changes in competitive conditions;

• disruptions of established supply channels;

• changes in the pricing of our products;

• manufacturing capacity underutilization or constraints; and

• the availability, terms and deployment of capital.

The factors listed above, together with other potential risks, are more specifically described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Our Business and Future Results.” If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected.

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

iii

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

AMIS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 25, 2004
	(unaudited)			December 31, 2003
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	164,352		$	119,063
Accounts receivable, net		85,986			73,585
Inventories		45,298			45,599
Deferred tax assets		10,021			8,987
Prepaid expenses and other current assets		20,988			20,777

Total current assets		326,645			268,011
Property, plant and equipment, net		196,955			205,909
Goodwill, net		1,211			1,211
Other intangibles, net		16,329			18,042
Deferred tax assets		32,563			38,627
Other long-term assets		15,718			18,288

Total assets	$	589,421		$	550,088

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,250		$	1,250
Accounts payable		30,736			34,753
Accrued expenses		48,079			54,185
Income taxes payable		4,211			1,088

Total current liabilities		84,276			91,276
Long-term debt, less current portion		252,813			253,437
Other long-term liabilities		360			360

Total liabilities		337,449			345,073
Stockholders’ Equity:
Common stock		830			820
Additional paid-in capital		513,620			510,691
Accumulated deficit		(277,972	)		(323,021	)
Deferred stock-based compensation		(378	)		(475	)
Accumulated other comprehensive income		15,872			17,000

Total stockholders’ equity		251,972			205,015

Total liabilities and stockholders’ equity	$	589,421		$	550,088

See accompanying notes.

AMIS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	September 25,			September 27,			September 25,			September 27,
	2004			2003			2004			2003
				(In thousands, except per share data)
Revenue	$	131,220		$	117,421		$	394,026		$	328,644
Cost of revenue		67,749			65,880			208,748			187,319

		63,471			51,541			185,278			141,325
Operating expenses:
Research and development		19,495			17,491			57,844			52,363
Marketing and selling		11,086			9,580			32,390			27,685
General and administrative		7,000			5,809			21,719			19,427
Impairment charge		—			—			—			20,028
Nonrecurring charges		—			11,401			—			11,401

		37,581			44,281			111,953			130,904

Operating income		25,890			7,260			73,325			10,421
Other income (expense):
Interest income		535			332			1,295			1,114
Interest expense		(5,117	)		(6,295	)		(15,006	)		(18,042	)
Other income (expense), net		39			(1,596	)		(567	)		(5,997	)

		(4,543	)		(7,559	)		(14,278	)		(22,925	)

Income (loss) before income taxes		21,347			(299	)		59,047			(12,504	)
Provision for (benefit from) income taxes		5,179			(1,970	)		13,998			(8,704	)

Net income (loss)		16,168			1,671			45,049			(3,800	)
Preferred stock dividends		—			15,143			—			46,327

Net income (loss) attributable to common stockholders	$	16,168		$	(13,472	)	$	45,049		$	(50,127	)

Basic net income (loss) per common share	$	0.20		$	(0.28	)	$	0.55		$	(1.06	)

Diluted net income (loss) per common share	$	0.19		$	(0.28	)	$	0.52		$	(1.06	)

Weighted average number of shares used in calculating basic net income (loss) per common share		82,868			47,962			82,507			47,107

Weighted average number of shares used in calculating diluted net income (loss) per common share		86,379			47,962			86,360			47,107

See accompanying notes.

AMIS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 25,			September 27,
	2004			2003
	(In thousands)
Cash flows from operating activities
Net income (loss)	$	45,049		$	(3,800	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		32,214			34,579
Amortization of deferred financing costs		940			933
Stock-based compensation expense		863			3,183
Write-off of deferred financing charges and loss on settlement of derivatives		—			5,876
Impairment of long-term asset		—			20,028
Deferred income taxes		4,929			(15,136	)
Loss on disposition of property, plant and equipment		50			270
Income statement impact of change in value of derivatives		—			(24	)
Interest on stockholder notes receivable		—			(250	)
Changes in operating assets and liabilities:
Accounts receivable		(13,398	)		(8,914	)
Inventories		(257	)		(2,369	)
Prepaid expenses and other assets		1,081			8,203
Accounts payable		(3,501	)		2,281
Accrued expenses		(2,212	)		1,742

Net cash provided by operating activities		65,758			46,602
Cash flows from investing activities
Purchases of property, plant and equipment		(21,067	)		(20,088	)
Proceeds from sale of property, plant and equipment		105			—
Release of restricted cash		971			—
Purchases of other intangibles		(1,575	)		(245	)

Net cash used in investing activities		(21,566	)		(20,333	)
Cash flows from financing activities
Payments on long-term debt		(624	)		(160,100	)
Proceeds from issuance of senior subordinated notes		—			200,000
Proceeds from senior term loan		—			125,000
Issuance of common stock, net of offering costs		—			472,102
Payment to settle derivatives		—			(788	)
Debt issuance costs		—			(11,201	)
Payments on long-term payables		—			(214	)
Proceeds from exercise of stock options		2,173			630
Redemption of preferred stock		—			(546,001	)

Net cash provided by financing activities		1,549			79,428
Effect of exchange rate changes on cash and cash equivalents		(452	)		3,290

Net increase in cash and cash equivalents		45,289			108,987
Cash and cash equivalents at beginning of period		119,063			62,184

Cash and cash equivalents at end of period	$	164,352		$	171,171

See accompanying notes.

AMIS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 25, 2004

Note 1: Basis of Presentation

The financial statements have been prepared on a consolidated basis in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of AMIS Holdings, Inc. (the “Company”) and its majority controlled and owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial information included therein. This financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2003 contained in the Company’s Annual Report on Form 10-K.

New Accounting Pronouncements

The Company has reviewed all recently issued accounting standards that have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of the Company. Based on that review, the Company does not currently believe that any of these recent accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures.

Note 2: Stock-Based Compensation

The Company has elected to follow the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations in accounting for its employee stock options rather than adopting the alternative fair value accounting provided for under SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).

Stock compensation expense for options and/or warrants granted to non-employees has been determined in accordance with SFAS 123 and the Emerging Issues Task Force consensus on Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services” (EITF 96-18).

The following table provides pro forma information for the three and nine month periods ended September 25, 2004 and September 27, 2003 that illustrates the net income (loss), net income (loss) attributable to common stockholders, and net income (loss) per common share as if the fair value method had been adopted under SFAS No. 123 (in thousands, except per share data).


	Three Months Ended						Nine Months Ended
	September 25,			September 27,			September 25,			September 27,
	2004			2003			2004			2003
Net income (loss), as reported	$	16,168		$	1,671		$	45,049		$	(3,800	)
Less: Stock-based compensation expense determined under the fair value method, net of related tax effects		(1,038	)		(45	)		(1,917	)		(105	)
Add: Stock-based compensation expense (reversal of) included in determination of net income (loss) as reported, net of related income tax effects		(57	)		—			479			—

Pro forma net income (loss)		15,073			1,626			43,611			(3,905	)
Preferred stock dividend, as reported		—			(15,143	)		—			(46,327	)

Pro forma net income (loss) attributable to common stockholders	$	15,073		$	(13,517	)	$	43,611		$	(50,232	)

Net income (loss) per common share:
Basic as reported	$	0.20		$	(0.28	)	$	0.55		$	(1.06	)
Diluted as reported	$	0.19		$	(0.28	)	$	0.52		$	(1.06	)
Pro forma basic	$	0.18		$	(0.28	)	$	0.53		$	(1.07	)
Pro forma diluted	$	0.17		$	(0.28	)	$	0.50		$	(1.07	)

Note 3: Inventories

Inventories consist of the following (in thousands):


	September 25,		December 31,
	2004		2003
Raw materials	$	4,645	$	5,307
Work-in-process		28,163		27,213
Finished goods		12,490		13,079

	$	45,298	$	45,599

Note 4: Intangible Assets

During the nine month period ended September 25, 2004, the Company acquired certain intangible assets for licenses relating to technologies used in the Company’s products for approximately $1,575,000. The costs of these intangible assets will be amortized over the three-year life of the licenses.

Note 5: Net Income (Loss) per Common Share

Basic net income (loss) per common share is based on the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share also includes the effect of common stock equivalents, consisting of stock options and warrants, if the effect of their inclusion is dilutive.

The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands):


	Three Months Ended					Nine Months Ended
	September 25,		September 27,			September 25,		September 27,
	2004		2003			2004		2003
Numerator (Basic and Diluted):
Net income (loss) attributable to common stockholders	$	16,168	$	(13,472	)	$	45,049	$	(50,127	)
Denominator:
Weighted average shares outstanding-basic		82,868		47,962			82,507		47,107
Stock options and warrants (treasury stock method)		3,511		—			3,853		—

Weighted average shares outstanding-diluted		86,379		47,962			86,360		47,107

Options to purchase 2,014,512 and 5,293,831 shares of common stock and warrants to purchase 4,603,032 and 13,787,883 shares of common stock were outstanding at September 25, 2004 and September 27, 2003, respectively, but were not included in the computation of diluted earnings per share as the effect would be antidilutive.

For the nine months ended September 25, 2004, upon exercise of stock options, 914,765 shares of common stock were issued. Also during the nine months ended September 25, 2004, through the employee stock purchase plan, 145,191 shares of common stock were issued.

Note 6: Income Taxes

Income taxes are recorded based on the liability method, which requires recognition of deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the Company’s deferred tax asset to an amount determined to be more likely than not to be realized, based on management’s analyses of past operating results, future reversals of existing taxable temporary differences and projected taxable income, including tax strategies available to generate future taxable income. Based on the operating results for the first nine months of 2004 and management’s projections of taxable income for the remainder of 2004, during the three and nine month periods ended September 25, 2004, the Company reversed approximately $1,600,000 and $4,800,000 of the valuation allowance, respectively. Management’s analyses of future taxable income are subject to a wide range of variables, many of which involve estimates and, therefore, the Company’s deferred tax asset may not be ultimately realized in full.

Note 7: Long-Term Debt

The Company and AMI Semiconductor, Inc. (AMIS) maintain senior secured credit facilities (the facilities) consisting of a term loan and a revolving credit facility. As of September 25, 2004, the balance of the term loan was $124,062,500 and no amount was drawn on the $90,000,000 revolving credit facility. The term loan requires a principal payment of $312,500, together with accrued and unpaid interest, on the last day of March, June, September and December, with the balance due on September 26, 2008. The interest rate on the term loan at September 25, 2004 was 4.14%. The revolving credit facility ($20,000,000 of which may be in the form of letters of credit) is available for working capital and general corporate purposes.

The facilities require the Company to maintain a consolidated interest coverage ratio and a maximum senior leverage ratio and contain certain other nonfinancial covenants, all as defined within the credit agreement, as amended. The facilities also generally restrict payment of dividends to parties outside of the consolidated entity. The Company was in compliance with these covenants as of September 25, 2004.

On August 26, 2004 the Company and AMIS received lender consent to amend the facilities to permit the acquisition of the assets of Dspfactory Ltd.’s digital signal processing business and to acquire the equity interests of dspfactory, S.A. (see Note 14). The amendment also changed the facility’s annual capital expenditure limits.

AMIS also has $130,000,000 aggregate principal amount of 103/4% senior subordinated notes maturing on February 1, 2013 (senior subordinated notes). Interest on the senior subordinated notes is payable semi-annually on February 1 and August 1. The indenture governing the senior subordinated notes contains covenants that, among other things, (i) limit AMIS’ ability and certain of its subsidiaries’ ability to incur additional indebtedness, (ii) pay dividends on AMIS’ capital stock or redeem, repurchase or retire AMIS’ capital stock or subordinated indebtedness, (iii) make investments, (iv) engage in certain transactions with affiliates, (v) sell assets, including capital stock of subsidiaries, and (vi) consolidate, merge or transfer assets.

Note 8: Financial Instruments

As of September 25, 2004, the Company had a zero-cost foreign exchange collar contract, which ensures conversion of €3,900,000 in the fourth quarter of 2004 at a rate of no less than $1.24 and no more than $1.22 per €1, should the weighted averages of euro income translation fall outside of that range. At September 25, 2004, the fair value of the zero-cost collar contract was immaterial to the accompanying financial statements.

Note 9: Comprehensive Income (Loss)

Comprehensive income for the three and nine month periods ended September 25, 2004 was approximately $18,388,000 and $43,921,000, respectively. Gains (losses) of approximately $2,220,000 and $(1,128,000), respectively, related to changes in the cumulative translation adjustment.

Comprehensive income for the three and nine month periods ended September 27, 2003 was approximately $1,919,000 and $695,000, respectively. Of these amounts, gains of approximately $0 and $628,000, respectively, related to the change in the fair value of derivatives. Additional gains of approximately $248,000 and $3,867,000, respectively, related to changes in the cumulative translation adjustment.

Note 10: Restructuring and Impairment Charges

During 2001, the Company entered into a non-competition agreement with Nippon Mining and its subsidiary (our former parent). According to this agreement, each of Nippon Mining and its subsidiary agreed to not engage in the custom semiconductor business anywhere in the world through December 2005. During 2003, the Company reached a determination that the carrying value of the non-competition agreement had been impaired based primarily on a change in Nippon Mining’s and its subsidiary’s business focus and related capabilities such that they did not intend to focus on custom semiconductors. Effective June 26, 2003, the Company released Nippon Mining and its subsidiary from the non-competition agreement and expensed the $20,028,000 remaining unamortized balance of the agreement, which is included as an impairment charge for the nine months ended September 27, 2003 on the accompanying unaudited condensed consolidated statements of operations.

Pursuant to FASB Statement 146, “Accounting for Costs Associated with Exit or Disposal Activities,” in 2003, and EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” in 2001, senior management and the Board of Directors approved plans to restructure certain of the Company’s operations. All expenses associated with these plans were included as restructuring and impairment charges in the periods incurred.

The 2003 plan involved the termination of certain management and other employees as well as certain sales representative firms in the United States. Internal sales employees replaced these sales representative firms. In total, 32 employees, from various departments within the Company, were terminated as part of this program. All terminated employees were notified in the period in which the charge was recorded. Expenses related to the plan totaled approximately $1,713,000, which included $653,000 related to the accelerated vesting on certain options making them immediately exercisable upon termination. As of December 31, 2003, approximately $692,000 of these severance costs were not paid and were included in accrued expenses. As of September 25, 2004, all amounts related to this plan had been paid.

The 2001 plan involved the closure of certain offices and the termination of certain management and other employees. As of December 31, 2003, and September 25, 2004, the remaining accrual for this plan, representing lease termination costs, of approximately $164,000, and $77,000, respectively, was included in accrued expenses on the accompanying condensed consolidated balance sheets. The remaining lease termination costs will be paid over the remaining lease terms, which end in July 2005.

Following is a summary of the restructuring accrual relating to the 2003 and 2001 plans (in thousands):


				Lease
	Severance			Termination
	Costs			Costs			Total
Balance at December 31, 2003	$	692		$	164		$	856
Paid in 2004		(692	)		(87	)		(779	)

Balance at September 25, 2004	$	—		$	77		$	77

Note 11: Transactions with Related Parties

In 2000, the Company entered into advisory agreements with affiliates of Citigroup Venture Capital Equity Partners, L.P. (CVC) and Francisco Partners, L.P. (Francisco Partners) (the Sponsors) pursuant to which the Sponsors may provide financial, advisory and consulting services to the Company. For the three and nine month periods ended September 27, 2003, expenses totaling approximately $500,000 and $1,500,000 were recorded related to these advisory agreements. During 2003, the Company entered into amendments to these advisory agreements whereby the annual advisory fees payable under these agreements ceased. Additionally, the amendments called for a one-time payment of $8,500,000 for investment banking and financial advisory services, which was paid in September 2003 and is included in nonrecurring charges in the accompanying statement of operations.

Note 12: Segment Reporting

The Company has three reportable segments: Integrated Mixed Signal Products, Structured Digital Products and Mixed Signal Foundry Services. Each segment comprises product families with similar requirements for design, development and marketing.

Information about segments (in thousands):


					Mixed
	Integrated		Structured		Signal
	Mixed Signal		Digital		Foundry		Total
Three months ended September 25, 2004
Net revenue from external customers	$	74,289	$	32,462	$	24,469	$	131,220
Segment operating income		14,286		7,585		4,019		25,890
Nine months ended September 25, 2004
Net revenue from external customers		216,284		90,951		86,791		394,026
Segment operating income		40,120		17,724		15,481		73,325
Three months ended September 27, 2003
Net revenue from external customers		61,848		24,795		30,778		117,421
Segment operating income		8,307		4,411		5,943		18,661
Nine months ended September 27, 2003
Net revenue from external customers		179,150		65,699		83,795		328,644
Segment operating income		18,739		8,658		14,453		41,850

Reconciliation of segment information to consolidated financial statements (in thousands):


	Three months ended			Nine months ended
	September 27, 2003			September 27, 2003
Total operating income for reportable segments	$	18,661		$	41,850
Unallocated amounts:
Impairment charge		—			(20,028	)
Nonrecurring charges		(11,401	)		(11,401	)

Operating income (loss)	$	7,260		$	10,421

Note 13: Restricted Cash

Restricted cash is comprised of an escrow account, which was created to provide for the duties and obligations associated with an employment agreement between the Company and its Chief Executive Officer. Obligations in the amount of approximately $971,000 were fulfilled under this arrangement during the nine months ended September 25, 2004, and thus were released from the escrow account.

Note 14: Acquisitions

On September 9, 2004, the Company entered into a definitive agreement to purchase substantially all of the assets and certain liabilities of Dspfactory Ltd., (“Dspfactory”) headquartered in Waterloo, Ontario, Canada. Dspfactory develops and markets ultra-miniature and ultra-low power digital signal processing solutions for audio devices targeting the medical and consumer markets. As part of the agreement, the Company will also acquire all of the common stock of Dspfactory’s wholly-owned subsidiary, dspfactory S.A., located in Neuchatel, Switzerland.

Under the agreements, the Company will pay approximately $27,700,000 in cash, including fees and expenses, and 1,314,000 shares of common stock, subject to purchase price adjustments, with an additional $8,500,000 in common stock payable in whole or in part upon the achievement of certain revenue milestones in either 2005 or 2006. The acquisition is expected to be completed by the end of the fourth quarter of 2004.

Note 15: Subsequent Event

On September 30, 2004, the Company entered into a restructuring plan involving the termination of approximately 80 employees in the United States and Europe, the closure of a design center in Twain Harte, California, the relocation of our Manila, Philippines test facility into a new larger facility and the consolidation of wafer sort operations currently located in our Pocatello, Idaho and Oudenaarde, Belgium facilities into that new facility. Restructuring charges of approximately $5,000,000 primarily for severance, are expected to be recorded in the fourth quarter of 2004. Total estimated charges under this plan are $10,000,000 to $12,000,000, with the remainder expected to be recorded in 2005. Completion of activities under this restructuring plan are expected by the end of the third quarter of 2005.

Note 16: Condensed Consolidating Financial Statements

The term loan and the senior subordinated notes are each fully and unconditionally guaranteed by the Company and each existing domestic subsidiary and by each subsequently acquired or organized domestic subsidiary of AMIS. AMIS’ foreign subsidiaries do not provide these guarantees. Below are the Company’s unaudited condensed consolidating balance sheet as of September 25, 2004 and the audited condensed consolidating balance sheet as of December 31, 2003, and the unaudited condensed consolidating statements of operations for the three and nine months ended September 25, 2004 and September 27, 2003, and the unaudited condensed consolidating statements of cash flows for the nine months ended September 25, 2004 and September 27, 2003, reflecting the financial position, results of operations and cash flows of the guarantor and non-guarantor entities.

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

September 25, 2004 (unaudited)


														AMIS
						AMIS		AMI		AMI		AMI		Foreign		Non-
						Holdings,		Semiconductor,		Acquisition		Acquisition		Holdings,		Guarantor
	Consolidated		Eliminations			Inc.		Inc.		LLC		II LLC		Inc.		Subsidiaries
								(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	164,352	$	—		$	13,594	$	67,326	$	—	$	—	$	—	$	83,432
Accounts receivable, net		85,986		—			—		41,641		—		—		—		44,345
Intercompany accounts receivable		—		(17,249	)		1,561		15,558		—		130		—		—
Inventories		45,298		(257	)		—		25,304		—		—		—		20,251
Deferred tax assets		10,021		—			—		5,686		—		—		—		4,335
Prepaid expenses and other current assets		20,988		14			12		8,260		—		—		—		12,702

Total current assets		326,645		(17,492	)		15,167		163,775		—		130		—		165,065
Property, plant and equipment, net		196,955		—			—		163,068		—		—		—		33,887
Investment in subsidiaries		—		(631,947	)		322,717		167,658		134,121		7,451		—		—
Goodwill and other intangibles, net		17,540		—			—		10,753		—		—		—		6,787
Deferred tax assets		32,563		—			5,600		26,101		—		—		—		862
Other long-term assets		15,718		—			3,229		690		—		—		—		11,799

Total assets	$	589,421	$	(649,439	)	$	346,713	$	532,045	$	134,121	$	7,581	$	—	$	218,400

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet (continued)


																	AMIS
										AMI			AMI		AMI		Foreign		Non-
							AMIS			Semiconductor,			Acquisition		Acquisition		Holdings,		Guarantor
	Consolidated			Eliminations			Holdings, Inc.			Inc.			LLC		II LLC		Inc.		Subsidiaries
										(In thousands)
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,250		$	—		$	—		$	1,250		$	—	$	—	$	—	$	—
Accounts payable		30,736			—			—			15,071			—		—		—		15,665
Accrued expenses		48,079			(241	)		—			20,961			—		—		—		27,359
Intercompany accounts payable		—			(17,489	)		95,036			(81,031	)		1		1		—		3,482
Income taxes payable		4,211			—			(57	)		(96	)		—		8		—		4,356

Total current liabilities		84,276			(17,730	)		94,979			(43,845	)		1		9		—		50,862
Long-term debt, less current portion		252,813			—			—			252,813			—		—		—		—
Other long-term liabilities		360			—			—			360			—		—		—		—

Total liabilities		337,449			(17,730	)		94,979			209,328			1		9		—		50,862
Stockholders’ Equity
Common stock		830			(3,717	)		830			—			—		—		—		3,717
Additional paid-in capital		513,620			(387,954	)		513,620			229,561			71,359		4,062		—		82,972
Retained earnings (accumulated deficit)		(277,972	)		(194,702	)		(278,210	)		77,284			49,795		2,790		—		65,071
Deferred stock-based compensation		(378	)		—			(378	)		—			—		—		—		—
Accumulated other comprehensive income		15,872			(45,336	)		15,872			15,872			12,966		720		—		15,778

Total stockholders’ equity		251,972			(631,709	)		251,734			322,717			134,120		7,572		—		167,538

Total liabilities and stockholders’ equity	$	589,421		$	(649,439	)	$	346,713		$	532,045		$	134,121	$	7,581	$	—	$	218,400

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2003


								AMI		AMI		AMI		Non-
						AMIS		Semiconductor,		Acquisition		Acquisition II		Guarantor
	Consolidated		Eliminations			Holdings, Inc.		Inc.		LLC		LLC		Subsidiaries
						(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	119,063	$	—		$	10,407	$	49,446	$	—	$	—	$	59,210
Accounts receivable, net		73,585		—			—		33,474		—		—		40,111
Intercompany accounts receivable		—		(16,150	)		696		13,420		—		118		1,916
Inventories		45,599		—			—		23,860		—		—		21,739
Deferred tax assets		8,987		—			—		4,163		—		—		4,824
Prepaid expenses and other current assets		20,777		(51	)		—		9,687		—		—		11,141

Total current assets		268,011		(16,201	)		11,103		134,050		—		118		138,941
Property, plant and equipment, net		205,909		—			—		168,322		—		—		37,587
Investment in subsidiaries		—		(542,701	)		278,619		144,505		113,283		6,294		—
Goodwill and other intangibles, net		19,253		—			—		11,952		—		—		7,301
Deferred tax assets		38,627		—			5,534		33,737		—		—		(644	)
Other long-term assets		18,288		—			4,200		685				—		13,403

Total assets	$	550,088	$	(558,902	)	$	299,456	$	493,251	$	113,283	$	6,412	$	196,588

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet (continued)


										AMI			AMI		AMI		Non-
							AMIS			Semiconductor,			Acquisition		Acquisition II		Guarantor
	Consolidated			Eliminations			Holdings, Inc.			Inc.			LLC		LLC		Subsidiaries
	(In thousands)
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,250		$	—		$	—		$	1,250		$	—	$	—	$	—
Accounts payable		34,753			—			—			14,752			—		—		20,001
Accrued expenses		54,185			(270	)		—			23,336			—		—		31,119
Intercompany accounts payable		—			(16,171	)		94,680			(78,509	)		—		—		—
Income taxes payable		1,088			—			—			6			—		—		1,082

Total current liabilities		91,276			(16,441	)		94,680			(39,165	)		—		—		52,202
Long-term debt, less current portion		253,437			—			—			253,437			—		—		—
Other long-term liabilities		360			—			—			360			—		—		—

Total liabilities		345,073			(16,441	)		94,680			214,632			—		—		52,202
Stockholders’ Equity
Common stock		820			(3,717	)		820			—			—		—		3,717
Additional paid-in capital		510,691			(387,952	)		510,691			229,561			71,357		4,062		82,972
Retained earnings (accumulated deficit)		(323,021	)		(101,732	)		(323,260	)		32,058			27,838		1,566		40,509
Deferred stock-based compensation		(475	)		—			(475	)		—			—		—		—
Accumulated other comprehensive income		17,000			(49,060	)		17,000			17,000			14,088		784		17,188

Total stockholders’ equity		205,015			(542,461	)		204,776			278,619			113,283		6,412		144,386

Total liabilities and stockholders’ equity	$	550,088		$	(558,902	)	$	299,456		$	493,251		$	113,283	$	6,412	$	196,588

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

Three Months Ended September 25, 2004 (unaudited)


																	AMIS
							AMIS			AMI			AMI		AMI		Foreign		Non-
							Holdings,			Semiconductor,			Acquisition		Acquisition		Holdings,		Guarantor
	Consolidated			Eliminations			Inc.			Inc.			LLC		II LLC		Inc.		Subsidiaries
										(In thousands)
Revenue	$	131,220		$	(17,766	)	$	—		$	84,077		$	—	$	—	$	—	$	64,909
Cost of revenue		67,749			(16,054	)		—			41,736			—		—		—		42,067

		63,471			(1,712	)		—			42,341			—		—		—		22,842
Operating expenses:
Research and development		19,495			(706	)		—			14,091			—		—		—		6,110
Marketing and selling		11,086			(961	)		—			7,899			—		—		—		4,148
General and administrative		7,000			(48	)		177			4,602			—		—		—		2,269

		37,581			(1,715	)		177			26,592			—		—		—		12,527

Operating income (loss)		25,890			3			(177	)		15,749			—		—		—		10,315
Other income (expense):
Interest income (expense), net		(4,582	)		—			39			(4,944	)		—		4		—		319
Other income (expense), net		39			(7	)		—			(15	)		—		1		—		60
Equity earnings in subsidiaries		—			(31,962	)		16,254			8,055			7,250		403		—		—

		(4,543	)		(31,969	)		16,293			3,096			7,250		408		—		379

Income before income taxes		21,347			(31,966	)		16,116			18,845			7,250		408		—		10,694
Provision (benefit) for income taxes		5,179			—			(56	)		2,591			—		2		—		2,642

Net income	$	16,168		$	(31,966	)	$	16,172		$	16,254		$	7,250	$	406	$	—	$	8,052

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

Nine Months Ended September 25, 2004 (unaudited)


																	AMIS
							AMIS			AMI			AMI		AMI		Foreign		Non-
							Holdings,			Semiconductor,			Acquisition		Acquisition		Holdings,		Guarantor
	Consolidated			Eliminations			Inc.			Inc.			LLC		II LLC		Inc.		Subsidiaries
										(In thousands)
Revenue	$	394,026		$	(50,058	)	$	—		$	243,043		$	—	$	—	$	—	$	201,041
Cost of revenue		208,748			(45,143	)		—			123,851			—		—		—		130,040

		185,278			(4,915	)		—			119,192			—		—		—		71,001
Operating expenses:
Research and development		57,844			(2,073	)		—			40,431			—		—		—		19,486
Marketing and selling		32,390			(2,731	)		—			22,307			—		—		—		12,814
General and administrative		21,719			(117	)		369			14,630			—		—		—		6,837

		111,953			(4,921	)		369			77,368			—		—		—		39,137

Operating income (loss)		73,325			6			(369	)		41,824			—		—		—		31,864
Other income (expense):
Interest income (expense), net		(13,711	)		—			71			(14,634	)		—		11		—		841
Other income (expense), net		(567	)		(7	)		—			(505	)		—		1		—		(56	)
Equity earnings in subsidiaries		—			(92,969	)		45,226			24,566			21,957		1,220		—		—

		(14,278	)		(92,976	)		45,297			9,427			21,957		1,232		—		785

Income before income taxes		59,047			(92,970	)		44,928			51,251			21,957		1,232		—		32,649
Provision (benefit) for income taxes		13,998			—			(122	)		6,025			—		8		—		8,087

Net income	$	45,049		$	(92,970	)	$	45,050		$	45,226		$	21,957	$	1,224	$	—	$	24,562

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

Three Months Ended September 27, 2003 (unaudited)


							AMIS			AMI					AMI		Non-
							Holdings,			Semiconductor,			AMI		Acquisition II		Guarantor
	Consolidated			Eliminations			Inc.			Inc.			Acquisition LLC		LLC		Subsidiaries
										(In thousands)
Revenue	$	117,421		$	(7,771	)	$	—		$	72,200		$	—	$	—	$	52,992
Cost of revenue		65,880			(6,746	)		—			38,284			—		—		34,342

		51,541			(1,025	)		—			33,916			—		—		18,650
Operating expenses:
Research and development		17,491			(636	)		—			11,375			—		—		6,752
Marketing and selling		9,580			(437	)		—			6,275			—		—		3,742
General and administrative		5,809			(25	)		596			3,542			—		—		1,696
Nonrecurring charges		11,401			—			8,500			2,901			—		—		—

		44,281			(1,098	)		9,096			24,093			—		—		12,190

Operating income (loss)		7,260			73			(9,096	)		9,823			—		—		6,460
Other income (expense):
Interest income (expense), net		(5,963	)		25			85			(6,216	)		—		3		140
Other income (expense), net		(1,596	)		(98	)		—			(1,303	)		2		—		(197	)
Equity earnings in subsidiaries		—			(19,127	)		6,847			6,211			5,750		319		—

		(7,559	)		(19,200	)		6,932			(1,308	)		5,752		322		(57	)

Income (loss) before income taxes		(299	)		(19,127	)		(2,164	)		8,515			5,752		322		6,403
Provision (benefit) for income taxes		(1,970	)		—			(3,835	)		1,668			—		—		197

Net income (loss)	$	1,671		$	(19,127	)	$	1,671		$	6,847		$	5,752	$	322	$	6,206

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

Nine Months Ended September 27, 2003 (unaudited)


							AMIS			AMI			AMI			AMI		Non-
							Holdings,			Semiconductor,			Acquisition			Acquisition		Guarantor
	Consolidated			Eliminations			Inc.			Inc.			LLC			II LLC		Subsidiaries
										(In thousands)
Revenue	$	328,644		$	(15,762	)	$	—		$	195,968		$	—		$	—	$	148,438
Cost of revenue		187,319			(11,717	)		—			104,782			—			—		94,254

		141,325			(4,045	)		—			91,186			—			—		54,184
Operating expenses:
Research and development		52,363			(1,298	)		—			34,935			—			—		18,726
Marketing and selling		27,685			(2,913	)		—			20,849			—			—		9,749
General and administrative		19,427			(25	)		1,784			13,678			—			—		3,990
Restructuring, impairment and nonrecurring charges		31,429			—			8,500			22,929			—			—		—

		130,904			(4,236	)		10,284			92,391			—			—		32,465

Operating income (loss)		10,421			191			(10,284	)		(1,205	)		—			—		21,719
Other income (expense):
Interest income (expense), net		(16,928	)		8			260			(17,712	)		—			10		506
Other income (expense), net		(5,997	)		(199	)		—			(6,024	)		(1	)		—		227
Equity earnings in subsidiaries		—			(38,074	)		1,974			18,408			16,761			931		—

		(22,925	)		(38,265	)		2,234			(5,328	)		16,760			941		733

Income (loss) before income taxes		(12,504	)		(38,074	)		(8,050	)		(6,533	)		16,760			941		22,452
Provision (benefit) for income taxes		(8,704	)		—			(4,250	)		(8,507	)		—			—		4,053

Net income (loss)	$	(3,800	)	$	(38,074	)	$	(3,800	)	$	1,974		$	16,760		$	941	$	18,399

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 25, 2004 (unaudited)


															AMIS
						AMIS		AMI			AMI		AMI		Foreign		Non-
						Holdings,		Semiconductor,			Acquisition		Acquisition		Holdings,		Guarantor
	Consolidated			Eliminations		Inc.		Inc.			LLC		II LLC		Inc.		Subsidiaries
								(In thousands)
Net cash provided by operating activities	$	65,758		$	—	$	43	$	35,725		$	—	$	—	$	—	$	29,990
Net cash flows from investing activities:
Purchases of property, plant, and equipment		(21,067	)		—		—		(15,751	)		—		—		—		(5,316	)
Proceeds from sale of property, plant and equipment		105			—		—		105			—		—		—		—
Release of restricted cash		971			—		971		—			—		—		—		—
Purchases of other intangibles		(1,575	)		—		—		(1,575	)		—		—		—		—

Net cash provided by (used in) investing activities		(21,566	)		—		971		(17,221	)		—		—		—		(5,316	)
Net cash flows from financing activities:
Payments on long-term debt		(624	)		—		—		(624	)		—		—		—		—
Exercise of stock options for common and preferred stock		2,173			—		2,173		—			—		—		—		—

Net cash provided by (used in) financing activities:		1,549			—		2,173		(624	)		—		—		—		—

Effect of exchange rate changes on cash and cash equivalents		(452	)		—		—		—			—		—		—		(452	)

Net change in cash and cash equivalents		45,289			—		3,187		17,880			—		—		—		24,222
Cash and cash equivalents at beginning of period		119,063			—		10,407		49,446			—		—		—		59,210

Cash and cash equivalents at end of period	$	164,352		$	—	$	13,594	$	67,326		$	—	$	—	$	—	$	83,432

AMIS Holdings, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 27, 2003 (unaudited)


									AMI			AMI		AMI
						AMIS			Semiconductor,			Acquisition		Acquisition		Non-Guarantor
	Consolidated			Eliminations		Holdings, Inc.			Inc.			LLC		II LLC		Subsidiaries
									(In thousands)
Net cash flows provided by operating activities	$	46,602		$	—	$	4,919		$	22,046		$	—	$	—	$	19,637
Net cash flows from investing activities:
Purchases of property, plant, and equipment		(20,088	)		—		—			(10,149	)		—		—		(9,939	)
Acquisition of other intangibles		(245	)		—		—			(245	)		—		—		—
Investment in subsidiaries		—			—		80,764			(80,764	)		—		—		—

Net cash provided by (used in) investing activities		(20,333	)		—		80,764			(91,158	)		—		—		(9,939	)
Net cash flows from financing activities
Payments on long-term debt		(160,100	)		—		—			(160,100	)		—		—		—
Proceeds from issuance of Senior Subordinated Notes		200,000			—		—			200,000			—		—		—
Proceeds from Senior Term Loan		125,000			—		—			125,000			—		—		—
Issuance of common stock		472,102			—		472,102			—			—		—		—
Payment to settle derivatives		(788	)		—		—			(788	)		—		—		—
Debt issuance costs		(11,201	)		—		—			(11,201	)		—		—		—
Payments on long-term payables		(214	)		—		—			(214	)		—		—		—
Exercise of stock options for common and preferred stock		630			—		630			—			—		—		—
Redemption of preferred stock		(546,001	)		—		(546,001	)		—			—		—		—

Net cash provided by (used in) financing activities:		79,428			—		(73,269	)		152,697			—		—		—

Effect of exchange rate changes on cash and cash equivalents		3,290			—		—			—			—		—		3,290

Net change in cash and cash equivalents		108,987			—		12,414			83,585			—		—		12,988
Cash and cash equivalents at beginning of period		62,184			—		1,910			35,274			—		—		25,000

Cash and cash equivalents at end of period	$	171,171		$	—	$	14,324		$	118,859		$	—	$	—	$	37,988

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Unaudited Condensed Consolidated Financial Statements included elsewhere herein. Except for the historical information contained herein, the discussions in this section contain forward-looking statements that involve risks and uncertainties. For example, the “Outlook” section below contains numerous forward-looking statements. Actual results could differ materially from those discussed below. See “Factors That May Affect Our Business and Future Results” for a discussion of these risks and uncertainties. Unless the context otherwise requires, references to “we,” “our,” “us” and “the company” refer to AMIS Holdings, Inc. and consolidated subsidiaries; and references to “AMI Semiconductor” and “AMIS” refer to AMI Semiconductor, Inc., a wholly owned subsidiary of the company.

Overview

We are a leader in the design and manufacture of customer specific integrated analog mixed signal semiconductor products. We focus on the automotive, medical and industrial markets, which have many products with significant real world, or analog, interface requirements. We have organized our business into three operating segments: integrated mixed signal products, structured digital products and mixed signal foundry services. Integrated mixed signal products combine analog and digital functions on a single chip to form a customer defined system-level solution. Structured digital products, which involve the conversion of higher cost programmable digital logic integrated circuits into lower cost digital custom integrated circuits, provide us with growth opportunities and digital design expertise which we use to support the design of system solutions for customers in our target markets. We also provide outsourced mixed signal foundry services for other semiconductor designers and manufacturers. Mixed signal foundry services provide us with an opportunity to further penetrate our target markets with our products and increase the utilization of our fabrication facilities.

When evaluating our business, we generally look at financial measures such as revenue and operating income. We also use internal tracking measures, such as anticipated three year revenue from design wins and the capacity utilization of our fabrication facilities. This is a measure of the degree to which our manufacturing assets are being used, thus spreading the fixed costs of these items across multiple products. As capacity utilization increases, our facilities become more efficient, and as a result, our gross profit margin increases. When our capacity utilization decreases, our gross margins could potentially be adversely affected. Although our capacity utilization decreased in the third quarter of 2004, our gross margins increased due to improved product mix.

In addition to these profit related measures, we also track how effectively we are managing our assets. Measurements include return on invested capital, days sales outstanding (DSO) and inventory turns.

Results of Operations

Three and nine month periods ended September 25, 2004 compared to the three and nine month periods ended September 27, 2003

Revenue

Revenue increased 12% and 20% to $131.2 million and $394.0 million for the third quarter and first nine months of 2004, respectively, from $117.4 million and $328.6 million in the third quarter and first nine months of 2003, respectively. Revenues from our target automotive, medical and industrial end markets increased 16% and 18% for the three and nine month periods ended September 25, 2004, respectively, as compared to the three and nine month periods ended September 27, 2003, as a result of an increase in volume of products sold and an improvement in the product mix. We also increased the volume of products sold into the communications end market between these periods. However, we expect communications revenue to decline in the future, partially due to weakness in communications orders on a worldwide basis and to the expiration of the take-or-pay agreement that had been in place with STMicroelectronics.

Integrated mixed signal products revenue increased 20% and 21% to $74.3 million and $216.3 million for the third quarter and the first nine months of 2004, respectively, from $61.8 million and $179.2 million in the third quarter and first nine months of 2003, respectively. The volume of products shipped to customers in the automotive, industrial and communications end markets increased substantially between these periods, reflecting improved market conditions overall.

Structured digital products revenue increased 31% and 39% to $32.5 million and $91.0 million for the third quarter and first nine months of 2004, respectively, from $24.8 million and $65.7 million in the third quarter and first nine months of 2003, respectively. Increased volume of products shipped to the communications, industrial and computing end markets, as well as revenue from our XPressArray™ products, helped to increase the structured digital products revenue for these periods.

Mixed signal foundry services revenue decreased 20% to $24.5 million in the third quarter of 2004 from $30.8 million in the third quarter of 2003, but increased 4% to $86.8 million in the first nine months of 2004 from $83.8 million in the first nine months of 2003. Revenue fluctuations are primarily due to changes in the level of revenue from the STMicroelectronics take-or-pay contract and a temporary decrease in the volume of products shipped to a major medical customer who is moving to a lean inventory model. Revenue from STMicroelectronics was approximately $3.6 million and $21.2 million in the third quarter and first nine months of 2004, respectively, compared with $7.6 million and $24.3 million in the third quarter and first nine months of 2003, respectively. This take-or-pay contract expired in June 2004. We expect any future revenue from STMicroelectronics to be minimal.

The following table represents our regional revenue for the third quarter and first nine months of 2004 compared with the third quarter and first nine months of 2003:


	Three Months Ended:						Nine Months Ended:
	September 25,			September 27,			September 25,			September 27,
	2004			2003			2004			2003
North America		41.5	%		43.0	%		42.0	%		41.2	%
Europe		40.2	%		39.3	%		41.3	%		40.8	%
Asia		18.3	%		17.7	%		16.7	%		18.0	%

Gross Profit

Cost of revenue consists primarily of purchased materials, labor and overhead (including depreciation) associated with the design and manufacture of products sold. Costs related to non-recurring engineering fees are included in cost of revenue to the extent that they are reimbursed by our customers under a development arrangement. Costs associated with unfunded non-recurring engineering are classified as research and development because we typically retain ownership of the proprietary rights to intellectual property that has been developed in connection with non-recurring engineering work.

Gross profit increased to $63.5 million, or 48.4%, in the third quarter of 2004 from $51.5 million, or 43.9%, in the third quarter of 2003. Gross profit was $185.3 million, or 47.0% as a percentage of revenue, in the first nine months of 2004 compared with $141.3 million, or 43.0% as a percentage of revenue, in the first nine months of 2003. These increases in gross profit are a result of our increased revenue level and a favorable shift in the product mix between the periods.

Operating Expenses

Research and development expenses consist primarily of activities related to process engineering, cost of design tools, investments in development libraries, technology license agreements and product development activities. Research and development expenses were $19.5 million, or 14.9% of revenue, in the third quarter of 2004, compared with $17.5 million, or 14.9% of revenue, in the third quarter of 2003. These expenses were $57.8 million, or 14.7% of revenue, in the first nine months of 2004, compared with $52.4 million, or 15.9% of revenue, in the first nine months of 2003. These increases are primarily

attributable to expenses related to design activity and the associated internally funded development expenses.

Marketing and selling expenses consist primarily of commissions to sales representatives, salaries and commissions for sales and marketing personnel and advertising and communication costs. Marketing and selling expenses were $11.1 million, or 8.4% of revenue, in the third quarter of 2004, compared to $9.6 million, or 8.2% of revenue, for the third quarter of 2003. These expenses were $32.4 million, or 8.2% of revenue, in the first nine months of 2004, compared to $27.7 million, or 8.4% of revenue, for the first nine months of 2003. These increases are primarily due to sales commissions associated with higher revenue levels.

General and administrative expenses consist primarily of salaries of our administrative staff, amortization of intangibles and professional and advisory fees for various consulting projects. General and administrative expenses were $7.0 million, or 5.3% of revenue, in the third quarter of 2004, compared to $5.8 million, or 4.9% of revenue, for the third quarter of 2003. These expenses were $21.7 million, or 5.5% of revenue, in the first nine months of 2004, compared to $19.4 million, or 5.9% of revenue, for the first nine months of 2003. These increases in general and administrative expenses are primarily due to professional fees associated with various consulting projects, and for the nine months ended September 25, 2004, a one-time expense of $0.7 million related to the termination of a consulting agreement with a former executive officer. These increases were partially offset by a decrease in amortization related to the non-competition agreement that was entered into with Nippon Mining and its subsidiary at the time of our recapitalization in December 2000 and which was written off in June 2003.

Nonrecurring Charges

In September 2003, we recorded nonrecurring charges of $11.4 million. This amount includes a one-time payment of $8.5 million associated with amendments to our advisory agreements with Francisco Partners and Citigroup Venture Capital Equity Partners, which also called for the termination of future scheduled annual fees payable under these advisory agreements, and compensation expense of $2.9 million related to the redemption of options to purchase our Series A and Series B Preferred Stock.

Impairment Charge

In the second quarter of 2003, we recorded a non-cash impairment charge of $20.0 million related to the write-off of the unamortized balance of an intangible asset that had no remaining value. We entered into a non-competition agreement with Nippon Mining and its subsidiary (collectively “Nippon”) in connection with our December 21, 2000 recapitalization. According to this agreement, Nippon agreed to not engage in the custom semiconductor business anywhere in the world through December 2005. In our quarterly review of the carrying value of intangible assets, we reached a determination that the carrying value of the non-competition agreement had been impaired based primarily on a change in Nippon’s business focus and related capabilities such that they did not intend to focus on custom semiconductors. Effective June 26, 2003, we released Nippon from the non-competition agreement and we expensed the $20.0 million remaining unamortized balance of the agreement as of the effective date.

Operating Income (Loss)

Operating income was $25.9 million or 19.7% of revenue for the third quarter of 2004 compared with operating income of $7.3 million or 6.2% of revenue for the third quarter of 2003. Operating income was $73.3 million or 18.6% of revenue for the first nine months of 2004, compared with $10.4 million or 3.2% of revenue for the first nine months of 2003. The primary factors affecting operating income have been discussed above and include improved revenue levels, operational efficiency gains in 2004, nonrecurring charges in 2003 including a one-time payment and amendments associated with our advisory agreements with Francisco Partners and Citigroup Venture Capital Equity Partners, the compensation expense related to the redemption of options to purchase our Series A and Series B Preferred Stock and the write-off of the unamortized balance of an intangible asset that had no remaining value in June 2003.

Integrated mixed signal products operating income was $14.3 million or 19.2% of revenue in the third quarter of 2004, compared with $8.3 million or 13.4% of revenue in the third quarter of 2003. Operating income for this segment was $40.1 million or 18.5% of revenue in the first nine months of 2004, compared

with $18.7 million or 10.4% of revenue in the first nine months of 2003. These increases are attributable to increased revenue and an improvement in the product mix toward higher gross margin products.

Structured digital products operating income was $7.6 million or 23.4% of revenue in the third quarter of 2004, compared with $4.4 million or 17.7% of revenue in the third quarter of 2003. Structured digital products operating income was $17.7 million or 19.5% of revenue in the first nine months of 2004, compared with $8.7 million or 13.2% of revenue in the first nine months of 2003. These increases are attributable to increased revenue and an improvement in the product mix toward higher gross margin products.

Mixed signal foundry services operating income was $4.0 million or 16.3% of revenue in the third quarter of 2004, compared with $5.9 million or 19.2% of revenue in the third quarter of 2003. Operating income in this segment was $15.5 million or 17.9% of revenue in the first nine months of 2004, compared with $14.5 million or 17.3% of revenue in the first nine months of 2003. The decrease in the third quarter of 2004 is driven primarily by lower revenues, as the shipments to STMicroelectronics during the quarter decreased substantially and we experienced a temporary decrease in shipments to a major medical customer who is moving to a lean inventory model. The increases in the first nine months of 2004 are attributable primarily to increased revenue levels.

Interest Income

Interest income was $0.5 million and $1.3 million for the third quarter and first nine months of 2004, respectively, compared with $0.3 million and $1.1 million for the third quarter and first nine months of 2003, respectively. The level of our cash balances and the interest rates available in the marketplace affect interest income. Our average cash balances increased between the periods, which caused our interest income to increase slightly between these periods.

Interest Expense

Interest expense was $5.1 million and $15.0 million for the third quarter and first nine months of 2004, respectively, compared to $6.3 million and $18.0 million for the third quarter and first nine months of 2003, respectively. The lower interest expense was primarily attributable to the decreased level of high yield debt associated with the $70 million of senior subordinated notes redeemed in November 2003.

Income Taxes

Income tax expense was $5.2 million for the third quarter of 2004, compared with an income tax benefit of $2.0 million for the third quarter of 2003. Income tax expense was $14.0 million for the first nine months of 2004, compared with an income tax benefit of $8.7 million for the first nine months of 2003. The effective tax rate was 24.3% and 23.7% in the third quarter and first nine months of 2004, respectively. Our effective tax rate in 2004 is impacted by adjustments to the deferred tax valuation allowance because of improved operating results in the United States. We have a valuation allowance to reduce our deferred tax assets to amounts that are more likely than not to be realized. Based on the operating results for the third quarter and first nine months of 2004 and our projections of taxable income for the remainder of 2004, we reversed approximately $1.6 million and $4.8 million of valuation allowance during the third quarter and first nine months of 2004, respectively. We will continue to evaluate the need to increase or decrease the valuation allowance on our deferred tax assets based upon the anticipated pre-tax operating results of future periods. An increase in certain tax credits from 2003 to 2004 has also reduced the overall effective tax rate. Finally, adjustments for permanent differences favorably impacted our income tax expense recorded in the 2003 periods, while similar adjustments in 2004 have the opposite effect on our income tax expense.

We operate in multiple tax jurisdictions. In the case of certain foreign jurisdictions, no provision for U.S. income taxes has been recorded on the income from those jurisdictions because we consider these amounts to be permanently invested in the foreign entities.

Backlog

Our backlog was $103.2 million as of September 25, 2004 compared to backlog of $128.4 million as of December 31, 2003. Backlog as of December 31, 2003 is reflective of a comparatively stronger market environment than the current environment. Backlog is typically recorded only upon receipt of a written purchase order from a customer. Reported backlog represents products scheduled to be delivered within six months. Backlog is influenced by several factors including market demand, customer order patterns, changes in product lead times and pricing. Backlog may fluctuate from booking to time of delivery to reflect changes in customer needs or industry conditions. Once manufacturing has commenced, orders generally are not cancelable. In addition, because customers already have invested significant time working with us (typically from six to 24 months before production of a custom semiconductor) and have incurred the non-recurring engineering fee in full before production begins, they generally have given careful consideration to the orders they place, and generally do not cancel orders. However, there is no guarantee that backlog will ultimately be realized as revenue.

Backlog should not be taken as an indicator of our anticipated revenue for any particular future period. Line items recorded in backlog may not result in revenue within six months for several reasons, including: (a) certain customer orders within backlog may not be able to be recognized as revenue within six months (i.e., we, for various reasons, may be unable to ship the product within the specified time frame promised); (b) certain customer order delivery dates may be delayed to a subsequent period by our customers; and (c) certain customer orders may even be cancelled at our customers’ request. These items have often been offset, and exceeded by, both (a) new customer orders that are booked subsequent to the backlog reporting date and delivered to the customer within six months and (b) customer orders with anticipated delivery dates outside six months and subsequently shipped sooner than originally anticipated. The amount of revenue recognized in excess of backlog during any six month period varies and depends greatly on overall capacity in the semiconductor industry and capacity in our manufacturing facilities. We routinely investigate backlog that is cancelled, pushed out for later delivery or accelerated for earlier delivery.

Outlook

We expect our fourth quarter revenue to be down four to eight percent as compared to third quarter. Bookings slowed down in the third quarter due to weakness in the communications market impacting all of our businesses, a greater than expected decline in STMicroelectronics foundry orders and an inventory adjustment at certain of our integrated mixed-signal customers. Despite lower revenues, we anticipate gross margins and operating margins, excluding an anticipated restructuring charge and an in-process research and development charge in connection with the pending acquisition of Dspfactory Ltd., to each be roughly flat sequentially due to an improved product mix. We anticipate our effective tax rate to be between 24 percent and 26 percent in the fourth quarter. We continue to expect capital expenditures for the year to be approximately seven percent of annual revenues. Depreciation and amortization is expected to be about $10.8 million in the fourth quarter.

Liquidity and Capital Resources

Our principal cash requirements are to fund working capital needs, meet required debt payments, including debt service payments on the senior subordinated notes and the senior credit facilities as amended, complete planned maintenance of equipment and equip our fabrication facilities. We anticipate that cash flow from operations, together with available borrowings under our revolving credit facility, will be sufficient to meet working capital, interest payment requirements on our debt obligations and capital expenditures for at least the next twelve months. Although we believe these resources may also meet our liquidity needs beyond that period, the adequacy of these resources will depend on our growth, semiconductor industry conditions and the capital expenditures necessary to support capacity and technology improvements.

As of September 25, 2004, we had total debt of $254.1 million, consisting of $130.0 million of senior subordinated notes and a $124.1 million term loan.

We generated $65.8 million in cash from operating activities in the first nine months of 2004, compared to $46.6 million in cash from operating activities in the first nine months of 2003. This increase was primarily due to an improvement in our net income.

Other significant sources and uses of cash can be divided into investing activities and financing activities. During the first nine months of 2004 and 2003, we invested in capital equipment in the amounts of $21.1 million and $20.1 million, respectively. See “Capital Expenditures” below.

During the first nine months of 2004, we generated net cash from financing activities of $1.5 million from the issuance of common stock upon exercise of stock options and the purchase of stock under our Employee Stock Purchase Plan offset by payments on long-term debt. During the first nine months of 2003, we generated net cash from financing activities of $79.4 million. During this period we raised $472.1 million, net of offering expenses paid as of September 27, 2003, through our initial public offering of 25,145,000 shares of common stock at a price to the public of $20 per share, issued the senior subordinated notes for $200.0 million in cash, entered into a senior term loan for $125.0 million, repaid $160.1 million on our previous term loan, paid $546.0 million to redeem our Series A, Series B and Series C Preferred Stock and paid $11.2 million in debt issuance costs related to the senior subordinated notes and the senior term loan.

Capital Expenditures

During the first nine months of 2004, we spent $21.1 million for capital expenditures, compared with $20.1 million during the same period in 2003. Capital expenditures for 2004 have focused on expanding capacity in our U.S. eight-inch fabrication facility. Total capital expenditures for 2004 are expected to be approximately 7% of revenue for the year. Our annual capital expenditures are limited by the terms of the senior credit facilities. We believe we have adequate capacity under the senior credit facilities to make planned capital expenditures.

Restructuring and Impairment Charges

During 2001, we entered into a non-competition agreement with Nippon Mining and its subsidiary (collectively “Nippon”). According to this agreement, Nippon agreed to not engage in the custom semiconductor business anywhere in the world through December 2005. During 2003, we reached a determination that the carrying value of the non-competition agreement had been impaired based primarily on a change in Nippon’s business focus and related capabilities such that they did not intend to focus on custom semiconductors. Effective June 26, 2003, we released Nippon from the non-competition agreement and expensed the $20.0 million remaining unamortized balance of the agreement, which is included as an impairment charge for the nine months ended September 27, 2003 in our accompanying unaudited condensed consolidated statements of operations.

Pursuant to FASB Statement 146, “Accounting for Costs Associated with Exit or Disposal Activities,” in 2003, and EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” in 2001, senior management and the Board of Directors approved plans to restructure certain of our operations. All expenses associated with these plans were included as restructuring and impairment charges in the periods incurred.

The 2003 plan involved the termination of certain management and other employees as well as certain sales representative firms in the United States. Internal sales employees replaced these sales representative firms. In total, 32 employees, from various departments, were terminated as part of this program. All terminated employees were notified in the period in which the charge was recorded. Expenses related to the plan totaled approximately $1.7 million, which includes $0.7 million related to the accelerated vesting on certain options making them immediately exercisable upon termination. As of December 31, 2003, approximately $0.7 million of these termination costs were included in accrued expenses. As of September 25, 2004, all amounts related to this plan had been paid.

The 2001 plan involved the closure of certain offices and the termination of certain management and other employees. As of December 31, 2003, and September 25, 2004, the remaining accrual for this plan, representing lease termination costs, of approximately $0.2 million, and $0.1 million, respectively, was included in accrued expenses on the accompanying balance sheets. The remaining lease termination costs will be paid over the remaining lease terms, which end in July 2005.

Following is a summary of the restructuring accrual relating to the 2003 and 2001 plans (in millions):


				Lease
	Severance			Termination
	Costs			Costs			Total
Balance at December 31, 2003	$	0.7		$	0.2		$	0.9
Paid in 2004		(0.7	)		(0.1	)		(0.8	)

Balance at September 25, 2004	$	—		$	0.1		$	0.1

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expenses and related disclosures. We have identified revenue recognition, inventories, property, plant and equipment, intangible assets, goodwill, income taxes and stock options as areas involving critical accounting policies and the most significant judgments and estimates.

We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require the most difficult, subjective or complex judgments in the preparation of our financial statements.

Revenue Recognition

Several criteria must be met before we can recognize revenue from our products and revenue relating to engineering design and product development. We must apply our judgment in determining when revenue recognition criteria are met.

We recognize revenue from products sold directly to end customers when persuasive evidence of an arrangement exists, the price is fixed and determinable, shipment is made and collectability is reasonably assured. In certain situations, we ship products through freight forwarders where title does not pass until product is shipped from the freight forwarder. In other situations, by contract, title does not pass until the product is received by the customer. In both cases, revenue and related gross profit are not recognized until title passes to the customer. Estimates of product returns and allowances, based on actual historical experience, are recorded at the time revenue is recognized and are deducted from revenue.

Revenue from contracts to perform engineering design and product development are recognized as milestones are achieved, which approximates the percentage-of-completion method. Costs associated with such contracts are expensed as incurred. A typical milestone billing structure is 40% at the start of the project, 40% at the creation of the reticle set and 20% upon delivery of the prototypes.

Since up to 40% of revenue is billed and recognized at the start of the design development work and, therefore, could result in the acceleration of revenue recognition, we analyze those billings and the status of in-process design development projects at the end of each reporting period in order to determine that the milestone billings approximate percentage-of-completion on an aggregate basis. We compare each project’s stage with the total level of effort required to complete the project, which we believe is representative of the cost-to-cost method of determining percentage-of-completion. Based on this analysis, the relatively short-term nature of our design development process and the billing and recognition of 20% of the project revenue after design development work is complete (which effectively defers 20% of the revenue recognition to the end of the contract), we believe our milestone method approximates the percentage-of-completion method in all material respects.

Our engineering design and product development contracts generally involve pre-determined amounts of revenue. We review each contract that is still in process at the end of each reporting period and estimate the cost of each activity yet to be performed under that contract. This cost determination involves our

judgment and the uncertainties inherent in the design and development of integrated circuits. If we determine that our costs associated with a particular development contract exceed the revenue associated with such contract, we estimate the amount of the loss and establish a corresponding reserve.

Inventories

We initiate production of a majority of our semiconductors once we have received an order from a customer. Based on forecasted demand from specific customers, we may build a small finished goods inventory. As a result, we generally do not carry a significant inventory of finished goods. However, we 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 provide an allowance for inventories on hand that are in excess of forecasted demand. Forecasted demand is determined based on historical sales or inventory usage, expected future sales or using backlog and other projections and the nature of the inventories. We also review other inventories for indicators of impairment and provide an allowance as deemed necessary. We also provide an allowance for obsolete inventory, which is written off at the time of disposal.

We state inventories at the lower of cost (using the first-in, first-out method) or market.

Property, Plant and Equipment and Intangible Assets

We regularly evaluate the carrying amounts of long-lived assets, including property, plant and equipment and intangible assets, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current circumstances or events. The evaluation, which involves significant management judgment, is based on various analyses including cash flow and profitability projections. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of the related long-lived assets, the carrying amount of the underlying assets will be reduced, with the reduction charged to expense so that the carrying amount is equal to fair value, primarily determined based on future discounted cash flows. To the extent such evaluation indicates that the useful lives of property, plant and equipment are different than originally estimated, the amount of future depreciation expense is modified such that the remaining net book value is depreciated over the revised remaining useful life.

Goodwill

Under the guidelines of Financial Accounting Standards (FAS) 142, “Goodwill and Other Intangible Assets,” we assess goodwill at least annually for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step is to identify potential impairment by comparing the fair value of a reporting unit to which the goodwill is assigned with the unit’s net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds its carrying amount, there is no deemed impairment of goodwill and the second step of the impairment test is unnecessary. However, if the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of goodwill impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. We completed the first step of the annual impairment test in 2003 and determined that the fair value of our reporting units exceeded their carrying values including goodwill; therefore, no impairment charge was taken and there was no need to proceed to the second step of the goodwill impairment test.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test requires judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized, including the magnitude of any such

charge. To assist in the process of determining goodwill impairment, we may obtain appraisals from independent valuation firms. In addition to the use of independent valuation firms, we perform internal valuation analyses and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons of recent transactions. These approaches use significant estimates and assumptions including the amount and timing of projected future cash flows, discount rates reflecting the risk inherent in the future cash flows, perpetual growth rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to these comparables.

Income Taxes

Income taxes are recorded based on the liability method, which requires recognition of deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce our deferred tax asset to an amount we determine is more likely than not to be realized, based on our analyses of past operating results, future reversals of existing taxable temporary differences and projected taxable income, including tax strategies available to generate future taxable income. Our analyses of future taxable income are subject to a wide range of variables, many of which involve our estimates and, therefore, our deferred tax asset may not be ultimately realized in full. Under the “change of ownership” provisions of the Internal Revenue Code, utilization of our net operating loss carryforwards may be subject to an annual limitation.

Stock-Based Compensation

We have elected to follow the intrinsic value-based method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for employee stock options rather than adopting the alternative fair value accounting provided under SFAS No. 123, “Accounting for Stock-Based Compensation.” Therefore, we do not record any compensation expense for stock options we grant to our employees where the exercise price equals the fair market value of the stock on the date of grant and the exercise price, number of shares eligible for issuance under the options and vesting period are fixed. Deferred stock-based compensation is recorded when stock options are granted to employees at exercise prices less than the estimated fair value of the underlying common stock on the grant date. Historically, we generally determined the estimated fair value of our common stock based on independent valuations. We recorded deferred stock-based compensation of approximately $519,000 in 2003, prior to our initial public offering. Such deferred compensation is amortized to expense over the vesting period of the related options. We comply with the disclosure requirements of SFAS No. 123 and SFAS No. 148, which require that we disclose our pro forma net income or loss and net income or loss per common share as if we had expensed the fair value of the options in determining net income or loss. In calculating such fair value, there are certain assumptions that we use, as disclosed in note 14 to our consolidated financial statements, included in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

We have reviewed all recently issued accounting standards that have not yet been adopted in order to determine their potential effect, if any, on our results of operations and financial position. Based on that review, we do not currently believe that any of these recent accounting pronouncements will have a significant effect on our current or future financial position, results of operations, cash flows or disclosures.

Contractual Obligations and Contingent Liabilities and Commitments

We have no off-balance sheet transactions and we are not a guarantor of any other entities’ debt or other financial obligations. As of September 25, 2004, other than operating leases for certain equipment and real estate, purchase agreements for certain chemicals, raw materials and services at fixed prices, or similar instruments, there were no significant changes to our contractual obligations and contingent liabilities and commitments from those disclosed in our Annual Report on Form 10-K.

Factors that May Affect our Business and Future Results

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Relating to Our Company and the Semiconductor Industry

The cyclical nature of the semiconductor industry may limit our ability to maintain or increase revenue and profit levels.

The semiconductor industry is cyclical and our ability to respond to downturns is limited. The semiconductor industry experienced the effects of a significant downturn that began in late 2000 and continued into 2003. Our business was impacted by this downturn. Our financial performance was negatively affected by various factors, including general reductions in inventory levels by customers and excess production capacity. Bookings and backlog decreased during the third quarter of 2004, as compared to the second quarter of 2004. We cannot predict how long the current soft bookings environment will persist or to what extent business conditions will change in the future.

During industry downturns and for other reasons, we may need to record impairment or restructuring charges. We have incurred impairment or restructuring charges in each of the last three fiscal years. In 2003 we recorded $1.7 million in restructuring charges related to employee severance and the termination of relationships with certain sales representative firms. We plan to eliminate approximately 80 employee positions during the fourth quarter of 2004. During 2005 we plan to relocate our test operations to a new larger facility in the Philippines and to transfer our wafer sort operations in Pocatello, Idaho and Oudenaarde, Belgium to that new facility. These changes will result in additional restructuring charges in 2004 and 2005 which are expected to total approximately $10-$12 million. In the future, we may need to record additional impairment charges or further restructure our business and incur additional restructuring charges.

Due to our relatively fixed cost structure, our margins will be adversely affected if we experience a significant decline in customer orders.

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can challenge our resources, reduce margins or harm our relationships with our customers. We may not have sufficient capacity at any given time to meet our customers’ demands. Conversely, downturns in the semiconductor industry, such as the downturn that commenced late in 2000 and ended in 2003, can and have caused our customers to significantly reduce the amount of products ordered from us. In addition, we experienced a decrease in orders in the third quarter of 2004 due to general declines in the industry and an inventory policy change with one of our major medical customers. Significant rapid reductions in customer orders have caused our wafer fabrication capacity to be under-utilized. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand has an adverse effect on our gross margins and operating income. Reduction of customer demand also causes a decrease in our backlog. There is also a higher risk that our trade receivables will be uncollectible during industry downturns or downturns in the economy.

A significant portion of our revenue comes from a relatively limited number of customers and devices.

If we lose major customers or if customers cease to place orders for our high volume devices, our financial results will be adversely affected. While we served more than 400 customers in the first nine months of 2004, sales to our 15 largest customers represented 51.0% of our revenue during this period. The identities of our principal customers have varied from year to year and our principal customers may not continue to purchase products and services from us at current levels, or at all. In addition, while we sold over 2,000 different products in the first nine months of 2004, the 93 top selling devices represented 50.1% of our revenue during this period. The devices generating the greatest revenue have varied from year to

year and our customers may not continue to place orders for such devices from us at current levels, or at all. Significant reductions in sales to any of these customers, the loss of major customers or the curtailment of orders for our high volume devices within a short period of time would adversely affect our business.

Our customers may cancel their orders, change production quantities or delay production.

We generally do not obtain firm, long-term purchase commitments from our customers. Customers may cancel their orders, change production quantities or delay production for a number of reasons. Cancellations, reductions or delays by a significant customer or by a group of customers, which we have experienced as a result of the recent downturn in the semiconductor industry, have adversely affected and may continue to adversely affect our results of operations. In addition, while we do not obtain long-term purchase commitments, we generally agree to the pricing of a particular product for the entire lifecycle of the product, which can extend over a number of years. If we underestimate our costs when determining the pricing, our margins and results of operations will be adversely affected.

We depend on our key personnel.

Our success depends to a large extent upon the continued services of our chief executive officer, Christine King, and our other key executives, managers and skilled personnel, particularly our design engineers. Generally our employees are not bound by employment or non-competition agreements and we cannot assure you that we will retain our key executives and employees. We may or may not be able to continue to attract, retain and motivate qualified personnel necessary for our business. Loss of the services of, or failure to recruit, skilled personnel could be significantly detrimental to our product development programs or otherwise have a material adverse effect on our business.

We depend on successful technological advances for growth.

Our industry is subject to rapid technological change as customers and competitors create new and innovative products and technologies. We may not be able to access leading edge process technologies or to license or otherwise obtain essential intellectual property required by our customers. If we are unable to continue manufacturing technologically advanced products on a cost-effective basis, our business would be adversely affected.

We depend on growth in the end markets that use our products.

Our continued success will depend in large part on the growth of various industries that use semiconductors, including our target automotive, medical and industrial markets, as well as the communications, military and computing markets, and on general economic growth. Factors affecting these markets as a whole could seriously harm our customers and, as a result, harm us. These factors include:

• recessionary periods or periods of reduced growth in our customers’ markets;

• the inability of our customers to adapt to rapidly changing technology and evolving industry standards;

• the potential that our customers’ products may become obsolete or the failure of our customers’ products to gain widespread commercial acceptance; and

• the possibility of reduced consumer demand for our customers’ products.

The declining average selling price of communications equipment places significant pressure on the prices of the components that are used in this equipment. If the average selling prices of communications equipment continue to decrease, the pricing pressure on components we produce may reduce our revenue and our gross profit margin.

Our industry is highly competitive.

The semiconductor industry is highly competitive and includes hundreds of companies, a number of which have achieved substantial market share. Current and prospective customers for our custom products evaluate our capabilities against the merits of our direct competitors, as well as the merits of continuing to use standard or semi-standard products. Some of our competitors have substantially greater market share, manufacturing, financial, research and development and marketing resources than we do. We also compete with emerging companies that are attempting to sell their products in specialized markets. We expect to experience continuing competitive pressures in our markets from existing competitors and new entrants. Our ability to compete successfully depends on a number of other factors, including the following:

• our ability to offer cost-effective products on a timely basis using our technologies;

• our ability to accurately identify emerging technological trends and demand for product features and performance characteristics;

• product introductions by our competitors;

• our ability to adopt or adapt to emerging industry standards;

• the number and nature of our competitors in a given market; and

• general market and economic conditions.

Many of these factors are outside of our control. In addition, in recent years, many participants in the industry have substantially expanded their manufacturing capacity. If overall demand for semiconductors should decrease, this increased capacity could result in substantial pricing pressure, which could adversely affect our operating results. Because our products are typically designed for a specific customer and are not commodity products, we did not decrease our prices as significantly as many other companies in the semiconductor industry to try to maintain or increase customer orders during the downturn in the semiconductor industry from 2000 through 2003, nor have we changed our pricing significantly since then. However, we cannot assure you that we will not face increased pricing pressure in the future.

We may incur costs to engage in future acquisitions of companies or technologies and the anticipated benefits of those acquisitions may never be realized.

In June 2002 we completed our acquisition of the mixed signal business of Alcatel Microelectronics NV from STMicroelectronics NV and in September 2002 we purchased the Micro Power Products Division of Microsemi Corporation. In September 2004 we announced our intention to acquire substantially all of the assets of Dspfactory Ltd., however, this acquisition may not ever close and we may never realize the benefits of this acquisition. We may in the future make additional acquisitions of complementary companies or technologies. The Dspfactory acquisition as well as any future acquisitions would be accompanied by risks, including the following:

• potential inability to maximize our financial or strategic position, which could result in impairment charges if the acquired company or assets are later worth less than the amount paid for them in the acquisition;

• difficulties in assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings and revenue synergies;

• entry into markets or countries in which we may have limited or no experience;

• potential increases in our indebtedness and contingent liabilities and potential unknown liabilities associated with any such acquisition;

• diversion of management’s attention due to transition or integration issues;

• difficulties in managing multiple geographic locations;

• cultural impediments that could prevent establishment of good employee relations, difficulties in retaining key personnel of the acquired business and potential litigation from terminated employees; and

• difficulties in maintaining uniform standards, controls and procedures and information systems.

We cannot guarantee that we will be able to successfully integrate any company or technologies that we might acquire in the future and our failure to do so could harm our business. The benefits of an acquisition may take considerable time to develop and we cannot guarantee that any acquisition will in fact produce the intended benefits.

In addition, our senior credit facilities and our senior subordinated notes may prohibit us from making acquisitions that we may otherwise wish to pursue.

Risks Relating to Our International Operations

Our international sales and operations expose us to various political and economic risks.

As a percentage of total revenue, our revenue outside of North America was approximately 58%, 59%, 44% and 17% in the first nine months of 2004, and the years 2003, 2002 and 2001, respectively. Our manufacturing operations are located in the United States and Belgium, our test facilities and outsourced primary packagers are located in Asia and we maintain design centers and sales offices in North America, Europe and Asia. International sales and operations are subject to a variety of risks, including:

• greater difficulty in staffing and managing foreign operations;

• greater risk of uncollectible accounts;

• longer collection cycles;

• logistical and communications challenges;

• potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;

• changes in labor conditions;

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

• political and economic instability;

• increases in duties and taxation;

• greater difficulty in protecting intellectual property; and

• general economic and political conditions in these foreign markets.

We are subject to risks associated with currency fluctuations.

A significant portion of our revenue and costs are denominated in foreign currencies, including the euro and, to a lesser extent, the Philippine Peso and the Japanese Yen. Euro-denominated revenue represented approximately 35% of our revenue in the first nine months of 2004 and 36% of our revenue in 2003. As a result, changes in the exchange rates of these foreign currencies to the U.S. dollar will affect our revenue, cost of revenue and operating margins and could result in exchange losses. The impact of future exchange rate fluctuations on our results of operations cannot be accurately predicted. In June 2004, we entered into

an exchange rate hedge in an effort to mitigate the impact of exchange rate fluctuations. However, we cannot assure you that any hedging transactions will be effective or will not result in foreign exchange hedging losses.

Our exposure to foreign labor laws due to our operational presence in Europe.

We had 906 employees in Europe as of September 25, 2004, most of whom were in Belgium. The employees located in Belgium are represented by unions and have collective bargaining arrangements at the national, industry and company levels. In connection with any future reductions in work force we may implement, we would be required to, among other things, negotiate with these unions and make severance payments to employees upon their termination. In addition, these unions may implement work stoppages or delays in the event they do not consent to severance packages proposed for future reductions in work force or for any other reason. Furthermore, our substantial operations in Europe subject us to compliance with labor laws and customs that are generally more employee favorable than in the United States. As a result, it may not be possible for us to quickly or affordably implement workforce reductions in Europe.

Risks Relating to Manufacturing

Our success depends on efficient utilization of our manufacturing capacity.

An important factor in our success is the extent to which we are able to utilize the available capacity in our fabrication and test facilities. Utilization rates can be negatively affected by periods of industry over- capacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion or relocation of operations and fire or other natural disasters. In addition, our agreement with STMicroelectronics terminated in June 2004 and utilization of our fabs has declined as a result. Because many of our costs are fixed, a reduction in capacity utilization, together with other factors such as yield and product mix, could adversely affect our operating results. The downturn in the semiconductor industry from 2000 to 2003 resulted in a decline in the capacity utilization at our wafer fabrication facilities. In addition, our capacity utilization for the third quarter of 2004 declined from the previous two quarters. If this continues, or if we enter another downturn, our wafer fabrication capacity may be under-utilized and our inability to quickly reduce fixed costs, such as depreciation and other fixed operating expenses necessary to operate our wafer manufacturing facilities, would harm our operating results.

We could be adversely affected by manufacturing interruptions or reduced yields.

The fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean room environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. We may experience problems in achieving acceptable yields in the manufacture of semiconductors, particularly in connection with the production of a new product, the adoption of a new manufacturing process or any expansion of our manufacturing capacity and related transitions. The interruption of manufacturing, including power interruptions or the failure to achieve acceptable manufacturing yields at any of our wafer fabrication facilities, would adversely affect our business.

We may face product warranty or product liability claims that are disproportionately higher than the value of the products involved.

Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. Although we maintain rigorous quality control systems, in the ordinary course of our business we receive warranty claims for some of these products that are defective or that do not perform to published specifications. Since a defect or failure in our product could give rise to failures in the goods that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenues and profits we receive from the products involved. We attempt, through our standard terms and conditions of sale and other customer contracts, to limit our liability for defective products to obligations to replace the defective goods or refund the purchase price. Nevertheless, we have received claims in the past for other charges,

such as for labor and other costs of replacing defective parts, lost profits and other damages. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business. And, even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill or to settle claims to avoid protracted litigation. Our results of operations and business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay for the damages that result.

We are dependent on successful outsourcing relationships.

We have formed arrangements with other wafer fabrication foundries to supplement capacity and gain access to more advanced digital process technologies. If we experience problems with our foundry partners, we may face a shortage of finished products available for sale. We believe that in the future we will increasingly rely upon outsourced wafer manufacturing to supplement our capacity and technology. If any foundries with which we form an outsourcing arrangement, experience wafer yield problems or delivery delays, which are common in our industry, or are unable to produce silicon wafers that meet our specifications with acceptable yields, our operating results could be adversely affected.

We rely on packaging subcontractors.

Most of our products are assembled in packages prior to shipment. The packaging of semiconductors is a complex process requiring, among other things, a high degree of technical skill and advanced equipment. We outsource our semiconductor packaging to subcontractors, most of which are located in Southeast Asia. In particular, we rely heavily on a single packager for packaging. We depend on these subcontractors to package our devices with acceptable quality and yield levels. If our semiconductor packagers experience problems in packaging our semiconductor devices or experience prolonged quality or yield problems, our operating results would be adversely affected.

We depend on successful parts and materials procurement for our manufacturing processes.

We use a wide range of parts and materials in the production of our semiconductors, including silicon, processing chemicals, processing gases, precious metals and electronic and mechanical components. We procure materials and electronic and mechanical components from domestic and foreign sources and original equipment manufacturers. However, there is no assurance that, if we have difficulty in supply due to an unforeseen catastrophe, worldwide shortage or other reason, alternative suppliers will be available or that these suppliers will provide materials or electronic or mechanical components in a timely manner or on favorable terms. If we cannot obtain adequate materials in a timely manner or on favorable terms, our business and financial results would be adversely affected.

We may need to raise additional capital that may not be available.

Semiconductor companies that maintain their own fabrication facilities have substantial capital requirements. We made capital expenditures of $21.1 million in the first nine months of 2004 and $20.1 million in the first nine months of 2003. These expenditures were used to expand capacity in our eight inch fabrication facility in 2004 and replace equipment and expand our test and design capabilities in both years. In the future, we intend to continue to make capital investments to support business growth and achieve manufacturing cost reductions and improved yields. We may seek additional financing to fund further expansion of our wafer fabrication capacity or to fund other projects. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. Additional financing may not be available when needed or, if available, may not be available on satisfactory terms.

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology, as well as our ability to operate without infringing the proprietary rights of others.

As of September 25, 2004, we held 74 U.S. patents and 104 foreign patents. We also had over 55 patent applications in progress. At the end of 2004, approximately 8% of the patents we currently have in place will be expiring. We do not expect this to have a material impact on our results, as these technologies are not revenue producing and we will be able to continue using the technologies associated with these patents. We intend to continue to file patent applications when appropriate to protect our proprietary technologies. The process of seeking patent protection takes a long time and is expensive. We cannot assure you that patents will issue from pending or future applications or that, if patents issue, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, we cannot assure you that other countries in which we market our services will protect our intellectual property rights to the same extent as the United States.

We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, by confidentiality agreements. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach.

Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States until they are published. In January 2003, Ricoh Company, Ltd. filed in the U.S. District Court for the District of Delaware a complaint against us and other parties alleging infringement of a patent owned by Ricoh. The case was transferred to the U.S. District Court for the Northern District of Delaware in August 2003 and was subsequently transferred to the U.S. District Court for the Northern District of California. Ricoh is seeking an injunction and damages in an unspecified amount relating to such alleged infringement. The patents relate to certain methodologies for the automated design of custom semiconductors. Based on information available to us to date, our belief is that the asserted claims are without merit or, if meritorious, that we will be indemnified (with respect to damages) for these claims by Synopsys, Inc. and resolution of this matter will not have a material adverse effect on our future financial results or financial condition.

In addition, the semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. As is typical in the semiconductor industry, we have from time to time received communications from third parties asserting rights under patents that cover certain of our technologies and alleging infringement of certain intellectual property rights of others. We analyze these claims as best we can given the information available and applicable legal principles. Recently, we have been in discussions with two companies who claim that certain of our products infringe a number of their patents relating to certain manufacturing processes. Our discussions to date have not resulted in a resolution of either matter. At this time, the overall validity or invalidity of the claims cannot be determined with any certainty and we cannot predict whether any litigation will ensue, or what the outcome of any such litigation might be. We expect to receive similar communications in the future. In the event that any third party had a valid claim against us or our customers, we could be required to:

• discontinue using certain process technologies which could cause us to stop manufacturing certain semiconductors;

• pay substantial monetary damages;

• seek to develop non-infringing technologies, which may not be feasible; or

• seek to acquire licenses to the infringed technology which may not be available on commercially reasonable terms, if at all.

In the event that any third party causes us or any of our customers to discontinue using certain process technologies, such an outcome could have an adverse effect on us as we would be required to design around such technologies, which could be costly and time consuming.

Litigation, which could result in substantial costs to us and diversion of our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. If we fail to obtain a necessary license or if litigation relating to patent infringement or any other intellectual property matter occurs, our business could be adversely affected.

We could incur material costs to comply with environmental laws.

Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released into the environment from our operations. We have incurred and will in the future incur costs, including capital expenditures, to comply with these regulations. Significant regulatory changes or increased public attention to the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs or requiring changes in the way we make our products. For example, Belgium has enacted national legislation regulating emissions of greenhouse gases, such as carbon dioxide.

In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of accidental spills or other sources of contamination, which could result in injury to the environment, personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example, we have recently received concurrence with a proposal to curtail pumping at one of our former manufacturing sites. Ongoing monitoring and reporting is still required. If levels significantly change in the future additional remediation may be required. In addition, at some point in the future, we will have to formally close and remove the extraction wells and treatment system. The discovery of additional contamination at this site or other sites where we currently have or historically have had operations could result in material cleanup costs.

Risks Relating to Our Substantial Debt

Our substantial consolidated indebtedness could adversely affect our financial health and the value of your investment in our common stock.

AMI Semiconductor, our wholly owned subsidiary through which we conduct all our business operations, has a substantial amount of indebtedness, most of which is guaranteed by us. We are a holding company with no business operations and no significant assets other than our ownership of AMI Semiconductor’s capital stock. As of September 25, 2004, our consolidated indebtedness was approximately $254.1 million and our total consolidated debt as a percentage of total capitalization was 50%. Subject to the restrictions in the senior credit facilities and the senior subordinated notes, we and our subsidiaries may incur certain additional indebtedness from time to time.

Our substantial consolidated indebtedness could have important consequences to you. For example, our substantial indebtedness:

• will require our operating subsidiaries to dedicate a substantial portion of cash flow from operations to payments in respect of indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

• could increase the amount of our consolidated interest expense because some of our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

• will increase our vulnerability to adverse general economic or industry conditions;

• could limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

• could restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

• could place us at a competitive disadvantage compared to our competitors that have less debt; and

• could limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets.

To service our consolidated indebtedness, we will require a significant amount of cash.

Our ability to generate cash depends on many factors beyond our control. Our ability to make payments on our consolidated indebtedness and to fund working capital requirements, capital expenditures and research and development efforts will depend on our ability to generate cash in the future. Our historical financial results have been, and we expect our future financial results will be, subject to substantial fluctuation based upon a wide variety of factors, many of which are not within our control. These factors include:

• the cyclical nature of both the semiconductor industry and the markets for our products;

• fluctuations in manufacturing yields;

• the timing of introduction of new products;

• the timing of customer orders;

• changes in the mix of products sold and the end markets into which they are sold;

• the extent of utilization of manufacturing capacity;

• the length of the lifecycle of the semiconductors we are manufacturing;

• availability of supplies and raw materials;

• price competition and other competitive factors; and

• work stoppages, especially at our fabs in Belgium.

Unfavorable changes in any of these factors could harm our operating results and our ability to generate cash to service our indebtedness. If we are unable to service our debt using our operating cash flow, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling equity securities, each of which could adversely affect the market price of our common stock. However, we cannot assure you that any alternative strategies will be feasible at the time or prove adequate. Also, certain of these strategies would require the consent of our senior secured lenders.

Restrictions imposed by the senior credit facilities and the senior subordinated notes limit our ability to take certain actions.

We cannot assure you that the operating and financial restrictions and covenants in our debt instruments, including the senior credit facilities and the senior subordinated notes, will not adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. The senior credit facility requires us to maintain certain financial ratios which become more restrictive over time. Our ability to comply with these ratios may be affected by events beyond our control. In 2002, 2003 and 2004, the lenders under our senior credit facility and we agreed to certain amendments, including changes to our financial covenants and restrictions on our capital expenditures. We also sought and obtained certain waivers and consents under our senior credit facilities. We may be required to seek waivers or consents in the future. We cannot be sure that these waivers or consents will be granted. A breach of any of the covenants or our inability to comply with the required financial ratios could result in a default under our senior credit facilities. In the event of any default under the senior credit facilities, the lenders under our senior credit facilities will not be required to lend any additional amounts to us and could elect to declare all outstanding borrowings, together with accrued interest and other fees, to be due and payable, and require us to apply all of our available cash to repay these borrowings. If we are unable to repay any such borrowings when due, the lenders could proceed against their collateral, which consists of substantially all of our assets, including 65% of the outstanding stock of certain of our foreign subsidiaries. If the indebtedness under our senior credit facilities were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.

In addition, the indenture governing the senior subordinated notes contains covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness, make investments, engage in transactions with affiliates, sell assets, including capital stock of subsidiaries, and consolidate, merge or transfer assets.

Risks Related to our Common Stock

The price of our common stock may be volatile and subject to wide fluctuations.

The market price of the securities of technology companies has been especially volatile. Thus, the market price of our common stock may be subject to wide fluctuations. If our revenue does not meet securities analysts or investors expectations, or if operating or capital expenditures exceed our estimates and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock could decline. In addition, if the market for semiconductor-related stocks or the stock market in general experiences a loss in investor confidence or otherwise falls, the market price of our common stock could fall for reasons unrelated to our business, results of operations or financial condition. The market price of our common stock also might decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

We may experience significant period-to-period quarterly and annual fluctuations in our revenue and operating results, which may result in volatility in our stock price.

We may experience significant period-to-period fluctuations in our revenue and operating results in the future due to a number of factors and any such variations may cause our stock price to fluctuate. It is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If this occurs, our stock price could drop significantly.

A number of factors, in addition to those cited in other risk factors, may contribute to fluctuations in our revenue and operating results, including:

• the timing and volume of orders from our customers;

• the rate of acceptance of our products by our customers, including the acceptance of design wins;

• the demand for and lifecycles of equipment incorporating our products;

• the rate of adoption of integrated mixed signal products in the end markets we target;

• deferrals of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of integrated circuits;

• changes in product mix; and

• the rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets.

We are a holding company that depends on dividends from our subsidiaries to meet our cash requirements and we do not anticipate paying any dividends on our common stock in the foreseeable future.

We are a holding company with no business operations. Our only significant asset is the outstanding capital stock of AMI Semiconductor, our wholly owned subsidiary through which we conduct all our business operations, and certain other assets. We will not be able to pay cash dividends on our common

stock without receiving dividends or other distributions from AMI Semiconductor. Furthermore, AMI Semiconductor is restricted by the senior credit facilities and the senior subordinated notes from paying dividends or making distributions to us. In any event, we currently expect that our earnings and cash flow will be retained for use in our operations and to service our debt obligations. Even if we determined to pay a dividend on or make a distribution in respect of our common stock, we cannot assure you that our subsidiaries will generate sufficient cash flow to pay a dividend or distribute funds to us or that applicable state law and contractual restrictions will permit such dividends or distributions.

Our principal stockholders exert substantial influence over us and may exercise their control in a manner adverse to your interests.

As of September 25, 2004, affiliates of Francisco Partners, Citigroup Venture Capital Equity Partners, or CVC, and Nippon Mining together beneficially owned 52,399,753 shares, or approximately 63.2%, of our outstanding common stock. These stockholders are party to a shareholders’ agreement, pursuant to which these stockholders have the power to direct our affairs and will be able to determine the outcome of all matters required to be submitted to stockholders for approval, including the election of a majority of our directors, any merger, consolidation or sale of all or substantially all of our assets and amendment of our certificate of incorporation. Because a limited number of persons control us, transactions could be difficult or impossible to complete without the support of those persons. It is possible that these persons will exercise control over us in a manner adverse to your interests.

Delaware law and provisions of our charter documents could discourage potential acquisition proposals and could delay, deter or prevent a change in control.

The anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Additionally, provisions of our amended and restated certificate of incorporation and by-laws could deter, delay or prevent a third party from acquiring us, even if doing so would benefit our stockholders. These provisions include:

• a requirement that special meetings of stockholders may be called only by our board of directors, the chairman of the board (if any), the president or the secretary;

• advance notice requirements for stockholder proposals and nominations; and

• the authority of the board to issue, without stockholder approval, preferred stock with such terms as the board may determine.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products and services to foreign customers and changes in interest rates on our long-term debt.

A substantial portion of our annual sales and operating costs are denominated in euros. Additionally, we have foreign currency exposure arising from the translation or remeasurement of our foreign subsidiaries’ financial statements into U.S. dollars. The primary currencies to which we are exposed to fluctuations include the Euro, the Japanese Yen and the Philippine Peso. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency. As of September 25, 2004, approximately 66% of our consolidated net assets were attributable to

subsidiaries that prepare their financial statements in foreign currencies denominated in Euro and Japanese Yen. As such, a 10% change in the U.S. dollar exchange rates in effect as of September 25, 2004 would cause a change in consolidated net assets of approximately $13 million. We have attempted to mitigate the impact of this exchange rate risk. During September 2004, we entered into a foreign exchange collar contract, which ensures conversion of €3.9 million at a rate of no less than $1.22 and no more than $1.24 per euro.

Our exposure to interest rate risk consists of floating rate debt based on the London Interbank Offered Rate (LIBOR) plus an adjustable margin under our credit agreement. A change of 10% in the interest rate would cause a change of approximately $0.5 million in interest expense.

In January 2003, we issued $200.0 million of fixed rate 10¾% senior subordinated notes. As of September 25, 2004, $130.0 million of this issuance was outstanding. Because our interest rate is fixed, changes in market interest rates do not impact our interest expense.

Item 4: Controls and Procedures

(a) Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

We were named as a defendant in a complaint filed on January 21, 2003, by Ricoh Company, Ltd. in the U.S. District Court for the District of Delaware alleging infringement of a patent owned by Ricoh. Ricoh is seeking an injunction and damages in an unspecified amount relating to such alleged infringement. The patents relate to certain methodologies for the automated design of custom semiconductors. The allegations are premised, at least in part, on the use of software we licensed from Synopsys, Inc. Synopsys has agreed to assume the sole and exclusive control of our defense relating to our use of the Synopsys software pursuant to the indemnity provisions of the Synopsys software license agreement, subject to the exceptions and limitations contained in the agreement. Synopsys will bear the cost of the defense as long as it is controlling the defense. However, it is possible that we may become aware of circumstances, or circumstances may develop, that result in our defense falling outside the scope of the indemnity provisions of the Synopsys software license agreement, in which case we would resume control of our defense and bear its cost, or share the cost of the defense with Synopsys and any other similarly situated parties. On August 29, 2003 the United States District Court for the District of Delaware granted the defendants motion to transfer the case to the United States District Court for the Northern District of California, where Synopsys currently has an action for declaratory judgment pending against Ricoh.

On February 10, 2004, we and the other named defendants in this case filed a motion to dismiss the complaint on the basis that it failed to state a cause of action. Ricoh opposed our motion and moved to amend its complaint to clarify the bases on which it was claiming that the patent infringement occurred. A hearing was held on April 6, 2004 and the judge subsequently denied our motion to dismiss. We filed our answer to the amended complaint on April 26, 2004. On July 7, 2004, the parties jointly filed a Stipulation and Proposed Order Dismissing Certain Claims, in which Ricoh agreed not to sue and to release the defendants for actions existing as of July 7, 2004 and arising solely as a result of the operation or use of prior or current versions of Synopsys design compiler products with regard to claims 1-12 and 18-20 of the patent in question, as well as from another Ricoh patent not currently alleged in the litigation. The

defendants also agreed to dismiss their counterclaims relating to the same claims and release Ricoh from any causes of action relating to communications made by Ricoh to the defendants relating to the dismissed claims. The result was to narrow the focus of the current litigation more specifically to the methodologies used to design custom semiconductors using a computer-aided design process having the characteristics referenced in the surviving claims. Discovery in the case is on-going and a claims construction hearing is scheduled for November 17, 2004. Based on information available to us to date, our preliminary belief is that the asserted claims against us are without merit or, if meritorious, we will be indemnified (with respect to damages) for such claims by Synopsys, and resolution of this matter will not have a material adverse effect on our future financial results or financial condition. However, if Ricoh is successful, we could be subject to an injunction or substantial damages or we could be required to obtain a license from Ricoh, if available.

• discontinue using certain process technologies which could cause us to stop manufacturing certain semiconductors;

• pay substantial monetary damages;

• seek to develop non-infringing technologies, which may not be feasible; or

• seek to acquire licenses to the infringed technology which may not be available on commercially reasonable terms, if at all.

From time to time we are a party to various litigation matters incidental to the conduct of our business. There is no pending or threatened legal proceeding to which we are a party that, in the opinion of management, is likely to have a material adverse effect on our future financial results or financial condition.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

See Item 3.02 of our Current Report on Form 8-K dated September 9, 2004 (filed September 14, 2004).

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5: Other Information

The Company’s independent auditor, Ernst & Young LLP (“E&Y”), has recently advised the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and the Audit Committee of our Board of Directors that it has identified potential independence issues in connection with the performance of certain non-audit services for a number of its audit clients in Taiwan. As it relates to AMIS Holdings, Inc., these services involve performing certain non-audit work by E&Y’s Taiwan affiliate for an immaterial Taiwanese subsidiary of the Company. From November 2002 through June 2004, E&Y assisted our subsidiary in preparing and filing certain business and income tax returns and calculating certain monthly national health and labor insurance premiums. In connection with the performance of

these services, E&Y’s Taiwan affiliate made payments on behalf of our Taiwanese subsidiary to the applicable Taiwanese tax authorities and insurance representatives totaling approximately $1,249 in 2002, $8,561 in 2003 and $3,774 in 2004. The payment of those taxes and insurance premiums involved handling of Company related funds, which is not permitted under SEC auditor independence rules. These actions by affiliates of E&Y have been discontinued. E&Y’s Taiwan affiliate received fees for these services of approximately $7,879 from November 2002 through June 2004.

AMIS Holdings, Inc.’s Audit Committee and E&Y have discussed E&Y’s independence with respect to the Company in light of the foregoing facts. E&Y has informed the Audit Committee that it is unaware of any similar instance in which E&Y has held custody of Company funds. Both the Audit Committee and E&Y have considered the impact that the holding and paying of these funds may have had on E&Y’s independence with respect to the Company and each have independently concluded that there has been no impairment of E&Y’s independence. In making this determination, the Audit Committee considered the de minimus amount of funds involved, the ministerial nature of the actions, and that the revenue, operating profit and total assets of the subsidiary involved were not material to the consolidated financial statements of the Company.

Item 6: Exhibits

(a) Exhibits

2.1 Asset Purchase Agreement dated September 9, 2004 among AMI Semiconductor, Inc., Emma Mixed Signal C.V., AMI Semiconductor Canada Company, AMIS Holdings, Inc., Dspfactory Ltd. and the other parties named therein.

2.2 Share Purchase Agreement dated September 9, 2004 among AMI Semiconductor Netherlands B.V., AMIS Holdings, Inc., Dspfactory Ltd. and the other parties named therein.

10.1 Amendment No. 1, Consent and Waiver Agreement dated August 26, 2004, to the Amended and Restated Credit Agreement dated as of September 26, 2003, among AMI Semiconductor, Inc., AMIS Holdings, Inc., the lenders party thereto and Credit Suisse First Boston, as Administrative Agent and Collateral Agent.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	AMIS HOLDINGS, INC.
	By:	/s/ DAVID HENRY
Dated: November 5, 2004		David Henry
		Senior Vice President and Chief Financial Officer


	Page
Forward Looking Statements	iii
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements		1
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3: Quantitative and Qualitative Disclosures About Market Risk		39
Item 4: Controls and Procedures		40
PART II: OTHER INFORMATION
Item 1: Legal Proceedings		40
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3: Defaults Upon Senior Securities		41
Item 4: Submission of Matters to a Vote of Security Holders		41
Item 5: Other Information		41
Item 6: Exhibits		42
EXHIBIT 2.1
EXHIBIT 2.2
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

(a)		Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b)		Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2.1		Asset Purchase Agreement dated September 9, 2004 among AMI Semiconductor, Inc., Emma Mixed Signal C.V., AMI Semiconductor Canada Company, AMIS Holdings, Inc., Dspfactory Ltd. and the other parties named therein.

2.2		Share Purchase Agreement dated September 9, 2004 among AMI Semiconductor Netherlands B.V., AMIS Holdings, Inc., Dspfactory Ltd. and the other parties named therein.

10.1		Amendment No. 1, Consent and Waiver Agreement dated August 26, 2004, to the Amended and Restated Credit Agreement dated as of September 26, 2003, among AMI Semiconductor, Inc., AMIS Holdings, Inc., the lenders party thereto and Credit Suisse First Boston, as Administrative Agent and Collateral Agent.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002