Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended January 2, 2005

or

For the transition period from              to             

Commission File No. 0-8866

MICROSEMI CORPORATION

(Exact name of registrant as specified in its charter)

2381 Morse Avenue, Irvine, California 92614

(Address of principal executive offices) (Zip Code)

(949) 221-7100

(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the issuer’s Common Stock, $0.20 par value, outstanding on January 31, 2005 was 61,087,798.

Table of Contents

Table of Contents

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

The unaudited consolidated income statements for the three months ended January 2, 2005 of Microsemi Corporation and Subsidiaries (which we herein sometimes refer to collectively as “Microsemi”, “the Company”, “we”, “our”, “ours” or “us”), the unaudited consolidated statements of cash flows for the three months ended January 2, 2005, and the comparative unaudited consolidated financial information for the corresponding period of the prior year, together with the unaudited balance sheets as of January 2, 2005 and as of September 26, 2004, are included herein.

3

Table of Contents

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

(amounts in thousands, except per share data)

The accompanying notes are an integral part of these statements

4

Table of Contents

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Income Statements

(amounts in thousands, except earnings per share)

The accompanying notes are an integral part of these statements.

5

Table of Contents

MICROSEMI CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(amounts in thousands)

The accompanying notes are an integral part of these statements.

6

Table of Contents

MICROSEMI CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

January 2, 2005

1. PRESENTATION OF FINANCIAL INFORMATION

The unaudited consolidated financial statements include the accounts of Microsemi Corporation and its subsidiaries (which we herein sometimes refer to collectively as “Microsemi”, “the Company”, “we”, “our”, “ours” or “us”). Intercompany transactions have been eliminated in consolidation.

The financial information furnished herein is unaudited, but in the opinion of our management, includes all adjustments (all of which are normal, recurring adjustments) necessary for a fair presentation of the results of operations for the periods indicated. The results of operations for the first quarter ended January 2, 2005 of the current fiscal year are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and note disclosures necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended September 26, 2004.

Critical Accounting Policies and Estimates

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that materially affect the reported amounts of assets and liabilities at the date of the unaudited consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates.

2. INVENTORIES

Inventories used in the computation of cost of goods sold were (amounts in thousands):

3. CONTINGENCY

In Broomfield, Colorado, the owner of a property located adjacent to a manufacturing facility owned by Microsemi Corp. - Colorado (“the Subsidiary”) had notified the subsidiary and other parties, of a claim that contaminants migrated to his property, thereby diminishing its value. In August 1995, the subsidiary, together with Coors Porcelain Company, FMC Corporation and Siemens Microelectronics, Inc. (former owners of the manufacturing facility), agreed to settle the claim and to indemnify the owner of the adjacent property for remediation costs. Although TCE and other contaminants previously used by former owners at the facility are present in soil and groundwater on the subsidiary’s property, we vigorously contest any assertion that the subsidiary caused the contamination. In November 1998, we signed an agreement with the three former owners of this facility whereby they have 1) reimbursed us for $530,000 of past costs, 2) assumed responsibility for 90% of all future clean-up costs, and 3) promised to indemnify and protect us against any and all third-party claims relating to the contamination of the facility. An Integrated Corrective Action Plan was submitted to the State of Colorado. Sampling and management plans were prepared for the Colorado Department of Public Health & Environment. State

7

Table of Contents

and local agencies in Colorado are reviewing current data and considering study and cleanup options. The most recent forecast estimated that the total project cost, up to the year 2020, would be approximately $5,300,000; accordingly, by assuming that this amount is accurate and that the indemnifying parties will pay 90% of this amount as agreed without need for us to incur material costs to enforce that agreement, we reserved for this contingency by recording a one-time charge of $530,000 for the life of this project in fiscal year 2003. There has not been any significant development since September 28, 2003.

On October 7, 2004, we filed a complaint in the United States District Court for the Central District of California entitled Microsemi Corporation v. Monolithic Power Systems, Inc., Case Number SACV04-1174 CJC (Anx). The Complaint alleges infringement of Microsemi patents and seeks an injunction, actual damages, treble damages, declaratory relief and attorneys’ fees. The defendant filed a cross-claim for declaratory relief and attorneys’ fees. We are in the early stage of this litigation and unable to assess the possible outcome of this litigation.

We are involved also in other normal litigation matters, arising out of the ordinary routine conduct of our business, including from time to time litigation relating to commercial transactions, contracts, and environmental matters. In the opinion of management, the final outcome of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

4. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. Our comprehensive income consists of net income and the change of the cumulative foreign currency translation adjustment. Accumulated other comprehensive loss consists of the cumulative foreign currency translation adjustment. Total comprehensive income for the quarters ended December 28, 2003 and January 2, 2005 were calculated as follows (amounts in 000’s):

5. EARNINGS PER SHARE

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share have been computed, when the result is dilutive, using the treasury stock method for stock options outstanding during the respective periods.

Earnings per share (“EPS”) for the respective quarters ended December 28, 2003 and January 2, 2005 were calculated as follows (amounts in thousands, except per share data):

Approximately 403,800 and -0- options were not included in the computation of diluted EPS in the first quarters of fiscal years 2004 and 2005, respectively, as they would have been antidilutive.

8

Table of Contents

6. RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 123 (revised 2004)

There is more than one way under generally accepted accounting principles to account for the economic consequences of granting options or other equity compensation, and many accounting experts believe that charging, earnings pursuant to the Financial Accounting Standards Board, or FASB, Statement 123 (“FAS 123”), as amended by FASB Statement 148 (“FAS 148”), would account better for the economic consequences of granting an option or other equity compensation than APB Opinion No. 25 (“APB 25”) would. We use APB 25 to account for equity compensation, which does not require a charge to earnings for the economic consequences of granting options or other equity compensation. We will be required to account for equity compensation under FASB Statement 123R “Share-Based Payment” (“FAS 123R”), commencing prospectively with our fourth quarter of fiscal year 2005.

We have reported an estimate of stock option expense in the Notes to our financial statements, but have not deducted this amount from our earnings as reported in the financial statements. We will be required to do so for the first time by generally accepted accounting principles because FASB issued FAS 123R, which will require all companies to record compensation costs for all share-based payments, at fair value, which include employee stock options. This statement will be effective prospectively, commencing with our fourth quarter of fiscal year 2005. We have not determined the transition method to be used in adopting FAS 123R. The affect of the adoption of FAS 123R may be material but currently not estimable.

Statement of Financial Accounting Standards No. 151

In November 2004, the Financial Accounting Standards Board issued FAS No. 151, “Inventory costs, an amendment of ARB No. 43 Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be applied prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005 (our fiscal year 2006). We do not expect the adoption of this statement would have a material impact on our results of operations or financial position.

Statement of Financial Accounting Standards No. 153

In December 2004, the Financial Accounting Standards Board issued FAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29,

9

Table of Contents

Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this statement would have a material impact on our results of operations or financial position.

7. STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) provides an alternative to APB 25 in accounting for stock-based compensation issued to employees. SFAS 123 provides for a fair value based method of accounting for employee stock options and similar equity instruments. However, companies that continue to account for stock-based compensation arrangements under APB 25 are required by SFAS 123 to disclose, in the notes to financial statements, the pro forma effect on net income (loss) and net income (loss) per share as if the fair value based method prescribed by SFAS 123 had been applied. We continue to account for stock-based compensation using the provisions of APB 25 and present the pro forma information required by SFAS 123 as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148).

The following table illustrates the effects on net income (loss) and earnings per share as if the fair value based method had been applied to all outstanding awards in each period (amounts in thousands, except earnings per share):

The fair value of each stock option grant was estimated pursuant to SFAS 123 on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

10

Table of Contents

8. SEGMENT INFORMATION

We operate in a single industry segment as a manufacturer of semiconductors in different geographic areas, including the United States, Europe and Asia. Intergeographic sales primarily represent intercompany sales which are accounted for based on established sales prices between the related companies and are eliminated in consolidation.

Financial information by geographic areas is as follows (amounts in thousands):

11

Table of Contents

9. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

In 2001, we commenced our Capacity Optimization Enhancement Program (the “Plan”) to increase company-wide capacity utilization and operating efficiencies through consolidations and realignments of operations.

We started phase 1 of the Plan (“Phase 1”) in fiscal year 2001, which included (a) the closure of most of our operations in Watertown, Massachusetts and relocation of those operations to other Microsemi plants in Lawrence and Lowell, Massachusetts and Scottsdale, Arizona and (b) the closure of the CDI, Melrose, Massachusetts facility and relocation of those operations to Lawrence, Massachusetts.

At January 2, 2005, the remaining restructuring balance of $0.05 million of Phase 1 relates to the renovation of the leased Watertown facilities, which will be vacated by March 31, 2005. The following table reflects the activities of Phase 1 and the Accrued Liabilities in the consolidated balance sheets at the dates below (amounts in 000s):

Fiscal year 2004 restructuring

In October 2003, we announced the consolidation of the hi-rel products operations of Microsemi Corp. - Santa Ana of Santa Ana, California (“Santa Ana”) into Microsemi Corp. – Integrated Products of Garden Grove, California (“IPG”) and Microsemi Corp. - Scottsdale of Scottsdale, Arizona (“Scottsdale”). Santa Ana had approximately 380 employees and occupied 123,000 square feet in two facilities, including 93,000 square feet in owned facilities and 30,000 square feet in facilities that are leased by us from a third party under a 30-year capital lease. Santa Ana shipped approximately 20% and 13% of our shipments in fiscal years 2003 and 2004, respectively. In the fourth quarter of fiscal 2004, Santa Ana ceased shipments of its products and Scottsdale shipped all products that used to be produced in Santa Ana.

Restructuring-related costs have been and will be recorded in accordance with SFAS 112, “Employers’ Accounting for Postemployment Benefits (“FAS 112”) or SFAS 146, “Accounting for the Costs Associated with Exit or Disposal Activities” (“FAS 146”), as appropriate. The estimated severance payments total approximately $5.3 million, of which, $4.7 million and $0.4 million were recorded in fiscal year 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.2 million over the future service periods as required by FAS 146. The severance payments cover approximately 350 employees, including 55 management positions. Approximately 30 employees have been or will be transferred to other Microsemi operations. In Q1 2005, we recorded $0.1 million for other restructuring related expenses. We do not anticipate any material charge for cancellations of operating leases. Any change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. Production in Santa Ana has been reduced substantially and will cease in the second quarter of fiscal year 2005.

12

Table of Contents

Further, we own a substantial portion of the plant and the real estate occupied in Santa Ana, California, and we expect to offer the owned property for sale at the prevailing market price.

The following table reflects the activities related to the consolidation of Santa Ana and the accrued liabilities in the consolidated balance sheets at January 2, 2005 (amounts in 000s):

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our operations in Watertown, Massachusetts. We moved production to our facilities in Scottsdale and Lowell, Massachusetts (“Lowell”). Restructuring-related costs have been and will be recorded in accordance with FAS 112 or FAS 146, as appropriate. The estimated severance payments total approximately $0.8 million, of which, $0.5 million and $0.2 million were recorded in fiscal year 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.1 million over the future service periods (in fiscal year 2005) as required by FAS 146. The severance payments cover approximately 30 employees, including 4 management positions. We also recorded $1.5 million for impairment of fixed assets in fiscal year 2004. We did not incur any material other charge. The consolidation of the Watertown operations was completed in December 2004.

The following table reflects the activities of the final phase of the consolidation of Watertown and the liabilities included in accrued liabilities in the consolidated balance sheets at January 2, 2005 (amounts in 000s):

In the quarter ended January 2, 2005, we recorded $0.3 million of severance for 22 employees of Microsemi Corp. – Colorado, of Broomfield, Colorado in accordance with FAS 112.

The following table reflects the activities related to the reduction in force of Colorado and the accrued liabilities in the consolidated balance sheet at January 2, 2005 (amounts in 000s):

13

Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This Quarterly Report on Form 10-Q includes current beliefs, expectations and other forward looking statements, the realization of which may be adversely impacted by any of the factors discussed or referenced under the heading “Important Factors Related to Forward-Looking Statements and Associated Risks,” found in this section. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying unaudited consolidated financial statements and notes should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended September 26, 2004.

Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high reliability semiconductors. Our semiconductors manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.

Our products include individual components as well as integrated circuit solutions that enhance customer designs by improving performance, reliability and battery optimization, reducing size or protecting circuits. The principal markets we serve include implanted medical, defense/aerospace and satellite, notebook computer, monitors, and LCD TV’s, automotive and mobile connectivity applications.

We currently serve a broad group of customers. None of our customers accounts for more than 5% of our total net sales in the first quarter of fiscal year 2005 (“Q1 2005”). The following are our major customers: Seagate Technology (5%), The Boeing Co. (3%), Lockeed Martin Corporation (3%), Raytheon Co. (2%), Medtronic Incorporated (2%), Honeywell (2%), St. Jude Medical (2%), and Siemens AG (2%). The percentage amounts in parentheses are the approximate sales to these customers as percentages of our net sales in Q1 2005.

Capacity Optimization Enhancement Program

Phase I

In 2001, we commenced our Capacity Optimization Enhancement Program (the “Plan”) to increase company-wide capacity utilization and operating efficiencies through consolidations and realignments of operations.

We started phase 1 of the Plan (“Phase 1”) in fiscal year 2001, which included (a) the closure of most of our operations in Watertown, Massachusetts and relocation of those operations to other Microsemi plants in Lawrence and Lowell, Massachusetts and Scottsdale, Arizona and (b) the closure of the CDI, Melrose, Massachusetts facility and relocation of those operations to Lawrence, Massachusetts.

14

Table of Contents

At January 2, 2005, the remaining restructuring balance of $0.05 million of Phase 1 relates to the renovation of the leased Watertown facilities, which will be vacated by March 31, 2005. The following table reflects the activities of Phase 1 and the accrued liabilities in the consolidated balance sheets at the dates below (amounts in 000s):

Phase II —Fiscal year 2004 restructuring

In October 2003, we announced the consolidation of the hi-rel products operations of Microsemi Corp.—Santa Ana of Santa Ana, California (“Santa Ana”) into Microsemi Corp. – Integrated Products of Garden Grove, California (“IPG”) and Microsemi Corp. - Scottsdale of Scottsdale, Arizona (“Scottsdale”). Santa Ana had approximately 380 employees and occupied 123,000 square feet in two facilities, including 93,000 square feet in owned facilities and 30,000 square feet in facilities that are leased by us from a third party under a 30-year capital lease. Santa Ana shipped approximately 20% and 13% of our shipments in fiscal years 2003 and 2004, respectively. In the fourth quarter of fiscal 2004, Santa Ana ceased shipments of its products and Scottsdale shipped all products that used to be produced in Santa Ana.

Restructuring-related costs have been and will be recorded in accordance with FAS 112, “Employers’ Accounting for Postemployment Benefits (“FAS 112”) or SFAS 146, “Accounting for the Costs Associated with Exit or Disposal Activities” (“FAS 146”), as appropriate. The estimated severance payments total approximately $5.3 million, of which, $4.7 million and $0.4 million were recorded in fiscal year 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.2 million over the future service periods as required by FAS 146. The severance payments cover approximately 350 employees, including 55 management positions. Approximately 30 employees have been or will be transferred to other Microsemi operations. In Q1 2005, we recorded $0.1 million for other restructuring related expenses. We do not anticipate any material charge for cancellations of operating leases. Any change of estimate will be recognized as an adjustment to the accrued liabilities in the period of change. Production in Santa Ana has been reduced substantially and will cease in the second quarter of fiscal year 2005.

15

Table of Contents

The following table reflects the activities related to the consolidation in Santa Ana and the accrued liabilities in the consolidated balance sheets at January 2, 2005 (amounts in 000s):

The consolidation of Santa Ana has been expected to result, subsequent to its completion, in annual cost savings of $8 million to $12 million from the elimination of redundant facilities and related expenses and employee reductions.

Further, we own a substantial portion of the plant and the real estate it occupies in Santa Ana, California, and we expect to offer the owned property for sale at the prevailing market price which is expected to exceed book value.

Thus far, we believe we have incurred a total cost of $14.0 million to $18.0 million, upon completion of the consolidation of Santa Ana, excluding any gain from a sale of the plant and property.

In the second quarter of fiscal year 2004, we started to consolidate the remainder of our operations in Watertown, Massachusetts. We moved production to our facilities in Scottsdale and Lowell, Massachusetts (“Lowell”). Restructuring-related costs have been and will be recorded in accordance with FAS 112 or FAS 146, as appropriate. The estimated severance payments total approximately $0.8 million, of which, $0.5 million and $0.2 million were recorded in fiscal year 2004 as required by FAS 112 and FAS 146, respectively. We will record an additional $0.1 million over the future service periods (in fiscal year 2005) as required by FAS 146. The severance payments cover approximately 30 employees, including 4 management positions. We also recorded $1.5 million for impairment of fixed assets in fiscal year 2004. We did not incur any material other charge. The consolidation of the Watertown operations was completed in December 2004.

The following table reflects the activities of the final phase of the consolidation in Watertown and the liabilities included in accrued liabilities in the consolidated balance sheets at January 2, 2005 (amounts in 000s):

In the quarter ended January 2, 2005, we recorded $0.3 million of severance for 22 employees of Microsemi Corp. – Colorado, of Broomfield, Colorado in accordance with FAS 112.

16

Table of Contents

The following table reflects the activities related to the reduction in force of Colorado and the accrued liabilities in the consolidated balance sheet at January 2, 2005 (amounts in 000s):

Phase III

We expect to announce our Phase III plans for further consolidation of facilities within 90 days under our Capacity Optimization Enhancement Program. We do not expect the savings from each of our further consolidations to result in as much cost savings as we expected from our previous consolidations. Our expectation is that consolidating the next facilities could have a material positive effect on our gross margins; however, the effect of each future consolidation is expected to be less than each of the previous consolidations.

RESULTS OF OPERATIONS FOR THE THIRTEEN-WEEK QUARTER ENDED DECEMBER 28, 2003 COMPARED TO THE FOURTEEN-WEEK QUARTER ENDED JANUARY 2, 2005.

Net sales increased $14.9 million or 27% from $54.9 million for the first quarter of fiscal year 2004 (“Q1 2004”) to $69.8 million for the first quarter of fiscal year 2005 (“Q1 2005”). The increase included approximately $7.7 million, $1.2 million, $5.5 million, $1.2 million, and $0.5 million of higher sales for defense and aerospace, notebook computers, monitors and LCD TV’s, mobile connectivity, automotive backlighting products, and other products, respectively, offset by a decrease of approximately $1.2 million in shipments of medical products.

At January 27, 2005, we announced that we expected our sales for the second quarter to increase by two to four percent.

Sales to OEM customers represented approximately 62% and 60% of our revenues for Q1 2004 and Q1 2005, respectively. The breakout of net sales to OEM customers (which excludes sales to distributors) in Q1 2004 and Q1 2005 were as follows:

Gross profit increased $5.8 million, from $18.2 million (33.1% of sales) for Q1 2004 to $24.0 million (34.4% of sales) for Q1 2005. The improvement in gross profit in the first quarter was favorably affected by: 1) improved factory utilization from our phase I and phase II consolidations; 2) increased shipments and 3) higher average selling prices. The positive impact of the preceding items on gross margin in Q1 2005 were partially offset by $4.7 million of certain costs of sales items which included $0.2 million of write-off of inventories associated with our restructuring and consolidation program, $3.5 million for estimated transitional idle capacity and other restructuring related costs comprise of $0.6 million at IPG, $2.1 million at Santa Ana, $0.3 million at Watertown, and $0.5 million at Lawrence, $0.6 million for estimated time spent by existing employees for the consolidation of the Santa Ana facilities and $0.4 million of other expenses related to the consolidation of the Santa Ana facilities.

Selling, general and administrative expenses increased $1.1 million, from $9.7 million for Q1 2004 to $10.8 million for Q1 2005, primarily due to higher commission and other selling expenses associated with higher sales, and certain costs associated with implementation of the provisions of the Sarbanes-Oxley Act, which are expected to increase in future quarters.

17

Table of Contents

In Q1 2005, restructuring charges of $0.4 million included expenses related to the consolidation in Santa Ana, some restructuring activity in Colorado and the consolidation in Watertown, as follows (amounts in thousands):

We had lower average balances of debt and more cash in short-term investments in the first quarter of fiscal year 2005, compared to prior year first quarter; consequently, we had $0.04 million higher net interest income in Q1 2005 compared to Q1 2004.

The effective income tax rates were 33.0% for both Q1 2004 and Q1 2005.

CAPITAL RESOURCES AND LIQUIDITY

In the first quarter of fiscal year 2005, we financed our operations with cash from operations.

Net cash provided by operating activities was $6.3 million, and $0.6 million for the first quarters of fiscal years 2004 (“Q1 2004”) and 2005 (“Q1 2005”), respectively. The $5.7 million decrease was primarily a result of the $2.9 million increase in income that was offset by the combined effect of non-cash items included in income or expense, such as depreciation and amortization, accounts receivable, accounts payable, accrued liabilities and income tax payable. In the first quarter of 2005, we paid approximately $4.9 million of bonus that was accrued at September 26, 2004. Timing of payments of invoices was also a factor because fiscal year 2004 ended on September 26, 2004 and the current quarter ended after a calendar month end on January 2, 2005.

Accounts receivable increased from $42.2 million at September 26, 2004 to $44.8 million at January 2, 2005. The increase of accounts receivable was primarily due to higher sales in the current quarter compared with sales in the prior quarter. The Days Sales Outstanding (“DSO”) was 56 days and 58 days at September 26, 2004 and at January 2, 2005, respectively. The 2-day increase in DSO in the current quarter was due to a timing shift of shipments closer to the end of the quarter compared to the prior quarter.

Inventories were $54.6 million at September 26, 2004 and $54.9 million at January 2, 2005. The increase in inventory resulted from products built in advance to cover shipments during changes of manufacturing locations associated with our consolidation program.

At January 2, 2005 we had $38.8 million of current liabilities, a decrease of $5.1 million from $43.9 million at September 26, 2004. The decrease was primarily due to payments of accrued employee severance related to the consolidations of the Santa Ana and Watertown facilities and other accrued employees benefit payments, partially offset by an increase in income taxes payable.

Net cash used in investing activities was $1.9 million and $2.2 million in Q1 2004 and Q1 2005, respectively. We spent $1.9 million and $2.2 million for capital equipment in Q1 2004 and Q1 2005, respectively.

Net cash provided by financing activities was $1.9 million and $6.1 million in Q1 2004 and Q1 2005, respectively. We received $1.9 million and $6.6 million from exercises of employee stock options in Q1 2004 and Q1 2005, respectively.

We had $45.1 million and $49.7 million in cash and cash equivalents at September 26, 2004 and January 2, 2005, respectively.

18

Table of Contents

Current ratios were 3.5 to 1 and 4.1 to 1 at September 26, 2004 and January 2, 2005, respectively.

We have a $30.0 million credit line with a bank, which expires in March 2006 and includes a facility to issue letters of credit. As of January 2, 2005, $0.4 million was outstanding in the form of a letter of credit; consequently $29.6 million was available under this credit facility.

As of January 2, 2005, we were in compliance with the covenants required by our credit facility.

Upon completion, the estimated cost to consolidate the Santa Ana plant will be between $14.0 million to $18.0 million, including $1.5 million to $3.5 million in future costs to complete this project. We anticipate that our cash and cash equivalents will be our primary source for paying such costs.

As of January 2, 2005, we had no additional material commitments for capital expenditures.

Any proceeds from sales of assets should enhance our cash position; however, we believe we can meet our cash requirements without the receipt of such proceeds.

We are involved in certain patent litigation (see Legal Proceedings). Legal costs could increase above normal levels and continue at elevated levels over the next several years. We have not estimated the total amounts of these costs, but it is possible that these costs could have a material effect on our future results.

We have been incurring costs associated with the implementation of Section 404 of the Sarbanes-Oxley Act. We have spent approximately $200,000 on this project. We believe the costs for the first year of implementation (fiscal year 2005) could be, on an annual basis, approximately 1% of annual revenue and such costs could decrease to approximately ½% of annual revenue in subsequent years. These costs could have a material impact on our results.

The following table summarizes our contractual payment obligations and commitments as of January 2, 2005:

Based upon information currently available to us, we believe that we can meet our cash requirements and capital commitments in the foreseeable future with cash balances, internally generated funds from ongoing operations and, if necessary, from the available line of credit.

19

Table of Contents

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 123 (revised 2004)

There is more than one way under generally accepted accounting principles to account for the economic consequences of granting options or other equity compensation, and many accounting experts believe that charging, earnings pursuant to the Financial Accounting Standards Board, or FASB, Statement 123 (“FAS 123”), as amended by FASB Statement 148 (“FAS 148”), would account better for the economic consequences of granting an option or other equity compensation than APB 25 (“APB 25”) would. We use APB Opinion No. 25 to account for equity compensation, which does not require a charge to earnings for the economic consequences of granting options or other equity compensation. We will be required to account for equity compensation under FASB Statement 123R “Share-Based Payment” (“FAS 123R”), commencing prospectively with our fourth quarter of fiscal year 2005.

We have reported an estimate of stock option expense in the Notes to our financial statements, but have not deducted this amount from our earnings as reported in the financial statements. We will be required to do so for the first time by generally accepted accounting principles because FASB issued FAS 123R, which will require all companies to record compensation costs for all share-based payments, at fair value, which include employee stock options. This statement will be effective prospectively, commencing with our fourth quarter of fiscal year 2005. We have not determined the transition method to be used in adopting FAS 123R. The affect of the adoption of FAS 123R may be material but currently not estimable.

Our estimated expense for stock options in accordance with FAS 123 might provide at least some indication of the impact of adoption of FAS 123R, but the actual effects may be different by a substantial but unknown amount due to changes in the amounts of stock options granted in future periods and changes in the other factors that are included in the calculation of stock option expense. We will study and may react differently to the revised rule than we did the prior rule. Also, there are differences in assumptions that affect the outcome, and we may reexamine our assumptions at any time before our required prospective adoption of the rule with our financial statements for our fourth fiscal quarter of FY 2005.

Statement of Financial Accounting Standards No. 151

In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory costs, an amendment of ARB No. 43 Chapter 4”. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). It requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be applied prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of this statement would have a material impact on our results of operations or financial position.

Statement of Financial Accounting Standards No. 153

In December 2004, the Financial Accounting Standards Board issued No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for non monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this statement would have a material impact on our results of operations or financial position.

20

Table of Contents

ACCOUNTING FOR INCOME TAXES

On October 4, 2004, President Bush signed into Law the Working Families Tax Relief Act of 2004 (the “2004 Act”). The 2004 Act retroactively extended the expiration date of the research tax credit from June 30, 2004 to December 31, 2005. Since the credit was reinstated after September 26, 2004, the Company recognized credit only through June 30, 2004. The credit retroactively reinstated from July 1, 2004 through September 26, 2004 has been recognized in the first quarter of the fiscal year ending September 2005.

On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA provides several incentives for U.S. multinational corporations and U.S. manufacturers, subject to certain limitations. The incentives include an 85% dividends received deduction for certain dividends from controlled foreign corporations that repatriate accumulated income abroad, and a deduction for domestic qualified production activities taxable income, which will be phased in from 2005 through 2010. Both deductions are subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, we are not yet in a position to decide on whether, and to what extent, we might benefit from these provisions. We expect to be in a position to finalize our assessment by the end of the current fiscal year.

WE ARE INCURRING ADDITIONAL EXPENSES TO DOCUMENT OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS CONTEMPLATED IN SARBANES-OXLEY SECTION 404.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we undertake, in fiscal year 2005, a thorough examination of our internal control over financial reporting. We also are required to document and test our system. Ultimately, our management will be responsible to report to our stockholders in the fiscal year 2005 annual report about the condition of our internal control over financial reporting as measured against the standards promulgated under the Sarbanes-Oxley Act and interpretations thereof by relevant organizations, such as PCAOB, IT Governance Institute or others, and our auditors will be requested to attest to that report. The independent registered public accounting firm that audits our financial statements will audit our internal control over financial reporting for weaknesses and comment on any identified material weaknesses, using the standards promulgated under the Sarbanes-Oxley Act. We can not be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is no precedent available by which to measure compliance adequacy.

We are uncertain about the total costs we will incur, although we roughly estimate that the costs in fiscal year 2005 could be approximately one to two percent of the current revenues. There is great demand for consultants in the relevant area, and their fees reflect the short supply, which was caused by thousands of companies concurrently dealing with the requirement. (Section 404 applies to other public companies as well, although implementation dates vary from company to company.) The consultants will charge based on hours worked, and the actual work may materially exceed the estimates we have received from the consultants. Unforeseen challenges could be encountered that require additional work, as well as additional time. In order to meet our deadlines, we may incur material expenses and costs for overtime and additional consulting fees and charges.

Our filing of our fiscal year 2005 annual report on a timely basis will depend upon our timely completion of these tasks and our independent registered public accounting firm’s timely completion of the audit of our internal control over financial reporting. A late annual report could have material adverse effects on us, both legally and with respect to the opinions of the participants in the securities market.

Any discovery of any material irremediable weakness in our internal control over financial reporting could have material adverse effects on us as we would need to conclude that our internal control over financial reporting is ineffective.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates.

21

Table of Contents

Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended September 26, 2004.

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Some of the statements in this report or incorporated by reference are forward-looking, including, without limitation, the statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements include all those statements that contain words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “maintain,” “continue” and variations of these words or comparable words. In addition, all of the information herein that does not state an historical fact is forward-looking, including any statement or implication about an estimate or a judgment, an expectation as to a future time, future result or other future circumstance. For various reasons, actual results may differ substantially from the results that the forward-looking statements suggest. Therefore, forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

The forward-looking statements included in this report are based on, among other items, current assumptions that we will be able to meet our current operating cash and debt service requirements, that we will be able to successfully complete announced and to-be-announced plant consolidations on the anticipated schedules and without unanticipated costs or expenses, that we will continue to retain the full-time services of all of our present executive officers and key employees, that we will be able to successfully resolve any disputes and other business matters as anticipated, that competitive conditions within the analog, mixed signal and discrete semiconductor, integrated circuit or custom component assembly industries will not affect us adversely, that our customers will not cancel orders or terminate or renegotiate their purchasing relationships with us, that we will retain existing key personnel, that our forecasts will reasonably anticipate market demand for our products, and that there will be no other material adverse changes in our operations or business. Other factors that could cause results to vary materially from current expectations are referred to elsewhere in this report. Assumptions relating to the foregoing involve judgments that are difficult to make and future circumstances that are difficult to predict accurately or correctly. Forecasting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on historic experience and business developments, the impact of which may cause us to alter our internal forecasts, which may in turn affect our subsequent expectations and our future results. We do not undertake to announce publicly the changes that may occur in our expectations. Readers are cautioned against giving undue weight to any of the forward-looking statements.

Adverse changes to our results could result from any number of factors, including but not limited to fluctuations in economic conditions, potential effects of inflation, lack of earnings visibility, dependence upon certain customers or markets, dependence upon suppliers, future capital needs, rapid technological changes, difficulties in integrating acquired businesses, ability to realize cost savings or productivity gains, potential cost increases, dependence on key personnel, difficulties regarding hiring and retaining qualified personnel in a competitive labor market, risks of doing business in international markets, and problems of third parties upon whom we rely in our business or operations.

The inclusion of forward-looking information should not be regarded as a representation by us or any other person that all of our estimates shall necessarily prove correct or that all of our objectives or plans shall necessarily be achieved.

We are setting out some of the relevant risk factors below in full for the convenience of the readers. The readers may also refer to the risk factors in our previous and future filings, for further information of interest, as well as detailed factual descriptions of or related to risks and uncertainties in the Notes to our financial statements accompanying this report.

22

Table of Contents

Downturns in the highly cyclical semiconductor industry have adversely affected the operating results and the value of our business.

The semiconductor industry is highly cyclical, and the value of our business has declined during the “down” portion of these cycles. During recent years, we as well as many others in our industry, experienced significant declines in the pricing of, as well as demand for, products. The market for semiconductors has experienced severe and prolonged downturns. In the future, these downturns may prove to be as, or possibly more, severe. The markets for our products depend on continued demand in the mobile connectivity, automotive, telecommunications, computers/peripherals, defense and aerospace, space/satellite, industrial/commercial and medical markets, and these end-markets have experienced changes in demand that have adversely affected our operating results and financial condition.

Concentration of the factories in the semiconductor industry.

Relevant portions of the semiconductor industry, and those that serve or supply this industry, tend somewhat to be concentrated in certain areas of the world, and therefore, the semiconductor industry has from time to time been, and may from time to time be adversely affected by natural disasters in various locales, epidemics and health advisories such as those related to Sudden Acute Respiratory Syndrome.

The semiconductor business is highly competitive and increased competition could reduce our value.

The semiconductor industry, including the areas in which we do business, is highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability and customer service. Pricing pressures may emerge. For instance, competitors may attempt to gain a greater market share by lowering prices. The market for commercial products is characterized by declining selling prices. We anticipate that our average selling prices will decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. The pricing pressure in the semiconductor industry in recent years has been due primarily to the Asian currency crisis, industry-wide excess manufacturing capacity, weak economic growth, the slowdown in capital spending that followed the “dot-com” collapse, the reduction in capital spending by telecom companies and satellite companies, and certain effects of the tragic events of terrorism on September 11, 2001. We compete in various markets with companies of various sizes, many of which are larger and have greater resources than we have, and thus may be better able to penetrate new markets or pursue acquisition candidates and to withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may introduce competing products in the future. We have numerous competitors. Some of our current major competitors are Motorola, Inc., National Semiconductor Corporation, Texas Instruments, Inc., Philips Electronics, ON Semiconductor, L.L.C., Fairchild Semiconductor Corporation, Micrel Incorporated, International Rectifier Corporation, Semtech Corporation, Linear Technology Corp., Maxim Integrated Products, Inc., Skyworks Solutions, Inc., Diodes, Inc., Vishay Intertechnology, Inc. and its subsidiary Siliconix Incorporated. Some of our competitors in developing markets are Triquint Semiconductor, Inc., Mitel Corporation, RF Micro Devices, Inc., Conexant Systems, Inc., Anadigics, Inc. and Skyworks Solutions, Inc. We may not be able to compete successfully in the future or competitive pressures may harm our financial condition, operating results or cash flows.

New technologies could result in the development of competing products and a decrease in demand for our products.