As filed with the Securities and Exchange Commission on August 8, 2007

Registration No. 333-      

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

Registration Statement Under

The Securities Act of 1933

 

 

ALLEGRO MICROSYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

115 Northeast Cutoff

Worcester, MA 01606

508-853-5000

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Dennis H. Fitzgerald

President and Chief Executive Officer

Allegro MicroSystems, Inc.

115 Northeast Cutoff

Worcester, MA 01606

508-853-5000

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

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

 

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

 

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

 

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

 

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

 

CALCULATION OF REGISTRATION FEE CHART

 

 

 

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

 

 

Subject to Completion, dated August 8, 2007

PROSPECTUS

 

           Shares

 

 

Common Stock

 

This is the initial public offering of the common stock of Allegro MicroSystems, Inc. We are offering           shares of our common stock and the selling stockholder named in the prospectus is offering           shares of our common stock. We will not receive any proceeds from sale of shares sold by the selling stockholder. No public market currently exists for our common stock.

 

We have applied to have our common stock listed on the Nasdaq Global Select Market under the symbol “ALGM.” We anticipate that the initial public offering price will be between $      and $      per share.

 

Investing in our common stock involves risks. See “Risk Factors”
beginning on page 7.

 

 

We and the selling stockholder have granted the underwriters a 30-day option to purchase up to an additional           shares on the same terms and conditions as set forth above if the underwriters sell more than           shares of common stock in this offering.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about          , 2007.

 

 

 

 

 

          , 2007

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission, or the SEC. We have not authorized anyone to provide you with information different from that contained in this prospectus.

 

We and the selling stockholder are offering to sell, and are seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

Through and including          , 2007 (25 days after the commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

PROSPECTUS SUMMARY

	•	Gartner, Inc., “Forecast: Application-Specific Analog ICs, Worldwide, 2005-2010,” S. Ohr, December 2006.
	•	Gartner, Inc., “Semiconductor Forecast Database,” 2Q07 Update, May 2007.
	•	Gartner, Inc., “Semiconductor Forecast Worldwide: Forecast Database,” A. Blanco et. al., 2Q07.
	•	Gartner, Inc., “Semiconductor Applications Worldwide Annual Market Share: Database,” G. Van Hoy, April 2007.
	•	Gartner, Inc., “Dataquest Alert: Semiconductor Market Forecast,” R. Gordon, 2Q07.
	•	Gartner, Inc., “Methodology and Definitions for Semiconductor Devices and Applications, 2005,” G. Van Hoy, November 22, 2006.
	•	World Semiconductor Trade Statistics (WSTS), May 2007 Forecast.

Common stock offered by us		shares
Common stock offered by the selling stockholder		shares
Common stock to be outstanding after this offering		shares
Use of proceeds		We estimate that the net proceeds to us from the sale of shares of common stock will be approximately $      million, assuming an offering price of $      (which is the mid-point of the range specified on the cover of this prospectus). We intend to use the net proceeds from the offering of shares by us for general corporate purposes, including amounts related to the repayment of a portion of our outstanding term loans, working capital and capital expenditures. We may also use a portion of our net proceeds to acquire or invest in complementary technologies, businesses or other assets. We have no current commitments or agreements with respect to any acquisitions. We will not receive any proceeds from the shares sold by the selling stockholder. See “Use of Proceeds.”
Proposed Nasdaq Global Select Market symbol		“ALGM”

	•	3,069,790 shares of common stock issuable upon the exercise of options outstanding as of March 30, 2007 at a weighted average exercise price of $7.27 per share (all such options, to the extent that such options are not currently vested, will vest at the time of this offering according to the provisions of our 2001 Stock Option Plan, pursuant to which no options will be granted following this offering); and
	•	shares of common stock reserved for issuance under our 2007 Long-Term Incentive Plan.

	•	an initial public offering price of $      per share, the mid-point of the initial public offering price range specified on the cover of this prospectus; and
	•	that the underwriters do not exercise their over-allotment option to purchase an additional number of shares from us or the selling stockholder.

		Fiscal Year Ended
		March 28,				March 26,				March 25,				March 31,				March 30,
		2003				2004				2005				2006				2007
		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net sales		$	199,717			$	216,962			$	227,463			$	222,694			$	257,837
Net sales to Sanken			43,449				48,408				54,913				62,361				62,904
Total net sales			243,166				265,370				282,376				285,055				320,741
Cost of goods sold			172,273				176,781				190,028				194,050				207,828
Gross profit			70,893				88,589				92,348				91,005				112,913
Operating expenses:
Selling, general and administrative			35,078				36,915				39,292				40,926				44,944
Research and development			23,150				28,862				35,239				35,493				38,906
Total operating expenses			58,228				65,777				74,531				76,419				83,850
Operating income			12,665				22,812				17,817				14,586				29,063
Interest expense			(4,681	)			(3,250	)			(2,642	)			(2,638	)			(1,942	)
Foreign currency transaction gain (loss)			930				339				125				466				(417	)
Interest income			435				92				178				333				441
Other			1,039				178				429				1,220				104
Income before income taxes			10,388				20,171				15,907				13,967				27,249
Income tax provision			1,436				1,758				333				2,385				6,149
Minority interest in net income of a subsidiary			—				—				22				24				25
Net income		$	8,952			$	18,413			$	15,552			$	11,558			$	21,075
Earnings per share:
Basic		$	0.36			$	0.74			$	0.62			$	0.46			$	0.84
Diluted		$	0.36			$	0.73			$	0.59			$	0.44			$	0.81
Weighted average shares outstanding:
Basic			25,000				25,000				25,000				25,000				25,000
Diluted			25,102				25,348				26,263				26,216				26,178

		As of March 30, 2007
		Actual				As Adjusted(3)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	13,468			$
Working capital(1)			66,877
Total assets			212,326
Total debt(2)			27,972
Total stockholder’s equity			145,008

(1)		Excludes cash and cash equivalents and current portion of total debt.
(2)		Includes $19,255 (actual and as adjusted) of current portion of total debt.
(3)		The as adjusted balance sheet data reflects our receipt of estimated net proceeds of $      million from our sale of           shares of our common stock that we are offering at an assumed initial public offering price of $      per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

An investment in our common stock involves risks. You should consider these risks carefully, as well as the other information in this prospectus. If any of these risks actually occurs, our business could be harmed materially. In that event, the trading price of our common stock might decline, and you might lose all or part of your investment. Additional risks and uncertainties not presently known to us or not believed by us to be material may also negatively impact us.

 

Risks Related to Our Business and Industry

 

We face intense competition and may not be able to compete effectively, which could reduce our market share and decrease our net sales and profitability.

 

We are engaged in an intensely competitive segment of the global semiconductor industry. Our competitive landscape includes rapid technological change in product design and manufacturing technology, continuing declines in unit prices, and customers that make purchase decisions based on a mix of factors of varying importance. The most important competitive factors that we face are time to market, system and application expertise and product quality and reliability. The relative importance placed on each of these factors varies from customer to customer and from market to market. Our ability to compete in this environment depends on such factors as our ability to identify emerging markets and technology trends in an accurate and timely manner, introduce new products and implement new manufacturing technologies at a sustainable pace, maintain the performance and quality of our products and manufacture our products in a cost-effective manner, as well as our competitors’ performance and general economic and industry market conditions. Often, we compete against larger companies that possess substantial financial, technical, development, engineering, manufacturing and marketing resources. Varying combinations of these resources provide advantages to these competitors that enable them to influence industry trends and the pace at which they adapt to these trends.

 

If our net sales growth falls short of our expectations, we may not be able to proportionately reduce our operating expenses in a timely manner and our profitability would decline.

 

We maintain an infrastructure of facilities and human resources in several locations around the world. We have limited ability to reduce the expenses required to maintain this infrastructure as quickly as our net sales could decrease. Declines in our net sales or failure to increase our net sales in accordance with our expectations, coupled with our limited ability to reduce expenses rapidly in response to such declines, could have a material adverse effect on our profitability.

 

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

 

The semiconductor industry, including the analog segment of this industry, is highly cyclical and is prone to significant downturns from time to time. These downturns can result from supply-and-demand imbalances caused by declines in the general economy in regions where analog semiconductor products are sold for installation in end products and systems, changes in the markets for those end products and systems, and technological and commercial dynamics of the industry itself. Any combination of one or more of these factors can result in significant declines for analog semiconductor manufacturers, during which demand for analog semiconductor products decreases, inventory levels increase, manufacturing capacity is underutilized, and average selling prices decline. We have experienced downturns in the past and may experience such downturns in the future. Future downturns of this nature could have a material adverse effect on our business, financial condition and results of operations.

Our quarterly total net sales and operating results are difficult to predict accurately and may fluctuate significantly from period to period. As a result, we may fail to meet the expectations of investors, which could cause our stock price to decline.

 

We operate in a highly dynamic industry and our future results could be subject to significant fluctuations, particularly on a quarterly basis. Our quarterly total net sales and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Although some of our customers, for example those in the automotive industry, provide us with forecasts of their future requirements for our products, a significant percentage of our net sales in each fiscal quarter is dependent on sales that are booked and shipped during that fiscal quarter, and are typically attributable to a large number of orders from diverse customers and markets. As a result, accurately forecasting our operating results in any fiscal quarter is difficult. If our operating results do not meet our publicly stated guidance, if any, or the expectations of investors, our stock price may decline. Additional factors that can contribute to fluctuations in our operating results include:

 

 

Due to these and other factors, quarter-to-quarter comparisons of our historical operating results should not be relied upon as accurate indicators of our future performance.

 

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

 

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

when demand for our products has decreased. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges.

 

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, levels of reliance on outsourced contract manufacturing, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of the commitments by many of our customers and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate future requirements of our customers. On occasion, our customers may require rapid increases in production, which can challenge our resources. We may not have sufficient capacity at any given time to meet our customers’ demands. Conversely, downturns in the semiconductor industry have in the past caused and may in the future cause our customers to significantly reduce the amount of products ordered from us. Because many of our sales, research and development, and manufacturing expenses are relatively fixed, a reduction in customer demand may decrease our gross margins and operating income.

 

We depend on growth in the end markets that use our products. Any slowdown in the growth of these end markets could adversely affect our financial results.

 

Our continued success will depend in large part on general economic growth and growth within our target markets. Factors affecting these markets could seriously harm our customers and, as a result, harm us, including:

 

 

Any slowdown in the growth of these end markets could adversely affect our financial results.

 

Substantial portions of our sales are made to automotive industry suppliers. Any downturn in this market could significantly harm our financial results.

 

Of our total net sales, approximately 43.1%, 46.3% and 46.4% were made to customers that supply various systems and components to the automotive industry in fiscal years 2005, 2006 and 2007, respectively. This concentration of sales exposes us to the risks associated with this market. For example, the automotive supplier industry is undergoing a period of consolidation and reorganization and, in some cases, suppliers to the automotive industry have entered bankruptcy. Although we have not experienced any lost business or material bad debt write-offs because of this situation, further such changes in the automotive market could have a material adverse effect on our business and results of operations.

 

The loss of one or more significant customers in any of the markets to which we make substantial sales could have a material adverse effect on our business and results of operations.

 

With respect to each of the markets to which we make substantial sales, in particular the automotive and the computer and office automation markets, we make sales to a limited number of customers in each such market. For example, approximately 5.2% of our total net sales in fiscal year 2007, sold either directly or indirectly, were derived from our largest customer in the automotive market, and approximately 6.7% of our total net sales in fiscal year 2007, sold either directly or indirectly, were derived from our largest customer in the computer and office automation market. Sales in fiscal year 2007 from our top ten OEM customers, sold either directly or indirectly, represented approximately 41.7% of our total net sales in that year. In fiscal year 2007 approximately 23.1% of our total net sales were derived from sales to distributors, with 19.1% of our total net sales from our top ten distributors. In addition, in fiscal year 2007, approximately 19.6% of our total net sales were derived from sales to Sanken, our parent company, which resells our products to a wide range of end customers in Japan. The loss of business from any of these large customers or distributors in either of

these markets could have a material adverse effect on our sales with respect to that market and, in turn, on our overall business and results of operations.

 

If we fail in a timely and cost-effective manner to develop new product features or new products that achieve market acceptance, our operating results could be adversely affected.

 

Our existing and prospective customers demand continuing improvements in the design and cost of analog and mixed-signal semiconductor products for existing applications in their products and systems, as well as higher performance, cost-effective analog and mixed-signal semiconductor products for new applications in their products and systems. The future success of our business depends on our ability to identify, design and develop new product features and products rapidly in response to these demands and to then manufacture, market and support these new product features and products in a cost-effective and timely manner. Our failure to successfully meet these requirements could have a material adverse effect on us. Historically, we have focused our efforts on analog semiconductor products that provide power control in the products and systems in which they are used or that determine, or “sense,” the motion or position of various objects. While we expect to continue our focus on analog and mixed-signal semiconductor power ICs and sensor IC products, we plan in the next several years to grow our power management line of semiconductor products. If we fail to develop our power management business in accordance with our plans or fail to meet the expectations of securities analysts or investors, the price of our common stock may decline.

 

The nature of the design process requires us to incur expenses prior to generating net sales associated with those expenses without any guarantee that the design efforts will generate net sales, which could adversely affect our financial results.

 

We focus on winning competitive bid selection processes, called “design wins,” to develop products for use in our customers’ products. These lengthy selection processes may require us to incur significant expenditures in the development of new products without any assurance that we will achieve design wins. If we incur such expenditures and fail to be selected, our operating results may be adversely affected. Further, because of the significant costs associated with qualifying new suppliers, customers are likely to use the same or an enhanced version of semiconductor products from existing suppliers across a number of similar and successor products for a lengthy period of time. If we fail to secure an initial design win for any of our products, we may lose the opportunity for future sales of those products for a significant period of time and experience an associated decline in net sales relating to those products. This phenomenon is typical in the automotive market. Failure to achieve initial design wins may also weaken our position in future competitive selection processes because we may be perceived as not being an industry leader.

 

Even if we succeed in securing design-wins for our products, we may not generate timely or sufficient net sales or margins from those wins and our financial results could suffer.

 

After incurring significant expenses in achieving an initial design win for a product, a substantial period of time generally elapses before we generate net sales relating to such products. The reasons for this delay include the following:

 

 

If we are unable to achieve expected net sales levels associated with these design wins or experience delays in achieving these levels, our operating results could be adversely affected.

If we are unable to protect portions of our proprietary technology and inventions through patents, our ability to compete successfully and our financial results could be adversely impacted.

 

We protect portions of our proprietary technology and inventions, particularly those relating to the design of our products, through the use of patents. As of June 29, 2007, we held 84 U.S. patents and had 31 pending patent applications in various stages of review by the U.S. Patent & Trademark Office (called the USPTO) and counterparts of the USPTO outside the United States. Many of these patents have counterparts in key industrial countries. Maintenance of patent portfolios is expensive, and the process of seeking patent protection is lengthy and costly. While we intend to maintain our current portfolio of patents and to continue to prosecute our currently pending patent applications and file future patent applications when appropriate, the value of these actions may not exceed their expense. Existing patents and those that may be issued from any pending or future applications may be subject to challenges, invalidation or circumvention, and the rights granted under our patents may not provide us with meaningful protection or any commercial advantage. In addition, the protection afforded under the patent laws of one country may not be the same as that in other countries. This means, for example, that our right to exclusively commercialize a product in those countries where we have patent rights for that product can vary on a country-by-country basis.

 

If we are unable to protect portions of our proprietary technology and inventions through trade secrets, our competitive position and financial results could be adversely affected.

 

We protect portions of our proprietary technology and inventions, particularly those relating to our manufacturing processes, as trade secrets. In the United States, trade secrets are protected under the federal Economic Espionage Act of 1996 and under state law, with many states having adopted the Uniform Trade Secrets Act and several of which that have not. In addition to these federal and state laws inside the United States, under the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights Agreement (called the TRIPS Agreement), trade secrets are to be protected by World Trade Organization member states as “confidential information.” Under the Uniform Trade Secrets Act and other trade secret laws, protection of our proprietary information as trade secrets requires us to take steps to prevent unauthorized disclosure to third parties or misappropriation by third parties. While we require our officers, employees, consultants, distributors, and existing and prospective customers and collaborators to sign confidentiality agreements and take various security measures to protect unauthorized disclosure and misappropriation of our trade secrets, we cannot assure or predict that these measures will be sufficient. If any of our trade secrets are subject to unauthorized disclosure or are otherwise misappropriated by third parties, our competitive position may be materially adversely affected.

 

If we fail to operate without infringing on the patents and proprietary rights of others, our ability to compete successfully and our financial results could be adversely affected.

 

To the same extent that we seek to protect our technology and inventions with patents and trade secrets, our competitors and other third parties do the same for their technology and inventions. Our ability to compete successfully, therefore, depends in part on our ability to commercialize our products without infringing the patent, trade secret or other intellectual property rights of others. In this respect, we have no means of knowing the content of patent applications filed by third parties until they are published. Patent applications are generally published 18 months after they are filed.

 

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, we receive communications from third parties that allege that our products or technologies infringe their patent or other intellectual property rights. We may receive similar communications in the future. In the event that any third party succeeds in asserting a valid claim against us or any of our customers, any of the following risks could occur:

 

 

 

If a third party causes us to discontinue use of any of our technologies, we could be required to design around those technologies. This could be costly and time consuming and could have an adverse effect on our financial results.

 

We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and market our products could be harmed, which in turn could adversely affect our financial results.

 

Our success depends to a large extent upon the continued services of our executive officers, managers and skilled personnel, particularly our development 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. In addition, we have historically encountered difficulties in hiring and retaining qualified engineers because we recruit from a limited pool of engineers with expertise in analog and mixed-signal semiconductor design and the competition for such personnel can be intense. While we have not lost any of our executive officers, managers and skilled personnel in large numbers within our last five fiscal years, the loss of skilled personnel or our inability to recruit skilled personnel could be significantly detrimental to our product development efforts and could have a material adverse effect on our business.

 

We rely on a limited number of wafer fabrication facilities for the fabrication of semiconductor wafers, and the failure of any of these foundries or additional foundries to continue to produce wafers on a timely basis could harm our business and our financial results.

 

In fiscal year 2007, we obtained approximately 60.1% of wafers from our wafer fabrication facility in Worcester, MA, approximately 36.5% of wafers from PSI under a supply agreement and the remainder from another external foundry which we no longer use. PSI is wholly owned by our parent company Sanken and is, therefore, our affiliate. We expect to increase the portion of wafers that we obtain from PSI over the next several years. Under our agreement with PSI, in the event that PSI determines to cease operations at its Bloomington, MN facility, PSI must provide us with 24 months’ written notice while also providing us with additional rights to purchase wafers. If PSI were to give notice of termination or suffer an interruption in its operations and we failed to establish one or more alternative sources of wafer supply in a timely fashion, our business would be materially adversely affected. We are also in the early stages of identifying one or more third-party wafer fabrication foundries in Asia with which we can enter into supply arrangements to meet a portion of our future wafer capacity needs. If we do not successfully manage our own wafer fabrication facility and our relationship with PSI, and identify and enter into supply arrangements with one or more additional wafer fabrication operators, we may not have sufficient wafer capacity to meet customer demand for our products, which in turn may have a material adverse impact on our operations and our financial results.

 

If we fail to continually improve our wafer manufacturing technology, our competitive position could be adversely affected.

 

We currently rely on our proprietary ABCD4 technology for the manufacture of our analog power ICs and our DABiC^tm technology for the manufacture of our magnetic sensor ICs. Our ABCD4 technology consists of the manufacture of different types of transistors, commonly referred to as “Bipolar,” “CMOS” and “Double-Diffused” transistors. We currently use our ABCD4 and DABiC^tm 6 technologies at our affiliate, PSI, and license PSI to use these technologies in its facility. In order to achieve our long-term product design and manufacturing cost objectives, we expect to transition over the next two to three years from our ABCD4 and DABiC^tm 6 technologies to a new generation of BCD technology, called “Sanken Group 5” or “SG5,” which we refer to as “ABCD5.” We are collaborating with Sanken and PSI on the development of SG5 technology. If we fail to complete the development of SG5 technology at all or within the expected time period, or we or PSI

fail to successfully implement it, our competitive position could be adversely affected. See “Business—Technology—Semiconductor Process Technologies” for further explanation regarding our wafer manufacturing technologies.

 

If we fail to procure the parts, materials and components used in our manufacturing process in a timely and cost-effective manner, our operating results could be materially adversely affected.

 

We use a wide range of parts and materials in the production of our products, including silicon subtrates, processing chemicals and gases, precious metals, and packaging components. We procure these parts and materials from many suppliers, some of which are our sole source of supply for the product or material that we obtain from them. Our suppliers’ abilities to meet our requirements could be impaired or interrupted by factors beyond their control, such as earthquakes, hurricanes, monsoons and other geologic, meteorological or natural phenomena, labor strikes and shortages, political unrest, war, terrorism, outbreaks of viral or other epidemics, and global or regional economic downturns. In the event that any one or more of our suppliers is unable or unwilling to deliver us products and we are unable to identify alternative sources of supply for such materials or components, our operations may be adversely affected. In addition, even if we identify any such alternative sources of supply, we could experience delays in testing, evaluating and validating materials or products of potential alternative suppliers or products we obtain through outsourcing. Furthermore, financial or other difficulties faced by our suppliers, or significant changes in demand for the components or materials they use in the products they supply to us, could limit the availability of those products, components or materials to us. Any of these occurrences could negatively impact our operating results and harm our business. If we cannot obtain adequate materials in a timely manner or on favorable terms, our business and financial results could be adversely affected.

 

Warranty claims, product liability claims and product recalls could harm our business, results of operations and financial condition.

 

We face an inherent business risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in bodily injury and/or property damage. In addition, if any of our designed products are or are alleged to be defective, we may be required to participate in their recall. As suppliers become more integrally involved in the electrical design, original equipment manufacturers are increasingly expecting them to warrant their products and are increasingly looking to them for contributions when faced with product liability claims or recalls. For example, some of our products are used in automotive safety systems, the failure of which could lead to injury or death. We carry various commercial liability policies, including umbrella/excess policies which provide some protection against product liability exposure. However, a successful warranty or product liability claim against us in excess of our available insurance coverage and established reserves, or a requirement that we participate in a product recall, could have adverse effects on our business results.

 

Our competitive position could be adversely affected if we are unable to meet customers’ quality requirements.

 

IC suppliers must meet increasingly stringent quality standards, particularly for automotive applications. While our quality performance to date has generally met these requirements, we may experience problems in achieving acceptable quality results in the manufacture of our products, particularly in connection with the production of a new product or adoption of a new manufacturing process. Our failure to achieve acceptable quality levels could adversely affect our business results.

 

Our dependence on international customers and operations subjects us to a range of regulatory, operational, financial and political risks that could adversely affect our financial results.

 

For fiscal years 2005, 2006 and 2007, approximately 74.2%, 74.3% and 70.0%, respectively, of our total net sales were to customers outside of the United States. In addition, a substantial majority of our products are assembled and tested at facilities outside of the United States. Global operations of this type pose multiple

risks and challenges that could have a material adverse effect on our business, financial condition and results of operations. These risks and challenges include:

 

 

Against this backdrop, armed conflicts around the world from time to time create economic and political uncertainties that could have an adverse impact on the global economy. Escalation of these conflicts could severely impact our operations and demand for our products.

 

A majority of our products are assembled, tested and finished in Asia, primarily in the Philippines. Any conflict or uncertainty in this region or nation, including public health or safety concerns or natural disasters, could have a material adverse effect on our business, financial condition and results of operations.

 

To the extent we sell our products in markets outside the United States, currency fluctuations may result in our products becoming too expensive for non-U.S. customers who do not conduct their business in U.S. dollars.

 

We prepare our consolidated financial statements in U.S. dollars, but a portion of our earnings and expenditures are denominated in other currencies. Changes in exchange rates, therefore, will result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our equity.

 

We may pursue acquisitions and investments in new businesses, products or technologies that involve numerous risks, which could disrupt our business and harm our financial condition.

 

We have historically not made any acquisitions and we currently have no potential acquisitions under consideration. In the future, however, we may make acquisitions of and investments in new businesses, products and technologies, or we may acquire operations that expand our current capabilities. Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs and reduce the value to us of the acquired company. For example, if we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms. Even if we are successful, we may not be able to integrate the acquired businesses, products or technologies into our existing business and products. As a result of the rapid pace of technological change, we may miscalculate the long-term potential of the acquired business or technology, or the acquisition may not be complementary to our existing business. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management’s attention and require considerable cash outlays at the expense of our existing operations. In addition, to complete potential acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability.

 

We may not be able to effectively manage our growth, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.

 

To continue to grow, we must continue to expand our operational, engineering, accounting and financial systems, procedures, controls and other internal management systems. This may require substantial managerial and financial resources, and our efforts in this regard may not be successful. Our current systems, procedures

and controls may not be adequate to support our future operations. If we fail to adequately manage our growth, or to improve our operational, financial and management information systems, or fail to effectively motivate or manage our new and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

 

The implementation of a supply chain management system could disrupt our business.

 

We are in the testing phase of a new supply chain management system that we expect will provide enhanced inventory tracking, cost and production planning capabilities compared to our existing systems. The implementation of this supply chain management system, including the integration with other systems, is a very complex and time consuming process that requires significant financial resources, personnel time and new procedures to ensure that the total system operates efficiently and effectively. Delays or errors in the implementation could result in additional costs and cause disruptions to our business, which could adversely affect our ability to accurately report our financial results or comply with our periodic reporting requirements on a timely basis and could have a material adverse effect on our business, financial condition and operating results.

 

Our failure to comply with the large body of laws and regulations to which we are subject could have a material adverse effect on our business and operations.

 

We are subject to regulation by various governmental agencies in the United States and other jurisdictions in which we operate. These laws and regulations (and the government agency responsible for their enforcement in the United States) cover: radio frequency emission regulatory activities (Federal Communications Commission); anti-trust regulatory activities (Federal Trade Commission and Department of Justice); consumer protection laws (Federal Trade Commission); import/export regulatory activities (Department of Commerce); product safety regulatory activities (Consumer Products Safety Commission); worker safety (Occupational Safety and Health Administration); environmental protection (Environmental Protection Agency and similar state and local agencies); employment matters (Equal Employment Opportunity Commission); and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business. In certain jurisdictions, regulatory requirements in one or more of these areas may be more stringent than in the United States.

 

In the area of environmental protection, we are subject to a variety of federal, state, local and foreign laws relating to the use, disposal, clean up of and exposure to hazardous materials. Any failure by us to comply with environmental, health and safety requirements could result in suspension of production or subject us to future liabilities. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes. In the event of the discovery of contaminants or the imposition of clean up obligations for which we are responsible, we may be required to take remedial or other measures which could have a material adverse effect on our business, financial condition and results of operations.

 

In the area of occupational safety and health, in the last few years there has been increased media scrutiny and associated reports focusing on a potential link between working in semiconductor manufacturing clean room environments and certain illnesses, primarily different types of cancers. Regulatory agencies and industry associations have studied the issue over the past decade but have not concluded any specific correlation. Because we utilize these clean rooms, we may become subject to liability claims.

 

In the area of employment matters, we are subject to a variety of federal, state and foreign employment and labor laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the WARN Act and other regulations related to working conditions, wage-hour pay, over-time pay, employee benefits, anti-discrimination, and termination of employment. Noncompliance with any of these applicable regulations or requirements could subject us to investigations, sanctions, enforcement actions, fines, damages, penalties, or injunctions. In certain instances, former employees have brought claims against us and we expect that we will encounter similar actions against us in the future. An adverse outcome in any such

litigation could require us to pay damages, attorneys’ fees and costs. These enforcement actions could harm our reputation, business, financial condition and results of operations. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition and results of operations could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees.

 

Risks Related to Our Relationship with Sanken

 

As long as Sanken controls us, your ability to influence the outcome of matters requiring stockholder approval will be limited and Sanken’s and your interests may conflict.

 

After the offering, Sanken will own approximately     % of our common stock, or approximately     % if the underwriters exercise their over-allotment option in full. As long as Sanken has voting control of our company, Sanken will continue to be able to control the election of our directors, determine our corporate and management policies, amend our organizational documents and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval. As a result, Sanken will have the ability to influence or control all matters affecting us, including:

 

 

We cannot assure you that the interests of Sanken will coincide with the interests of other holders of our common stock. For example, Sanken could cause us to make acquisitions that increase the amount of our indebtedness or sell income-producing assets. Sanken’s voting control may discourage transactions involving a change of control of our company, including transactions in which you, as a holder of our common stock, might otherwise receive a premium for your shares over the then-current market price. Furthermore, Sanken is not prohibited from selling a controlling interest in our company to a third-party without your approval or without providing for a purchase of your shares. Additionally, Sanken may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Sanken may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as Sanken continues to own a majority of the outstanding shares of our common stock, it will continue to be able to strongly influence or effectively control our decisions.

 

We may have potential business conflicts of interest with Sanken with respect to our past and ongoing relationships and, because of Sanken’s controlling ownership, the resolution of these conflicts may not be favorable to us and could adversely affect our business and financial results.

 

Conflicts of interest may arise between Sanken and us in a number of areas relating to our past and ongoing relationships, including:

 

 

Several of these potential conflicts and the subject matter to which they pertain are the subject of related-party contracts between Sanken and us that are described below in this prospectus under the heading “Transactions and Arrangements with Sanken and PSI.” Among other provisions, these agreements provide dispute resolution mechanisms for resolving these conflicts. Even though these mechanisms are provided in these related-party contracts, we may not be able to resolve any potential conflicts with Sanken, and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. Because we are controlled by Sanken, it is possible for Sanken to cause us to amend these agreements on terms that may be less favorable to us than the original terms of the agreement and which could adversely affect our financial results.

 

Our related-party agreements with Sanken may be less favorable to us than if they had been negotiated with unaffiliated third parties.

 

We entered into related-party agreements with Sanken while we were a wholly owned subsidiary of Sanken. Had these agreements been negotiated with unaffiliated third parties, they might have been more favorable to us. See “Transactions and Arrangements with Sanken and PSI” for a description of these obligations. Future related-party agreements with Sanken could be less favorable to us than if negotiated with unaffiliated third parties.

 

Our stock price may decline because of the ability of Sanken and others to sell shares of our common stock.

 

Sales of substantial amounts of our common stock after this offering, or the possibility of those sales, could adversely affect the market price of our common stock and impede our ability to raise capital through the issuance of equity securities. See “Shares Eligible for Future Sale” for a discussion of possible future sales of our common stock.

 

After this offering, Sanken will own approximately     % of the outstanding shares of our common stock (or     % if the underwriters exercise their over-allotment option in full).

 

Subject to Sanken’s agreement with the underwriters not to sell without their consent during the 180 days after the date of this prospectus, any of the shares of our common stock that it will own following the closing of the offering made by this prospectus and, thereafter, applicable U.S. federal and state securities laws, Sanken may sell any and all of the shares of our common stock that it beneficially owns or distribute any or all of these shares of our common stock to its stockholders. In addition, after the expiration of the 180-day lock-up period following the date of this prospectus, we could issue and sell additional shares of our common stock. Any sale by Sanken or us of our common stock in the public market, or the perception that sales could occur, could adversely affect prevailing market prices for the shares of our common stock.

 

Our reliance on the controlled company exemption may not provide you with the customary protections available to you under the Nasdaq corporate governance rules.

 

We intend to rely on the “controlled company” exemption under the Nasdaq listing rules under which we will be exempt from the requirements of having a majority of our board of directors consist of independent directors. Except for the audit committee, none of our other committees, such as the nominating/corporate governance or compensation committees, is expected to be comprised of a majority of independent directors. We intend to rely on the phase-in rules of the SEC and Nasdaq with respect to the independence of our audit committee. These rules permit us to have an audit committee that has one member that is independent upon the effectiveness of the registration statement, a majority of members that are independent within 90 days thereafter, and all members that are independent within one year thereafter. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of Nasdaq’s corporate governance requirements.

Risks Related to this Offering

 

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all.

 

Prior to this offering, our common stock has not been sold in a public market. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for the shares was determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The trading price of our common stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this prospectus. Factors such as variations in our actual or anticipated operating results, changes in or failure to meet earnings estimates of securities analysts, market conditions in the semiconductor industry, regulatory actions and general economic and securities market conditions, among other factors, could cause the market price of our common stock to decline below the initial public offering price. In addition, the stock market in general has, and the Nasdaq Global Select Market and technology companies in particular have, experienced extreme price and volume fluctuations. These trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against companies that experienced such volatility. This litigation, if instituted against us, regardless of its outcome, could result in substantial costs and a diversion of our management’s attention and resources.

 

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Our ability to raise capital in the future may be limited and could prevent us from executing our growth strategy.

 

We believe that our cash flow from operations and existing cash and cash equivalents will satisfy our anticipated cash requirements for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

 

 

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

 

New investors in our common stock will experience immediate and substantial dilution in book value after this offering.

 

The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock. If you purchase common stock in this offering, you will incur immediate dilution of

$      in net tangible book value per share of common stock, based on an assumed initial public offering price of $      per share. Investors will incur additional dilution upon the exercise of stock options. See “Dilution.”

 

Future sales of shares by our stockholders could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

Immediately after this offering, we will have outstanding           shares of common stock. This includes the           shares we and Sanken are selling in this offering, which may be resold in the public market immediately. In addition, immediately after this offering 3,052,890 shares of common stock will be issuable upon the exercise of vested employee stock options, subject to the provisions of the lock-up agreements. We expect to file a Form S-8 for the resale of shares issuable upon the exercise of options granted under our employee stock option plans. The table below shows when the shares outstanding immediately after this offering that are not being sold by Sanken (assuming that we and Sanken remain affiliated) and shares issued upon the exercise of vested employee stock options will become available for resale in the public market.

 

 

At any time and without public notice, the underwriters may in their sole discretion release all or some of the securities subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could drop significantly if the holders of those shares sell them or are perceived by the market as intending to sell them. These declines in our stock price could occur even if our business is otherwise doing well.

 

Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.

 

We intend to use our net proceeds from this offering for general corporate purposes, including the repayment of a portion of our outstanding term loans, working capital and capital expenditures. We may also use a portion of our net proceeds to acquire or invest in complementary technologies, businesses or other assets. We have not reserved or allocated our net proceeds for any specific purpose, and we cannot state with certainty how our management will use our net proceeds. Accordingly, our management will have considerable discretion in applying our net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. We may use our net proceeds for purposes that do not result in any increase in our results of operations or market value. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value.

 

Delaware law contains anti-takeover provisions that could discourage a takeover.

 

Neither our amended and restated certificate of incorporation nor our amended and restated by-laws have any provisions that may have the effect of deterring or delaying attempts by our stockholders to remove or

replace management, engage in proxy contests and effect changes in control. However, we are subject to Section 203 of the Delaware General Corporation Law. Subject to specified exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the time of the transaction in which the person became an interested stockholder without the prior approval of our board of directors or the subsequent approval of our board of directors and our stockholders. “Business combinations” include mergers, asset sales and other transactions resulting in a financial benefit to the “interested stockholder.” Subject to various exceptions, an “interested stockholder” is a person who together with his or her affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. These provisions may have the effect of deterring or delaying a tender offer or takeover attempt (such as changes in incumbent management, proxy contests or changes in control) that a stockholder may consider in its best interest, including any attempt that may result in a premium over the market price for the shares held by stockholders.

 

As a public company, we will be required to meet periodic reporting requirements under SEC rules and regulations. Complying with federal securities laws as a public company is expensive and we will incur significant time and expense enhancing, documenting, testing and certifying our internal controls over financial reporting, which could adversely impact our financial results and our stock price.

 

SEC rules require that, as a publicly-traded company following completion of this offering, we file periodic reports containing our financial statements within a specified time following the completion of quarterly and annual periods. Prior to this offering, we have not been required to comply with SEC requirements to have our financial statements completed and reviewed or audited within a specified time and, as such, we may experience difficulty in meeting the SEC’s reporting requirements. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and reduce the trading price of our common stock.

 

As a public company we will incur significant legal, accounting, insurance and other expenses. The Sarbanes-Oxley Act of 2002, as well as compliance with other SEC and Nasdaq Global Select Market rules, will increase our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot predict or estimate with precision the amount of additional costs we may incur or the timing of such costs.

 

Furthermore, once we become a public company, SEC rules require that our chief executive officer and chief financial officer periodically certify the existence and effectiveness of our internal controls over financial reporting.

 

Under Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for our fiscal year 2009, management will be required to assess the effectiveness of internal controls over financial reporting and our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting. This process generally requires significant documentation of policies, procedures and systems, review of that documentation by our internal accounting staff and our outside auditors and testing of our internal controls over financial reporting by our internal accounting staff and our outside independent registered public accounting firm. Documentation and testing of our internal controls will involve considerable time and expense, may strain our internal resources and may have an adverse impact on our operating costs. We expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

Any deficiencies in our financial reporting or internal controls could adversely affect our business and the trading price of our common stock.

 

As a public company following the completion of this offering, we may, during the course of our testing of our internal controls over financial reporting, identify deficiencies which would have to be remediated to satisfy the SEC rules for certification of our internal controls over financial reporting. As a consequence, we

may have to disclose in periodic reports we file with the SEC significant deficiencies or material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal controls over financial reporting are effective, and would preclude our independent auditors from issuing an unqualified opinion that our internal controls over financial reporting are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the trading price of our common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting, it could negatively impact our business, results of operations and reputation.

 

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

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not rely upon forward-looking statements as predictors of future events. We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances except to the extent required by applicable securities laws.

 

 

We estimate that the net proceeds from the sale of the shares of common stock we are offering will be approximately $      million. We and the selling stockholder have granted the underwriters an option exercisable for 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of      shares at the initial public offering price less underwriting discounts and commissions. This option may be exercised if the underwriters sell more than           shares in connection with this offering. To the extent that this option is exercised in full, the net proceeds from the shares we sell will be approximately $      million. “Net proceeds” is what we expect to receive after paying the assumed underwriting discount and commissions and other expenses of the offering. We will not receive any proceeds from the sale of shares of common stock by the selling stockholder.

 

We intend to use our net proceeds for general corporate purposes, including the repayment of a portion of our outstanding term loans, working capital and capital expenditures. These term loans consist of a $3.0 million bank loan due and payable on November 30, 2007 and bearing interest at a fixed rate of 6.416% per annum, and $1.6 million of intercompany loans due and payable during the month of October 2007 to Sanken. We may also use a portion of our net proceeds to acquire or invest in technologies, businesses or other assets that are complementary to our business. Although we have from time to time evaluated possible acquisitions, we currently have no potential acquisitions under consideration, and we cannot assure you that we will make any acquisitions in the future. Until we use our net proceeds of the offering, we intend to invest the funds in United States government securities and other short-term, investment-grade, interest-bearing instruments or high-grade corporate notes. Management will have significant flexibility in applying our net proceeds from this offering.

 

We have been profitable since fiscal year 2001 and the expansion of our business has been funded primarily through our operating cash flow, bank loans and loans from Sanken. Historically, we have returned a portion of our retained earnings to our stockholder in the form of cash dividends. From fiscal year 2003 through fiscal year 2007, we paid cash dividends of $1 million for each fiscal year to the holder of our common stock. Following this offering, our board of directors will determine annually whether a cash dividend will be paid to stockholders. Our board of directors will consider factors such as our earnings levels, working capital, capital expenditure requirements and overall financial condition in making its determination.

 

The following table sets forth our cash and cash equivalents and capitalization as of March 30, 2007:

 

 

You should read this table together with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

 

 

The foregoing table excludes:

 

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately upon the completion of this offering. Our net tangible book value on March 30, 2007 was $143.3 million, or a value of approximately $5.73 per share of common stock. Net tangible book value is total book value of tangible assets less total liabilities. After giving effect to adjustments of the sale by us of        shares of our common stock in this offering at an assumed initial public offering price of $      per share and our receipt of the estimated net proceeds of this offering, our as adjusted net tangible book value as of March 30, 2007, would have been approximately $      million, or a value of approximately $      per share of common stock. This represents an immediate increase in net tangible book value of $      per share to existing stockholders and an immediate dilution of $      per share to new investors in this offering. The following table illustrates this per share dilution:

 

 

The following table shows the difference between existing stockholder and new investors with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share. The table assumes the initial public offering price will be $      per share.

 

 

 

If the underwriters exercise their over-allotment option in full, our existing stockholder would own approximately     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.

 

The foregoing table excludes:

 

 

The selected consolidated financial data for fiscal years 2005, 2006 and 2007, and as of March 31, 2006 and March 30, 2007, have been derived from our historical consolidated financial statements audited by Ernst & Young LLP, an independent registered public accounting firm, and included elsewhere in this prospectus. The selected consolidated financial data for fiscal years 2003 and 2004 and as of March 28, 2003, March 26, 2004 and March 25, 2005 have been derived from our audited consolidated financial statements, which are not included in this prospectus.

 

You should read the following selected consolidated financial data in connection with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and the accompanying notes to those consolidated financial statements included elsewhere in this prospectus.

 

 

 

The following discussion should be read in conjunction with and is qualified in its entirety by reference to our audited consolidated financial statements and unaudited interim financial statements included elsewhere in this prospectus. Except for the historical information contained herein, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. See “Risk Factors” and “Information Regarding Forward-Looking Statements” for a discussion of risks and uncertainties.

 

Overview

 

We design, develop, manufacture and market magnetic sensor ICs and application-specific analog power semiconductors for the automotive, computer and office automation, communications, consumer and industrial markets. We are a leading provider, in terms of total net sales, of integrated Hall-Effect sensor ICs with applications in each of these markets. Our broad product portfolio of application-specific analog power ICs includes motor drivers and power interface drivers that are used in automotive electronic systems and computer and office automation products, such as printers and LED displays.

 

We were incorporated in Delaware in 1990 as the company through which Sanken acquired the semiconductor division of Sprague. Our 40 years of experience in the semiconductor industry serves as our foundation for designing and manufacturing magnetic sensor ICs and analog power ICs, and enables our current expansion into the growing field of power management ICs.

 

We are headquartered in Worcester, MA. We employ both internal and external manufacturing capacity for wafer fabrication, assembly and testing. Most of our wafer requirements are provided by our six-inch wafer fabrication facility in Worcester, MA. In fiscal year 2007, we subcontracted approximately 36.5% of our wafer requirements to a Sanken-owned foundry, PSI, that is located in Bloomington, MN. We use PSI for six- and eight-inch wafer manufacturing and for process development. Wafer probe is performed at our Worcester facility. In fiscal year 2007, approximately 59.1% of our assembly requirements were completed at our facility in the Philippines, with the balance split among four subcontractors. Approximately 97.3% of our test volume was sourced through our Philippines facility or our New Hampshire facility in fiscal year 2007 with the balance covered by several subcontractors.

 

Our product portfolio includes over 325 Allegro products across a range of high-performance analog and mixed-signal semiconductors, including magnetic sensor ICs, analog power ICs and power management ICs. During fiscal year 2007, we sold our products directly to approximately 140 OEMs, 33 distributors and 49 EMS providers, many of which are leaders in their respective markets. In addition, we also sold our products to a wide range of end customers in Japan through Sanken, our parent company. Our close relationship with Sanken enables us to access a broad base of leading Japanese customers in the automotive, consumer and computer and office automation markets for which we develop advanced products that can be sold worldwide. We provide product design and applications development support to our customers through design and application centers located in the Americas, Asia and Europe.

 

Our Relationship with Sanken

 

Prior to this offering, we have been a wholly owned subsidiary of Sanken, a Japanese company. We were formed in 1990 when Sanken acquired the semiconductor division of Sprague in an effort to expand its U.S. operations and strengthen its worldwide semiconductor business.

 

In addition to currently being our controlling stockholder, Sanken collaborates with us in the areas of marketing and distribution, technology development and manufacturing. We and Sanken are parties to reciprocal product distribution agreements under which Sanken distributes our semiconductor products in Japan and we distribute Sanken’s semiconductor products in the Americas. Sanken also provides us with “design-in” assistance in Japan. We are also collaborating with Sanken and PSI, our affiliate, on the development of our next generation of BCD manufacturing process technology.

We expect to continue our collaborative efforts with Sanken in areas such as marketing and distribution, manufacturing, and development of products and manufacturing process technology. Please see “Transactions and Arrangements with Sanken and PSI” for more information on the collaborative arrangements between and among Sanken, PSI and us.

 

Trends and Factors Affecting Our Business

 

Our business is impacted by general conditions of the semiconductor industry and seasonal demand patterns in our target end markets. The semiconductor industry is characterized by periods of rapid growth and capacity expansion that are occasionally followed by significant market corrections in which sales decline, inventories accumulate and facilities go underutilized. In addition, certain end markets such as the consumer and computer and office automation markets are subject to both seasonal and cyclical growth patterns tied to holiday purchasing patterns and product innovations. We believe that our focus on the automotive segment of the analog semiconductor industry helps mitigate our susceptibility to the volatile cyclicality of the semiconductor industry.

 

During periods of expansion, our margins generally improve as fixed costs related to our wafer fabrication and backend facilities are spread over higher manufacturing volumes and unit sales. In addition, we may build inventory to meet increasing market demand for our products during these times, which serves to absorb fixed costs further and increase our gross margins. During an expansion cycle, we may increase capital spending and hiring to add to our production capacity. During periods of slower growth or industry contractions, sales, production and productivity suffer and margins generally decline.

 

Many of our product lines, especially those linked to the automotive and consumer markets, are subject to competitive pressures that may result in significant reductions in average selling prices from period to period. In order to limit the impact of this price erosion on our margins, we aggressively manage our production costs. Our recent initiatives to shut down our four-inch wafer fabrication line in Worcester, MA and transition production towards eight-inch wafer processes at PSI are examples of these efforts. In addition, to achieve our margin objectives, we may need to redesign particular products to reduce die sizes, improve yields, change packaging, reduce test times, shift production to lower-cost manufacturing locations and migrate to lower-cost processes.

 

We compete in markets that are subject to technological change and innovation that require us to design new products to maintain or increase our sales. New technology may result in sudden changes in system designs or platform changes that may render some of our products obsolete and require us to devote significant research and development resources to compete effectively. Further, the dynamic aspects of our customers’ markets require us to commit significant research and development resources to develop products even when the commercial success of these products remains uncertain. We address these challenges by developing relationships with customers that are leaders in their respective industries. In addition, we seek to be a sole supplier and we work closely with our significant OEM customers in a number of our target markets to understand their product technology roadmaps so that we can maintain or increase our share in these markets.

 

The industry trend toward more features and functionality in smaller ICs and packages and at lower cost has resulted in an increase in circuit integration and greater complexity in the design and manufacturing process. To adapt effectively to these trends, we must maintain and develop a broad range of engineering capabilities, including expertise in device modeling, systems-level knowledge and both digital and analog IC design skills. To manage the resource requirements imposed by trends in our industry, we focus our research and development expenditures in areas that enhance our technology leadership and increase the value of our product.

 

Accelerated Vesting of Our Unvested Options upon the Offering

 

As of March 30, 2007, there were 3,069,790 options outstanding, of which 2,218,050 were exercisable. Pursuant to the vesting and exercisability provisions of our 2001 Stock Option Plan, upon consummation of this initial public offering of our common stock, all options that were otherwise unvested and/or un-exercisable

will become vested and exercisable (however, these options may still be subject to the lock-up agreement). In accordance with the provisions of SFAS No. 123(R), at the time of this offering when these unvested options become vested, we would recognize all unrecognized compensation costs related to these options. We estimate that the unrecognized compensation cost related to these options will be approximately $2.0 million and will be recorded in the quarter in which this offering is completed. Following this offering, we will not grant any additional options under our 2001 Stock Option Plan.

 

Description of Our Total Net Sales, Costs and Expenses

 

Total net sales.  Our total net sales are derived from products sold in the automotive, computer and office automation, communications, consumer and industrial markets. All sales to our customers in Japan are transacted through Sanken who acts as our exclusive distributor for this region. Sanken purchases our product at a discount from the end customer price resulting in compensation to them as distributor that is within the range consistent with industry norms and practices. In addition to sales of our own products, a portion of our total net sales includes the sale of certain Sanken products in the Americas. We purchase Sanken products at a discount from the end customer price resulting in compensation to us as distributor that is within the range consistent with industry norms and practices.

 

We sell our products to OEMs, EMSs and distributors. Typically, EMSs purchase products from us based on sourcing decisions made by OEMs and they generally do not have discretion to replace our product with one from another supplier due to systems requirements. Our OEM and EMS customers incorporate our ICs into their electronic systems/assemblies that become part of products, such as automobiles, cell phones and office equipment that are sold to consumers or commercial end users.

 

Our sales cycle for existing products varies substantially, ranging from a period of three to six months to as long as three years. For new products, the time to revenue from design initiation could be as long as four years. All new products are subjected to rigorous qualification procedures by both us and our customers. Volume production for new products does not begin until the successful completion of development and customer qualification. In addition, volume production is contingent upon the successful roll out and acceptance of our customer’s end products.

 

A substantial portion of our total net sales for each fiscal quarter is derived from sales to customers that purchase large volumes of our products. These customers generally provide periodic forecasts of their requirements, but these forecasts do not commit such customers to minimum purchases and customers generally revise these forecasts without penalty. In addition, customers are generally permitted to cancel orders for our products that have scheduled ship dates beyond 45 days.

 

While our quarterly seasonal net sales patterns have varied over the last five fiscal years, we generally experience higher growth in net sales in our first two fiscal quarters followed by slower or flat net sales during our third and fourth fiscal quarters. We believe that this sales pattern is driven by seasonal purchasing patterns in consumer products, such as cell phones, office equipment and automobiles.

 

During fiscal year 2007, we sold our products directly to approximately 140 OEMs, 33 distributors and 49 EMSs, many of which are leaders in their respective markets. In addition, we also sold our products to a wide range of end customers in Japan through Sanken, our parent company. In fiscal year 2007, our top 10 OEM customers (whether sold directly or indirectly through EMSs, distributors or Sanken) accounted for 41.7% of our total net sales and no single OEM customer accounted for more than 6.7% of our total net sales during such period. Our product portfolio includes over 325 Allegro products across a range of high-performance analog and mixed-signal semiconductors including magnetic sensor ICs, analog power ICs and power management ICs. In many cases, these products are customized to meet the requirements of our customers. In addition, we sell over 400 Sanken products in the Americas under our reciprocal product distribution agreement with Sanken.

 

Cost of goods sold.  Cost of goods sold consists primarily of the costs associated with the manufacture and purchase of semiconductor wafers and the cost of assembling and testing our products. The cost of manufacturing wafers in our own wafer fabrication facility consists primarily of the cost of raw wafers, gases

and chemicals, depreciation, repair and maintenance, labor and other overhead costs, including facilities, engineering, quality control and IT services. For fiscal year 2007, approximately 36.5% of our wafer requirements were subcontracted to PSI. The cost of these wafers includes the purchase price and shipping costs that we pay for completed wafers. Cost of goods sold also includes the cost of assembling our die into various packages. In fiscal year 2007, we assembled approximately 59.1% of our product at our facility in the Philippines and we used four subcontractors to source the rest of our assembly requirements. Included in the cost of goods sold are the costs of internal assembly including epoxy, lead frames, gold wire, magnets, labor, depreciation, repair and maintenance and other overhead costs. The cost of subcontracted assembly includes the purchase cost and freight. In fiscal year 2007, approximately 97.3% of our volume was tested at our Philippines facility or our New Hampshire facility with the balance covered by several subcontractors. Nearly all of our sensor automotive assembly is conducted at our Philippines facility. The cost of goods sold related to test consists primarily of labor, depreciation, repair and maintenance, shipping supplies and overhead costs. We also review our inventories for indications of excess and/or obsolescence and provide reserves as we deem necessary. Cost of goods sold also includes the purchase cost for Sanken products that we resell.

 

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

 

Research and development.  Research and development expenses consist primarily of personnel costs of our research and development organization, costs of development wafers and masks, license fees for computer-aided design software, costs of development testing and evaluation, costs of developing automated test programs, and related occupancy and equipment costs. While most of the costs incurred are for new product development, a significant portion of these costs are focused on process technology development, and to a lesser extent package development. Research and development expenses also include technology development payments made to PSI and other third-party subcontractors. We expense all research and development costs as incurred.

 

Backlog

 

Our backlog at March 30, 2007 was approximately $78.2 million, down from approximately $89.0 million at March 31, 2006. We define backlog as firm orders that are scheduled for shipment. A portion of the decrease in backlog year over year is the result of the change by a number of our customers to a vendor managed inventory system in which inventories are consigned to customers to draw from as needed. For these kinds of shipments, no pre-ordering occurs. Thus, no order backlog is recorded for these customers. During periods of depressed demand, customers tend to rely on shorter lead times available from suppliers, including us. During periods of increased demand, there is a tendency towards longer lead times that have the effect of increasing backlog and, in some instances, we may not have sufficient manufacturing capacity to fulfill all orders. In addition, customers are generally permitted to cancel orders for our products for which the scheduled shipment date is more than 45 days from the date of cancellation. Accordingly, our backlog at any time should not be used as an indication of future sales.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis we re-evaluate our judgments and estimates including those related to uncollectible accounts receivable, inventories, intangible assets, income taxes and stock-based compensation. We base our estimates and judgments on our

historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and material effects on our operating results and financial position may result. The accounting policies described below are those which, in our opinion, involve the most significant application of judgment, or involve complex estimation, and which could, if different judgments or estimates were made, materially affect our reported results of operations.

 

Revenue recognition.  We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements. We recognize revenue from sales of our products to OEM and EMS customers and distributors when title passes, which is generally upon transfer of the products to a common carrier, provided, that, there are no uncertainties regarding customer acceptance, there is persuasive evidence of an arrangement, the fee is fixed or determinable and the collectibility of the related receivable is reasonably assured. We also establish reserves for product returns and allowances for OEM and EMS customers and distributors based on our historical experience or specific identification of an event that necessitates a reserve.

 

Allowance for doubtful accounts.  We work to mitigate our credit risks with respect to accounts receivable through our credit evaluation policies, reasonably short payment terms and geographical dispersion of sales. We continuously perform credit evaluations of our customers’ financial conditions. While we generally do not require customers to provide us with any collateral, we may require customers to provide us with letters of credit in certain circumstances. In addition, we maintain a reserve for potential credit losses based upon the age of our accounts receivable balances, known collectibility issues and our historical experience with losses. In the event that we determine that a customer may not be able to fulfill its obligations in its entirety, we record a specific allowance to reduce the related receivable to an amount that we expect to recover based on the information that we have on such customer at such time.

 

Inventory valuation.  Inventory is stated at the lower of cost (first-in, first-out method) or market. We establish inventory reserves when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for products and market conditions. We regularly evaluate our ability to realize the value of inventory based on a combination of factors, including historical usage rates, forecasted sales or usage and product end of life dates. Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future. Although we perform a detailed review of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and reported operating results.

 

Long-lived assets.  We review property, plant and equipment and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of assets that we have recorded may not be recoverable. Recoverability of these assets is measured by comparing their carrying amount to the future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair market value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. If such assets are not impaired, but their useful lives have decreased, the remaining net book value is amortized over the revised useful life. Evaluating impairment requires a judgment by our management to estimate future operating results and cash flows. If different estimates were used, the amount and timing of asset impairments could be affected. We charge impairments of long-lived assets to operations if our evaluations indicate that the carrying values of these assets are not recoverable.

 

Stock-based compensation.  Through March 31, 2006, we had accounted for our share-based payments to employees using the intrinsic value method prescribed by the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of our common stock and the exercise or purchase price multiplied by the

number of share-based payments granted. We did not record any stock-based compensation expense under the provision of APB Opinion No. 25 prior to fiscal year 2007.

 

Effective April 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under this transition method, compensation cost is recognized beginning with the effective date (1) for all share-based payments granted prior to the effective date of SFAS No. 123(R), but not yet vested, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123 and (2) compensation cost for all share-based payments granted subsequent to the effective date, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). In accordance with the modified-prospective method of adoption, the results of operations and financial position for prior periods have not been restated. We used the straight-line attribution method to recognize expense for all stock-based awards prior to the adoption of SFAS No. 123(R), and we have elected to continue to apply this attribution method upon the adoption of SFAS No. 123(R) to recognize expense for stock-based awards granted after April 1, 2006.

 

According to the provisions of SFAS No. 123(R), compensation cost related to stock options is based on the fair value of the stock option award on the date of grant. The fair value of the stock option award is then amortized on a straight-line basis over the vesting period to recognize compensation expense. We use the Black-Scholes valuation model to determine the fair value of our stock option awards at the date of grant. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yields and risk free interest rates that determine fair value. In addition, SFAS No. 123(R) requires forfeitures to be estimated at the time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate forfeitures based on our historical activity and we believe these forfeiture rates to be indicative of our expected forfeiture rate. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to increase or decrease compensation expense or income tax expense, which could be material to our results of operations.

 

Since we are not able to use public trading history to estimate the volatility of our common stock because our common stock has not been traded publicly, we have utilized a seven year rolling average volatility of the Philadelphia Semiconductor Index to estimate the volatility of our common stock. We believe that the entities that comprise this index are comparable to us in most significant respects. The expected volatility for options granted during fiscal year 2007 was 45.5%. The expected term for options granted during fiscal year 2007 was 7.5 years based on the shortcut method described in SEC’s Staff Accounting Bulletin No. 107. For fiscal year 2007, the risk-free interest rate used was 4.8% based on the yield on the zero-coupon U.S. Treasury securities with commensurate maturities. The expected dividend yield was calculated from the annual cash dividend, declared by our board of directors, expressed on a per share basis, divided by the estimated fair market value per share of our common stock as determined by valuation studies. The expected dividend yield used for options granted for fiscal year 2007 was 0.33%. Cash dividends are not paid on options.

 

The amount of stock-based compensation recognized during a period is based on the value of the awards that are expected to vest. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. We currently expect, based on an analysis of our historical forfeitures, that approximately 79.4% of our stock-based awards will vest, and therefore, we have applied an annual forfeiture rate of 7.6% to all unvested stock-based awards as of March 30, 2007. The 7.6% represents the portion that is expected to be forfeited each year over the vesting period; therefore, the cumulative amount, on a compounded basis, that is expected to be forfeited is approximately 20.6% of the aggregate stock-based awards. Our forfeiture analysis will be reevaluated quarterly, and the forfeiture rate adjusted as necessary. The actual expense that will be recognized over the vesting period will only be for those shares that vest.

 

Prior to this offering, there has been no public market for our common stock and in connection with our grant of stock options, our board of directors, with input from management, determined the fair value of our common stock. The fair value of the common stock was determined contemporaneously with option grants on an annual basis. The fair value was determined using an average of the discounted cash flow form of the

income approach, the guideline public company method and comparable transactions method of the market approach. The discounted cash flow approach involves applying appropriate risk-adjusted discount rates of approximately 17.8% to estimated debt-free cash flows, based on forecasted revenues and costs. The projections used in connection with this valuation were based on our expected operating performance over the forecast period. There is inherent uncertainty in these estimates; if different discount rates or assumptions had been used, the valuation would have been different. The guideline public company method estimates the fair value of a company by applying to the company market value multiples, in this case of earnings before interest, taxes, depreciation and amortization, observed for publicly traded firms in similar lines of business. The comparable transaction method of the market approach estimates the fair value of a company based upon comparable companies that have been bought and sold in the public marketplace. The fair value of our common stock was determined from the mid-point of the value ranges provided by each of the three described valuation methods with a 15.0% discount applied to account for the lack of marketability of the common stock.

 

We have incorporated the fair values determined in the contemporaneous valuation into the Black-Scholes option pricing model when calculating the compensation expense to be recognized for the stock options granted during fiscal year 2007.

 

Since April 1, 2006, we have granted stock options with exercise prices as follows:

 

 

Prior to the adoption of SFAS No. 123(R), on March 28, 2006, we accelerated the vesting of all unvested stock options awarded to employees during the time period of April 2004 through May 2005 that had exercise prices of $12.20 per share. Unvested options to purchase 222,500 shares became exercisable as a result of the vesting acceleration. Because the exercise price of all the modified options was greater than the market price of our underlying common stock on the date of the modification, no stock-based compensation expense was recorded in the consolidated statement of operations, in accordance with APB Opinion No. 25. The primary purpose for modifying the terms of these out-of-the-money stock options to accelerate their vesting was to eliminate the need to recognize the remaining unrecognized non-cash compensation expense in the statement

of income associated with these options as measured under SFAS No. 123, because the approximately $1,105,000 of future expense associated with these options would have been disproportionately high compared to the economic value of the options at the date of modification.

 

Income taxes.  We provide for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 recognizes tax assets and liabilities for the cumulative effect of all temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and are measured using the enacted tax rates that will be in effect when these differences are expected to reverse. The tax consequences of most events recognized in the current fiscal year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, net sales, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related assets or liabilities are settled or the reported amount of the assets are recovered, hence giving rise to a deferred tax asset or liability. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider the undistributed foreign earnings of our foreign subsidiaries to be indefinitely reinvested and, as such, we do not provide U.S. income tax on such undistributed earnings.

 

Results of Operations

 

The following tables set forth, for the periods indicated, selected statement of operations data in dollar amount and expressed as a percentage of our total net sales:

 

Comparison of Fiscal Year 2007 to Fiscal Year 2006

 

Total net sales.  Our total net sales increased $35.7 million, or 12.5%, to $320.7 million in fiscal year 2007 from $285.0 million in fiscal year 2006. This increase was attributable to a $34.4 million, or 13.1%, increase in Allegro product sales and a $1.3 million, or 5.7%, increase in Sanken product sales. The increase in Allegro product sales was due to strong gains in all product lines.

 

Cost of goods sold and gross profit.  The cost of goods sold increased $13.8 million, or 7.1%, to $207.8 million in fiscal year 2007 from $194.1 million in fiscal year 2006. The increase in the cost of goods sold was attributable to increased Allegro product sales volumes and increased purchase costs for Sanken products on higher Sanken product sales. Gross profit in fiscal year 2007 increased $21.9 million to $112.9 million from $91.0 million in fiscal year 2006. Our gross margin increased to 35.2% in fiscal year 2007 from 31.9% in fiscal year 2006 primarily due to higher sales, better product mix, higher utilization of our wafer fabrication line in the Worcester facility, lower foundry wafer costs and product transfers to lower-cost manufacturing facilities.

 

Selling, general and administrative.  Selling, general and administrative expenses increased $4.0 million, or 9.8%, to $44.9 million in fiscal year 2007, from $40.9 million in fiscal year 2006, and represented 14.0% of our total net sales in fiscal year 2007 compared to 14.4% in fiscal year 2006. The increase in our selling, general and administrative expenses was primarily attributable to a $2.5 million increase in compensation costs, including stock option expense, a $0.6 million increase in sales commissions and a $0.6 million increase in legal expenses.

 

Research and development.  Research and development expenses increased $3.4 million, or 9.6%, to $38.9 million in fiscal year 2007 from $35.5 million in fiscal year 2006. Research and development represented 12.1% of our total net sales in fiscal year 2007 down from 12.4% of total net sales in fiscal year 2006. The increase in our research and development expense was primarily due to a $1.7 million increase in contracted process development costs, a $1.0 million increase in employee-related compensation costs, including stock option expense and a $0.7 million increase in tape-out costs related to new product development.

 

Operating income.  Operating income increased $14.5 million, or 99.3%, to $29.1 million in fiscal year 2007 from $14.6 million in fiscal year 2006. The increase in operating income is attributable to a 12.5% increase in total net sales, and a 3.3% improvement in gross margin percentage, which were partially offset by moderate increases in operating expenses. The operating margin percentage increased 4.0% in fiscal year 2007, to 9.1%, from 5.1% in fiscal year 2006.

 

Interest income, interest expense, currency and other income.  Interest expense declined by $0.7 million to $1.9 million in fiscal year 2007 from $2.6 million in fiscal year 2006 due to an $11.9 million repayment of long-term debt. We recorded a foreign currency transaction loss of $0.4 million in fiscal year 2007 compared to a $0.5 million gain in fiscal year 2006. The currency loss recorded in fiscal year 2007 was primarily due to realized/unrealized losses on foreign currency denominated transactions of our UK subsidiary. The currency gains recorded in fiscal year 2006 were primarily attributable to the appreciation of the local functional currency of our Philippine subsidiary relative to the U.S. dollar. Other income decreased by $1.1 million to $0.1 million in fiscal year 2007 from $1.2 million in fiscal year 2006. Other income in fiscal year 2006 benefited from the recording of a $0.5 million utility rebate, a $0.3 million asset sale gain and a $0.1 million insurance rebate.

 

Income tax provision.  Income tax provision increased $3.8 million, to $6.1 million in fiscal year 2007, from $2.4 million in fiscal year 2006, representing an effective tax rate of 22.6% in fiscal year 2007 and 17.1% in fiscal year 2006. The increase in the effective tax rate in fiscal year 2007 was due to lower research and development expense and extraterritorial income exclusion (ETI) benefits in relation to the increase in pre-tax income, as well as permanent booked-to-tax differences in deductibility of incentive stock option expense.

Net income.  Net income increased $9.5 million, or 82.3%, to $21.1 million in fiscal year 2007 from $11.6 million in fiscal year 2006. The increase in net income in fiscal year 2007 was attributable to higher sales, improvement in gross margins and a higher return on sales for our operating expenses.

 

Comparison of Fiscal Year 2006 to Fiscal Year 2005

 

Total net sales.  Our total net sales increased $2.7 million, or 1.0%, to $285.0 million in fiscal year 2006 from $282.4 million in fiscal year 2005. This increase was attributable to a $13.8 million, or 5.6%, increase in sales of Allegro products, which were partially offset by a decrease of $11.1 million, or 32.4%, in Sanken product sales. The increase in Allegro product sales was due to strong sales of Hall-Effect speed and position sensors in automotive applications and the extra fiscal week in fiscal year 2006. The decrease in Sanken product sales was due to lower sales in cathode ray tube television applications.

 

Cost of goods sold and gross profit.  Cost of goods sold increased $4.1 million, or 2.2%, to $194.1 million in fiscal year 2006 from $190.0 million in fiscal year 2005. This increase in cost of goods sold was attributable to increased sales volumes of our products and increased utility costs, which were partially offset by a decrease in purchase cost for Sanken products. The $3.7 million increase in utility costs resulted from the expiration of a favorable three-year utility contract at the end of fiscal year 2005 and from significant increases in power and fuel rates during fiscal year 2006. Gross profit in fiscal year 2006 declined by $1.3 million to $91.0 million from $92.3 million in fiscal year 2005 due to increases in utility costs and declines in Sanken product sales. Our gross margin decreased to 31.9% in fiscal year 2006 from 32.7% in fiscal year 2005.

 

Selling, general and administrative.  Selling, general and administrative expenses increased $1.6 million, or 4.2%, to $40.9 million in fiscal year 2006, from $39.3 million in fiscal year 2005, and represented 14.4% of our total net sales in fiscal year 2006 compared to 13.9% in fiscal year 2005. This increase in selling, general and administrative expenses was primarily attributable to an $1.0 million increase in employee profit sharing payments and a $0.8 million increase in bad debt expense.

 

Research and development.  Research and development expenses increased $0.3 million, or 0.9%, to $35.5 million in fiscal year 2006 from $35.2 million in fiscal year 2005. Research and development expenses represented 12.5% of our total net sales in fiscal year 2006 and was nearly unchanged from the same figure in fiscal year 2005. The small increase in our research and development expenses was primarily due to increased depreciation related to our test development equipment.

 

Operating income.  Operating income decreased $3.2 million, or 18.1%, to $14.6 million in fiscal year 2006 from $17.8 million in fiscal year 2005. The decrease in operating income was attributable to an 0.8% decline in gross margin, which was due to moderate increases in operating expenses and nearly flat sales during fiscal year 2006. The operating margin decreased 1.2% in fiscal year 2006, to 5.1%, from 6.3% in fiscal year 2005.

 

Interest income, interest expense, currency and other income.  Interest expense in fiscal year 2006 was $2.6 million, nearly unchanged from fiscal year 2005. We recorded a foreign currency transaction gain of $0.5 million in fiscal year 2006 compared to a $0.1 million gain in fiscal year 2005. The currency gain recorded in fiscal year 2006 was primarily due to the appreciation of the local currency of our Philippine subsidiary. Other income increased by $0.8 million to $1.2 million in fiscal year 2006 from $0.4 million in fiscal year 2005. Other income in fiscal year 2006 benefited from a $0.5 million utility rebate, a $0.3 million asset sale gain and a $0.1 million insurance rebate.

 

Income tax provision.  Income tax provision increased $2.1 million, to $2.4 million in fiscal year 2006, from $0.3 million in fiscal year 2005, representing an effective tax rate of 17.1% in fiscal year 2006 and 2.1% in fiscal year 2005. The effective tax rate increased to 17.1% in fiscal year 2006 from 2.1% in fiscal year 2005, as the income tax provision in fiscal year 2005 included a benefit from ETI credits related to prior fiscal years. No such benefit pertaining to prior fiscal years was recorded in the fiscal year 2006 income tax provision.

Net income.  Net income decreased $4.0 million, or 25.6%, to $11.6 million in fiscal year 2006 from $15.6 million in fiscal year 2005. The decrease in net income in fiscal year 2006 was attributable to the decline in operating income following increases in energy costs, bad debt expense and incentive payments on nearly constant sales. In addition, the income tax provision increased substantially over the tax provision in fiscal year 2005, which benefited from significant ETI tax credits.

 

Selected Quarterly Results

 

The following table presents certain unaudited quarterly financial information for our last eight fiscal quarters on a historical basis. The unaudited interim condensed consolidated financial information contained herein has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting of only normal recurring adjustments that we consider necessary to fairly present such information when read together with the audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

 

Our quarterly total net sales and operating results have fluctuated in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that can contribute to fluctuations in our operating results include:

 

 

 

Quarterly total net sales have fluctuated over the past eight fiscal quarters but generally have increased year to year. Sales declined in the fiscal quarter ended September 30, 2005 primarily due to lower sales of power interface products and Sanken products. The sales increase in the fiscal quarter ended December 30, 2005 was primarily due to higher sales of motor driver ICs in printer applications and higher shipments of automotive speed sensors. The increase in total net sales seen in the fiscal quarter ended March 31, 2006 was primarily due to the extra fiscal week in such fiscal quarter. On an adjusted basis, sales in the fiscal quarter ended March 31, 2006 declined, relative to the prior fiscal quarter, by approximately 1.3% primarily due to slower sales of motor driver ICs and power interface ICs.

 

In the fiscal quarter ended June 30, 2006, sales increased primarily due to higher Sanken product sales and higher shipments of position sensors in handset applications. The sequential increase in sales for the fiscal quarter ended September 29, 2006 was primarily due to increased shipments of motor driver ICs for printer applications, ICs for video applications and smoke detector ICs, which more than offset a $1.7 million decrease in Sanken product sales. The decrease in Sanken product sales in the fiscal quarter ended September 29, 2006 resulted from Sanken assuming responsibility for the distribution of its products in Europe. The subsequent decrease in sales in the fiscal quarter ended December 29, 2006 was primarily due to a decrease in Sanken product sales for accounts in the Americas and a decrease in power interface IC product sales for video applications. The decrease in total net sales in the fiscal quarter ended March 30, 2007 was primarily due to seasonally lower shipments of motor driver ICs for printer applications.

 

Our gross margin generally improved over the eight fiscal quarters ended March 30, 2007, but was subject to fluctuation from fiscal quarter to fiscal quarter. For example, our gross margin increased from 30.7% in the fiscal quarter ended June 24, 2005 to 32.4% in the fiscal quarter ended March 31, 2006. The improvement in gross margin during this period was largely due to higher factory utilization and higher sales. The gross margin in the fiscal quarter ended June 30, 2006 increased to 35.2% before decreasing to 34.3% in the fiscal quarter ended December 29, 2006, and ending the fiscal year at 35.3% for the fiscal quarter ended March 30, 2007. Gross margins in fiscal year 2007 benefited from higher factory utilization during the first half of fiscal year 2007 as inventory was built to satisfy last time buys for discontinued products from our four-inch wafer fabrication line that was shutdown in July 2006. In addition, gross margins in fiscal year 2007 benefited from higher sales and an improved product mix.

 

During fiscal year 2006, selling, general and administrative expenses varied between $9.5 million in the fiscal quarter ended September 30, 2005 to $11.2 million in the fiscal quarter ended March 31, 2006. The increase in selling, general and administrative expenses in the fiscal quarter ended March 31, 2006 was primarily due to higher sales commissions, compensation expenses associated with the extra fiscal week and accruals for employee profit sharing. During fiscal year 2007, selling, general and administrative expenses fluctuated between $10.2 million in the fiscal quarter ended September 29, 2006 and $12.0 million in the fiscal quarter ended March 30, 2007. The decrease in selling, general and administrative expenses observed for the fiscal quarter ended September 29, 2006 was due in part to $0.4 million refund of payroll taxes recognized by our European sales center, a $0.4 million reversal of bad debt expense and a $0.2 million decrease in commission expenses. The increase in selling, general and administrative expenses in the fiscal

quarter ended March 30, 2007 was primarily due to increased compensation costs related to headcount additions in Asia sales support offices and marketing functions.

 

Fluctuations in research and development expenses are primarily the result of variations in the level of tape-out costs related to new product development in any given fiscal quarter. In addition, any new process development programs requiring technology payments will cause our research and development expenses to fluctuate by fiscal quarter. During fiscal year 2006, our research and development expenses fluctuated between $8.4 million in the fiscal quarter ended September 30, 2005 to $9.1 million in the fiscal quarter ended December 30, 2005. Despite the extra fiscal week in the fiscal quarter ended March 31, 2006, research and development expenses declined slightly from the previous quarter primarily due to reduced tape-out expenses. Research and development expenses increased in the fiscal quarter ended June 30, 2006 primarily due to an increase in contracted process development costs and an increase in tape-out expenses. The increase in research and development expenses in the fiscal quarter ended March 30, 2007 was primarily due to a one-time payment to PSI to license certain technology, an increase in contracted process development costs and an increase in tape-out costs for new product development.

 

The quarterly income tax provision is determined by the effective tax rate, which fluctuates due to the timing in the recognition of the permanent book provision to tax return differences and changes in our estimates of other items that determine the effective tax rate for the current fiscal year. We typically file our tax returns for the prior fiscal year in our third fiscal quarter ending in December. During this quarter we may adjust our estimates of our effective tax rate based on identified differences between the taxes owed for the prior fiscal year and the related book provision. In both fiscal years 2006 and 2007, the effective tax rate was adjusted downward in the third fiscal quarter mainly due to the recognition of ETI benefits exceeding those estimated in our prior year book provision. Changes in the effective tax rate between the third and fourth quarters of both fiscal years 2006 and 2007 were primarily as a result of changes in profit before tax. The ETI exclusion was phased out as of December 2006.

 

We believe that future quarterly fluctuations in our results of operations are likely, as a result of the factors discussed above and other factors, and therefore do not believe that our operating results in any fiscal quarter or fiscal quarters should be relied upon as an accurate indicator of our future performance.

 

Liquidity and Capital Resources

 

Over the last five fiscal years, we have primarily relied upon our internally generated cash flow to fund our operations, support capital expenditures and to pay down our debt; however, at various times we have made use of our bank term debt and intercompany Sanken borrowings to manage period to period imbalances in our sources and uses of cash.

 

Our principal sources of liquidity as of March 30, 2007 consisted of $13.5 million in cash and cash equivalents and banking relationship with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTM) under which we have borrowed from time to time. In addition, at various times we have borrowed funds from Sanken. These intercompany borrowings take the form of unsecured term loans that carry variable rates based on a three-month London Inter Bank Offered Rate (LIBOR) plus a premium of 0.45%. As of March 30, 2007, the aggregate principal amount outstanding of four Sanken intercompany loans was $16.7 million. A portion of such Sanken intercompany loans has been repaid as of the date of this prospectus and the aggregate principal amount outstanding as of the date of this prospectus is $14.3 million. The provisions of our Sanken intercompany loans allow us to pre-pay the amounts due without penalty and do not contain restrictive covenants. We do not have in place any agreements with Sanken that allow us to borrow additional funds and there can be no guarantee that such funds will be provided in the future. As of March 30, 2007, we carried loans from Mizuho Corporate Bank, Ltd. (Mizuho) having an aggregate outstanding principal amount of $11 million due and payable on September 4, 2007 and November 30, 2007 under the Term Loan Agreements, dated September 4, 2001 and November 30, 2001, respectively. The Term Loan Agreement, dated September 4, 2001, bears interest at a fixed rate of 6.48% per annum and the Term Loan Agreement, dated November 30, 2001, bears interest at a fixed rate of 6.416% per annum. We plan to use some of the proceeds raised from this offering to repay the Mizuho loan having an aggregate principal amount of $3.0 million due November 30,

2007 and a portion of the Sanken intercompany loans in the amount of $1.6 million in the fiscal quarter ending December 31, 2007.

 

We believe that our cash flow from operations and existing cash and cash equivalents will satisfy our anticipated cash requirements for at least the next 12 months.

 

Operating activities

 

Cash from operating activities was $48.8 million in fiscal year 2007. The primary sources of cash from operating activities in fiscal year 2007 were net income, equal to $21.1 million, adjusted for non-cash charges totaling $23.3 million, which consisted primarily of depreciation and amortization expenses, a $4.3 million increase in trade payables to PSI and Sanken related to material purchases and a $1.2 million reduction in trade accounts receivable. The primary uses of cash from operating activities in fiscal year 2007 were an increase in inventories of $1.2 million related to our higher sales and increased production of four-inch wafers prior to their discontinuance.

 

Cash from operating activities was $24.7 million in fiscal year 2006. The primary sources of cash from operating activities in fiscal year 2006 were net income of $11.6 million, adjusted for non-cash charges totaling $18.7 million, which consisted primarily of depreciation and amortization expenses, and increases in accrued expenses and other liabilities of $1.5 million. The primary uses of cash from operating activities in fiscal year 2006 were decreases in trade payables and payables to Sanken and PSI totaling $4.1 million, accounts receivable increases of $1.9 million and a $1.2 million increase in prepaid expenses.

 

Cash from operating activities was $24.3 million in fiscal year 2005. The primary sources of cash from operating activities in fiscal year 2005 were net income of $15.6 million, adjusted for non-cash charges totaling $17.0 million, which were primarily comprised of depreciation and amortization expenses, and a $4.1 million increase in trade accounts payable related to capital equipment purchases. The primary uses of cash from operating activities were a $3.2 million increase in prepaid expenses, a $2.7 million increase in receivables due from PSI and Sanken, a $2.5 million increase in trade receivables and a $2.1 million increase in inventories.

 

Investing Activities

 

In fiscal year 2007, $25.9 million of net cash was used in investing activities, including $26.1 million for capital equipment purchases and $0.2 million of proceeds from disposal of assets. In fiscal year 2006, $18.2 million of net cash was used in investing activities, including $19.4 million of capital equipment purchases and $1.2 million in proceeds on the sale of an office facility in Concord, NH. In addition, during fiscal year 2006, we advanced a $5.0 million working capital loan to PSI that was repaid when it was acquired by Sanken in July 2005. In fiscal year 2005, net cash used in investing activities was $22.8 million primarily consisting of capital equipment purchases.

 

Capital equipment purchases include expenditures for our wafer fabrication facility, assembly and test operations, information technology infrastructure, research and development investments and other general facility spending. In fiscal year 2007, approximately 60.3% of our capital was spent on test operations, 14.8% on assembly operations, 9.2% on our wafer fabrication facility, 5.4% on information technology and 10.3% on general facility spending. Our expenditures for wafer fabrication were relatively low due to our outsourcing of approximately 36.5% of our wafer production to PSI and the shutdown of the four-inch wafer fabrication line in Worcester during fiscal year 2007. Our expenditure for test operations was relatively high due to the testing requirements and quality demands of our automotive customers and the unique test equipment needs of certain product lines. Our expenditures for assembly operations was driven largely by the need to increase capacity with respect to our automotive sensors.

 

Financing Activities

 

In fiscal year 2007, net cash used in financing activities was $12.9 million, including $11.2 million net repayment of bank term debt, a $1.0 million dividend payment to Sanken and $0.7 million net repayment of

Sanken intercompany debt. In fiscal year 2006, net cash used in financing activities was $8.9 million, including $13.2 million repayment of bank term debt, $5.4 million in borrowings from Sanken and a $1.0 million dividend payment to Sanken. In fiscal year 2005, net cash used in financing activities was $9.1 million, including $11.0 million repayment of bank term debt, $3.0 million of borrowings from Sanken and a $1.0 million dividend payment to Sanken.

 

Contractual Obligations

 

Set forth below is information concerning our known contractual obligations as of March 30, 2007.

 

 

Purchase orders for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the total amount of these purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. In addition, our purchase orders generally allow for cancellation without significant penalties. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected short-term requirements.

 

Off-balance Sheet Arrangements

 

Our off-balance sheet arrangements consist primarily of conventional operating leases. As of March 30, 2007, we did not have any other relationships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such arrangements.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value in accordance with generally accepted accounting principles and expands on required disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it is applied under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for us in fiscal year 2008 and will be applied prospectively. The provisions of SFAS No. 157 are not expected to have a material impact on our consolidated financial statements.

 

The FASB has issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FAS No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes. Currently, the accounting for uncertainty in income taxes is subject to significant varied interpretations that have resulted in diverse and inconsistent accounting practices and measurements. Addressing such diversity, FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring changes in such tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006, and became effective for us on March 31, 2007, the first day of fiscal year 2008. We have determined that the adoption of FIN 48 will not have a material impact on our financial results.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, to permit all entities to choose to elect, at specified election dates, to measure eligible

financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. We are currently evaluating the impact of the provisions of SFAS No. 159 on our consolidated financial statements, if any, when it becomes effective for fiscal year 2009.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are subject to market risk in the ordinary course of business, which includes interest rate risk related to our cash and cash equivalents, and our borrowings. In addition, we are exposed to the foreign exchange rate risk related to our foreign currency transactions and the net asset positions of our foreign subsidiaries.

 

Interest rate risk.  The primary objective of our investment activity is to preserve principal, provide liquidity and maximize income without increasing risk. Our investments have limited exposure to market risk. To minimize this risk, we maintain our portfolio of cash and cash equivalents in a variety of short-term investments, consisting primarily of bank deposits, U.S. Treasury securities and short-term corporate obligations. Because of the short term nature of these investments, we do not believe that their value is subject to significant interest rate risk. The interest income generated by these investments will fluctuate with current market interest rates.

 

We are exposed to interest rate risk relating to the increase or decrease in the amount of interest expense we must pay on our bank debt, our intercompany loans and any borrowings on our credit facility. The interest rate on our existing bank debt with Mizuho is currently fixed and therefore exposes us to limited market risk. The interest rate on our intercompany loans from Sanken is variable and fluctuates with the three-month LIBOR rate. As of March 30, 2007, our intercompany loans from Sanken totaled $16.7 million, of which $2.4 million has been repaid as of the date of this prospectus. We estimate that a 10% change in the LIBOR rate would result in an approximate $75,000 annual change in the interest expense related to these intercompany loans from Sanken.

 

Foreign currency risk.  Most of our billings are denominated in U.S. dollars, however, a portion of our sales to customers in Europe are denominated in euro and, to a lesser extent, in British pounds. In addition, while nearly all of our sales to Sanken are invoiced in U.S. dollars, a portion of our products sold to Sanken are re-priced, on a monthly basis, according to the change in the Japanese yen to U.S. dollar exchange rate. Nonetheless, the local currency denominated expenses of our European and Asian operations help us offset some of the foreign exchange sales exposure. Some of our foreign operations engage in transactions involving currencies other than their local functional currency and this may give rise to realized and unrealized gains/losses when exchange rates fluctuate. The translated U.S. dollar value of the net assets of these foreign operations could experience balance sheet gains or losses in stockholder’s equity and comprehensive income with changing exchange rates. According to our analysis of the net non-U.S. dollar composition of our sales and costs for fiscal year 2007, we estimate that a 10% change in exchange rates to the U.S. dollar would produce an approximately $2.5 million change in our net income. To date, we have not entered into any foreign currency hedging transactions to mitigate these exposures, although we may do so in the future. There is no guarantee that any future hedging activity that we may engage in would be effective in eliminating our foreign currency exposures.

 

Overview

 

Semiconductors may be classified as discrete devices or integrated circuits, or ICs. Discrete devices are individual devices, such as diodes, capacitors and transistors. ICs combine many discrete devices into a single chip to form a more complex circuit. ICs may be further classified as digital, analog or mixed-signal, terms which describe differences in the manner in which the circuit manages electricity. Digital circuits are generally designed to accept as inputs only two specific electrical voltages and treat those two voltages as “on” and “off” signals. Similarly, digital circuits generate as output “on” and “off” signals. This makes digital ICs well suited for use as microprocessors, memory and other logic devices for use in a wide range of products. Analog circuits are designed to accept electric signals that can vary across a continuous range of infinite values over the operating voltage of the circuits. In this manner, analog ICs are able to take as inputs electric signals generated in response to the continuously varying conditions that occur in the physical world, such as temperature, light intensity, speed, position, sound and pressure, and convert these input signals into output signals having electronic patterns that convey information about those physical conditions. Some analog circuits only accept analog inputs and generate analog outputs. Other analog ICs, called mixed-signal ICs, combine on one chip the capacity to process analog signals as inputs or outputs and digital signals as inputs or outputs.

 

For commercial and industrial purposes, mixed-signal ICs are often categorized as analog ICs. We use the term “analog ICs” in this discussion to include mixed-signal ICs, unless the context particularly requires us to emphasize a characteristic of mixed-signal ICs that is different from analog ICs in general. The properties of analog ICs, including mixed-signal ICs, make them well suited for a wide range of applications in industrial and consumer products. Examples of these applications in specific end-use markets include:

 

 

Analog IC Market

 

Based on statistics published by Gartner, Inc., the market for analog semiconductors in 2006 was estimated at $37.5 billion and represented 14.3% of the estimated $262.7 billion overall semiconductor market. Within the broad analog semiconductor market, we are focused on the areas of magnetic sensors and application specific ICs, which Gartner, Inc. defines as application specific standard products (ASSP) and single customer specific ICs.

 

According to Gartner, Inc., the non-optical sensor market, estimated at $2.1 billion in 2006, will grow to $3.3 billion in 2011, representing a compound annual growth rate of 9.5%. Within this market, we are focused in the automotive and communications areas. Gartner, Inc. projects that these areas, estimated at $1.6 billion and $61 million respectively in 2006, will grow to an estimated $2.4 billion and $234 million respectively in 2011, representing compound annual growth rates of 8.4% and 30.9%, respectively. We are further focused in the area of magnetic sensors, which WSTS projects will grow from an estimated $859.8 million in 2006 to $1.3 billion in 2010, a compound annual growth rate of 10.2%.

In the application-specific analog area, Gartner, Inc. projects that the market, estimated at $22.7 billion in 2006, will grow to an estimated $34.6 billion in 2010, a compound annual growth rate of 11.1%. Within this market, we are further focused on the automotive, computer and office automation and consumer markets. Gartner, Inc. projects that sales of application-specific analog ICs for the automotive market will grow from an estimated $3.4 billion in 2006 to an estimated $5.0 billion in 2010, a compound annual growth rate of 9.8%. According to Gartner, Inc., the analog data processing market (which we refer to as the computer and office automation market) will grow from an estimated $3.3 billion in 2006 to an estimated $4.4 billion in 2010, a compound annual growth rate of 7.5%. Within the computer and office automation market, we are focused on printer application ICs, such as motor driver ICs. The consumer market, estimated at $3.8 billion in 2006, is projected to $5.2 billion in 2010, a compound annual growth rate of 8.1%, according to Gartner, Inc. Within the consumer market, we are focused on power analog ICs for applications such as smoke detectors, projection TVs and digital cameras.

 

The analog IC market has several key characteristics that result in decreased volatility and higher barriers to entry relative to the overall semiconductor industry. These characteristics include:

 

 

 

Sensor IC Market

 

Semiconductor sensors are used to convert environmental information into electrical signals. The sensor IC market is composed of optical and non-optical sensor ICs. We are focused in the non-optical sensor area, a market which Gartner, Inc. estimates will grow from $2.1 billion in 2006 to an estimated $3.3 billion in 2011, representing a compound annual growth rate of 9.5%. Within the non-optical sensor market, we are further focused in the area of magnetic sensor ICs, which WSTS estimates will grow from $859.8 million in 2006 to $1.3 billion in 2010, a compound annual growth rate of at 10.2%.

 

Non-optical magnetic sensor ICs convert physical, chemical or biological measurements or properties to electrical signals. There are four primary types of non-optical magnetic sensor ICs: (1) temperature sensors, which convert temperature measurements to electric signals; (2) pressure sensors, which convert pressure measurements to electrical signals; (3) acceleration sensors, which convert acceleration measurements to electrical signals; and (4) magnetic field sensors, which convert magnetic field measurements to electrical signals.

 

Magnetic field sensors, a type of non-optical sensor IC, measure the strength and direction of a magnetic field by using one of several different sensing technologies. When using Hall-Effect sensing technology, magnetic field sensors detect magnetic fields to gather information on physical properties such as direction, presence, rotation, angle and electrical currents without direct physical contact. The absence of direct physical contact is a particularly important advantage in automotive applications. Unlike non-magnetic field sensors that generally detect and report physical properties, such as temperature, pressures, strain, flow, acceleration and yaw rate, in a direct manner, magnetic sensors are used along with permanent or electromagnetic configurations to translate information on the physical property into alterations in magnetic field that can be detected by the magnetic field sensor and be further processed or used to drive other devices.

 

Hall-Effect sensor ICs vary in their complexity, design, size, expense, and the strength of the magnetic field that they are able to detect. Hall-Effect sensor ICs can be cost-effectively manufactured in silicon substrates alongside other semiconductor microcircuitry that can process the signals generated by the detection of magnetic fields. The ability to integrate Hall-Effect sensors with complex analog and mixed-signal circuitry on a single IC is particularly advantageous in high-volume applications that can benefit from the economies provided by integration, including applications in the automotive, computer and office automation, consumer and industrial markets.

 

For example, Hall-Effect sensor ICs are commonly used in automotive electronic power steering (EPS) systems. In this application, the sensors detect the angle and torque of the steering wheel. The EPS function lowers overall system cost and reduces vehicle weight for higher fuel economy. Another example of Hall-Effect sensor ICs application is in the high-volume communications market, specifically controlling the on-off function in cellular phones that flip or slide. The Hall-Effect sensor IC replaces older technology mechanical or reed switch devices in cellular phones.

 

The magnetic sensor IC market is differentiated from the overall analog IC market in terms of the requisite design and manufacturing skills. The development of magnetic sensor ICs requires not only analog and mixed-signal IC design skills, but also expertise in the areas of mechanical systems, electromagnetic and magnetic design and specialized assembly and test techniques.

 

Power IC and Power Management IC Market

 

Power ICs are used to drive varying levels of power into electronic products and systems in accordance with the specific needs of the product or system. The key differentiating feature of a power IC relative to

other semiconductor technologies is its ability to handle high voltage, high current or a combination of both along with complex analog and mixed-signal circuitry.

 

Power ICs include products such as motor drivers, LED drivers, power arrays, and gate drivers. These products are used in a wide variety of applications in the automotive, computer and office automation and industrial markets. End applications include devices such as printers, copiers, scanners, projectors, display devices, smoke detectors, fans, cell phones and cameras. Within multi-function printers, for example, power ICs interface between digital logic devices and power loads to control the motor which feeds paper through the machine.

 

Within the application-specific analog market, we are further focused on the automotive, computer and office automation and consumer markets. Gartner, Inc. projects that sales of application-specific analog ICs for the automotive market will grow from an estimated $3.4 billion in 2006 to an estimated $5.0 billion in 2010, a compound annual growth rate of 9.8%. According to Gartner, Inc., the analog data processing market (which we refer to as the computer and office automation market) will grow from an estimated $3.3 billion in 2006 to an estimated $4.4 billion in 2010, a compound annual growth rate of 7.5%. Within the computer and office automation market, we are focused on printer and projector application ICs, such as motor driver ICs. The consumer market, which Gartner, Inc. estimated at $3.8 billion in 2006, will grow to an estimated $5.2 billion in 2010, a compound annual growth rate of 8.1%. Within the consumer market, we are focused on power analog ICs for applications such as smoke detectors, projection TVs and digital cameras.

 

Power management ICs convert power from sources such as electrical outlets, batteries or engine alternators into more useful levels for a wide range of electrical and electronic systems and equipment. Power management ICs enhance the way power is utilized by an electronic or electrical system by performing one or more of the following functions: power conversion, power regulation, power replenishment, power storage, power conservation and power monitoring. The more sophisticated the end product and the more features it has, the greater the need for power management.

 

Power management IC products include regulators and converters that accept a given input voltage, typically from a battery or wall adapter, and provide desired voltage or current levels depending on the application requirements. In addition to the required conversion(s), power management ICs should be power-efficient, compact, and add value through protection capabilities or diagnostics. These products are used in consumer, computer and office automation, and industrial applications such as mobile phones, set-top boxes, digital cameras, GPS navigation systems, notebooks, desktop monitors, and other general-purpose voltage regulator applications. According to Gartner, Inc., the voltage regulator market (which we refer to as our power management market) will grow from an estimated $7.6 billion in 2006 to an estimated $11.2 billion in 2010, representing a compound annual growth rate of 10.0%.

 

The power and power management IC design process is highly dependent on the training and experience of individual design engineers. In addition to analog and mixed-signal design expertise, engineers must also possess proficiency in thermal and electrical noise management, as well as switching and linear power supply topologies.

 

Industry Trends Affecting Our Business

 

Increasing use of analog ICs in end-user applications.  The use of analog ICs and magnetic sensor ICs has rapidly increased across a wide range of applications due to the broad replacement of mechanical functions with semiconductor-based devices that improve the reliability and efficiency of such electro-mechanical systems as motors, information encoders and potentiometers for measuring voltages. The growing use of these two types of ICs has been particularly significant in the automotive, computer and office automation, and communications markets. Within the automotive industry, for example, an increasing focus on fuel efficiency and safety has resulted in fundamental redesigns of automotive systems and the introduction of multiple electronically controlled systems, including hybrid vehicles, thereby increasing the number of semiconductors used in such systems. Gartner, Inc. projects that the market for application specific analog ICs will grow from an estimated $3.4 billion in 2006 to an estimated $5.0 billion in 2010, a compound annual growth rate of 9.8%. The automotive sensor IC market, which Gartner, Inc. estimated at $1.6 billion in 2006, will grow to an estimated $2.4 billion in 2011, representing a compound annual growth rate of 8.4%. Within the computer and office automation market, consumer demand for increased functionality has also resulted in

the increased use of analog ICs in a variety of applications. For example, increased demand for home office multi-function printing systems that perform printing, scanning and faxing functions has increased the demand for power ICs that enable this greater functionality. This market (which Gartner, Inc. refers to as the data processing market) is estimated to grow from $3.3 billion in 2006 to an estimated $4.4 billion in 2010, representing a compound annual growth rate of 7.5%, according to Gartner, Inc.

 

Increasing complexity of products.  Customer demand for more features and functionality in smaller, lower-cost ICs and IC packages has resulted in increased circuit integration and greater complexity in the IC design and manufacturing process. In order to more effectively deliver the benefits of higher integration to a customer, a semiconductor supplier must possess a broad range of engineering capabilities, including expertise in device modeling, the ability to optimize IC design and component interfaces based on system-level knowledge, and the ability to combine analog and digital designs on the same IC. Other required capabilities include the ability to manage the thermal, mechanical, magnetic and packaging engineering issues that affect the performance of a highly integrated system, as well as the capability to perform more complex assembly and test operations. As a result of these factors, the knowledge and skills required to design innovative, high-quality integrated analog and mixed-signal devices are highly specialized and can take many years to develop. Additionally, given the research and engineering lead times involved, close collaboration between semiconductor suppliers and their leading customers has become increasingly important. Finally, the semiconductor industry experiences sales cycles of varying length, requiring careful management of product lines, inventories and resources.

 

Consolidation of supplier base by customers.  To reduce supply chain complexity, lower costs and shorten time-to-market, OEMs are increasingly seeking to reduce the number of suppliers to their businesses. Preferred suppliers will have completed rigorous qualification processes and met standards in such areas as inventory management, quality, lead time and delivery. As OEMs consolidate their supplier bases, it becomes increasingly difficult for vendors who have not been previously qualified by a particular OEM to become a supplier to that OEM, thereby raising the barriers to entry.

 

Rising up-front development costs.  Advances in semiconductor technology and customer demand for greater functionality within smaller IC packages have resulted in products that are more complex and more highly integrated. While these trends have resulted in superior product performance, higher reliability, smaller form factors and simplified assembly processes, they have also increased the engineering times and resources required to develop new products. Within the automotive market, lengthy qualification processes have led to higher costs, as component suppliers must expend significant time and resources on product development well before high-volume product shipments can begin generating economies-of-scale benefits. Further, these product development costs will increase as companies adopt more advanced process technologies and produce products with smaller geometries.

 

Shorter product life cycles in portable electronics products.  Life cycles for portable electronics products in the consumer and communications markets are comparatively short relative to other markets served by analog products. In these markets, demand is driven by the user’s desire for greater functionality and suppliers’ ability to provide these new features at a relatively low cost. In the cell phone market, for example, users tend to upgrade their cell phones with high frequency, resulting in intense competition among cell phone suppliers to introduce new models. While shorter product life cycles typically create the opportunity for higher sales and higher average selling prices, they also require that suppliers invest heavily in new product development in order to continuously accelerate new product development.

 

Growing semiconductor demand for power management functionality.  The number of applications being integrated into electronic devices is increasing, especially for consumer products. Increasing demand for portable, handheld solutions is driving the convergence of functionality in handheld electronics and cell phones, resulting in more sophisticated wireless email devices and cell phones that include phone, camera, gaming, video and email capabilities. These applications require additional functionality or more semiconductors, which may in turn increase power consumption. The need for greater power efficiency, particularly in portable consumer electronics, increases demand for power management functionality at the semiconductor level.

 

Company Overview

 

We design, develop, manufacture and market magnetic sensor ICs and application-specific analog power semiconductors for the automotive, computer and office automation, communications, consumer and industrial markets. We are a leading provider, in terms of total net sales, of integrated Hall-Effect sensor ICs with applications in each of these markets. Our broad product portfolio of application-specific analog power ICs includes motor drivers and power interface drivers that are used in automotive electronic systems and computer and office automation products, such as printers and LED displays. Our 40 years of experience in the semiconductor industry serves as our foundation for designing and manufacturing magnetic sensor ICs and analog power ICs, and enables our current expansion into the growing field of power management ICs.

 

Our product portfolio includes over 325 Allegro products across a range of high-performance analog and mixed-signal semiconductors, including magnetic sensor ICs, analog power ICs and power management ICs. During fiscal year 2007, we sold our products directly to approximately 140 OEMs, 33 distributors and 49 EMSs, many of which are leaders in their respective markets. In addition, we also sold our products to a wide range of end customers in Japan through Sanken, our parent company. Through collaboration in product design with many of these customers, we are able to gain insights into trends in the markets we serve and the related needs of our customers for new and improved semiconductor technology and products. We believe that these insights enable us to develop leading-edge solutions, often in advance of our competitors. Our close relationship with Sanken, our parent company, gives us access to a broad base of leading Japanese customers in the automotive, consumer and computer and office automation markets for which we develop advanced products that can be sold worldwide. We provide product design and applications development support to our customers through design and application centers located in the Americas, Asia and Europe.

 

We employ both internal and external manufacturing capacity for wafer fabrication, assembly and testing. Our relationship with PSI, a wholly owned subsidiary of Sanken, provides us with cost-effective wafer manufacturing capacity that utilizes our advanced wafer fabrication technology. This manufacturing approach allows us to leverage our intellectual capital while reducing our capital investment requirements.

 

We were established as the semiconductor division of Sprague in 1965. In 1990, we were acquired by Sanken.

 

Our Relationship with Sanken

 

Prior to this offering, we have been a wholly owned subsidiary of Sanken, a Japanese company whose common stock is traded on the First Section of the Tokyo Stock Exchange. Sanken intends for the foreseeable future to maintain majority ownership of the outstanding shares of our common stock.

 

Sanken was established as the Toho Sanken Electric Co., Ltd. in 1946 as the successor to an industrial technology research institute that began operating in the 1930s. Sanken’s early industrial research and development activities in what was then the new field of semiconductors formed the foundation of its growth in semiconductor product design, development, manufacturing and marketing. Sanken’s worldwide production, design, and sales and distribution operations are organized in three segments: semiconductors (which includes Allegro), power modules and power supply equipment. Sanken’s semiconductor business segment, which includes power supply ICs, motor driver ICs, automotive ICs and discrete devices, complements our product lines. For fiscal year ended March 31, 2007, Sanken had net sales of approximately 203.8 billion Japanese yen (approximately US$1.7 billion) and net profits of 7.5 billion Japanese yen (approximately US$63.5 million).

 

Allegro was formed in 1990 when Sanken acquired the semiconductor division of Sprague in an effort to expand its U.S. operations and strengthen its worldwide semiconductor business. In addition to currently being our controlling stockholder, Sanken collaborates with us in the areas of marketing and distribution, technology

development and manufacturing. We believe that the collaborative efforts between Sanken and us create synergistic opportunities and benefits, some of which are highlighted below:

 

 

We expect to continue our collaborative efforts with Sanken in areas such as marketing and distribution, manufacturing and development of product and manufacturing process technology. Please refer to the section of this prospectus titled “Transactions and Arrangements with Sanken and PSI” for more information on the collaborative arrangements between and among Sanken, PSI and us.

 

Our Competitive Strengths

 

Our key competitive strengths include the following:

 

We have leading market positions.  According to Gartner, Inc., we were the leading provider of magnetic sensor ICs with an estimated 25% share of the $662 million market in 2006. Within this market, we were the second leading provider of magnetic sensor ICs for the automotive market, with an estimated 22% share of the $528 million market, according to Gartner, Inc. In addition, within the high-growth communications market for non-optical sensor ICs, we have the leading position, with an estimated 39% market share in 2006, according to Gartner, Inc. In addition, based on our sales to leading customers in the computer and office automation market during 2006, we estimate that we had an approximate 11.5% market share in motor driver ICs for printer applications during that year. We believe that these positions provide us with opportunities to take advantage of projected growth in these markets.

 

We have established technology leadership in the development of integrated magnetic sensor ICs and power ICs.  Our technology leadership is supported by a strong intellectual property portfolio and trade secrets, analog design expertise and sensor assembly and test expertise. Our innovations in Hall-Effect sensor ICs include assemblies with magnets and magnetic field concentrators and circuit design techniques for multiple applications. Our power IC applications are developed using our proprietary 60-volt BCD process which enables the efficient integration of various discrete power circuits on one chip. Our power IC expertise is especially strong in the integration of multiple motor drivers and switching regulators on the same chip. We have a team of highly skilled engineers with analog design, test development and process technology development expertise. On average, our engineers have 13 years of semiconductor development experience.

Our system-level expertise enables us to understand the complex, specific needs of our customers and provide advanced solutions that improve the performance of our customers’ products.

 

Our business diversification provides a stable base with multiple growth opportunities.  Our total net sales are diversified across customers, sales channels, geographies and end markets, which provides opportunities to grow and also maintain relative stability in total net sales across the business cycles that characterize the semiconductor industry. This enables us to continue to invest across business cycles, pursue multiple growth opportunities and leverage our research and development efforts across multiple products and end markets. Based on our sales during fiscal year 2007, no single customer exceeded 6.7% of our total net sales, and no single region exceeded 30.1% of our total net sales. We have strong relationships with market-leading, global customers across multiple end markets, including automotive, communications, consumer and computer and office automation. As a result, we have developed substantial system-level knowledge for our various end markets and applications. In addition, for many of our customers, we are among a limited number of vendors who are prequalified to compete for their next-generation product requirements and, for many of our products, we are the sole supplier to our customers. These relationships allow us to gain insight into the specifications for their products, enabling us to develop innovative solutions to meet their needs, hence providing us with multiple opportunities to expand our business.

 

We are well-positioned to access the Japanese markets.  Our collaboration with the Sanken Group provides access to the Japanese applications-specific analog semiconductor market. According to WSTS, the Japanese ASSP market, estimated at $3.4 billion market in 2006, will grow to $3.9 billion in 2010. We have leveraged Sanken’s customer relationships and extensive distribution and technical support networks to increase our sales in Japan. During fiscal year 2007, approximately 19.6% of our total net sales was derived from our sales to end-users in Japan, primarily for motor drivers in the computer and office automation market and for sensors in the automotive market. We believe we are also well-positioned to expand our power management business in Japan, particularly in the automotive, computer and office automation and consumer markets. Relationships with leading Japanese manufacturers in the consumer and automotive markets are particularly valuable since many of the solutions created for customers in these markets are quickly adopted by other manufacturers outside of Japan.

 

We possess a flexible, advanced manufacturing infrastructure.  We optimize our manufacturing infrastructure through a mix of internal and external capacity. Internal and affiliated manufacturing capacity, provided by our Worcester, MA wafer fabrication facility and PSI’s facility in Bloomington, MN, facilitates technology development and quality control. Our internal assembly and test facility, based in Manila, Philippines, provides high-volume production capacity while facilitating the protection of process intellectual property, particularly for the assembly and test of our magnetic sensor products. We are certified under TS-16949, the automotive sector-specific quality management system standard, and are a major supplier to Japanese automotive manufacturers, recognized as having very stringent quality standards. We also use external assembly and test facilities to enable flexible capacity utilization and technology access.

 

Our management team is highly experienced.  Our senior management team averages 25 years of semiconductor industry experience and 20 years of service to Allegro and its predecessor entity. We believe that our team has demonstrated expertise in our business and has the capability to develop and execute successful business strategies through semiconductor industry cycles.

 

Our Strategy

 

Our objective is to enhance our position as a leading provider of analog semiconductor products. Key elements of our strategy include:

 

Leveraging our intellectual property and technology capabilities to pursue additional opportunities in high-growth markets.  We address high-growth markets by developing new applications that create synergies with our existing technologies and product portfolio. For example, we will continue to develop innovative sensor and power products that target the increasing electronics content in automobiles in applications such as powertrain, chassis and safety systems. We are also expanding our presence in the communications and consumer markets by leveraging our analog power IC design and process capabilities to develop new power

management products. We are also applying our sensor design skills and our power supply and motor control applications expertise in the development of technologies for sensing electric current. Further, we will apply these new product areas along with innovative sensor and motor driver products to expand our presence in the consumer market. In addition, we will continue to make investments in growth segments, such as Xenon flash driver ICs for digital cameras, vibration motor ICs for cellular phones and magnetic sensor ICs that protect the power supplies of computer servers.

 

Rapidly introducing value-added products.  We believe that our research and development investments in the areas of product design, wafer fabrication technology enhancement and IC package development are critical to maintaining our competitive advantage. We continue to enhance our research and development capabilities through internal investments and will consider potential external acquisitions of technologies to enable us to continue to offer differentiated, value-added products to our customers. We intend to increase the pace of our new product introductions by continuing to enhance our design tools, collaborate closely with our industry-leading customers and actively manage our product development pipeline. We believe that this approach will enable us to meet the shorter design cycles and times-to-market requirements demanded by our customers, particularly in the communications and consumer markets.

 

Increasing the breadth and depth of our customer relationships.  We believe our close collaboration with industry-leading customers has provided us with market insights that enable us to focus our resources on developing innovative products. We intend to continue strengthening our relationships with existing customers by broadening our product portfolio to further satisfy their needs. In the automotive market, for example, our innovative sensor solutions and system-level expertise enabled us to develop extensive collaborative relationships with our customers which we believe will facilitate market acceptance of our new sensor and analog power IC solutions. In the computer and office automation market, our system-level expertise, diverse analog power IC portfolio and customer relationships will enable us to offer new power management solutions. Furthermore, we intend to continue broadening our customer base by enhancing our sales and marketing efforts by utilizing an expanded global sales infrastructure along with a network of local applications and support centers near customer locations. In addition, we will continue to leverage our relationship with Sanken to improve our service and support of Japanese customers, particularly those in the automotive, computer and office automation, and consumer markets.

 

Continuing to pursue a flexible and cost-effective manufacturing strategy.  We believe that our use of both internal and external manufacturing capacity provides a flexible and efficient manufacturing model that reduces capital requirements, lowers operating costs, ensures reliability of supply and supports our growth. Our internal manufacturing facilities and those of our affiliate PSI are focused on specialty wafer fabrication technologies. We intend to continue to collaborate with Sanken to develop quality methodologies that satisfy the needs of our global automotive customers, including those in Japan. We will continue to use our in-house manufacturing facilities to maintain the quality of our products for the automotive market, ensure continuity of supply and protect our intellectual property, particularly in assembly and testing, where we believe our customized solutions provide us with a competitive advantage. In addition, we intend to continue utilizing external wafer foundries for certain process technologies and subcontractors for more standardized assembly and test requirements in order to efficiently manage our capital requirements.

 

Continuing to improve our profit margins.  We expect to improve our profitability by enriching our product portfolio, rapidly introducing new, higher-margin products and reducing manufacturing costs. We expect to continue to improve our product mix by developing new products for growth markets that typically generate higher profit margins. We intend to place a particular focus on enhancing our margins by converting existing products to products using newer technologies. We also intend to reduce our manufacturing costs by transferring wafer manufacturing to eight-inch wafers where practicable, optimizing our mix of internal and external manufacturing capacity, implementing more cost-effective packaging technologies and seeking cost reductions from our suppliers.

 

Pursuing selective acquisitions and other strategic transactions.  We will evaluate and pursue selective transactions to facilitate our entrance into new applications, add to our intellectual property and design resources, and diversify our product offerings. For example, our collaboration with PSI was a key factor in

Sanken’s acquisition of PSI in July 2005. We may acquire companies, technologies or assets and participate in joint ventures when we believe they will cost effectively and rapidly improve our product development or manufacturing capabilities or complement our existing product offerings.

 

Our Products

 

Our product portfolio includes over 325 Allegro products across a range of high-performance analog and mixed-signal semiconductors including magnetic sensor ICs, analog power ICs and power management ICs. Our products are designed for use in a wide range of applications including automotive systems, communications devices, computer and office automation products, consumer products and industrial uses.

 

Magnetic Sensor ICs

 

We offer a wide range of integrated magnetic sensor ICs based on Hall-Effect technology that allow our customers to develop contactless sensor solutions that reduce mechanical wear and provide greater measurement accuracy.

 

 

Power and Power Management ICs

 

Our power IC portfolio is comprised of motor driver ICs, automotive ICs and power interface ICs. Our power management ICs include voltage converters and regulators for both application-specific and general-purpose use.

 

 

 

Examples of our products and their applications in end markets are set forth in the following table.