| ALLIANCE SEMICONDUCTOR CORP /DE/ Item 1A Risk Factors In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following are important factors which could cause actual results or events to differ materially from those contained in any forward looking statements made by or on behalf of the Company |
| We may have difficulties meeting our cash needs |
| We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund our needs for at least the next twelve months |
| However, our business has used significant cash over the last several years, and the value of our short-term investments in marketable securities, especially our previous holdings in UMC and our current holdings in Tower, declined substantially in value |
| We have a limited ability to sell our Tower securities, and they may continue to decline in value in the future |
| In addition, we are currently the subject of an audit by the Internal Revenue Service with respect to fiscal and tax years 1999 through 2002 |
| For those years under review we received tax refunds of approximately dlra32dtta3 million |
| At this stage of the audit, the IRS has informed us that there is a high likelihood that certain positions we have taken may be disallowed |
| We cannot determine at this stage what effect the resolution of this matter will have on our financial condition, including our liquidity |
| If our short-term investments in marketable securities continue to 11 _________________________________________________________________ [63]Table of Contents decrease in value or if there is an adverse determination with respect to the audit, we may have difficulties meeting our cash needs |
| In order to finance general corporate needs, we may rely on the equity markets to provide liquidity |
| Historically, we have been able to access the equity markets, but this does not necessarily guarantee that we will be able to access these markets in the future or on terms that are acceptable to us |
| The availability of capital in these markets is affected by several factors, including geopolitical risk, the interest rate environment and the condition of the economy as a whole |
| In addition, our disposition of our operating business units, capital structure and expected future performance may impact our ability to raise capital |
| In the event we are not able to meet our cash needs and raise additional capital, our financial condition will be materially and adversely affected |
| Most of our assets consist of securities that we have a limited ability to sell and which have experienced significant declines in value |
| We have held, and continue to hold, significant investments in securities which we have limited ability to sell |
| These assets may decline in value as a result of factors beyond our control, which may adversely affect our financial condition |
| Our investment in UMC, a publicly traded company in Taiwan, represented our largest single asset as of the end of fiscal 2005 |
| UMC common stock had been subject to significant fluctuations in value |
| For example, the price of UMC common stock decreased by approximately 30prca during fiscal 2005 |
| However, during fiscal 2006 we completed the sale of our position in UMC common stock and have no further exposure to fluctuations in its value |
| The shares we hold in Tower at the end of fiscal 2006 are unregistered, and our ability to transfer them was restricted until January 2006 |
| Since then, we have been able to sell Tower stock, but only in limited amounts under Rule 144 |
| Tower stock has been subject to significant fluctuations in value |
| For example, the price of Tower’s ordinary shares decreased by approximately 17prca and 78prca in fiscal 2006 and 2005, respectively, and the price of Tower’s ordinary shares may continue to decline in value in the future |
| Our investment in Tower is subject to inherent risks, including those associated with certain Israeli regulatory requirements, political unrest and financing difficulties, which could harm Tower’s business and financial condition |
| Further, through the Alliance Ventures funds and Solar Venture Partners, we invest in start-up companies that are not traded on public markets |
| These types of investments are inherently risky and many venture funds have a large percentage of investments that decrease in value or fail |
| During the past several years, many of our venture investments experienced significant declines in market value |
| For example, in fiscal 2006 we wrote down one of our Alliance Ventures investments and recognized a pretax, non-operating loss of dlra1dtta1 million, and during fiscal 2005 we wrote down one of our Alliance Ventures investments and one of our Solar investments and recognized pretax, non-operating losses of approximately dlra2dtta7 million and dlra473cmam000, respectively |
| In fiscal 2004, we wrote down nine of our Alliance Ventures’ investments and two of our Solar investments and recognized pretax, non-operating losses of approximately dlra5dtta8 million |
| We cannot be certain that our investment in these securities will not decline further in value |
| Further declines in our investments can have a material adverse effect on our financial condition |
| Our financial condition could be harmed by efforts to comply with, or penalties associated with, the Investment Company Act of 1940 |
| In August 2000, we applied to the SEC for an order under Section 3(b)(2) of the Investment Company Act of 1940 confirming our non-investment company status |
| In March 2002, the staff of the SEC informed us that the staff could not support the granting of the requested exemption |
| Since that time, we have been working to resolve our status under the Act |
| We cannot be certain that the SEC will agree that we are not currently deemed to be an unregistered investment company in violation of the Act |
| If the SEC takes the view that we have been operating and continue to operate as an unregistered investment company in violation of the Act, and does not provide us with a sufficient period to either register as an investment company or divest ourselves of investment securities and/or acquire non-investment assets, we may be subject to significant potential penalties |
| In the absence of exemptions granted by the SEC (which are discretionary in nature and require the SEC to make certain findings), we would be required either to register as a closed-end investment company under the Act, or, in the alternative, to divest ourselves of sufficient investment securities and/or to acquire sufficient non-investment assets so as not to be regarded as an investment company under the Act |
| In an effort to comply with the Act, we have divested ourselves of certain securities, ceased acquiring interests in 12 _________________________________________________________________ [64]Table of Contents any new companies through Alliance Ventures and taken certain additional actions; nonetheless, we have no assurance that the SEC will grant us an exemption under the Act |
| In the event we are required to divest ourselves of sufficient investment securities, we may not be able to do so because of our limited ability to sell our investments |
| Even if we are able to sell our investments, our financial condition may be materially, adversely affected |
| If we are required to register as a closed-end investment company under the Act, our financial condition may be materially, adversely affected |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include an internal controls report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K Our independent registered public accounting firm is required to attest to, and report on, our management’s assessment |
| Management has determined that our internal control over reporting was not effective as of March 31, 2006 and March 26, 2005 |
| In light of that fact, in FY2006, our independent registered public accounting firm issued an adverse opinion on our internal control over financial reporting |
| Since then we have dedicated significant resources to remediate the material weaknesses that have rendered our internal control ineffective |
| With the sale of our operating business units, a significant number of current controls no longer will be applicable, eliminating the risk from any inability to remediate weaknesses with respect to such controls |
| Nonetheless, there is no assurance that we will be able to remediate weaknesses with respect to controls that continue to be applicable |
| Even after we have remediated these weaknesses, in the course of future testing and documentation, certain deficiencies may be discovered that will require additional remediation, the costs of which could have a material adverse effect on our financial condition |
| Separately, our independent registered public accounting firm may not agree with our management’s assessment and may send us a deficiency notice that we are unable to remediate on a timely basis, or we may not be able to retain our independent registered public accounting firm with sufficient resources to attest to and report on our internal control |
| Moreover, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, our management may continue to conclude that we do not have effective internal controls over financial reporting in accordance with Section 404 |
| In the future, if we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated, if our independent registered public accounting firm is unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls, or if our independent registered public accounting firm expresses an adverse opinion on our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price |
| Additionally, any material weakness in internal control could result in a material misstatement in future financial statements |
| Our financial condition is likely to fluctuate and failure to meet financial expectations for any period may cause our stock price to decline |
| Our revenue has historically been, and will continue to be, subject to fluctuations due to a variety of factors, including general economic conditions |
| As discussed in the section entitled “Overview — Disposition of Operating Business Units” in Item 1 of Part I, we have sold each of our operating business units, and are in the process of exiting the semiconductor business that has characterized our company to date |
| As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful, and you should not rely on these comparisons as indications of future performance |
| These factors, together with the fact that our expense is primarily fixed and independent of revenue in any particular period, make it difficult for us to accurately predict our income and may cause it to be below market analysts’ expectations in some future quarters, which could cause the market price of our stock to decline significantly |
| 13 _________________________________________________________________ [65]Table of Contents Our stock price may be volatile and could decline substantially |
| The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline |
| Fluctuations or a decline in our stock price may occur regardless of our performance |
| Among the factors that could affect our stock price, in addition to our performance, are: • variations between our results and the published expectations of securities analysts; • changes in financial estimates or investment recommendations by securities analysts following our business; • announcements by us of significant transactions; • the inclusion or exclusion of our stock in various indices or investment categories, especially as compared to the investment profiles of our stockholders at a given time; • changes in economic and capital market conditions; • changes in business regulatory conditions; and • the trading volume of our common stock |
| In the event our stock trades below the minimum bid price per share of at least dlra1dtta00 for thirty consecutive trading days, our stock may be subject to delisting from the NASDAQ National Market |
| A low stock price may trigger violation of other NASDAQ listing standards |
| Delisting from NASDAQ would adversely affect the trading price and limit the liquidity of our common stock and cause the value of an investment in our company to substantially decrease |
| We are exposed to the risks associated with the slowdown in the US and worldwide economy |
| Among other factors, in the past decreased consumer confidence and spending and reduced corporate profits and capital spending resulted in a downturn in the US economy generally |
| The value of our marketable securities and Alliance Venture investments could be materially adversely affected if economic conditions were to deteriorate or worsen |
| We may face significant expense as a result of ongoing obligations in connection with the disposition of our operating business units |
| We are subject to certain ongoing obligations, including indemnification obligations, in connection with the disposition of our operating business units |
| Among other things, we are obligated to indemnify the purchasers of the assets of our operating business units against certain third party intellectual property claims |
| The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights |
| We have from time to time received, and believe that the purchasers of the assets of our operating business units likely will in the future receive, notices alleging that our products, or the processes used to manufacture our products, infringe the intellectual property rights of third parties |
| In the event of litigation to determine the validity of any third-party claims, or claims against us for indemnification related to such third-party claims, such litigation, whether or not determined in favor of us could result in significant expense to us |
| Our income could be severely harmed by natural disasters or other disruptions |
| Our corporate headquarters located in the San Francisco Bay area is near major earthquake faults, and we are subject to the risk of damage or disruption in the event of seismic activity |
| A number of Alliance Ventures and Solar Ventures portfolio companies face similar risks |
| Any future disruptions for any reason, including work stoppages, an outbreak of epidemic, fire, earthquakes, or other natural disasters could cause damages that could have a material adverse effect on our income |
| 14 _________________________________________________________________ [66]Table of Contents Any guidance that we may provide about our business or expected future results may prove to be inaccurate |
| From time to time we may share our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to potential future results |
| Predicting future events is inherently uncertain |
| Our analyses and forecasts have in the past, and may in the future, prove to be incorrect |
| We cannot be certain that such predictions or analyses will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution |
| Any analysis or forecast made by us that ultimately proves to be inaccurate may adversely affect our stock price |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expense |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management time and attention to compliance activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, we may be subject to fines and penalties, and our reputation may be harmed |
| We may be unable to attract and retain key personnel who are critical to the success of our business |
| In fiscal 2006 and 2005 we did not have sufficient permanent accounting staff with a level of financial reporting expertise commensurate with our financial reporting requirements |
| Accordingly, we need to enhance our existing finance staff and reduce our reliance on contractors and temporary personnel |
| During the first three quarters of fiscal 2006, we lost most of the accounting staff who had knowledge of what had been done in the past, and as a result, did not maintain effective controls over the reconciliation of unmatched material receipts |
| We also did not have full awareness of what made up other prepaid assets |
| These control deficiencies resulted in post-closing adjustments to the inventory purchase accrual and other prepaid assets |
| In fiscal 2005, we did not maintain effective controls over our inventory and cost of goods sold accounts |
| Specifically, we did not have effective controls to adequately identify, document and analyze work-in-process and finished goods inventory held at third-party subcontractors or to determine the reserves for slow-moving and excess and obsolete inventory in accordance with GAAP These control deficiencies resulted in an audit adjustment to net inventory for the year ended March 26, 2005 |
| Our future success will depend on our ability to attract and retain qualified management and finance personnel for which competition is intense globally |
| Additionally, limited human resources and untimely turnovers in staff may result in difficulties in implementing our policies and procedures including those related to our internal controls |
| We are not insured against the loss of any of our key employees, nor can we assure the successful recruitment of new and replacement personnel |