| CALIFORNIA MICRO DEVICES CORP ITEM 1A Risk Factors |
| Our operating results may fluctuate significantly because of a number of factors, many of which are beyond our control and are difficult to predict |
| These fluctuations may cause our stock price to decline |
| Our operating results may fluctuate significantly for a variety of reasons, including some of those described in the risk factors below, many of which are difficult to control or predict |
| While we believe that quarter to quarter and year to year comparisons of our revenue and operating results are not necessarily meaningful or accurate indicators of future performance, our stock price historically has been susceptible to large swings in response to short term fluctuations in our operating results |
| Should our future operating results fall below our guidance or the expectations of securities analysts or investors, the likelihood of which is increased by the fluctuations in our operating results, the market price of our common stock may decline |
| We incurred quarterly losses for ten consecutive quarters beginning with the quarter ended March 31, 2001 and ending with the quarter ended June 30, 2003, and in the quarter ended March 31, 2005, and we may be unable to sustain the profitability we have achieved in our four most recent quarters |
| After seven quarters of profitability, we incurred a loss of dlra1dtta0 million for the quarter ended March 31, 2005 |
| Prior to achieving profitability in the second quarter of fiscal 2004, we had been unprofitable for ten consecutive quarters, incurring a cumulative loss of dlra36dtta4 million more than doubling our accumulated deficit from dlra31dtta3 million to dlra67dtta7 million |
| Although we have been profitable for the past four quarters, many factors affect our ability to sustain profitability including the health of the mobile handset, personal computer and digital consumer markets on which we focus, continued demand for our products from our key customers, availability of capacity from our manufacturing subcontractors, ability to reduce manufacturing costs faster than price decreases thereby attaining a healthy gross margin, continued product innovation and design wins, and our continued ability to manage our operating expenses |
| In order to sustain profitability in the long term, we will need to continue to grow our business in our core markets and to reduce our product costs rapidly enough to maintain our gross margin |
| The semiconductor industry has historically been cyclical, and we may be subject to such cyclicality, which could lead to our incurring losses again |
| We currently rely heavily upon a few customers for a large percentage of our net sales |
| Our revenue would suffer materially were we to lose any one of these customers |
| Our sales strategy has been to focus on customers with large market shares in their respective markets |
| During fiscal 2006, one customer in the mobile handset market represented 40prca of our net sales |
| There can be no assurance that this customer will purchase our products in the future in the quantities we have forecasted, or at all |
| If we were to lose that customer as a distributor, we might not be able to obtain another distributor to represent us or a new distributor might not have sufficiently strong relationships with the current end customers to maintain our current level of net sales |
| Additionally, the time and resources involved with the changeover and training could have an adverse impact on our business in the short term |
| We currently rely heavily upon a few core markets for the bulk of our sales |
| If we are unable to further penetrate the mobile handset, personal computer and digital consumer electronics markets, our revenues could stop growing and might decline leading us to reduce our investment in research and development and marketing |
| Our revenues in recent periods have been derived from sales to manufacturers of mobile handsets, personal computers and peripherals, and digital consumer electronics |
| In order for us to be successful, we must continue to penetrate the mobile handset, personal computer and digital consumer electronics markets, both by obtaining more business from our current customers and by obtaining new customers |
| For example, should growth not occur in the markets we have penetrated, our future revenues could be adversely impacted |
| More than three quarters of our revenues in fiscal 2006 were from sales to the mobile handset market |
| If sales of mobile handsets decline, and in particular if sales by our mobile handset customers decline, our future revenues could stop growing and might decline |
| This might cause us to choose to cut our spending on research and development and marketing to reduce our loss or to avoid operating at a loss which could further adversely affect our future prospects |
| The fastest growing market for our products has been the mobile handset market |
| A slowdown in the adoption of ASIPs by mobile handset manufacturers would reduce our future growth in that market |
| Much of our revenue growth over the past three years has been in the mobile handset market where more complex mobile handsets have meant increased adoption of and demand for ASIP devices |
| Should the rate of ASIP adoption decelerate in the mobile handset market, our planned rate of increase in penetration of that market would also decrease, thereby reducing our future growth in that market |
| The markets in which we participate are intensely competitive and our products are not sold pursuant to long term contracts, enabling our customers to replace us with our competitors if they choose |
| Our core markets are intensely competitive |
| Our ability to compete successfully in our core markets depends upon our being able to offer attractive, high quality products to our customers that are properly priced and dependably supplied |
| Our customer relationships do not generally involve long term binding commitments making it easier for customers to change suppliers and making us more vulnerable to competitors |
| Our customer relationships instead depend upon our past performance for the customer, their perception of our ability to meet their future need, including price and delivery and the timely development of new devices, the lead time to qualify a new supplier for a particular product, and interpersonal relationships and trust |
| Because we operate in different semiconductor product markets, we generally encounter different competitors in our various market areas |
| Within the ASIP product families for the mobile, computing and consumer electronic markets, we compete with ON Semiconductor Corporation, Royal Philips Electronics NV, Semtech Corporation and STMicroelectronics, NV We also compete with filters based on MLCC technology from companies such as Amotek Company, Ltd, AVX Corporation, Innochip Technology, Inc, Murata Manufacturing Co, Ltd, and TDK Corp |
| In the active analog device area, our competitors include Advanced Analogic Technologies, Inc, Linear Technology Corp, Maxim Integrated Products, Inc, National Semiconductor Corp, and Semtech Corp |
| Many of our competitors are larger than we are, have substantially greater financial, technical, marketing, distribution and other resources than we do and have their own facilities for the production of semiconductor components |
| One of our competitive advantages for our mobile ASIP products may be lessening as some of our customers choose to use plastic packages rather than chip scale packaging |
| This could lead to our customers purchasing products from our competitors rather than us or to our having to reduce prices, thereby decreasing our revenues |
| Among our competitive advantages for our ASIP products, which comprise the dominant portion of our products sold in the mobile handset market, has been our rapid adoption of chip scale packaging (CSP) with respect to which our early entry and high volume has allowed us to gain advantage over competitors |
| Certain customers have indicated a preference for the use of plastic packages rather than CSP and the percentage of our mobile ASIP products using CSP packaging has declined by approximately 6prca during fiscal 2006 |
| Should this preference become more widespread, then packaging could cease to give us competitive advantage and could even become an area in which we are somewhat competitively disadvantaged, since some of our competitors 11 ______________________________________________________________________ have high volume internal packaging operations, unless we are able to match their capabilities and cost structure using merchant suppliers |
| This could lead to our losing sales or to reducing prices, thereby decreasing our revenues |
| We determined that we had material weaknesses in our internal control over financial reporting as of March 31, 2005, one of which was still continuing as of December 31, 2005 |
| As a result, we had to implement supplemental compensating procedures to determine that our financial statements are reliable |
| These material weaknesses, and any future adjustment to our financial statements which may result from them, could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending March 31, 2005, and annually thereafter, we are required to furnish a report by our management on our internal control over financial reporting |
| Such report will contain, among other matters, a statement as to whether or not our internal control over financial reporting is effective |
| This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management |
| Such report must also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls |
| As of March 31, 2005, management identified, and the auditors attested to, material weaknesses in the Company’s internal control over financial reporting, in the operating effectiveness within a portion of the revenue cycle and in the controls over the proper recognition of subcontractor invoices related to inventory and accounts payable |
| Management believed it had subsequently remediated these material weaknesses; however, while reviewing our third quarter financial results, our independent accountants identified some quarter-end vendor invoices which had not been accrued for in the proper quarter, which in turn led us to discover further such mis-timed invoice accruals |
| We believe these mis-timed accruals, which evidenced a continuing material weakness in this control, resulted not from a problem with the fundamental design of the control process but rather the operation of the control process, as Company personnel were not following the prescribed procedures for the accrual of services performed but not invoiced or for the analysis and encoding of invoices, and the management review in both instances was inadequate |
| We have replaced and trained the clerical personnel who perform much of this work and we have provided additional training to the other personnel involved, and management has begun to review their work more carefully |
| We have also enhanced our review of open purchase orders in an effort to reduce their number |
| During the required assessment of our internal control over financial reporting as of March 31, 2006, we concluded that we have remediated the material weaknesses which were discovered in previous periods to which our auditor have attested |
| However, should we or our auditors discover that we have a material weakness in our internal control over financial reporting at another time in the future, especially considering that we have had material weaknesses in the past which we incorrectly believed had been remediated, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price |
| Deficiencies in our internal controls could cause us to have material errors in our financial statements, which could require us to restate them |
| Such restatement could have adverse consequences on our stock price, potentially limiting our access to financial markets |
| In March, 2003 and in December, 2004, we discovered deficiencies in certain of our internal control processes which caused us to have material errors in our historic financial statements, which in turn required us to restate them |
| In addition, during our internal control assessment as of March 31, 2005, we determined that we had two material weaknesses in our internal controls; one of which we have learned was continuing as of December 31, 2005 |
| One common link in our two restatements and our continuing material weakness involves difficulties with our inventory costing system and operating expense determinations due to accounts payable issues at the end of a fiscal period |
| 12 ______________________________________________________________________ We have been susceptible to difficulties as many of our record keeping processes had been manual or had involved software that had not been upgraded for a significant period of time |
| As a result we implemented Oracle enterprise resource planning (ERP) software as part of our financial processes |
| In addition, we have experienced a relatively high personnel turnover in our finance department, including replacing our controller, which contributed to our difficulties |
| We had thought that we had remediated our accounts payable cut-off material weakness by implementing a three-way match via Oracle during fiscal 2006; however, during the process of reviewing our third quarter financial results, our independent accountants identified some quarter-end vendor invoices which had not been accrued for in the proper quarter, which in turn led us to discover further such mis-timed invoice accruals which comprise a continuing material weakness in this control |
| We believe these issues resulted not from a problem with the fundamental design of the control process but rather the operation of the control process, as Company personnel were not following the prescribed procedures for the accrual of services performed but not invoiced and for the analysis and encoding of invoices, and management review in both instances was inadequate |
| We have replaced and trained the clerical personnel who perform much of this work and have provided additional training to the other personnel involved, and management has begun to review their work more carefully |
| We have also enhanced our review of open purchase orders in an effort to reduce their number |
| While the design and operation of our new Oracle ERP system combined with our new clerical personnel, enhanced training, and management oversight, and the other remediation steps we took helped us improve our internal control over our business and financial processes to the extent we concluded in our assessment that we no longer had any material weaknesses, there can be no assurance that we will nonetheless not have an error in our financial statements |
| Such an error, if material, could require their restatement, having adverse effects on our stock price, potentially causing additional expense, and could limit our access to financial markets |
| Our competitors have in the past and may in the future reverse engineer our most successful products and become second sources for our customers, which could decrease our revenues and gross margins |
| Our most successful products are not covered by patents and have in the past and may in the future be reverse engineered |
| Thus, our competitors can become second sources of these products for our customers or our customers’ competitors, which could decrease our unit sales or our ability to increase unit sales and also could lead to price competition |
| This price competition could result in lower prices for our products, which would also result in lower revenues and gross margins |
| Certain of our competitors have announced products that are pin compatible with some of our most successful products, especially in the mobile handset market, where many of our largest revenue generating products have been second sourced |
| To the extent that the revenue secured by these competitors exceeds the expansion in market size resulting from the availability of second sources, this decreases the revenue potential for our products |
| Furthermore, should a second source vendor attempt to increase its market share by dramatic or predatory price cuts for large revenue products, our revenues and margins could decline materially |
| In the future our revenues will become increasingly subject to macroeconomic cycles and more likely to decline if there is an economic downturn |
| As ASIP penetration increases, our revenues will become increasingly susceptible to macroeconomic cycles because our revenue growth may become more dependent on growth in the overall market rather than primarily on increased penetration, as has been the case in the past |
| Our reliance on foreign customers could cause fluctuations in our operating results |
| International sales include sales to US based customers if the product was delivered outside the United States |
| International sales subject us to the following risks: • changes in regulatory requirements; 13 ______________________________________________________________________ • tariffs and other barriers; • timing and availability of export licenses; • political and economic instability; • the impact of regional and global illnesses such as severe acute respiratory syndrome infections (SARS); • difficulties in accounts receivable collections; • difficulties in staffing and managing foreign operations; • difficulties in managing distributors; • difficulties in obtaining foreign governmental approvals, if those approvals should become required for any of our products; • limited intellectual property protection; • foreign currency exchange fluctuations; • the burden of complying with and the risk of violating a wide variety of complex foreign laws and treaties; and • potentially adverse tax consequences |
| Because sales of our products have been denominated in United States dollars, increases in the value of the US dollar could increase the relative price of our products so that they become more expensive to customers in the local currency of a particular country |
| Furthermore, because some of our customer purchase orders and agreements are influenced, if not governed, by foreign laws, we may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded |
| If our distributors experience financial difficulty and become unable to pay us or choose not to promote our products, our business could be harmed |
| During fiscal 2006, 31prca of our sales were through distributors, primarily in Asia |
| Our distributors could reduce or discontinue sales of our products or sell our competitors’ products |
| They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect |
| In addition, we are dependent on their continued financial viability, and some of them are small companies with limited working capital |
| If our distributors experience financial difficulties and become unable to pay our invoices, or otherwise become unable or unwilling to promote and sell our products, our business could be harmed |
| Our dependence on a limited number of foundry partners and CSP ball drop contractors, and the limited capacity for plastic assembly and test subcontractors, exposes us to a risk of manufacturing disruption or uncontrolled price changes |
| Given the current size of our business, we believe it is impractical for us to use more than a limited number of foundry partners and CSP ball drop subcontractors as it would lead to significant increases in our costs |
| Currently, we have three foundry partners and rely on two CSP ball drop subcontractors |
| Some of our products are sole sourced at one of our foundry partners in China or Japan |
| CSP ball drop is a key step in the chip scale packaging used for the bulk of our mobile handset products |
| Currently, there are only a limited number of suppliers of this service and we currently use two of them |
| There is also a limited capacity of plastic assembly and test contractors, especially for TFDN packaging, for which customer demand is increasing |
| Our ability to secure sufficient plastic assembly and test capacity, especially the fast ramping TDFN offerings, may limit our ability to satisfy our customers’ demand |
| If the operations of one or more of our partners or subcontractors should be disrupted, or if they should choose not to devote capacity to our products in a timely manner, our business could be adversely impacted as we might be unable to manufacture some of our products on a timely 14 ______________________________________________________________________ basis |
| In addition, the cyclicality of the semiconductor industry has periodically resulted in shortages of wafer fabrication, assembly and test capacity and other disruption of supply |
| We may not be able to find sufficient capacity at a reasonable price or at all if such disruptions occur |
| As a result, we face significant risks, including: • reduced control over delivery schedules and quality; • longer lead times; • the impact of regional and global illnesses such as SARS or Avian flu pandemic; • the potential lack of adequate capacity during periods when industry demand exceeds available capacity; • difficulties finding and integrating new subcontractors; • limited warranties on products supplied to us; • potential increases in prices due to capacity shortages, currency exchange fluctuations and other factors; and • potential misappropriation of our intellectual property |
| We have outsourced our wafer fabrication, and assembly and test operations and may encounter difficulties in expanding our capacity |
| We have adopted a fabless manufacturing model that involves the use of foundry partners and assembly and test subcontractors to provide our production capacity |
| We chose this model in order to reduce our overall manufacturing costs and thereby increase our gross margin, reduce the impact of fixed costs when volume is low, provide us with upside capacity in case of short term demand increases and provide us with access to newer process technology, production facilities and equipment |
| During the past four years we have outsourced our wafer manufacturing and assembly and test operations overseas in Asia and we continue to seek additional foundry and assembly and test capacity to provide for growth |
| If we experience delays in securing additional or replacement capacity at the time we need it, we may not have sufficient product to fully meet the demand of our customers |
| Our reliance upon foreign suppliers exposes us to risks associated with international operations |
| We use foundry partners and assembly and test subcontractors in Asia, primarily in China, Japan, Thailand, and Taiwan for our products |
| Our dependence on these foundries and subcontractors involves the following substantial risks: • political and economic instability; • changes in our cost structure due to changes in local currency values relative to the US dollar; • potential difficulty in enforcing agreements and recovering damages for their breach; • inability to obtain and retain manufacturing capacity and priority for our business, especially during industry-wide times of capacity shortages; • exposure to greater risk of misappropriation of intellectual property; • disruption to air transportation from Asia; and • changes in tax laws, tariffs and freight rates |
| These risks may lead to delayed product delivery or increased costs, which would harm our profitability, financial results and customer relationships |
| In addition, we maintain significant inventory at our foreign subcontractors that could be at risk |
| 15 ______________________________________________________________________ We also drop ship product from some of these foreign subcontractors directly to customers |
| This increases our exposure to disruptions in operations that are not under our direct control and may require us to enhance our computer and information systems to coordinate this remote activity |
| Our markets are subject to rapid technological change |
| Therefore, our success depends on our ability to develop and introduce new products |
| The markets for our products are characterized by: • rapidly changing technologies; • changing customer needs; • evolving industry standards; • frequent new product introductions and enhancements; • increased integration with other functions; and • rapid product obsolescence |
| Our competitors or customers may offer new products based on new technologies, industry standards or end user or customer requirements, including products that have the potential to replace or provide lower cost or higher performance alternatives to our products |
| The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable |
| In addition, our competitors and customers may introduce products that eliminate the need for our products |
| Our customers are constantly developing new products that are more complex and miniature, increasing the pressure on us to develop products to address the increasingly complex requirements of our customers’ products in environments in which power usage, lack of interference with neighboring devices and miniaturization are increasingly important |
| To develop new products for our core markets, we must develop, gain access to, and use new technologies in a cost effective and timely manner, and continue to expand our technical and design expertise |
| In addition, we must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs |
| We may not be able to identify new product opportunities, to develop or use new technologies successfully, to develop and bring to market new products, or to respond effectively to new technological changes or product announcements by our competitors |
| There can be no assurance even if we are able to do so that our customers will design our products into their products or that our customers’ products will achieve market acceptance |
| Our pursuit of necessary technological advances may require substantial time and expense and involve engineering risk |
| Failure in any of these areas could harm our operating results |
| It is possible that a significant portion our research and development expenditures will not yield products with meaningful future revenue |
| We are attempting to develop one or more new mixed signal integrated circuit products, which have a higher development cost than our ASIP device products |
| This limits how many of such products we can undertake at any one time increasing our risk that such efforts will not result in a working product for which there is a substantial demand at a price which will yield good margins |
| We are engaging third parties to assist us with these developments and have also added personnel with new skills to our engineering group |
| These third parties and new personnel may not be successful |
| These new product developments involve technology in which we have less expertise which also increases the risk of failure |
| On the other hand, we believe that the potential payoff from these products makes it reasonable for us to take such risks |
| 16 ______________________________________________________________________ We may be unable to reduce the costs associated with our products quickly enough for us to meet our margin targets |
| In the mobile handset market our competitors have been second sourcing many of our products and as a result this market has become more price competitive |
| We are seeing the same trend develop in our low capacitance ESD devices for digital consumer electronics, personal computers and peripherals |
| We need to be able to reduce the costs associated with our products in order to achieve our target gross margins |
| We have in the past achieved and may attempt in the future to achieve cost reductions by obtaining reduced prices from our manufacturing subcontractors, using larger sized wafers, adopting simplified processes, and redesigning parts to require fewer pins or to make them smaller |
| There can be no assurance that we will be successful in achieving cost reductions through any of these methods, in which case we will experience lower margins |
| Our future success depends in part on the continued service of our key engineering and management personnel and our ability to identify, hire and retain additional personnel |
| There is intense competition for qualified personnel in the semiconductor industry, in particular for the highly skilled design, applications and test engineers involved in the development of new analog integrated circuits |
| Competition is especially intense in the San Francisco Bay area, where our corporate headquarters and engineering group is located |
| We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future |
| This is especially true for analog chip designers since competition is fierce for experienced engineers in this discipline |
| Growth is expected to place increased demands on our resources and will likely require the addition of management and engineering personnel, and the development of additional expertise by existing management personnel |
| The loss of services and/or changes in our management team, in particular our CEO, or our key engineers, or the failure to recruit or retain other key technical and management personnel, could cause additional expense, potentially reduce the efficiency of our operations and could harm our business |
| During fiscal 2006, we hired new vice presidents of engineering and sales and a material portion of our future success will depend upon their performance |
| In addition, we have recently replaced our chief financial officer on an interim basis |
| We are dependent upon retaining key employee of recently acquired Arques Technology in order to realize many of the hoped-for benefits of the acquisition |
| Loss of such employees could cause us to record a significant amount of expenses due to the loss of the goodwill asset associated with the acquisition |
| As part of our acquisition of Arques Technology in April 2006, we recorded a significant amount of goodwill |
| Many of Arques’ products are under development and our ability to realize revenue from the Arques assets is dependent upon Arques personnel remaining Company employees and successfully completing these products |
| Many of these Arques personnel are located in Taiwan and are experiencing cultural differences in addition to being associated with an established company instead of a start-up |
| Should certain of the key former Arques employees choose to leave the Company, we might not be able to realize value from the Arques assets and may need to write-off as impaired some or all of the goodwill associated with the Arques acquisition which could cause us to incur a loss during the quarter and/or year in which such write-off occurred which could adversely affect the market for our stock |
| Due to the volatility of demand for our products, our inventory may from time to time be in excess of our needs, which could cause write downs of our inventory or of inventory held by our distributors |
| Generally our products are sold pursuant to short term releases of customer purchase orders and some orders must be filled on an expedited basis |
| Our backlog is subject to revisions and cancellations and anticipated demand is constantly changing |
| Because of the short life cycles involved with our customers’ products, the order pattern from individual customers can be erratic, with inventory accumulation and liquidation during phases of the life cycle for our customers’ products |
| We face the risk of inventory write-offs if we manufacture products in 17 ______________________________________________________________________ advance of orders |
| However, if we do not make products in advance of orders, we may be unable to fulfill some or all of the demand to the detriment of our customer relationships because we have insufficient inventory on hand and at our distributors to fill unexpected orders and because the time required to make the product may be longer than the time that certain customers will wait for the product |
| We typically plan our production and our inventory levels, and the inventory levels of our distributors, based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially |
| Therefore, we often order materials and at least partially fabricate product in anticipation of customer requirements |
| Furthermore, due to long manufacturing lead times, in order to respond in a timely manner to customer demand, we may also make products or have products made in advance of orders to keep in our inventory, and we may encourage our distributors to order and stock products in advance of orders that are subject to their right to return them to us |
| In such situations, we do not recognize revenue until the customer withdraws inventory from stock or otherwise becomes obligated to retain our product |
| This imposes the burden upon us of carrying additional inventory that is stored on or near our customers’ premises and is subject in many instances to return to our premises if not used by the customer |
| We value our inventories on a part by part basis to appropriately consider excess inventory levels and obsolete inventory primarily based on backlog and forecasted customer demand, and to consider reductions in sales price |
| Our design wins may not result in customer products utilizing our devices and our backlog may not result in future shipments of our devices |
| During a typical quarter, a substantial portion of our shipments are not in our backlog at the start of the quarter, which limits our ability to forecast in the near term |
| We count as a design win each decision by one of our customers to use one of our parts in one of their products that, based on their projected usage, will generate more than dlra100cmam000 of sales annually for us when their product is in production |
| Not all of the design wins that we recognize will result in revenue as a customer may cancel an end product for a variety of reasons or subsequently decide not to use our part in it |
| Even if the customer’s end product does go into production with our part, it may not result in annual product sales of dlra100cmam000 by us and the customer’s product may have a shorter life than expected |
| In addition, the length of time from design win to production will vary based on the customer’s development schedule |
| Finally, the revenue from design wins varies significantly |
| Consequently, the number of design wins we obtain is not a quantitative indicator of our future sales |
| Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular point in time is not necessarily indicative of actual sales for any succeeding period |
| A reduction of backlog during any particular period, or the failure of our backlog to result in future shipments, could harm our business |
| Much of our revenue is based upon orders placed with us that have short lead time until delivery or sales by our distributors to their customers (in most cases, we do not recognize revenue on sales to our distributors until the distributor sells the product to its customers) |
| As a result, our ability to forecast our future shipments and our ability to increase manufacturing capacity quickly may limit our ability to fulfill customer orders with short lead times |
| The majority of our operating expenses cannot be reduced quickly in response to revenue shortfalls without impairing our ability to effectively conduct business |
| The majority of our operating expenses are labor related and therefore cannot be reduced quickly without impairing our ability to effectively conduct business |
| Much of the remainder of our operating costs such as rent is 18 ______________________________________________________________________ relatively fixed |
| Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls |
| Consequently, our operating results will be harmed if our revenues do not meet our projections |
| We may experience revenue shortfalls for the following and other reasons: • significant pricing pressures that occur because of competition or customer demands; • sudden shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers and, in turn, harm our ability to meet our sales obligations; and • rescheduling or cancellation of customer orders due to a softening of the demand for our customers’ products, replacement of our parts by our competitors or other reasons |
| We may not be able to protect our intellectual property rights adequately |
| Our ability to compete is affected by our ability to protect our intellectual property rights |
| We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and nondisclosure and licensing arrangements to protect our intellectual property rights |
| Despite these efforts, the steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technology that is substantially similar or superior to our technology |
| To the limited extent that we are able to seek patent protection for our products or processes, our pending patent applications or any future applications may not be approved |
| Any issued patents may not provide us with competitive advantages and may be challenged by third parties |
| If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business |
| Furthermore, others may independently develop similar products or processes, duplicate our products or processes, or design around any patents that may be issued to us |
| We could be harmed by litigation involving patents and other intellectual property rights |
| As a general matter, the semiconductor and related industries are characterized by substantial litigation regarding patent and other intellectual property rights |
| We may be accused of infringing the intellectual property rights of third parties |
| Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products |
| Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may harm our business |
| Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel |
| In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement |
| A license might not be available on reasonable terms, or at all |
| By supplying parts in the past which were used in medical devices that help sustain human life, we are vulnerable to product liability claims |
| We have in the past supplied products predominantly to Guidant and to a much lesser extent to Medtronic for use in implantable defibrillators and pacemakers, which help sustain human life |
| While we are no longer selling products into the Medical market, large numbers of our products are or will be used in implanted medical devices, which could fail and expose us to claims |
| Should our products cause failure in the implanted devices, we may be sued and ultimately have liability, although under federal law Guidant and Medtronic would be required to defend and take responsibility in such instances until their liability was established, in which case we could be liable for that part of those damages caused by our willful misconduct or, in the case of Medtronic only, our negligence |
| 19 ______________________________________________________________________ Our failure to comply with environmental regulations could result in substantial liability to us |
| We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment |
| These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations, as well as the maintenance of healthy and environmentally sound conditions within our facilities |
| If we fail to comply with applicable requirements, we could be subject to substantial liability for cleanup efforts, property damage, personal injury and fines or suspension or cessation of our operations |
| In these regards, during the closure of our Milpitas facility in fiscal 2003, residual contaminants from our operations were detected in concrete and soil samples which were remediated under a work plan approved the State Department of Toxic Substances Control (“DTSC”) |
| The DTSC informed us in a letter dated February 3, 2005, that they had determined that the site does not pose significant threat to public health and the environment |
| However, if other contaminants should later be found at the site, the DTSC or owner could attempt to hold us responsible |
| Similarly, our Tempe facility, which we closed in December 2004, is located in an area of documented regional groundwater contamination |
| While we have no reason to believe that our operations at the facility have contributed to this regional contamination, we can give no assurance that this is the case |
| In connection with our closure of this facility, we have conducted environmental studies at the site that did not identify any issues but should contaminants be found at the site at a later date a government agency or the new owner could attempt to hold us responsible |
| Under the agreement, we retain liability for any environmental issues that arise due to the condition of the property at the time of closing |
| Earthquakes, other natural disasters and shortages may damage our business |
| Our California facilities and some of our suppliers are located near major earthquake faults that have experienced earthquakes in the past |
| In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed |
| Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the ones that occurred in Taiwan in September 1999 and in Japan in October 2004, could disrupt the operations of those suppliers, limit the supply of our products and harm our business |
| The October 2004 earthquake in Japan temporarily shut down operations at one of the wafer fabrication facilities at which our products were being produced |
| We have since transferred that capacity to other fabs |
| Power shortages have occurred in California in the past |
| We cannot assure that if power interruptions or shortages occur in the future, they will not adversely affect our business |
| Future terrorist activity, or threat of such activity, could adversely impact our business |
| The September 11, 2001 attack may have adversely affected the demand for our customers’ products, which in turn reduced their demand for our products |
| In addition, terrorist activity interfered with communications and transportation networks, which adversely affected us |
| Future terrorist activity could similarly adversely impact our business |
| Implementation of the new FASB rules for the accounting of employee equity and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our business or stated results |
| From time to time, the government, courts and financial accounting boards issue new laws or accounting regulations, or modify or reinterpret existing ones |
| The Financial Accounting Standards Board (“FASB”) recently announced new regulations for the accounting for share based payments which have been deferred until our fiscal year 2007 |
| These regulations will cause us to recognize an expense associated with our employee stock options which will decrease our earnings |
| There may be other future changes in laws, interpretations or regulations that would affect our financial results or the way in which we present them |
| Additionally, changes in the laws or regulations could have adverse effects on hiring and many other aspects of our business that would affect our ability to compete, both nationally and internationally |
| 20 ______________________________________________________________________ Our stock price may continue to be volatile, and our trading volume may continue to be relatively low and limit liquidity and market efficiency |
| Should significant shareholders desire to sell their shares within a short period of time, our stock price could decline |
| The market price of our common stock has fluctuated significantly |
| In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter to quarter variations in: • our anticipated or actual operating results; • announcements or introductions of new products by us or our competitors; • technological innovations or setbacks by us or our competitors; • conditions in the semiconductor and passive components markets; • the commencement of litigation; • changes in estimates of our performance by securities analysts; • announcements of merger or acquisition transactions; and • general economic and market conditions |
| In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, that have often been unrelated or disproportionate to the operating performance of the companies |
| These fluctuations, as well as general economic and market conditions, may harm the market price of our common stock |
| Furthermore, our trading volume is often small, meaning that a few trades have disproportionate influence on our stock price |
| In addition, someone seeking to liquidate a sizable position in our stock may have difficulty doing so except over an extended period or privately at a discount |
| Thus, if a shareholder were to sell or attempt to sell a large number of its shares within a short period of time, this sale or attempt could cause our stock price to decline |
| Our stock is followed by a relatively small number of analysts and any changes in their rating of our stock could cause significant swings in its market price |
| Our shareholder rights plan, together with the anti-takeover provisions of our certificate of incorporation and of the California General Corporation Law, may delay, defer or prevent a change of control |
| Our board of directors adopted a shareholder rights plan in autumn 2001 to encourage third parties interested in acquiring us to work with and obtain the support of our board of directors |
| The effect of the rights plan is that any person who does not obtain the support of our board of directors for its proposed acquisition of us would suffer immediate dilution upon achieving ownership of more than 15prca of our stock |
| Under the rights plan, we have issued rights to purchase shares of our preferred stock that are redeemable by us prior to a triggering event for a nominal amount at any time and that accompany each of our outstanding common shares |
| These rights are triggered if a third party acquires more than 15prca of our stock without board of director approval |
| If triggered, these rights entitle our shareholders, other than the third party causing the rights to be triggered, to purchase shares of the company’s preferred stock at what is expected to be a relatively low price |
| In addition, these rights may be exchanged for common stock under certain circumstances if permitted by the board of directors |
| In addition, our board of directors has the authority to issue up to 10cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights of those shares without any further vote or action by our shareholders |
| The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future, including the preferred shares covered by the shareholder rights plan |
| The issuance of preferred stock may delay, defer or prevent a change in control |
| The terms of the preferred stock that might be issued could 21 ______________________________________________________________________ potentially make more difficult or expensive our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction |
| California Corporation law requires an affirmative vote of all classes of stock voting independently in order to approve a change in control |
| In addition, the issuance of preferred stock could have a dilutive effect on our shareholders |
| Further, our shareholders must give written notice delivered to our executive offices no less than 120 days before the one year anniversary of the date our proxy statement was released to shareholders in connection with the previous year’s annual meeting to nominate a candidate for director or present a proposal to our shareholders at a meeting |
| These notice requirements could inhibit a takeover by delaying shareholder action |
| The California Corporation law also restricts business combinations with some shareholders once the shareholder acquires 15prca or more of our common stock |
| We will incur increased costs as a result of recently enacted and proposed changes in laws and regulations relating to corporate governance matters and public disclosure |
| Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and by the NASDAQ National Market and new accounting pronouncements will result in increased costs to us as we evaluate the implications of these laws, regulations and standards and respond to their requirements |
| To maintain high standards of corporate governance and public disclosure, we intend to invest substantial resources to comply with evolving standards |
| This investment may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities |
| For example, we spent approximately an incremental dlra800cmam000 versus our prior financial audit only fees on internal control documentation, testing, and auditing to complete our first annual review associated with filing of 10-K for the year ended March 31, 2005 to comply with section 404 of the Sarbanes-Oxley Act |
| In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers |
| We are taking steps to comply with the recently enacted laws and regulations in accordance with the deadlines by which compliance is required, but cannot predict or estimate the amount or timing of additional costs that we may incur to respond to their requirements |
| Acquisitions and strategic alliances may harm our operating results or cause us to incur debt or assume contingent liabilities |
| We may in the future acquire, or form strategic alliances relating to, other businesses, products and technologies |
| Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and alignment of product offerings and manufacturing operations and coordination of sales and marketing and research and development efforts |
| We have no recent experience in making such acquisitions or alliances |
| The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and aligned and the necessity of integrating personnel with disparate business backgrounds and combining different corporate cultures |
| The integration and alignment of operations following an acquisition or alliance requires the dedication of management resources that may distract attention from the day to day business, and may disrupt key research and development, marketing or sales efforts |
| We may also incur debt or assume contingent liabilities in connection with acquisitions and alliances, which could harm our operating results |
| Without strategic acquisitions and alliances we may have difficulty meeting future customer product and service requirements |
| 22 ______________________________________________________________________ A decline in our stock price could result in securities class action litigation against us which could divert management attention and harm our business |
| In the past, securities class action litigation has often been brought against public companies after periods of volatility in the market price of their securities |
| Due in part to our historical stock price volatility, we could in the future be a target of such litigation |
| Securities litigation could result in substantial costs and divert management’s attention and resources, which could harm our ability to execute our business plan |