| CENTILLIUM COMMUNICATIONS INC ITEM 1A RISK FACTORS Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below, in addition to the other cautionary statements and risks described elsewhere and the other information contained in this Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously be harmed |
| With the adoption of SFAS 123R, we will not be profitable in the foreseeable future and it will have a material adverse impact on our operating results |
| Our success may depend in large part upon the adoption and utilization of our products and technology, as well as our ability to effectively maintain existing relationships and develop new relationships with customers and strategic partners |
| If we do not succeed in doing so, we may not achieve or maintain profitability on a timely basis or at all |
| In particular, we intend to expend significant financial and management resources on product development, sales and marketing, strategic relationships, technology and operating infrastructure |
| This includes our focus on development of new optical network products and improvements to our DSL products |
| As a result, we may incur additional losses and continued negative cash flow from operations for the foreseeable future and may not achieve or maintain profitability |
| Because of our lack of diversity in geographic sources of revenues, the slowdown in deployment of DSL in Japan and other factors have affected and may continue to adversely affect our business and operating results |
| Historically, our revenues have been largely dependent on the growth of new DSL subscribers in Japan |
| Sales to customers in Japan accounted for 64prca, 78prca and 79prca of net revenues in 2005, 2004 and 2003, respectively |
| Therefore, the slowdown in deployment of DSL in Japan has adversely affected our operating results |
| The continuing low number of net new DSL subscribers in Japan will likely continue to negatively affect our future revenues |
| Because a substantial portion of our revenues have been derived from sales into Japan, our revenues have been heavily dependent on developments in the Japanese market |
| Our sales in Japan have been historically denominated in US dollars and major fluctuations in currency exchange rates could materially affect our Japanese customers &apos demand, thereby forcing them to reduce their orders, which could adversely affect our operating results |
| While part of our strategy is to diversify the geographic sources of our revenues, failure to further penetrate markets outside of Japan could harm our business and results of operations and subject us to increased currency risk |
| We derive a substantial majority of our revenues from DSL products, and our failure to diversify our sources of our revenues could harm our business and operating results |
| Historically, our revenues have been derived primarily from the sale of our DSL products |
| 79prca, 94prca and 98prca of our net revenues were from sales of our DSL products for 2005, 2004 and 2003, respectively |
| If we are unsuccessful in generating meaningful sales of our VoIP and FTTP products, we may not be able to achieve or sustain profitability |
| We depend on a few customers, and if we lose any of them, our sales and operations will suffer |
| We sell our products primarily to network equipment manufacturers |
| (Sumitomo) accounted for 35prca, 35prca and 31prca of net revenues in 2005, 2004 and 2003, respectively |
| Lucent Technologies accounted for 13prca of net revenues in 2005 |
| We do not have contractual volume commitments with these customers; instead we sell our products to them on an order-by-order basis |
| Our ability to maintain relationships with these large customers is essential to our ability to meet financial metrics |
| However, this dependence means that we are especially susceptible to factors that affect their purchasing decisions that are, in many instances, outside of our direct control |
| These factors include, among other things: * the fact that many of our customers have pre-existing or concurrent relationships with our competitors that may affect the customers &apos decision to purchase our products; * the success of our largest OEM customers; and * the continued demand for our customers &apos systems products |
| Our concentration of business and on-going relationships with our major customers may also deter other potential customers who compete with these existing customers from buying our products |
| We expect to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period |
| If we are not successful in maintaining relationships with key customers and winning new customers, our business and results of operations will suffer |
| We anticipate lower margins as products mature and as we experience aggressive competition, which could adversely affect our profitability |
| We expect the average selling prices of our products to decline as they mature |
| Historically, competition in the semiconductor industry has driven down the average selling prices of products |
| If we price our products too high, our customers may use a competitorapstas product or an in-house solution |
| To maintain profit margins, we must reduce our costs sufficiently to offset declines in average selling prices, or successfully sell proportionately more new products with higher average selling prices |
| Yield or other production problems, or shortages of supply may preclude us from lowering or maintaining current product costs |
| We have also experienced more aggressive price competition from competitors in market segments in which we are attempting to expand our business |
| These circumstances may make some of our products less competitive and we may be forced to decrease our prices significantly to win a design |
| We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition |
| Our markets are highly competitive and many of our competitors are established and have greater resources than we have |
| The market for communications semiconductor and software solutions is intensely competitive |
| Given our stage of development, there is a substantial risk that we will not have the financial resources, technical expertise or marketing and support capabilities to compete successfully |
| In addition, a number of other semiconductor companies have entered or may enter the market segments adjacent to or addressed by our products |
| These competitors may have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than we have |
| We may also face competition from customers &apos or prospective customers &apos own internal development efforts |
| Any of these competitors may be able to introduce new technologies, respond more quickly to changing customer requirements or devote greater resources to the development, promotion and sale of their products than we can |
| Third-party claims regarding intellectual property matters could cause us to stop selling our products, pay monetary damages or obtain licenses on adverse terms |
| There is a significant risk that third parties, including current and potential competitors, will claim that our products, or our customers &apos products, infringe on their intellectual property rights |
| From time to time, third parties have asserted, and may in the future assert, patent, copyright, trademark or other intellectual property rights to technologies that are important to our business and have demanded or in the future may demand that we license their patents and technology |
| Any such litigation, whether or not determined in our favor or settled by us, would be costly and divert the attention of our management and technical personnel |
| Inquiries with respect to the coverage of our intellectual property could develop into litigation |
| In such a litigation, a court could issue a preliminary injunction that would require us to withdraw or recall certain products |
| Moreover, we cannot assure you that we would prevail in litigation given the complex technical issues and inherent uncertainties in intellectual property litigation |
| In the event of an adverse ruling for an intellectual property infringement claim, we could be required to obtain a license or pay substantial damages (including treble damages) or have the sale of our products stopped by a permanent injunction |
| In addition, if a customer of our products cannot acquire a required license on commercially reasonable terms, that customer may choose not to use our products |
| We also have obligations to indemnify our customers under some circumstances for infringement of third-party intellectual property rights |
| We have also received requests from certain customers to include increasingly broad indemnification provisions in our agreements with them |
| These indemnification provisions may, in some circumstances, result in liability for combinations of components or system level designs and consequential damages and/or lost profits and the costs to us could be substantial and our business could be harmed |
| Even if claims against us are not valid or successfully asserted, these claims could result in significant costs and a diversion of the attention of management and other key employees to defend |
| If any intellectual property claims from third parties against one of our customers whom we have indemnified is held to be valid, the costs to us could be substantial and our business could be harmed |
| In August 2004, Fujitsu Limited filed a suit against Centillium and Centillium Japan KK ( "e Centillium Japan "e ) in the Tokyo District Court alleging that Centillium and Centillium Japan infringe one Japanese patent jointly owned by Fujitsu and Ricoh Co, Ltd |
| The complaint seeks significant monetary damages against Centillium and Centillium Japan |
| The suit is in process and we do not believe it is feasible to predict or determine the outcome or resolution of this litigation with any certainty at this point |
| We believe we have meritorious defenses and we are continuing to defend ourselves against these claims vigorously |
| We have already incurred and are likely to continue to incur substantial expenses in our defense against these claims |
| In the event of a determination adverse to us, we may incur substantial liability and this could have a material adverse effect on our financial position, results of operations or cash flows |
| We operate in the highly cyclical semiconductor industry, which is subject to significant downturns |
| The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving technical standards, short product life cycles and wide fluctuations in product supply and demand |
| From time to time these and other factors, together with changes in general economic conditions, cause significant upturns and downturns in the industry, and in our business in particular |
| Periods of industry downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices |
| The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship product compared to our competitors and result in deteriorating market share |
| These factors have caused substantial fluctuations in our revenues and results of operations |
| We have experienced these cyclical fluctuations in our businesses in the past and we may experience cyclical fluctuations in the future |
| If we are unable to develop and introduce new products successfully and in a cost-effective and timely manner or to achieve market acceptance of our new products, our operating results would be adversely affected |
| Our future success is dependent upon our ability to develop new semiconductor products for existing and new markets, introduce these products in a cost-effective and timely manner and have these products selected by leading equipment manufacturers for design into their own new products |
| The development of new silicon products is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields in the early production of such products |
| Our ability to develop and deliver new products successfully will depend on various factors, including our ability to: * timely and accurately predict market requirements and evolving industry standards; * successfully define new products; * timely and accurately identify opportunities in new markets; * timely complete and introduce new product designs; * scale our operations in response to changes in demand for our products and services; * license any desired third party technology or intellectual property rights; * timely qualify and obtain industry interoperability certification of our products and the products of our customers into which our products will be incorporated; * obtain sufficient foundry capacity and packaging materials; * achieve high manufacturing yields; * shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and * gain market acceptance of our products and our customers &apos products |
| If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, we may need to explore purchasing new products and if unsuccessful, we may be unable to attract new customers or to retain our existing customers as these customers may choose or transition to other companies that can meet their product development needs, which would materially and adversely affect our results of operations |
| For example, one such FTTP customer in Japan has delayed orders due to its customers &apos requirements until as late as the fourth quarter of 2006 |
| We depend on sole or limited source suppliers for the manufacture of our products |
| As a fabless semiconductor that neither owns nor operates a fabrication or manufacturing facility, we are heavily dependent on certain suppliers |
| We obtain certain parts, components and packaging used in the delivery of our products from sole or limited sources of supply |
| For example, we obtain certain semiconductor wafers on a sole source basis from Taiwan Semiconductor Manufacturing Co, Ltd and Semiconductor Manufacturing International Corporation |
| Developing and maintaining these strategic relationships with our vendors is critical for us to be successful |
| Any of our sole or limited source suppliers may: * experience delays in meeting our customer demand on a timely basis, or at all; * enter into exclusive arrangements with our competitors; * stop selling their products or components to us at commercially reasonable prices; * refuse to sell their products or components to us at any price; or * be subject to production disruptions caused by power outages, earthquakes and financial difficulties |
| Developing and maintaining these strategic relationships with our vendors is critical for us to be successful, but our business is susceptible to disruption, and our results of operations can be adversely affected, by any inability to do so |
| In periods of high demand in the semiconductor market, we may experience delays in meeting our capacity demand for components and as a result may be unable to deliver products to our customers on a timely basis |
| In addition, we could experience similar delays due to technical and quality control problems at our suppliers &apos facilities |
| If any of these events occur, or if our suppliers &apos facilities suffer any damage or disruption, we may not be able to meet our customer demand on a timely basis, or at all, and may need to successfully qualify an alternative supplier in a timely manner in order to not disrupt our business |
| We typically require a significant period of time to qualify a new supplier or process before we can begin shipping products |
| If we cannot accomplish this qualification in a timely manner, we would experience a significant interruption in supply of the affected products |
| If we are unable to secure sufficient capacity at our suppliers &apos existing facilities, or in the event of a closure or significant delay at any of these facilities, our relationships with our customers would be harmed and our market share and operating results would suffer as a result |
| Sales of our products depend on the widespread adoption of broadband access services, especially DSL, VoIP and FTTP If the demand for broadband access service does not increase, we may not be able to generate substantial sales |
| Sales of our products depend on the increased use and widespread adoption of broadband access services, and DSL services in particular, and the ability of telecommunications service providers to market and sell broadband access services |
| Our business would be harmed, and our results of operations and financial condition would be adversely affected, if the use of broadband access services does not increase as anticipated |
| Certain critical factors will likely continue to affect the development of the broadband access service market |
| These factors include: * inconsistent quality and reliability of service; * lack of availability of cost-effective, high-speed service; * lack of interoperability among multiple vendors &apos network equipment; * congestion in service providers &apos networks; * inadequate security; and * slow deployment of new broadband services over DSL lines |
| Rapid changes in the market for broadband access chip sets may render our chip sets obsolete or unmarketable |
| The market for chip sets for our products is characterized by: * intense competition; * rapid technological change; * frequent new product introductions by our competitors; * changes in customer demands; and * evolving industry standards |
| In addition, the life cycles of some of our products may depend upon the life cycles of the end products into which our products will be designed |
| Products with short life cycles require us to closely manage production and inventory levels |
| Unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed may result in obsolete or excess inventories, which in turn may adversely affect our operating results |
| To compete, we must innovate and introduce new products |
| If we fail to successfully introduce new products on a timely and cost-effective basis that meet customer requirements and are compatible with evolving industry standards, then our business, financial condition and results of operations will be seriously harmed |
| Because the sales cycle for our products typically lasts up to one year or longer, and may be subject to delays, it is difficult to forecast sales for any given period |
| The sales cycle of our products is lengthy and typically involves a detailed initial technical evaluation of our products by our prospective customers, followed by the design, construction and testing of prototypes incorporating our products |
| Only after these steps are complete will we receive a purchase order from a customer for volume shipments |
| This process generally takes from 9 to 12 months, and may last longer |
| Additionally, this cycle may be as long as 18 to 24 months for our VoIP products |
| Given this lengthy sales cycle, it is difficult to accurately predict when sales to a particular customer will occur |
| In addition, we may experience unexpected delays in orders from customers, which may prevent us from realizing forecasted sales for a particular period and in turn adversely impact our stock price |
| Our products are typically sold to equipment manufacturers, who incorporate our products in the products that they in turn sell to consumers or to network service providers |
| As a result, any delay by our customers, or by our customers &apos customers, in the manufacture or distribution of their products will result in a delay in obtaining orders for our products, which could cause our business and results to suffer |
| Because other broadband technologies may compete effectively with DSL services or other services addressed by our products, a slowdown in deployment of DSL services, the lack of significant growth in non-DSL markets that we are targeting and our lack of success in penetrating such markets would adversely affect our business and operating results |
| Our revenues are heavily dependent on the increase in demand for DSL services |
| DSL services are competing with a variety of different broadband data transmission technologies, including cable modems, satellite and other wireless technologies |
| While part of our strategy is to diversify our product markets beyond DSL into such areas as FTTP and VoIP, if any technology that is competing with the technologies that we offer is more reliable, faster and/or less expensive or has any other advantages over the technologies for which we have products, then the demand for our products may decrease |
| The lack of significant growth in those markets we are targeting in general and the lack of success of our products in particular would also adversely affect our business and results of operations |
| Because our products are components of other equipment, if broadband equipment manufacturers do not incorporate our products in their equipment, or if the equipment incorporating our products are not successful, we may not be able to generate sales of our products in volume quantities |
| Our products are not sold directly to the end-user; they are components of other products |
| As a result, we rely upon equipment manufacturers to design our products into their equipment |
| We further rely on the manufacturing and deployment of the equipment to be successful |
| Our customers are typically not obligated to purchase our products and can choose at any time to stop using our products if their own products are not commercially successful or for any other reason |
| If equipment that incorporates our products is not accepted in the marketplace, we may not achieve sales of our products in volume quantities, which would have a negative impact on our results of operations |
| We are subject to order and shipment uncertainties, and any significant order cancellations or deferrals could adversely affect our business |
| We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty |
| Any significant cancellations or deferrals in the future could materially and adversely affect our business, financial condition and results of operations |
| In addition, cancellations or deferrals of product orders, the return of previously sold products or the overproduction of products due to the failure of anticipated orders to materialize could cause us to hold excess or obsolete inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations |
| Furthermore, we generally recognize revenues upon shipment of products to a customer |
| If a customer refuses to accept shipped products, we could incur significant charges against our revenues |
| We derive a substantial amount of our revenues from international sources, and difficulties associated with international operations could harm our business |
| A substantial portion of our revenues has been derived from customers located outside of the United States |
| In 2005, 2004 and 2003, 74prca, 86prca and 87prca, respectively, of our net revenues were to customers located in Asia |
| We may be unable to successfully overcome the difficulties associated with international operations |
| These difficulties include: * political, social and economic instability; * exposure to different legal standards, particularly with respect to intellectual property; * natural disasters and public health emergencies; * nationalization of business and blocking of cash flows; * trade and travel restrictions; * the imposition of governmental controls and restrictions; * burdens of complying with a variety of foreign laws; * import and export license requirements and restrictions of the United States and each other country in which we operate; * unexpected changes in regulatory requirements; * foreign technical standards; * changes in taxation and tariffs; * difficulties in staffing and managing international operations; * foreign currency exchange rates; * difficulties in collecting receivables from foreign entities or delayed revenue recognition; and * potentially adverse tax consequences |
| Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales |
| Because sales of our products are denominated exclusively in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country |
| We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards |
| We are spending an increased amount of management time and internal and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules |
| In particular, our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud |
| A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systemapstas objectives will be met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving Centillium have been, or will be, detected |
| These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake |
| Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls |
| The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures |
| Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2005, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future |
| A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective |
| If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price |
| Because manufacturers of communications equipment may be reluctant to change their sources of components, if we do not achieve design wins with such manufacturers, we may be unable to secure sales from these customers in the future |
| Once a manufacturer of communications equipment has designed a supplierapstas semiconductor into its products, the manufacturer may be reluctant to change its source of semiconductors due to the significant costs associated with qualifying a new supplier |
| Accordingly, our failure to achieve design wins with equipment manufacturers, who have chosen a competitorapstas semiconductors could create barriers to future sales opportunities with these manufacturers |
| We may need to raise additional capital which might not be available or which, if available, could be on terms adverse to our common stockholders |
| We expect that our current cash and cash equivalents and investment securities balances will be adequate to meet our working capital and capital expenditure needs for at least twelve months |
| After that, we may need to raise additional funds, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all |
| We may also require additional capital for the acquisition of businesses, products and technologies that are complementary to ours |
| Further, if we issue equity securities, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those existing holders of our common stock |
| If we are unable to obtain this additional financing, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our business, operating results and financial condition |
| A general economic slowdown and a slowdown in spending in the telecommunications industry have affected and may continue to negatively affect our business and operating results |
| There have been announcements throughout the worldwide telecommunications industry of current and planned reductions in component inventory levels and equipment production volumes, and of delays in the build-out of new infrastructure |
| Any of these trends, if continued, could result in lower than expected demand for our products, which could have a material adverse effect on our revenues and results of operations generally, and could cause the market price of our common stock to decline |
| Specifically, we have experienced: * reduced demand for our products; * increased price competition for our products; * increased risk of excess and obsolete inventories; and * higher research and development and general and administrative costs, as a percentage of revenues |
| Recent geopolitical and social turmoil in many parts of the world, including actual incidents and potential future acts of terrorism and war, may continue to put pressure on global economic conditions |
| These geopolitical and social conditions, together with the resulting economic uncertainties, make it extremely difficult for us, our customers and our vendors to accurately forecast and plan future business activities |
| This reduced predictability challenges our ability to operate profitably or to increase revenues |
| In particular, it is difficult to develop and implement strategies to create sustainable business models and efficient operations, and to effectively manage outsourced relationships for services such as contract manufacturing and information technology |
| If the current uncertain economic conditions continue or deteriorate, there could be additional material adverse impact on our financial position, revenues, results of operations, or cash flow |
| Changes in the accounting treatment of stock options will adversely affect our results of operations |
| In December 2004, the FASB issued SFAS 123R which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in Centilliumapstas consolidated statements of operations |
| The accounting provisions of SFAS 123R were to take effect for reporting periods beginning after June 15, 2005 |
| In April 2005, the SEC announced the adoption of a new rule that amends the compliance dates for SFAS 123R The SECapstas new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005 |
| Centillium is therefore required to adopt SFAS 123R in the first quarter of 2006 |
| The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition |
| Although Centillium has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it believes the adoption will have a material adverse impact on operating results |
| Our customers may demand preferential terms or lengthen our sales cycle, which would adversely affect our results of operations |
| Our customers are in most cases larger than us and are able to exert a high degree of influence over us |
| These customers may have sufficient bargaining power to demand low prices and other terms and conditions that may materially adversely affect our business, financial condition and results of operations |
| In addition, prior to selling our products to such customers, we must typically undergo lengthy product approval processes, often taking up to one year |
| Accordingly, we are continually submitting successive versions of our products as well as new products to our customers for approval |
| The length of the approval process can vary and is affected by a number of factors, including customer priorities, customer budgets and regulatory issues affecting telecommunication service providers |
| Delays in the product approval process could materially adversely affect our business, financial condition and results of operations |
| While we have been successful in the past in obtaining product approvals from our customers, such approvals and the ensuing sales of such products may not continue to occur |
| Delays can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for the services that our products support |
| A delay in, or cancellation of, the sale of our products could adversely affect our results from operations or cause them to significantly vary from quarter to quarter |
| We may be unable to attract, retain and motivate qualified personnel, which could seriously harm our business |
| Our future success depends on our ability to attract, retain and motivate qualified personnel, including executive officers and other key management and technical personnel |
| As the source of our technological and product innovations, our key technical personnel represent a significant asset |
| The competition for such personnel can be intense in the semiconductor industry |
| We do not have employment agreements with these executives, or any other key employees, that govern the length of their service |
| We have had, and may continue to have, particular difficulty attracting and retaining key personnel during periods of poor operating performance |
| The loss of the services of certain key senior management or technical personnel, or our inability to attract, retain and motivate qualified personnel, could materially and adversely affect our business, financial condition and results of operations |
| Future consolidation in the telecommunications equipment industry may increase competition that could harm our business |
| The markets in which we compete are characterized by increasing consolidation both within the telecommunications equipment sector and by companies combining or acquiring data communications assets and assets for delivering voice-related services |
| We cannot predict with certainty how industry consolidation will affect our competitors |
| We may not be able to compete successfully in an increasingly consolidated industry |
| Increased competition and consolidation in our industry may require that we reduce the prices of our products or result in a loss of market share, which could materially adversely affect our business, financial condition and results of operations |
| Additionally, because we are now, and may in the future be, dependent on certain strategic relationships with third parties in our industry, any additional consolidation involving these parties could reduce the demand for our products and otherwise harm our business prospects |
| If we deliver products with defects, our credibility will be harmed, and the sales and market acceptance of our products will decrease |
| Our products are complex and have contained errors, defects and bugs when introduced and revised |
| If we deliver products with errors, defects or bugs or products that have reliability, quality or compatibility problems, our credibility and the market acceptance and sales of our products could be harmed, which could adversely affect our ability to retain existing customers or attract new customers |
| Further, if our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate such problems and may have our sales to customers interrupted or delayed |
| If any of these problems are not found until we have commenced commercial production, we may be required to incur additional development costs and product repair or replacement costs |
| Defects could also lead to potential liability as a result of product liability lawsuits against us or against our customers |
| We have agreed to indemnify some of our customers in some circumstances against liability from defects in our products |
| A successful product liability claim could seriously harm our business, financial condition and results of operations, and may divert our technical and other resources from other development efforts |
| We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration and that may result in reduced manufacturing yields, delays in product deliveries and increased expenses |
| In order to remain competitive, we expect to continue to transition our products to increasingly smaller line width geometries |
| This transition will require us to modify the manufacturing processes for our products and redesign some products |
| We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs, and we have designed some of our products to be manufactured in |
| 13 micron geometry processes |
| In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses |
| We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes |
| We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully |
| We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our foundry relationships |
| If our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected |
| As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products |
| However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all |
| Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products, and if we do not enforce and protect our intellectual property, our business will be harmed |
| We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and other contractual provisions to protect our proprietary rights |
| However, these measures afford only limited protection |
| Our failure to adequately protect our proprietary rights may adversely affect us |
| Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary |
| The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and many US companies have encountered substantial infringement problems in these countries |
| There is a risk that our efforts to protect proprietary rights may not be adequate |
| For example, our competitors may independently develop similar technology, duplicate our products or design around our patents or our other intellectual property rights |
| If we fail to adequately protect our intellectual property or if the laws of a foreign jurisdiction do not effectively permit such protection, it would be easier for our competitors to sell competing products |
| Risks Related to Our Common Stock Our stock price may continue to be volatile |
| The market price of our common stock has been volatile |
| Since January 1, 2002 our common stock has traded at prices as low as dlra1dtta08 and as high as dlra14dtta58 per share |
| The price of our common stock will likely continue to fluctuate significantly in response to the following factors, some of which are beyond our control: * variations in our quarterly operating results; * changes in financial estimates of our revenues and operating results by securities analysts; * changes in market valuations of integrated circuit companies; * announcements by us, our competitors or others in related market segments of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; * loss or decrease in sales to a major customer or failure to complete significant transactions; * loss or reduction in manufacturing capacity from one or more of our key suppliers; * additions or departures of key personnel; * future sales of our common stock; * inconsistent or low levels of trading volume of our common stock; * commencement of or involvement in litigation; * announcements by us or our competitors of key design wins and product introductions; * a decrease in the average selling price of our products; * ability to achieve cost reductions; and * fluctuations in the timing and amount of customer requests for product shipments |
| Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our managementapstas attention and resources |
| In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities |
| Companies such as ours in the semiconductor industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices |
| While we are not aware of any such contemplated class action litigation against us, we may in the future be the target of securities litigation |
| Any securities litigation could result in substantial costs and could divert the attention and resources of our management |
| If securities or industry analysts do not publish research or reports about our business or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline |
| The trading market for our common stock is 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 issue an adverse opinion regarding our stock, our stock price would likely decline |
| If one or more of these analysts cease coverage of our company or fail 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 |