| Risk Factors We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements |
| Any or all of our forward-looking statements in this annual report, and in any other public statements we make, may turn out to be wrong |
| They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties |
| We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise |
| You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission |
| The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue |
| The markets for the products in which our technology is incorporated are highly competitive; for example, semiconductor customers may choose to adopt a multi-chip, off-the-shelf chip solution versus licensing or using highly integrated chips that embed our technologies |
| Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property |
| Many of our competitors are large companies that have significantly greater financial and other resources than we have |
| The following factors may have an impact on our competitiveness: · Microprocessor IP providers, such as ARM , MIPS , Tensilica , ARC, recently began to offer DSP extensions to their IP · SATA IP market is highly standardized with several vendors offering similar products, leading to price pressure for both licensing and royalty revenue |
| · Our video solution is software based and competes with hardware implementation offered by companies such as Hantro and other software solution offered by Hantro, Sci Works offered by ARM and StarCore cores |
| · Our GPS solution competes with IP offerings from companies such as SiRF, eRIDe, UnAV Theses companies offer chips in addition to IP which could provide customers with shorter time to market through a discrete chip-set solution which can later be integrated with the rest of the chips |
| · We also lack RF design expertise needed for further development of GPS applications |
| In addition, we may face increased competition from smaller, niche semiconductor design companies in the future |
| We compete on the basis of price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation, and financial strength |
| Our inability to compete effectively on these basis could have a material adverse effect on our business, results of operations and financial condition |
| 12 _________________________________________________________________ Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and may not be a meaningful indicator of future performance |
| In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall |
| Factors that may affect our quarterly results of operations in the future include, among other things: · the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market acceptance of such technologies; · the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues resulting from fluctuations in unit shipments by our licensees; · our lengthy sales cycle; · the gain or loss of significant licensees; · delays in the commercialization of end products that incorporate our technology; · changes in our pricing policies and those of our competitors; and · restructuring, asset impairment and related charges |
| We rely significantly on revenue derived from a limited number of customers |
| We expect that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of our revenues in any period |
| Our five largest customers accounted for 36prca of total revenues in 2005, 46prca in 2004 and 39prca in 2003 |
| Our five largest customers paying per unit royalties accounted for 73prca of total royalty revenues in 2005, 67prca in 2004 and 87prca in 2003 |
| Moreover, license agreements for our DSP cores have not historically provided for substantial ongoing license payments |
| Significant portions of our anticipated future revenue, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers |
| Our ability to succeed in these efforts will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products, as well as our sales and marketing skills |
| In addition, some of our licensees may decide to satisfy their needs through in-house design and production |
| Our failure to obtain future customer licenses would impede our future revenue growth and could materially harm our business |
| We depend on market acceptance of third-party semiconductor intellectual property |
| The semiconductor intellectual property (SIP) industry is a relatively new and emerging trend |
| Our future growth will depend on the level of acceptance by the market of our third-party licensable intellectual property model, the variety of intellectual property offerings available on the market, and a shift in customer preference away from the traditional approach of licensing standalone DSPs, and towards licensing highly integrated application platforms incorporating all the necessary hardware and software for their target applications |
| Semiconductor customers may choose to adopt a multi-chip, off-the-shelf chip solution versus licensing or using highly integrated chips that embed our technologies |
| Semiconductor customers may also decide to design programmable DSP core products in-house rather than license them from us |
| If the market shifts and third-party SIP is n o longer desired by our customers, our business, results of operations and financial condition could be materially harmed |
| Because our IP solutions are components of end products, if semiconductor companies and electronic equipment manufacturers do not incorporate our solutions into their end products or if the end products of our customers do not achieve market acceptance, we may not be able to generate adequate sales of our products |
| We do not sell our IP solutions directly to end-users; we license our technology primarily to semiconductor companies and electronic equipment manufacturers, who then incorporate our technology into the products they sell |
| As a result, we rely upon our customers to incorporate our technology into their end products at the design stage |
| Once our customer incorporates a competitor’s technology into its end product, it become significantly more difficult for us to sell our technology to that customer because changing suppliers involves significant cost, time, effort and risk for the customer |
| As a result, we may incur significant expenditures on the development of a new 13 _________________________________________________________________ technology without any assurance that our customer will select our technology for incorporation into its own product and without this “design win,” it becomes significantly difficult to sell our IP solutions |
| Moreover, even after our customer agrees to incorporate our technology into its end products, the design cycle is long and may be delayed due to factors beyond our control which may result in the end product incorporating our technology not to reach the market until long after the initial “design win” with the our customer |
| From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in |
| These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our customers’ schedule |
| Further, because we do not control the business practices of our customers, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology |
| We cannot assure you that our customers will devote satisfactory efforts to promote our IP solutions |
| In addition, our unit royalties from licenses are totally dependent upon the success of our customers in introducing products incorporating our technology and the success of those products in the marketplace |
| The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field |
| These industries are highly cyclical and have been subject to significant economic downturns at various times |
| These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage semiconducto r companies or electronic product manufacturers to reduce their expenditure on our technology |
| If we do not retain our current customers and continue to attract new customers, our business may be harmed |
| We depend on a limited number of key personnel who would be difficult to replace |
| Our success depends to a significant extent upon certain of our key employees and senior management; the loss of the service of these employees could materially harm our business |
| Competition for skilled employees in our field is intense |
| We cannot assure you that in the future we will be successful in attracting and retaining the required personnel |
| The sales cycle for our IP solutions is lengthy, which makes forecasting of our customer orders and revenues difficult |
| The sales cycle for our IP solutions is lengthy, often lasting more than a year |
| Our customers generally conduct significant technical evaluations, including customer trials, of our technology as well as competing technologies prior to making a purchasing decision |
| In addition, purchasing decisions may also be delayed because of a customer’s internal budget approval process |
| Because of the lengthy sales cycle and the size of customer orders, if orders forecasted for a specific customer for a particular period do not occur in that period, our revenues and operating results for that particular quarter could suffer |
| Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or change, which may further impact our operating results for a particular period |
| We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future results |
| On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether any should be discontinued or, to the extent possible, divested |
| For example, in connection with our reorganization and restructuring plans in 2003 and 2005, we ceased manufacturing of our hard IP products and certain non-strategic technology areas |
| We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of or discontinue various investments, products lines and technology developments is prudent if market conditions change |
| In addition, there are no assurances that the discontinuance of various product lines will reduce our operating expenses or will not cause us to incur material charges associated with such decision |
| Furthermore, the discontinuance of existing product lines entails various risks, including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to the book value of the assets for the product line |
| Other risks include managing the expectations of, and maintaining good relations with, our customers who previously purchased products from our disposed or discontinued product lines, which could prevent us from selling other products to them in the future |
| We may also incur other liabilities and costs associated with our disposal or discontinuance of product lines |
| 14 _________________________________________________________________ Our restructuring efforts in 2003 and 2005 could disrupt the operation of our business, distract our management from focusing on revenue-generating efforts, result in the erosion of employee morale, and impair our ability to respond rapidly to growth opportunities in the future |
| We implemented reorganization and restructuring plans in 2003 and 2005, including personnel reduction of 9 people in 2005 and 40 people in 2003 |
| The employee reductions and changes in connection with our restructuring activities could result in an erosion of morale, and affect the focus and productivity of our remaining employees, including those directly responsible for revenue generation, which in turn may adversely affect our revenue in the future |
| Additionally, employees directly affected by the reductions may seek future employment with our business partners, customers or competitors |
| Such matters could divert the attention of our employees, including management, away from our operations, harm productivity, harm our reputation and increase our expenses |
| Because our IP solutions are complex, the detection of errors in our products may be delayed, and if we deliver products with defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us |
| Our IP solutions are complex and may contain errors, defects and bugs when introduced |
| If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed |
| Furthermore, the nature of our products may also delay the detection of any such error or defect |
| If our products contain errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems |
| This could result in the diversion of technical and other resources from our other development efforts |
| Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers |
| Furthermore, the existence of any defects, errors or failure in our products could lead to product liability claims or lawsuits against us or against our customers |
| A successful product liability claim could result in substantial cost and divert management ’s attention and resources, which would have a negative impact on our financial condition and results of operations |
| Our operating results may fluctuate significantly due to the cyclicality of the semiconductor industry, which could adversely affect the market price of our stock |
| Our primary operations are in the semiconductor industry, which is cyclical and subject to rapid technological change and evolving industry standards |
| From time to time, the semiconductor industry has experienced significant downturns such as the one we experienced during the 2000 and 2001 periods and from which the industry is slowly recovering |
| These downturns are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity |
| These factors could cause substantial fluctuations in our revenues and in our results of operations |
| The downturn we inexperienced during the 2000 and 2001 periods was, and future downturns in the semiconductor industry may be, severe and prolonged |
| Also the slow recovery from the downturn during the 2000 and 2001 periods and the failure of this industry to fully recover or any future downturn could seriously impact our revenue and harm our business , financial condition and results of operations |
| The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products in future periods |
| Our financial results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline |
| Our success will depend on our ability to successfully manage our geographically dispersed operations |
| Most of our employees are located in Israel and Ireland |
| Accordingly, our ability to compete successfully will depend in part on the ability of a limited number of key executives located in geographically dispersed offices to integrate management, address the needs of our customers and respond to changes in our markets |
| If we are unable to effectively manage and integrate our remote operations, our business may be materially harmed |
| Our operations in Israel may be adversely affected by instability in the Middle East region |
| One of our principal research and development facilities is located in, and our executive officers and some of our directors are residents of, Israel |
| Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel |
| Any major hostilities involving Israel could significantly harm our business, operating results and financial condition |
| 15 _________________________________________________________________ In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called to active military duty at any time |
| Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future |
| Our operations could be disrupted by the absence, for a significant period, of one or more of our key officers or key employees due to military service |
| Our research and development expenses may increase if the grants we currently receive from the Israeli and Irish governments are reduced or withheld |
| We currently receive research grants from programs of the Chief Scientist of Israel and under the funding programs of Enterprise Ireland and Invest Northern Ireland |
| To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting obligations |
| Although we have met such conditions in the past, should we fail to meet such conditions in the future our research grants may be repayable, reduced or withheld |
| The repayment or reduction of such research grants may increase our research and development expenses which in turn may reduce our operating income |
| We are exposed to fluctuations in currency exchange rates |
| A significant portion of our business is conducted outside the United States |
| Although most of our revenue is transacted in US Dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies |
| Moreover, a portion of our expenses in Israel and Europe are paid in Israeli currency (NIS) and Euros, which subjects us to the risks of foreign currency fluctuations |
| Our primary expenses paid in NIS and Euro are employee salaries and lease payments on our Israeli and Dublin facilities |
| In the future, we may use derivative instruments in order to minimize the effects of currency fluctuations, but any hedging positions may not succeed in minimizing our foreign currency fluctuation risks |
| Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our revenues and business |
| Approximately 65prca of our total revenues in 2005 are derived from license agreements with customers located outside of the United States |
| We expect that international customers will continue to account for a significant portion of our revenue for the foreseeable future |
| As a result, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls |
| These shortfalls could cause our business, financial condition and results of operations to be harmed |
| Some of the risks of doing business internationally include: · unexpected changes in regulatory requirements; · fluctuations in the exchange rate for the United States dollar; · imposition of tariffs and other barriers and restrictions; · burdens of complying with a variety of foreign laws; · political and economic instability; and · changes in diplomatic and trade relationships |
| If we are unable to meet the changing needs of our end-users or to address evolving market demands, our business may be harmed |
| The markets for programmable DSP cores and application IP are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, requiring significant expenditure for research and development |
| We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards on a timely basis, to meet the specific technical requirements of our end-users or to avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business |
| For example, we have already licensed our multimedia solutions; however, this technology has not yet been deployed by our licensees to their end markets and may be subject to further modifications to address 16 _________________________________________________________________ evolving market demands |
| In addition, the reduction in the number of our employees in connection with our recent restructuring efforts could adversely affect our ability to attract or retain customers who require certain research and development capabilities from their IP providers |
| We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses |
| We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future that could expand our business |
| The negotiation of potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversion of management’s time and our resources |
| We may not be able to successfully integrate acquired businesses or joint ventures with our operations |
| If we were to make any acquisition or enter into a joint venture, we may not receive the intended benefits of the acquisition or joint venture |
| If future acquisitions or joint ventures disrupt our operations, or if we have difficulty integrating the businesses or technologies we acquire, our business, financial condition and results of operations could suffer |
| We may not be able to adequately protect our intellectual property |
| Our success and ability to compete depend in large part upon the protection of our proprietary technologies |
| We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights |
| These agreements and measures may not be sufficient to protect our technology from third-party infringement or to protect us from the claims of others |
| As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties |
| Our trade names or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in these markets |
| If we were forced to change any of our brand names, we could lose a significant amount of our brand equity |
| Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms |
| Although we are not currently involved in any litigation, we are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others |
| There is a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active |
| We have not, and cannot reasonably, investigate all such patents |
| From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future |
| Claims against us may require us to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of these claims |
| Any necessary licenses may not be available or, if available, may not be obtainable on commercially reasonable terms |
| If we cannot obtain necessary licenses on commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed |
| Our business depends on our customers and their suppliers obtaining required complementary components |
| Some of the raw materials, components and subassemblies included in the products manufactured by our OEM customers are obtained from a limited group of suppliers |
| Supply disruptions, shortages or termination of any of these sources could have an adverse effect on our business and results of operations due to the delay or discontinuance of orders for products containing our IP, especially our DSP cores, until those necessary components are available |
| The future growth of our business depends in part on our ability to license to system OEMs and small-to-medium-sized semiconductor companies directly and to expand our sales geographically |
| Historically, a substantial portion of our licensing revenues has been derived in any period from a relatively small number of licensees |
| Because of the substantial license fees we charge, our customers tend to be large semiconductor companies or vertically integrated system OEMs |
| Part of our current growth strategy is to broaden 17 _________________________________________________________________ the adoption of our products by small and mid-size companies by offering different versions of our products, targeted at these companies |
| In addition we plan to continue expanding our sales to include additional geographic areas |
| If we are unable to develop and market effectively our intellectual property through these models, our revenues will continue to be dependent on a smaller number of licensees and a less geographically dispersed pattern of licensees, which could materially harm our business and results of operations |
| We will be exposed to risks relating to evaluations of internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002 |
| We have spent and are spending a substantial amount of management time and 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 the NASDAQ Stock Exchange rules |
| In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations as to the effectiveness of these systems by our independent public accounting firm |
| We have expended and expect to continue to expend significant resources and management time documenting and testing our internal control systems and procedures |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control ov er financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Failure to maintain an effective internal control environment could have a material adverse effect on the market price of our stock |
| Newly adopted accounting standard that requires companies to expense stock options based on fair market value will result in a decrease in our earnings and our stock price may decline |
| The Financial Accounting Standards Board issued in December 2004 FASB 123(R) which revised the previously proposed accounting standard that will eliminate the ability to account for employees share-based compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be accounted for using a fair-value-based method and recognized as an expense in our consolidated statement of income |
| We will be required to record compensation expense for the unvested portion of previously granted awards that remain outstanding on the date of adoption of the new accounting standard based on their fair market value |
| We are required to implement the new standard no later than January 1, 2006 |
| Currently, we generally only disclose such expenses on a pro forma basis in the notes to our annual consolidated financial statements in accordance with accounting principles generally accepted in the United State s |
| The adoption of this new accounting standard will have a significant impact on our results of operations as our reported earnings will decrease significantly |
| Our stock price could decline in response to the perceived decline in our reported earnings |
| Furthermore, if we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses or if we are unable to introduce alternative methods of compensation, our ability to recruit, motivate and retain employees may be impaired, which could put us at a significant disadvantage in the employee marketplace relative to our competitors |
| The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet certain conditions and may be terminated or reduced in the future, which could increase our costs |
| We enjoy certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” status of our facilities and programs |
| To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations |
| We believe that we will be able to continue to meet such conditions |
| Should we fail to meet such conditions in the future, however, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard rate of 34prca-36prca and could be required to refund tax benefits already received |
| In addition, we cannot assure you that these tax benefits will be continued in the future at their current levels or otherwise |
| The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the Approved Enterprise status of our facilities and programs) or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition |
| 18 _________________________________________________________________ Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations |
| We have significant operations in Israel and the Republic of Ireland and a substantial portion of our taxable income historically has been generated there |
| Currently, some of our Israeli and Irish subsidiaries are taxed at rates substantially lower than the United States of America (US) tax rates |
| Although there is no expectation of any changes to Israeli and Irish tax law, if our Israeli and Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected |
| In addition, because our Israeli and Irish operations are owned by subsidiaries of a US corporation, distributions to the US corporation, and in certain circumstances undistributed income of the subsidiaries, may be subject to US tax |
| Moreover, if US or other authorities were to change applicable tax laws or successfully challenge the manner in which our subs idiaries’ profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected |