| DSP GROUP INC /DE/ Item 1A RISK FACTORS The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us |
| These forward-looking statements are based on current expectations and we assume no obligation to update this information |
| Before you decide to buy, hold, or sell our common stock, you should carefully consider the risks described below, in addition to the other information contained elsewhere in this report |
| The following risk factors are not the only risk factors facing our company |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| Our business, financial condition, and results of operation could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occurs |
| In that event, the market price for our common stock could decline, and you may lose all or part of your investment |
| We rely on a primary distributor for a significant portion of our total revenues and the failure of this distributor to perform as expected would materially reduce our future sales and revenues |
| We sell our products to customers primarily through a network of distributors and original equipment manufacturer (OEM) representatives |
| Particularly, revenues derived from sales through our Japanese distributor, Tomen Electronics, accounted for 75prca of our total revenues in 2005, 76prca in 2004 and 79prca in 2003 |
| Our future performance will depend, in part, on this distributor to continue to successfully market and sell our products |
| One customer, Panasonic Communications Co, Ltd, has continually accounted for a majority of the sales through Tomen Electronics |
| The loss of Tomen Electronics as our distributor and our inability to obtain a satisfactory replacement in a timely manner would materially harm our sales and results of operations |
| Additionally, the loss of Panasonic and Tomen Electronics’ inability to thereafter effectively market our products would also materially harm our sales and results of operations |
| 10 ______________________________________________________________________ [33]Table of Contents Because our products are components of end products, if OEMs do not incorporate our products into their end products or if the end products of our OEM customers do not achieve market acceptance, we may not be able to generate adequate sales of our products |
| Our products are not sold directly to the end-user; rather, they are components of end products |
| As a result, we rely upon OEMs to incorporate our products into their end products at the design stage |
| Once an OEM designs a competitor’s product into its end product, it becomes significantly more difficult for us to sell our products 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 product without any assurance that an OEM will select our product for design into its own product and without this “design win,” it becomes significantly difficult to sell our products |
| Moreover, even after an OEM agrees to design our products 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 products not to reach the market until long after the initial “design win” with the OEM 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 |
| Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market acceptance |
| Many of our OEM customers face intense competition in their markets |
| If end products that incorporate our products are not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have a negative effect on our results of operations |
| We generate a significant amount of our total revenues from the sale of Integrated Digital Telephony (IDT) products and our business and operating results may be materially adversely affected if we do not continue to succeed in the highly competitive IDT market |
| Sales of our Integrated Digital Telephony (IDT) products comprised 88prca of our total revenues for 2005 |
| Specifically, sales of our 2dtta4GHz and 5dtta8GHz products comprised 71prca of our total revenues for 2005 |
| We expect that our 2dtta4GHz and 5dtta8GHz products, especially our 5dtta8GHz products, will continue to account for a substantial portion of our revenues in future years |
| As a result, any adverse change in the digital IDT market or in our ability to compete and maintain our competitive position in that market would harm our business, financial condition and results of operations |
| The IDT market is extremely competitive, and we expect that competition will only increase |
| Our existing and potential competitors in each of our markets include large and emerging domestic and foreign companies, many of which have significantly greater financial, technical, manufacturing, marketing, sale and distribution resources and management expertise than we do |
| It is possible that we may one day be unable to respond to increased price competition for IDT processors or other products through the introduction of new products or reduction of manufacturing costs |
| This inability would have a material adverse effect on our business, financial condition and results of operations |
| Likewise, any significant delays by us in developing, manufacturing or shipping new or enhanced products in this market also would have a material adverse effect on our business, financial condition and results of operations |
| In addition, we believe new developments in the home residential market may adversely affect the revenues we derive from our IDT products |
| For example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, may reduce the market for products using fixed-line telephony |
| This decrease in demand would reduce our revenues derived from, and unit sales of, our cordless telephony products |
| 11 ______________________________________________________________________ [34]Table of Contents Because our quarterly operating results may fluctuate significantly, the price of our common stock may decline |
| Our quarterly results of operations may vary significantly in the future for a variety of reasons, many of which are outside our control, including the following: • fluctuations in volume and timing of product orders; • changes in demand for our products due to seasonal consumer buying patterns and other factors; • timing of new product introductions by us, including our DECT products, and by our customers or competitors; • changes in the mix of products sold by us or our competitors; • fluctuations in the level of sales by our OEM customers and other vendors of end products incorporating our products; • timing and size of expenses, including expenses to develop new products and product improvements; • entry into new markets, including China, Korea, South America and the domestic Japanese market; • mergers and acquisitions by us, our competitors, including the recent disposition by National Semiconductor Corporation of its DECT division, and our existing and potential customers; and • general economic conditions, including the changing economic conditions in the United States and worldwide |
| Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations |
| Also, we sell our products to OEM customers that operate in consumer markets |
| As a result, our revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our products and the market acceptance of such products supplied by our OEM customers |
| The fourth quarter in any given year is usually the strongest quarter for sales by our OEM customers in the consumer markets, and thus, our third quarter in any given year is usually the strongest quarter for revenues as our OEM customers request increased shipments of our products in anticipation of the increased activity in the fourth quarter |
| By contrast, the first quarter in any given year is usually the weakest quarter for us |
| Our gross margins and profitability may be materially adversely affected by the continued decline in average selling prices of our products and other factors, including increases in assembly and testing expenses |
| Sales of our IDT telephony products comprised 88prca of our total revenues for 2005 |
| We have experienced and will continue to experience a decrease in the average selling prices of our IDT products |
| Decreasing average selling prices could result in decreased revenues even if the volume of products sold increases |
| Decreasing average selling prices may also require us to sell our products at much lower gross margin than in the past and reduce profitability |
| Although we have to date been able to partially offset on an annual basis the declining average selling prices through manufacturing cost reductions by achieving a higher level of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the anticipated, continued decline in average selling prices of our IDT processors |
| In addition to the continued decline in the average selling prices of our products, our gross profit may decrease in the future due to other factors, including the roll-out of new products in any given period and the penetration of new markets which may require us to sell products at a lower margin, our failure to introduce new engineering processes, mix of products sold, increases in the pricing of silicon wafers, and increases in other production costs, including testing and assembly |
| For example, our gross profit decreased in 2005 as compared to 2004 primarily due to increased testing and assembly expense |
| Our gross profit for 2006 will decline further if such expenses continue to rise |
| Furthermore, as we are a fabless company, global market trends such as “over-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw material costs and thus decrease our gross margin |
| 12 ______________________________________________________________________ [35]Table of Contents Because we depend on independent foundries to manufacture all of our integrated circuit products, we are subject to additional risks that may materially disrupt our business |
| All of our integrated circuit products are manufactured by independent foundries |
| While these foundries have been able to adequately meet the demands of our increasing business, we are and will continue to be dependent upon these foundries to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to us a sufficient portion of their foundry capacity to meet our needs in a timely manner |
| A significant majority of our integrated circuit products at this time is manufactured by TSMC and tested and assembled at ASE We have entered into a short-term supply arrangement with TSMC pursuant to which it is obligated to supply a specified amount of wafers to us for a specific period |
| We may incur charges to TSMC if we fail to utilize all the quantities of products reserved for us in accordance with this arrangement, which may increase our operating expenses and adversely affect our operating profit |
| While we currently believe we have adequate capacity to support our current sales levels pursuant to our arrangement with our foundries, we may encounter capacity shortage issues in the future |
| In the event of a worldwide shortage in foundry capacity, we may not be able to obtain a sufficient allocation of foundry capacity to meet our product needs or we may incur additional costs to ensure specified quantities of products and services |
| Over-capacity at the current foundries we use, or future foundries we may use, to manufacture our integrated circuit products may lead to increased operating costs and lower gross margins |
| In addition, such a shortage could lengthen our products’ manufacturing cycle and cause a delay in the shipment of our products to our customers |
| This could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially reduced |
| Our business could also be harmed if our current foundries terminate their relationship with us and we are unable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner |
| In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles them, earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us from obtaining an adequate supply of wafers to fill customer orders |
| Such events could harm our reputation, business, financial condition, and results of operations |
| Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability that our business requires |
| The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment |
| Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry’s ability to achieve acceptable manufacturing yields and product reliability |
| If the foundries we currently use do not achieve the necessary yields or product reliability, our ability to fulfill our customers’ needs could suffer |
| This could ultimately lead to a loss of sales of our products and have a negative effect on our gross margins and results of operations |
| Furthermore, there are other significant risks associated with relying on these third-party foundries, including: • risks due to the fact that we have reduced control over production cost, delivery schedules and product quality; • less recourse if problems occur as the warranties on wafers or products supplied to us are limited; and • increased exposure to potential misappropriation of our intellectual property |
| As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additional risks that may materially disrupt our business |
| Independent subcontractors, located in Asia, assemble and test our semiconductor products |
| Because we rely on independent subcontractors to perform these services, we cannot directly control our product delivery 13 ______________________________________________________________________ [36]Table of Contents schedules or quality levels |
| Our future success also depends on the financial viability of our independent subcontractors |
| If the capital structures of our independent subcontractors weaken, we may experience product shortages, quality assurance problems, increased manufacturing costs, and/or supply chain disruption |
| Moreover, the economic, market, social, and political situations in countries where some of our independent subcontractors are located are unpredictable, can be volatile, and can have a significant impact on our business because we may not be able to obtain product in a timely manner |
| Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors are located also could have a severe negative impact on our operating capabilities |
| 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 business |
| Although the majority of end users of the consumer products that incorporate our products are located in the US, we are dependent on sales to OEM customers, located outside of the US, that manufacture these consumer products |
| We expect that international sales will continue to account for a significant portion of our net product sales for the foreseeable future |
| For example, export sales, primarily consisting of IDT speech processors shipped to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 99prca of our total revenues for 2005 |
| 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 |
| In order to sustain the future growth of our business, we must penetrate new markets and our new products, such as our DECT products, must achieve widespread market acceptance |
| In order to increase our sales volume and expand our business, we must penetrate new markets and introduce new products |
| Although we are exploring opportunities to expand sales of our products in China, Korea, South America and the domestic Japanese market, there are no assurances that we will gain significant market share in those markets |
| To further expand our business, we introduced our new DECT product for the European market in 2004, and began delivering initial shipments of these chipsets to our first key customer in the second half of 2004 |
| Our future growth is substantially dependent on our success in penetrating the European DECT market and the general market deployment and acceptance of our DECT products |
| Furthermore, there is a potential shift in the US digital telephony market towards DECT products |
| However, there are no assurances that we can successfully develop and market new DECT products targeted at the US market |
| There are several emerging market trends that may challenge our ability to continue to grow our business |
| We believe new technological developments in the home residential market may adversely affect our operating results |
| For example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the projected lack of growth in products using fixed- 14 ______________________________________________________________________ [37]Table of Contents line telephony would reduce our total revenues derived from, and unit sales of, cordless telephony products |
| Our ability to maintain our growth will depend on the expansion of our product lines to capitalize on the emerging access methods and on our success in developing and selling a portfolio of “system-on-a-chip” solutions that integrate video, voice, data and communication technologies in a wider multimedia market, as well as on our success in developing and selling DECT and video products |
| We cannot assure you that we will succeed in expanding our product lines, or develop and sell in a timely manner a portfolio of “system-on-a-chip” solutions |
| One additional factor that could affect our results of operations is the potential shift in the US digital telephony market towards DECT products |
| We were recently informed that at the conclusion of negotiations between the DECT Forum and the Federal Communications Commission (FCC), FCC authorized the use of the DECT frequency band in the US This allows companies and private households to use the multifunctional DECT technology for various communications |
| As our DECT chipsets are in the early stage of deployment, we can provide no assurance that we can penetrate any emerging US DECT market |
| The US market is currently our dominant market |
| If we are unable to develop and market new DECT products to compete effectively in any emerging US market against the introduction of new products by our competitors, our profits and results of operation may be materially adversely effected |
| The possible emerging trend of our OEM customers outsourcing their production may cause our revenue to decline |
| We believe there may be an emerging trend of our OEM customers outsourcing their production to third parties |
| We have invested substantial resources to build relationships with our OEM customers |
| However the outsourcing companies whom our OEM customers may choose to outsource production may not have prior business relationship with us or may instead have prior or ongoing relationships with our competitors |
| The emergence of this trend may require us to expend substantial additional resources to build relationships with these outsourcing companies, which would increase our operating expenses |
| Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to incorporate our chipsets rather than chipsets of our competitors |
| Our inability to retain an OEM customer once such customer chooses to outsource production would have a material adverse effect on our future revenue |
| Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that could increase our operating expenses and disrupt our business |
| Our principal research and development facilities are located in the State of Israel and, as a result, at December 31, 2005, 227 of our 291 employees were located in Israel, including 148 out of 197 of our research and development personnel |
| In addition, although we are incorporated in Delaware, a majority of our directors and executive officers are residents of Israel |
| Although substantially all of our sales currently are being made to customers outside of Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel |
| Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial condition |
| Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest |
| In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel’s establishment |
| Although they have not done so to date, these restrictive laws and policies may have an adverse impact on our operating results, financial condition or expansion of our business |
| Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries |
| Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with 15 ______________________________________________________________________ [38]Table of Contents efforts to resolve some of the economic and political problems in the Middle East, hostilities between Israel and some of its Arab neighbors have recently escalated and intensified |
| We cannot predict whether or in what manner these conflicts will be resolved |
| Our results of operations may be negatively affected by the obligation of key personnel to perform military service |
| 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 for 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 officers or key employees due to military service |
| Our future profits may be diminished if the current Israeli tax benefits that we enjoy are reduced or withheld |
| We receive certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” status of our facilities and programs |
| To be eligible for tax benefits, we must 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 |
| Although we have met such conditions in the past, should we fail to meet such conditions in the future, we would be subject to corporate tax in Israel at the standard corporate tax rate (34prca for 2005) and could be required to refund tax benefits already received |
| We cannot assure you that such grants and tax benefits will be continued in the future at their current levels, if at all |
| The tax benefits under these investment plans are scheduled to gradually expire by 2017 |
| 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 have a material adverse effect on our business, operating results and financial condition |
| On April 1, 2005, an amendment to the Investments Law came into effect |
| As a result of the amendment, tax-exempt income generated under the provisions of the new law for investment programs approved after December 31, 2004 will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income |
| The amendment may increase our tax rate in future years |
| We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition |
| We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies |
| We are unable to predict whether or when any other prospective acquisition will be completed |
| The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention |
| We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets |
| Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected |
| The occurrence of any of these events could harm our business, financial condition or results of operations |
| Future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing |
| Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: • issuance of equity securities that would dilute our current stockholders’ percentages of ownership; • large one-time write-offs; • the incurrence of debt and contingent liabilities; • difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies; 16 ______________________________________________________________________ [39]Table of Contents • diversion of management’s attention from other business concerns; • contractual disputes; • risks of entering geographic and business markets in which we have no or only limited prior experience; and • potential loss of key employees of acquired organizations |
| Third party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and seriously harm our operating results and disrupt our business |
| As is typical in the semiconductor industry, we have been and may from time to time be notified of claims that we may be infringing patents or intellectual property rights owned by third parties |
| For example, in a lawsuit against Microsoft Corporation, AT&T asserted that our TrueSpeech 8dtta5 algorithm includes certain elements covered by a patent held by AT&T AT&T sued Microsoft, one of our TrueSpeech 8dtta5 licensees, for infringement |
| We were not named in AT&T’s suit against Microsoft |
| If litigation becomes necessary to determine the validity of any third party claims, it could result in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor |
| If it appears necessary or desirable, we may try to obtain licenses for those patents or intellectual property rights that we are allegedly infringing |
| Although holders of these types of intellectual property rights commonly offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us |
| Our failure to obtain a license for key intellectual property rights from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacturing of products utilizing the technology |
| Alternatively, we could be required to expend significant resources to develop non-infringing technology |
| We cannot assure you that we would be successful in developing non-infringing technology |
| We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position |
| Our success and ability to compete is in part dependent upon our internally-developed technology and other proprietary rights, which we protect through a combination of copyright, trademark and trade secret laws, as well as through confidentiality agreements and licensing arrangements with our customers, suppliers, employees and consultants |
| In addition, we have filed a number of patents in the United States and in other foreign countries with respect to new or improved technology that we have developed |
| However, the status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain |
| Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that the patents issued to us will not be infringed by others |
| Also, our competitors and potential competitors may develop products with similar technology or functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use information that we regard as proprietary |
| Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States |
| Policing the unauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical and management personnel |
| Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able to prevent misappropriation of our technology |
| Use by others of our proprietary rights could materially harm our business and expensive litigation may be necessary in the future to enforce our intellectual property rights |
| 17 ______________________________________________________________________ [40]Table of Contents Because our products 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 products 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 failures in our products could lead to product liability claims or lawsuits against us or against our customers |
| We generally provide our customers with a standard warranty for our products, generally lasting one year from the date of purchase |
| Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for the defective products |
| 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 executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we may not be able to attract and retain such qualified personnel |
| Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing, sales customer support and product development personnel |
| The loss of significant numbers of such personnel could significantly harm our business, financial condition and results of operations |
| We do not have any life insurance or other insurance covering the loss of any of our key employees |
| Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical, marketing and sales personnel |
| However, the competition for personnel is intense and we may have difficulty attracting and retaining such personnel |
| We are exposed to fluctuations in currency exchange rates |
| A significant portion of our business is conducted outside the United States |
| Export sales to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 99prca of our total revenues in 2005 |
| Although most of our revenue and expenses are 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, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations between the US dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation |
| Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities |
| As a result, an increase in the value of Israeli currency in comparison to the US dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses |
| From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks |
| The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industry standards, changes in customer needs, demand for higher levels of integration, growing competition and new product introductions |
| Our future growth is dependent not only on the continued success of our existing products but also successful introduction of new products as some of our existing products, such as 900MHz and 2dtta4GHz, experienced decreased sales |
| Our ability to adapt to changing technology 18 ______________________________________________________________________ [41]Table of Contents and anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth |
| If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share |
| We may also have to incur substantial unanticipated costs to comply with these new standards |
| If our product development and improvements take longer than planned, the availability of our products would be delayed |
| Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sell our products and our results of operations |
| Because of changing customer requirements and emerging industry standards, we may not be able to achieve broad market acceptance of our products |
| Our success is dependent, in part, on our ability to: • successfully develop, introduce and market new and enhanced products at competitive prices and in a timely manner in order to meet changing customer needs; • convince leading OEMs to select our new and enhanced products for design into their own new products; • respond effectively to new technological changes or new product announcements by others; • effectively use and offer leading technologies; and • maintain close working relationships with our key customers |
| We cannot be sure that we will be successful in these pursuits, that the growth in demand will continue or that our products will achieve market acceptance |
| Our failure to develop and introduce new products that are compatible with industry standards and that satisfy customer requirements, and the failure of our products to achieve broad market acceptance, could have a negative impact on our ability to sell our products and our results of operations |
| Because the markets in which we compete are highly competitive, and many of our competitors have greater resources than we do, we cannot be certain that our products will be accepted in the marketplace or capture market share |
| The markets in which we operate are extremely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion |
| We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market |
| Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our current products would be sufficient to establish and sustain our new products in the market |
| Any increase in price or competition could result in the erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations |
| In each of our business activities, we face current and potential competition from competitors that have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do |
| These competitors may also have pre-existing relationships with our customers or potential customers |
| Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so |
| Our principal competitors in the cordless market include SiTel (formerly the DECT division of National Semiconductor), Philips, Oki Electronic, Micro Linear and Infineon |
| Our principal competitors in the VoP market include Broadcom, AudioCodes, Texas Instruments, Infineon and new Taiwanese IC vendors |
| As discussed above, various new developments in the home residential market may require us to enter into new markets with competitors that have more established presence, and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do |
| The expenditure of greater resources to expand our current product lines and develop a portfolio of 19 ______________________________________________________________________ [42]Table of Contents “system-on-a-chip” solutions that integrate video, voice, data and communication technologies in a wider multimedia market may increase our operating expenses and reduce our gross profit |
| We cannot assure you that we will succeed in developing and introducing new products that are responsive to market demands |
| We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses |
| A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve higher levels of functionality |
| In order to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis |
| This will require us to expend greater research and development resources, and may require us to modify the manufacturing processes for some of our products, to achieve greater integration |
| We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs |
| Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our IDT products, this effort may not continue to be successful |
| Also, because we are a fabless semiconductor company, we depend on our foundries to transition to smaller geometry processes successfully |
| We cannot assure you that our foundries will be able to effectively manage the transition |
| In case 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 |
| Newly adopted accounting standard that requires companies to expense stock options will result in a decrease in our earnings and our stock price may decline |
| The Financial Accounting Standards Board recently adopted the previously proposed accounting standard that will eliminate the ability to account for 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 |
| The new accounting standard is effective for fiscal periods beginning after December 15, 2005, so we are required to implement the 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 States |
| 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 |
| Our certificate of incorporation and bylaws contain anti-takeover provisions that could prevent or discourage a third party from acquiring us |
| Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our stockholders |
| We have a staggered board, which means it will generally take two years to change the composition of our board |
| Our board of directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote |
| It is possible that these provisions may prevent or discourage third parties from acquiring us, even if the acquisition would be beneficial to our stockholders |
| In addition, these factors may also adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock |
| 20 ______________________________________________________________________ [43]Table of Contents Our stock price may be volatile so you may not be able to resell your shares of our common stock at or above the price you paid for them |
| Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially |
| In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies |
| These factors and fluctuations could have a material adverse effect on the market price of our common stock |