| IXYS CORP /DE/ Item 1A Risk Factors In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our business and us |
| Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition |
| Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control |
| Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations |
| Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs |
| Thus, small declines in revenues could seriously negatively affect our operating results in any given quarter |
| Our operating results may fluctuate significantly from quarter to quarter and year to year |
| Some of the factors that may affect our quarterly and annual results are: • the reduction, rescheduling or cancellation of orders by customers; • fluctuations in timing and amount of customer requests for product shipments; • changes in the mix of products that our customers purchase; • loss of key customers; • the cyclical nature of the semiconductor industry; 13 _________________________________________________________________ [69]Table of Contents • competitive pressures on selling prices; • damage awards or injunctions as the result of litigation; • market acceptance of our products and the products of our customers; • fluctuations in our manufacturing yields and significant yield losses; • difficulties in forecasting demand for our products and the planning and managing of inventory levels; • the availability of production capacity; • the amount and timing of investments in research and development; • changes in our product distribution channels and the timeliness of receipt of distributor resale information; • the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and • the amount and timing of costs associated with product returns |
| As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Annual Report on Form 10-K, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis |
| Our gross margin is dependent on a number of factors, including our level of capacity utilization |
| Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense |
| We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues |
| If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins |
| Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future |
| IXYS could be harmed by litigation |
| As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights |
| We have been sued on occasion for purported patent infringement and are currently defending such a claim |
| For example, we were sued by International Rectifier for purportedly infringing some of its patents covering power MOSFETs |
| After a trial in September and October 2005, the US District Court awarded damages to International Rectifier of dlra6dtta2 million plus 6dtta5prca of revenues from infringing products between September 30, 2005 and February 14, 2006 |
| In addition, a permanent injunction against IXYS, effectively barring us from selling or distributing the allegedly infringing products, was issued by the US District Court, although its enforcement has been temporarily stayed |
| We continue to contest International Rectifier’s claims vigorously but the outcome of this litigation remains uncertain |
| Additionally, in the future, we could be accused of infringing the intellectual property rights of International Rectifier or other third parties |
| We also have certain indemnification obligations to customers and suppliers with respect to the infringement of third party intellectual property rights by our products |
| We could incur substantial costs defending ourselves and our customers and suppliers from any such claim |
| Infringement claims or claims for indemnification, whether or not proven to be true, may divert the efforts and attention of our management and technical personnel from our core business operations and could otherwise harm our business |
| In the event of an adverse outcome in any intellectual property litigation, including the pending power MOSFET litigation with International Rectifier, we could be required to pay substantial damages, cease the development, manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us |
| An adverse 14 _________________________________________________________________ [70]Table of Contents outcome in the International Rectifier power MOSFET litigation would, and in any other infringement action could, materially and adversely affect our financial condition, results of operations and cash flows |
| was sued in Massachusetts state court in 2003 over a dispute between it and LoJack Corporation relating to a contract for the design, development and purchase of application specific integrated circuits and assemblies |
| On February 8, 2006, the jury found that Clare was liable for damages in the amount of dlra36dtta7 million |
| Under Massachusetts law, a jury’s award is increased for pre-judgment interest |
| The Court determined the method for calculating the pre-judgment interest and, at March 31, 2006, it was dlra6dtta2 million |
| In addition, the Court determined the attorney’s fees and costs payable by Clare to be dlra708cmam000 |
| Post-judgment interest accrues on the total judgment, inclusive of the pre-judgment interest, attorneys fees and costs, at the rate of 12prca per annum simple interest |
| Clare sought post-judgment relief from the trial court and, if necessary, intends to file an appeal |
| The trial court has yet to rule on Clare’s post-trial motions |
| The enforcement of the judgment will be stayed pending appeal without the necessity of filing any bond |
| Post-judgment proceedings and/or appeals may take several months or even years to conclude |
| Payment of an award, if ever, will only occur at the conclusion of this process |
| We cannot predict the final outcome of this litigation matter |
| An adverse outcome would materially and adversely affect our financial condition, results of operations and cash flows |
| Although we recorded an additional dlra42dtta8 million in litigation provision during the year ended March 31, 2006, there can be no assurance that our aggregate accrual of dlra43dtta6 million is sufficient for any actual losses that may be incurred as a result of this litigation |
| Semiconductors for inclusion in consumer products have short product life cycles |
| We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than other types of products sold by our customers |
| Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result in design wins for us |
| In particular, in recent years we have sold semiconductors for inclusion in the plasma display panels of a small number of manufacturers |
| Plasma display panels are one of several technologies used for visual display in television |
| Should competition among the various visual display technologies for television adversely affect the sales of plasma display panels that incorporate our products, our operating results could be adversely affected |
| Moreover, our operating results could be adversely affected if those plasma display panel manufacturers that have selected our semiconductors for inclusion in their products are not successful in their competition against other manufacturers of plasma display panels |
| As plasma display panels cycle into next generation products, we must achieve new design wins for our semiconductors to be included in the next generation plasma display panels |
| New design wins may not occur |
| Our international operations expose us to material risks |
| During fiscal 2006, our product sales by region were approximately 31dtta5prca in the United States, approximately 33dtta2prca in Europe and the Middle East, approximately 30dtta3prca in Asia and approximately 5dtta0prca in Canada and the rest of the world |
| We expect revenues from foreign markets to continue to represent a significant portion of total revenues |
| IXYS maintains significant operations in Germany and the United Kingdom and contracts with suppliers and manufacturers in South Korea, Japan and elsewhere in Europe and Asia |
| Some of the risks inherent in doing business internationally are: • foreign currency fluctuations; • changes in the laws, regulations or policies of the countries in which we manufacture or sell our products; • trade restrictions; 15 _________________________________________________________________ [71]Table of Contents • longer payment cycles; • challenges in collecting accounts receivable; • cultural and language differences; • employment regulations; • limited infrastructure in emerging markets; • transportation delays; • seasonal reduction in business activities; • work stoppages; • terrorist attack or war; and • economic or political instability |
| Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that facility are denominated in Euros, and sales of products manufactured in our Chippenham, UK facility and our costs at that facility are primarily denominated in British pounds and Euros |
| Fluctuations in the value of the Euro and the British pound against the US dollar could have a significant impact on our balance sheet and results of operations |
| We generally do not enter into foreign currency hedging transactions to control or minimize these risks |
| Fluctuations in currency exchange rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country |
| If we expand our international operations or change our pricing practices to denominate prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations |
| In addition, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do US laws regarding the manufacture and sale of our products in the US Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in these foreign countries |
| The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results |
| Business conditions in the semiconductor industry may rapidly change from periods of strong demand and insufficient production to periods of weakened demand and overcapacity |
| The industry in general is characterized by: • alternating periods of overcapacity and production shortages; • cyclical demand for semiconductors; • changes in product mix in response to changes in demand; • significant price erosion; • variations in manufacturing costs and yields; • rapid technological change and the introduction of new products; and • significant expenditures for capital equipment and product development |
| These factors could harm our business and cause our operating results to suffer |
| 16 _________________________________________________________________ [72]Table of Contents Our operating expenses are relatively fixed, and we order materials and commence production in advance of anticipated customer demand |
| Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls |
| Our operating expenses are relatively fixed, and, therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls |
| Consequently, our operating results will be harmed if we do not meet our revenue projections |
| We also typically plan our production and inventory levels based on our own expectations for customer demand |
| Actual customer demand, however, can be highly unpredictable and can fluctuate significantly |
| In response to anticipated long lead times to obtain inventory and materials, we order materials and production in advance of anticipated customer demand |
| This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize |
| This risk has increased in recent periods |
| As our customers have increasingly demanded “just-in-time” deliveries that cannot be accommodated in the time required for a normal production cycle, we have increased our inventory produced in expectation of future orders |
| If anticipated demand fails to materialize, we may have to write down excess inventory, which would hurt our financial results |
| We may not be able to acquire additional production capacity to meet the present and future demand for our products |
| The semiconductor industry has been characterized by periodic limitations on production capacity |
| Although we may be able to obtain the capacity necessary to meet present demand, if we are unable to increase our production capacity to meet possible future demand, some of our customers may seek other sources of supply or our future growth may be limited |
| We have a material weakness in our internal control over financial reporting that could result in a material misstatement of our financial condition, results of operations and cash flows |
| Our management assessed our internal control over financial reporting and concluded that a material weakness existed as of March 31, 2006 as a result of the absence of a financial accounting professional with sufficient skills and experience to make estimates and judgments about non-routine transactions consistent with accounting principles generally accepted in the United States of America (“US GAAP”) during the closing process |
| During the closing process, we were unable to support some of our estimates and judgments about non-routine transactions with appropriate analysis |
| Our initial analysis of goodwill under SFAS 142 was not sufficiently robust to support our conclusions |
| We drew an inappropriate conclusion regarding the presentation of a non-cash related item of dlra15dtta3 million in the cash flow from operating activities of our consolidated statements of cash flows |
| In connection with the settlement of litigation after the end of a period but prior to filing financial statements with the SEC, we inappropriately concluded that aspects of the settlement should be recorded in a future period, as opposed to being accounted for as a subsequent event that should be reflected in the current period financial statements |
| As a result of the errant judgment, we understated our accounts payable at March 31, 2006 by dlra560cmam000 and overstated our income before income taxes for the quarter ended March 31, 2006 by dlra560cmam000 |
| We have not concluded that this material weakness was remediated at March 31, 2006 |
| Existence of this material weakness or other material weaknesses in our internal control could result in a material misstatement of our financial condition, results of operations and cash flows |
| Whether or not a misstatement occurs, the existence of one or more material weaknesses could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our controls over financial reporting, which ultimately could negatively impact the market price of our shares |
| Based on its assessment included in this Annual Report on Form 10-K, our management determined that our internal control over financial reporting was not effective as of March 31, 2006 |
| Our management further determined that our disclosure controls and procedures were not effective as of March 31, 2006 |
| For additional 17 _________________________________________________________________ [73]Table of Contents information on our internal control over financial reporting and our disclosure controls and procedures, see “Item 9A Controls and Procedures,” elsewhere in this Annual Report on Form 10-K Our efforts to correct the deficiencies in our disclosure and internal controls have required, and will continue to require, the commitment of significant financial and managerial resources |
| In addition, we anticipate the costs associated with the testing and evaluation of our internal controls will be significant and material in fiscal 2007 and may continue to be material in future fiscal years as these controls are maintained and continually evaluated and tested |
| We may not be successful in our acquisitions |
| We have in the past made, and may in the future make, acquisitions of other companies and technologies |
| These acquisitions involve numerous risks, including: • diversion of management’s attention during the acquisition process; • disruption of our ongoing business; • the potential strain on our financial and managerial controls and reporting systems and procedures; • unanticipated expenses and potential delays related to integration of an acquired business; • the risk that we will be unable to develop or exploit acquired technologies; • failure to successfully integrate the operations of an acquired company with our own; • the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions; • the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets; • the risks of entering new markets in which we have limited experience; • difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses; • failure to retain key personnel of the acquired business; • the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs; • customer dissatisfaction or performance problems with an acquired company’s products or personnel; • adverse effects on our relationships with suppliers; • the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash; • the costs associated with acquisitions, including in-process R&D charges and amortization expense related to intangible assets, and the integration of acquired operations; and • assumption of known or unknown liabilities or other unanticipated events or circumstances |
| We cannot assure you that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems |
| As a result of an acquisition, our financial results may differ from the investment community’s expectations in a given quarter |
| Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions |
| If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows, or stock price could be negatively impacted |
| 18 _________________________________________________________________ [74]Table of Contents We depend on external foundries to manufacture many of our products |
| Of our revenues for fiscal 2006, 39prca came from wafers manufactured for us by external foundries |
| Our dependence on external foundries may grow |
| We currently have arrangements with a number of wafer foundries, three of which produce the wafers for power semiconductors that we purchase from external foundries |
| Samsung Electronics’ facility in Kiheung, South Korea is our principal external foundry |
| Our relationships with our external foundries do not guarantee prices, delivery or lead times, or wafer or product quantities sufficient to satisfy current or expected demand |
| These foundries manufacture our products on a purchase order basis |
| We provide these foundries with rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity |
| At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us on short notice |
| If growth in demand for our products occurs, these foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth |
| Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy our requirements |
| In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms |
| If we are not able to obtain additional foundry capacity as required, our relationships with our customers could be harmed and our revenues could be reduced or their growth limited |
| Moreover, even if we are able to secure additional foundry capacity, we may be required, either contractually or as a practical business matter, to utilize all of that capacity or incur penalties or an adverse effect on the business relationship |
| The costs related to maintaining foundry capacity could be expensive and could harm our operating results |
| Other risks associated with our reliance on external foundries include: • the lack of control over delivery schedules; • the unavailability of, or delays in obtaining access to, key process technologies; • limited control over quality assurance, manufacturing yields and production costs; and • potential misappropriation of our intellectual property |
| Our requirements typically represent a small portion of the total production of the external foundries that manufacture our wafers and products |
| We cannot be certain these external foundries will continue to devote resources to the production of our wafers and products or continue to advance the process design technologies on which the manufacturing of our products is based |
| These circumstances could harm our ability to deliver our products on time or increase our costs |
| Our success depends on our ability to manufacture our products efficiently |
| We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and independent subcontract assembly facilities |
| The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous die on each wafer could be nonfunctional as a result of, among other factors: • contaminants in the manufacturing environment; • defects in the masks used to print circuits on a wafer; • manufacturing equipment failure; or • wafer breakage |
| For these and other reasons, we could experience a decrease in manufacturing yields |
| Additionally, if we increase our manufacturing output, we may also experience a decrease in manufacturing yields |
| As a result, we may not be able to cost effectively expand our production capacity in a timely manner |
| 19 _________________________________________________________________ [75]Table of Contents Our markets are subject to technological change and our success depends on our ability to develop and introduce new products |
| The markets for our products are characterized by: • changing technologies; • changing customer needs; • frequent new product introductions and enhancements; • increased integration with other functions; and • product obsolescence |
| To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise |
| Failure to do so could cause us to lose our competitive position and seriously impact our future revenues |
| Products or technologies developed by others may render our products or technologies obsolete or noncompetitive |
| A fundamental shift in technologies in our product markets would have a material adverse effect on our competitive position within the industry |
| We may not be able to protect our intellectual property rights adequately |
| Our ability to compete is affected by our ability to protect our intellectual property rights |
| We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights |
| Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology |
| More specifically, we cannot assure you that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties |
| Nor can we assure you that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business |
| We may also become subject to or initiate interference proceedings in the US Patent and Trademark office, which can demand significant financial and management resources and could harm our financial results |
| Also, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us |
| Our revenues are dependent upon our products being designed into our customers’ products |
| Many of our products are incorporated into customers’ products or systems at the design stage |
| The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s electronic system also accommodates incorporation of components manufactured by our competitors |
| In addition, our customers could subsequently redesign their products or systems so that they no longer require our products |
| The development of the next generation of products by our customers generally results in new design competitions for semiconductors, which may not result in design wins for us, potentially leading to reduced revenues and profitability |
| We may not achieve design wins or our design wins may not result in future revenues |
| Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues |
| The time from initiation of design to volume production of new semiconductors often takes 18 months or longer |
| We first work with customers to achieve a design win, which may take nine months or longer |
| Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period that may last an additional nine months or longer |
| As a result, a significant period of time may elapse between 20 _________________________________________________________________ [76]Table of Contents our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers |
| Our backlog may not result in future revenues |
| Customer orders typically can be cancelled or rescheduled without penalty to the customer |
| As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period |
| A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations |
| The markets in which we participate are intensely competitive |
| Certain of our target markets are intensely competitive |
| Our ability to compete successfully in our target markets depends on the following factors: • proper new product definition; • product quality, reliability and performance; • product features; • price; • timely delivery of products; • breadth of product line; • design and introduction of new products; • market acceptance of our products and those of our customers; and • technical support and service |
| In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products |
| The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable |
| Our primary power semiconductor competitors include Fairchild Semiconductor, Fuji, Hitachi, Infineon, International Rectifier, Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas Technology, Semikron International, STMicroelectronics, Siemens and Toshiba |
| Our IC products compete principally with those of Agere Systems, Legerity, NEC and Silicon Labs |
| Our RF power semiconductor competitors include RF Micro Devices and RF Monolithics |
| Many of our competitors have greater financial, technical, marketing and management resources than we have |
| Some of these competitors may be able to sell their products at prices below which it would be profitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage |
| We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition |
| We rely on our distributors and sales representatives to sell many of our products |
| A substantial majority of our products are sold to distributors and through sales representatives |
| Our distributors and sales representatives could reduce or discontinue sales of our products |
| They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect |
| In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital |
| These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry |
| We believe that our success will continue to depend upon these distributors and sales 21 _________________________________________________________________ [77]Table of Contents representatives |
| If any significant distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed |
| Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and retain additional personnel |
| Our success depends upon our ability to attract and retain highly-skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph |
| D, our President and Chief Executive Officer, and other members of senior management |
| The loss of the services of one or more of our senior management or other key employees could adversely affect our business |
| We do not maintain key person life insurance on any of our officers, employees or consultants |
| There is intense competition for qualified employees in the semiconductor industry, particularly for highly skilled design, applications and test engineers |
| We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified individuals who could leave us at any time in the future |
| If we grow, we expect increased demands on our resources, and growth would likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees |
| If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed |
| Growth and expansion place a significant strain on our resources, including our information systems and our employee base |
| Presently, because of past acquisitions, we are operating a number of different information systems that are not integrated |
| In part because of this, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting |
| Consequently, in our accounting, we perform many manual reconciliations and other manual steps, which result in a high risk of errors |
| Manual steps also increase the probability of control deficiencies and material weaknesses |
| If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed |
| Our ability to successfully implement our goals and comply with regulations, including those adopted under the Sarbanes-Oxley Act of 2002, requires an effective planning and management system and process |
| We will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future |
| In improving our operational and financial systems, procedures and controls, we would expect to periodically implement new software and other systems that will affect our internal operations regionally or globally |
| The conversion process from one system to another is complex and could require, among other things, that data from the existing system be made compatible with the upgraded system |
| During any transition, we could experience errors, delays and other inefficiencies, which could adversely affect our business |
| Any delay in the implementation of, or disruption in the transition to, any new or enhanced systems, procedures or controls, could harm our ability to forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and record and report financial and management information on a timely and accurate basis |
| In addition, as we add additional functionality, new problems could arise that we have not foreseen |
| Such problems could adversely impact our ability to do the following in a timely manner: provide quotes; take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business |
| Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, impact our ability to manage our business and our results of operations, cash flows, and stock price could be negatively impacted |
| Any future growth would also require us to successfully hire, train, motivate and manage new employees |
| In addition, continued growth and the evolution of our business plan may require significant additional management, technical and administrative resources |
| We may not be able to effectively manage the growth and evolution of our current business |
| The market price of our common stock has fluctuated significantly to date |
| The future market price of our common stock may also fluctuate significantly in the event of: • variations in our actual or expected quarterly operating results; • announcements or introductions of new products; • technological innovations by our competitors or development setbacks by us; • conditions in the communications and semiconductor markets; • the commencement or adverse outcome of litigation; • changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers; • announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by financial analysts; • terrorist attack or war; • sales of our common stock by one or more members of management, including Nathan Zommer, Ph |
| D, our President and Chief Executive Officer; or • general economic and market conditions |
| In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies |
| These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock |
| Our dependence on independent subcontractors to assemble and test our products subject us to a number of risks, including an inadequate supply of products and higher materials costs |
| We depend on independent subcontractors for the assembly and testing of our products |
| The majority of our products are assembled by independent subcontractors located outside of the United States |
| Our reliance on these subcontractors involves the following significant risks: • reduced control over delivery schedules and quality; • the potential lack of adequate capacity during periods of excess demand; • difficulties selecting and integrating new subcontractors; • limited or no warranties by subcontractors or other vendors on products supplied to us; • potential increases in prices due to capacity shortages and other factors; • potential misappropriation of our intellectual property; and • economic or political instability in foreign countries |
| These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships |
| In addition, we use a limited number of subcontractors to assemble a significant portion of our products |
| If one or more of these subcontractors experiences financial, operational, production or quality assurance difficulties, we could experience a reduction or interruption in supply |
| Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors |
| 23 _________________________________________________________________ [79]Table of Contents We depend on a limited number of suppliers for our wafers |
| We purchase the bulk of our silicon wafers from three vendors with whom we do not have long-term supply agreements |
| Our reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon wafers and reduced control over the price, timely delivery, reliability and quality of the silicon wafers |
| We cannot assure that problems will not occur in the future with suppliers |
| Our ability to access capital markets could be limited |
| From time to time we may need to access the capital markets to obtain long-term financing |
| Although we believe that we can continue to access the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by our existing capital structure, our credit ratings, and the health of the semiconductor industry |
| In addition, many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control |
| There can be no assurance that we will continue to have access to the capital markets on favorable terms |
| Geopolitical instability, war, terrorist attacks, terrorist threats, and government responses thereto, may negatively affect all aspects of our operations, revenues, costs and stock prices |
| Any such event may disrupt our operations or those of our customers or suppliers |
| Our markets currently include South Korea, Taiwan and Israel, which are currently experiencing political instability |
| Additionally, our principal external foundry is located in South Korea |
| Business interruptions may damage our facilities or those of our suppliers |
| Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control |
| We do not have a detailed disaster recovery plan and do not have backup generators |
| Our facilities in California are located near major earthquake faults and have experienced earthquakes in the past |
| If any of these events occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows |
| We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses |
| We may be affected by environmental laws and regulations |
| We are subject to a variety of laws, rules and regulations in the United States, England and Germany related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process |
| Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them |
| If we incur substantial additional expenses, product costs could significantly increase |
| Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations |
| Our tax liability has been in dispute from time to time |
| From time to time, we have received notices of tax assessments from certain governments of countries in which we operate |
| These governments or other government entities may serve future notices of assessments on us and the amounts of these assessments or our failure to favorably resolve such assessments may have a material adverse effect on our financial condition or results of operations |
| We face the risk of financial exposure to product liability claims alleging that the use of products that incorporate our semiconductors resulted in adverse effects |
| Approximately 15prca of our net revenues in fiscal 2006 were derived from sales of products used in medical devices such as defibrillators |
| Product liability risks may exist even for those medical devices that have 24 _________________________________________________________________ [80]Table of Contents received regulatory approval for commercial sale |
| We cannot be sure that the insurance that we maintain against product liability will be adequate to cover our losses |
| Any defects in our semiconductors used in these devices, or in any other product, could result in significant replacement, recall or product liability costs to us |
| Nathan Zommer, Ph |
| D owns a significant interest in our common stock |
| Nathan Zommer, Ph |
| D, our President and Chief Executive Officer, beneficially owned, as of May 16, 2006, approximately 20prca of the outstanding shares of our common stock |
| Zommer can exercise significant control over all matters requiring stockholder approval, including the election of the board of directors |
| His holdings could result in a delay of, or serve as a deterrent to, any change in control of IXYS, which may reduce the market price of our common stock |
| Regulations may adversely affect our ability to sell our products |
| Power semiconductors with operating voltages above 40 volts are subject to regulations intended to address the safety, reliability and quality of the products |
| These regulations relate to processes, design, materials and assembly |
| For example, in the United States, some high voltage products are required to pass Underwriters Laboratory recognition for voltage isolation and fire hazard tests |
| Sales of power semiconductors outside of the United States are subject to international regulatory requirements that vary from country to country |
| The process of obtaining and maintaining required regulatory clearances can be lengthy, expensive and uncertain |
| The time required to obtain approval for sale internationally may be longer than that required for US approval, and the requirements may differ |
| In addition, approximately 15prca of our revenues in fiscal 2006 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the US Food and Drug Administration, or FDA The FDA and certain foreign regulatory authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation requirements |
| Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries |
| Our failure to comply with applicable regulatory requirements could prevent our products from being included in approved medical devices |
| Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements |
| The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control |
| Our board of directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders |
| The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future |
| The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock |
| In addition, the issuance of preferred stock could have a dilutive effect on our stockholders |
| Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting |
| These notice requirements could inhibit a takeover by delaying stockholder action |
| The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15prca or more of our common stock |
| The 25 _________________________________________________________________ [81]Table of Contents Delaware statute makes it more difficult for us to be acquired without the consent of our board of directors and management |