| LEADIS TECHNOLOGY INC ITEM 1A RISK FACTORS You should carefully consider the risks described below as well as the other information contained in this annual report on Form 10-K in evaluating our company and our business |
| The risks and uncertainties described below may not be the only risks and uncertainties that we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations |
| If any of the following risks actually occurs, our business, financial condition and results of operations would be impaired |
| In such case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| We depend on a small number of key customers for substantially all of our revenue and the loss of, or a significant reduction in orders from, any key customer would significantly reduce our revenue and adversely impact our operating results |
| We sell display drivers to display module manufacturers serving the mobile handset market |
| Historically, substantially all of our revenue has been generated from sales to a very small number of customers |
| During 2005, our top three customers, Hosiden Corporation, Philips Mobile Display Systems, or Philips MDS, and Samsung SDI Co, including its wholly-owned subsidiary, Samsung OLED Co |
| Ltd, accounted for approximately 17prca, 13prca and 42prca of our revenue, respectively |
| Our market has a relatively small number of potential customers and we expect this market concentration to continue for the foreseeable future |
| Therefore, even as we seek to broaden our customer base we expect that our operating results will likely continue to depend on sales to a relatively small number of customers, and we expect that the customers that represent a significant portion of our revenue will fluctuate from period to period |
| The loss of, or a reduction in purchases by, any of our key customers could harm our business, financial condition and results of operations |
| As further discussed in a risk factor below, because our sales to these customers are made pursuant to standard purchase orders rather than contracts, orders may be cancelled or reduced more readily than if we had long-term purchase commitments with these customers |
| In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business |
| Consolidation in our customers’ industries may result in increased customer concentration and the potential loss of customers |
| In November 2005, the parent corporation of Philips MDS announced that the business of Philips MDS would be merged with Toppoly Optoelectronics Corporation |
| The transaction is expected to be completed in the first half of 2006 and we do not yet know what effect this may have on our business with Philips MDS In addition, some of our customers may have efforts underway to actively diversify their supply chain, which could reduce their purchases of our products |
| In addition, nearly all of our products are used for displays sold for use in mobile handsets manufactured by a concentrated group of handset manufacturers |
| To the extent any of our module display customers lose some or all of their business with the mobile handset manufacturers to which they supply modules containing our products, our business would be adversely affected |
| If we are unable to timely develop new and enhanced products that achieve market acceptance, our operating results and competitive position could be harmed |
| Our future success will depend on our ability to develop new drivers and product enhancements that achieve timely and cost-effective market acceptance |
| The development of our drivers is highly complex, and we have 9 ______________________________________________________________________ [35]Table of Contents experienced, and in the future may experience, delays in the development and introduction of new products and product enhancements |
| In addition, because we sell our products to display module manufacturers, we have limited visibility into the specification requirements of the mobile handset manufacturers, making it more difficult for us to influence or predict future technology requirements |
| Once a display module manufacturer or mobile handset manufacturer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers typically involves significant cost, time, effort and risk for the customer |
| Successful product development and market acceptance of our products depend on a number of factors, including: • accurate prediction of changing requirements of customers within the mobile device and small panel display markets; • timely completion and introduction of new designs, including low-cost versions of existing products; • timely qualification and certification of our drivers for use in our customers’ products; • the prices at which we are able to offer our products; • quality, performance, power use and size of our products as compared to competing products and technologies; • successful integration of the display module, including components supplied by other suppliers; • commercial acceptance and commercial production of the products into which our drivers are incorporated; • achievement of acceptable manufacturing yields; • interoperability of our products with other display module components; • our customer service and support capabilities and responsiveness; • successful development of our relationships with existing and potential customers; • mobile service providers’ demand for handsets incorporating our products; and • changes in technology, industry standards or end-user preferences |
| We cannot assure you that products we recently developed, such as our new amorphous TFT, or a-TFT, and low temperature polysilicon, or LTPS-TFT, drivers, or products we may develop in the future, will achieve market acceptance |
| If these drivers fail to achieve market acceptance, or if we fail to develop new products that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected |
| The average selling prices of our products could continue to decrease rapidly, which could negatively impact our revenue and operating results |
| We have experienced, and may continue to experience, substantial period-to-period fluctuations in our operating results due to declines in our average selling prices |
| We may reduce the average unit price of our products in response to competitive pricing pressures, new product introductions by us or our competitors and other factors |
| The mobile handset market is extremely cost sensitive, which has resulted and may continue to result in declining average selling prices of the components comprising mobile handsets, including display modules and display drivers |
| In recent periods, we experienced significant declines in the average selling prices of our products |
| As display driver prices vary by technology, our average selling price for any period is also impacted by our mix of products sold for that period |
| In recent periods our mix of products sold has been weighted more heavily toward lower priced products, which has reduced our average selling price |
| To maintain acceptable operating results, we will need to develop and introduce new products and product enhancements on a 10 ______________________________________________________________________ [36]Table of Contents timely basis and continue to reduce our production costs |
| If we are unable to offset reductions in our average selling prices by increasing our sales volumes and corresponding production cost reductions, or we fail to develop and introduce new products and enhancements on a timely basis, our operating results will suffer |
| We are dependent on sales of a small number of products, and the absence of continued market acceptance of these products could harm our business |
| We derive all of our revenue from a limited number of display driver products primarily used in mobile handset displays, and we expect to continue to derive a substantial portion of our revenue from these or related products in the near term |
| As a result, decline in market demand for one or more of our products, or the failure of one or more of our products to gain broad market acceptance, could result in a significant decline in revenue and reduced operating results |
| Our product portfolio has traditionally been heavily weighted toward products based on color super twisted nematic liquid crystal display, or CSTN, and color organic light-emitting diode, or OLED, technology |
| Similarly, demand for our CSTN drivers with 4K color resolution declined in 2005 as handset manufacturers transitioned to displays with 65K color resolution |
| We began shipping our initial a-TFT and LTPS-TFT products in 2005 |
| Accordingly, market acceptance of our new a-TFT and LTPS-TFT products, as well as the next generation of our CSTN products, is critical to our future success |
| Our business is highly dependent on the mobile handset market, which is highly concentrated and characterized by significant price competition, short product life cycles, fluctuations in demand, and seasonality, any of which could negatively impact our business or results of operations |
| Nearly all of our revenue is generated from sales of display drivers for use in mobile handsets |
| The mobile handset market is characterized by intense competition among a concentrated group of manufacturers, rapidly evolving technology, and changing consumer preferences |
| These factors result in the frequent introduction of new products, significant price competition, short product life cycles, and continually evolving mobile handset specifications |
| If we, our customers or mobile handset manufacturers are unable to manage product transitions, our business and results of operations could be negatively affected |
| Our business is also dependent on the broad commercial acceptance of the mobile handsets into which our drivers are incorporated |
| Even though we may achieve design wins, if the mobile handsets incorporating our products do not achieve significant customer acceptance, our revenue will be adversely affected |
| We expect our business to be subject to seasonality and varying order patterns in the mobile handset market |
| In the mobile handset market, demand is typically stronger in the second half of the year than the first half of the year |
| However, in the past mobile handset manufacturers inaccurately forecasted consumer demand, which led to significant changes in orders to their component suppliers |
| We have experienced both increases and decreases in orders during our limited operating history within the same quarter and with limited advance notice, and we expect such increases and decreases to occur in the future |
| Our limited operating history makes it difficult for us to assess the impact of seasonal factors on our business |
| If we, or our customers, are unable to increase production of new or existing products to meet any increases in demand due to seasonality or other factors, our revenue from such products would be adversely affected and this may damage our reputation with our customers and the mobile handset manufacturers |
| Conversely, if our customers or the mobile handset manufacturers overestimate consumer demand, they may reduce their orders or delay shipments of our products from amounts forecasted, and our revenue in a particular period could be adversely affected |
| Our quarterly financial results fluctuate, which leads to volatility in our stock price |
| Our revenue and operating results have fluctuated from quarter to quarter in the past and may continue to do so in the future |
| As a result, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance |
| Fluctuations in our revenue and operating results could negatively affect 11 ______________________________________________________________________ [37]Table of Contents the trading price of our stock |
| In addition, our revenue and results of operations may, in the future, be below the expectations of analysts and investors, which could cause our stock price to decline |
| Factors that are likely to cause our revenue and operating results to fluctuate include the risk factors discussed throughout this section |
| If we are unable to comply with evolving customer specifications and requirements, customers may choose other products instead of our own |
| Our products are incorporated in display modules, which must comply with mobile handset manufacturers’ continually evolving specifications |
| Our ability to compete in the future will depend on our ability to comply with these specifications |
| As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant specifications |
| If our products are not in compliance with prevailing specifications for a significant period of time, we could miss opportunities to have customers choose our drivers over those of our competitors early in the customer’s design process, which is known as a design win |
| Loss of design wins could harm our business because display module manufacturers and mobile handset manufacturers typically do not change display drivers once a display module is designed |
| In addition, loss of a design win may make it more difficult to obtain future design wins with the manufacturer |
| We may not be successful in developing new products or product enhancements that achieve market acceptance |
| Our pursuit of necessary technological advances requires substantial time and expense and may not be successful, which would harm our competitive position |
| Our products are complex and may require modifications to resolve undetected errors or failures, which could lead to an increase in our costs, a loss of customers or a delay in market acceptance of our products |
| Our small panel display drivers are highly complex and have contained, and may in the future contain, undetected errors or failures when first introduced or as new revisions are released |
| If we deliver products with errors or defects, we may incur additional development, repair or replacement costs, and our credibility and the market acceptance of our products could be harmed |
| Defects could also lead to liability for defective products as a result of lawsuits against us or our customers |
| We have agreed to indemnify our customers in some circumstances against liability from defects in our products |
| A successful product liability claim could require us to make significant damage payments |
| Our products must interoperate with the display module components supplied to our customers by other suppliers |
| Our small panel display drivers comprise only part of a complex display subassembly manufactured by our display module customers |
| As a result, our drivers must operate according to specifications with the other components in the subassembly |
| For example, in the subassembly our drivers are attached to the display glass and must interoperate with the glass efficiently |
| If other components of the subassembly system fail to operate efficiently with our drivers, we may be required to incur additional development time and costs optimizing the interoperability of our drivers with the other components |
| Additionally, if other components of the subassembly contain errors or defects that cannot be corrected in a timely fashion, the display module customer may delay or cancel production of its modules, adversely impacting our sales |
| Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin |
| To remain competitive, we strive to improve our drivers to be manufactured using increasingly smaller geometries and to achieve higher levels of design integration |
| Our strategy is to utilize the most advanced manufacturing process technology appropriate for our products and available from our third-party foundry contractors |
| Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development |
| In the past, we have experienced difficulty in migrating to new manufacturing 12 ______________________________________________________________________ [38]Table of Contents processes and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels |
| We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes |
| Moreover, we are dependent on our relationships with our third-party manufacturers to successfully migrate to smaller geometry processes |
| The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our gross margin and our operating results |
| Our limited operating history makes it difficult for us to accurately forecast revenue and appropriately plan our expenses |
| We were formed in May 2000 and had our initial meaningful shipments of products in the third quarter of 2002 |
| Moreover, because we do not sell directly to mobile handset manufacturers, we have limited visibility into their order patterns and sales of their products |
| Due to our limited operating history and limited visibility into mobile handset manufacturers’ demand, it is difficult to accurately forecast our future revenue and budget our operating expenses |
| The rapidly evolving nature of the mobile handset market and other factors that are beyond our control also limit our ability to accurately forecast revenue and expenses |
| Because most of our expenses are fixed in the short term or incurred in advance of anticipated revenue, we may not be able to decrease our expenses in a timely manner to offset any shortfall in revenue |
| We do not expect to achieve our historical revenue growth rates, so you should not rely on the results of any past periods as an indication of future revenue growth |
| In the past, we have experienced significant revenue growth |
| Specifically, our annual revenue grew 970prca in 2003 and 78prca in 2004 |
| We did not experience such rate of growth in 2005 and we do not expect similar revenue growth rates in future periods |
| Although our revenue grew in the third and fourth quarters of 2005, we may not sustain such growth rates in future periods |
| Accordingly, you should not rely on the results of any prior annual periods as an indication of our future revenue growth or financial results |
| We have incurred losses in prior periods and may incur losses in the future |
| We incurred net losses of approximately $(0dtta1) million and $(1dtta7) million for the years ended December 31, 2001 and 2002, respectively |
| Although we realized net income of approximately dlra12dtta8 million and dlra17dtta6 million for the years ended December 31, 2003 and 2004, respectively, we incurred a net loss of dlra11dtta4 million in 2005 and we may not again achieve or sustain profitability on a quarterly or annual basis |
| We will continue to incur stock-based compensation in the future as a result of past and potentially future option grants |
| Further, under the recently issued Financial Accounting Standard Board Statement Nodtta 123(R), we are now required to apply certain expense recognition provisions to share-based payments to employees using the fair value method, which expense recognition will have an adverse impact on our results of operations |
| Our ability to return to or sustain profitability on a quarterly or annual basis in the future depends in part on our ability to develop new products, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our customers’ products, and our ability to manage expenses |
| If we fail to accurately forecast customer demand, we may have excess or insufficient inventory, which may increase our operating costs and harm our business |
| We sell our drivers to display module manufacturers who integrate our drivers into the displays that they supply to handset manufacturers |
| We have limited visibility as to the volume of our products that our customers are selling to their customers or carrying in their inventory |
| If our customers have excess inventory or experience a slowing of products sold through to their end customers, it would likely result in a slowdown in orders from our customers and adversely impact our future sales |
| Moreover, to ensure availability of our products for our 13 ______________________________________________________________________ [39]Table of Contents customers, in some cases we start the manufacturing of our products based on forecasts provided by these customers in advance of receiving purchase orders |
| However, these forecasts do not represent binding purchase commitments, and we do not recognize revenue from these products until they are shipped to the customer |
| In addition, our ability to accurately forecast demand for our products is limited by our lack of a direct relationship with mobile handset manufacturers |
| As a result, we incur inventory and manufacturing costs in advance of anticipated revenue |
| Because demand for our products may not materialize or may decrease rapidly, manufacturing based on forecasts subjects us to risks of high inventory carrying costs and increased obsolescence and may increase our costs |
| If we overestimate customer demand for our drivers or if purchase orders are cancelled or shipments delayed, we may end up with excess inventory that we cannot sell, which would harm our financial results |
| This inventory risk is exacerbated because many of our products are customized, which hampers our ability to sell any excess inventory to the general market |
| Our customer orders are subject to cancellation, reduction or delay in delivery schedules, which may result in lower than anticipated revenue |
| Our sales are generally made pursuant to standard purchase orders rather than long-term purchase commitments |
| These purchase orders may be cancelled or modified or the shipment dates delayed by the customer |
| Although we have not in the past experienced significant cancellations of orders, we may in the future experience such cancellations |
| We have in the past experienced, and may in the future experience, delays in scheduled shipment dates, which have on occasion resulted, and may in the future result, in our recognizing revenue in a later period than anticipated |
| We have also experienced reductions to previously placed purchase orders |
| Any cancellation, modification or delay in shipments in the future may result in lower than anticipated revenue |
| We face significant competition and may be unsuccessful in competing against current and future competitors |
| The markets for semiconductors generally, and small panel display drivers in particular, are intensely competitive, and we expect competition to increase and intensify in the future |
| Increased competition may result in price pressure, reduced profitability and loss of market share, any of which could seriously harm our revenue and operating results |
| The major independent semiconductor suppliers with which we may compete include Himax Technologies, Ltd, MagnaChip Semiconductor Ltd, NEC Corporation, Novatek Microelectronics Corp, Ltd, Renesas Technology Corp, Sitronix Technology Corporation, and Solomon Systech Limited |
| Additionally, many mobile device display module manufacturers are affiliated with vertically integrated electronics companies |
| Some of these companies also have semiconductor design and manufacturing resources for developing display drivers |
| Captive semiconductor suppliers with which we may compete include semiconductor divisions of Philips Electronics, NV, Samsung Electronics Co, Ltd, Seiko Epson Corporation, Sharp Electronics Corporation and Toshiba Corporation |
| Many of our competitors and potential competitors have longer operating histories, greater name recognition, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us |
| As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we can |
| In addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain wafer fabrication capacity when we are unable to do so |
| Any of these factors could cause us to be at a competitive disadvantage to our existing and potential new competitors |
| We face competition from businesses related to our customers, which could harm our business |
| Our direct customers are display module manufacturers serving the mobile handset market |
| Two of our primary customers, Philips MDS and Samsung SDI, are divisions or entities within or affiliated with corporate organizations that have other divisions or entities that design, manufacture and sell display drivers that compete with our products |
| To the extent one or more of these primary customers chooses to replace our products with internally developed products, our business will be negatively impacted |
| 14 ______________________________________________________________________ [40]Table of Contents We rely on third-party contractors to manufacture, assemble and test our products and our failure to secure sufficient capacity or a significant increase in wafer pricing could limit our growth and adversely affect our operating results |
| We rely on third-party contractors to manufacture, assemble and test our drivers |
| We currently do not have long-term supply contracts with any of our third-party contractors |
| As a result, none of our third-party contractors is obligated to perform services or supply products to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order |
| Moreover, none of our third-party foundry or assembly and test contractors has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products |
| We provide our foundry contractors with monthly 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 |
| Our foundry contractors use raw materials in the manufacture of wafers used to manufacture our products |
| To the extent our foundry contractors experience shortages of these wafers, we may be unable to obtain capacity as required |
| In addition, the price of our wafers will fluctuate based on changes in available industry capacity |
| Our foundry, assembly and test contractors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice or increasing the prices they charge us |
| These foundry, assembly and test contractors may reallocate capacity to other customers that are larger and better financed than us or that have long-term agreements or relationships with these foundries or assembly and test contractors, which would decrease the capacity available to us |
| We currently anticipate that we may experience capacity constraints at key test vendors in the first half of 2006, which could result in higher costs required to secure needed capacity |
| There are significant risks associated with our reliance on contractors, including: • inability to increase production and achieve acceptable yields on a timely basis; • reduced control over delivery schedules and product quality; • increased exposure to potential misappropriation of our intellectual property; • limited warranties on wafers or products supplied to us; • shortages of materials that foundries use to manufacture our products; • failure to qualify a selected supplier; • limited ability to obtain insurance coverage for business interruptions related to contractors; • labor shortages or labor strikes; • natural disasters, particularly earthquakes, or disease outbreaks affecting countries in which we conduct our business or in which our products are manufactured, assembled, or tested; • political instability in countries where the contractors are located; and • actions taken by our contractors that breach our agreements |
| Our manufacturing, assembly and test processes are complex and involve significant customization and refinement |
| We are therefore restricted, in terms of time and cost, in our ability to use alternate third-party contractors in the event of capacity constraints |
| If we are unable to obtain capacity as required or obtain alternative sources of capacity on favorable terms, our revenue and profitability would likely decline |
| Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margin and could adversely affect our ability to compete effectively |
| We have experienced, and may again experience, manufacturing yields that were less than we had anticipated |
| Semiconductor manufacturing yields are a function of product design, which is developed largely by us, and process technology, which is typically developed by our third-party foundries |
| As low manufacturing 15 ______________________________________________________________________ [41]Table of Contents yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify sensitivities relating to the design processes used |
| Resolution of yield problems requires cooperation by and communication between us and the foundry |
| Any decrease in manufacturing yields could result in an increase in our manufacturing costs and decrease our ability to fulfill customer orders in a timely fashion |
| This could potentially have a negative impact on our revenue, our gross margin, our gross profit, and our customer relationships |
| Our wafer manufacturers may be unable to achieve or maintain acceptable manufacturing yields in the future |
| We also face the risk of product recalls or product returns resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process |
| A significant number of product returns due to a defect or recall could damage our reputation and result in our customers working with our competitors |
| Use of our customized manufacturing process by our foundry contractors in connection with their manufacturing of our competitors’ products could harm our business |
| In an effort to increase yields and reduce manufacturing times, we have developed with our foundry contractors a customized version of the manufacturing process used for the fabrication of our drivers |
| While we have expended significant resources on the customization of this process, the process is not proprietary to us, and may be used by our foundry partners in the fabrication of semiconductors for their other customers |
| Any use of this customized manufacturing process for the manufacture of our competitors’ products could harm our competitive position |
| The semiconductor industry is highly cyclical, and our operating results may be negatively impacted by downturns in the general semiconductor industry |
| Our business is impacted by the cyclical nature of the semiconductor industry |
| The semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies and their customers and declines in general economic conditions |
| These downturns have been characterized by production overcapacity, high inventory levels and accelerated erosion of average selling prices |
| Any future downturns could significantly harm our sales, reduce our profitability or result in losses for a prolonged period of time |
| From time to time, the semiconductor industry also has experienced periods of increased demand and production capacity constraints |
| We may experience substantial changes in future operating results due to general semiconductor industry conditions, general economic conditions and other factors |
| Any disruption to our operations or the operations of our foundry, assembly and test contractors resulting from earthquakes or other natural disasters could cause significant delays in the production or shipment of our products |
| Our corporate headquarters are located in California |
| In addition, a substantial portion of our engineering operations and the third-party contractors that manufacture, assemble and test our drivers are located in the Pacific Rim |
| The risk of losses due to an earthquake in California and the Pacific Rim is significant due to the proximity to major earthquake fault lines |
| The occurrence of earthquakes or other natural disasters could result in disruption of our operations and the operations of our foundry, assembly and test contractors |
| We rely on our key personnel to manage our business, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed |
| We believe that our future success depends in large part on our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel |
| Our future success will also depend on our ability to retain the services of our key personnel, developing their successors and effectively managing the transition of key roles when they occur |
| In November 2005, we hired Antonio Alvarez as our President and Chief Executive 16 ______________________________________________________________________ [42]Table of Contents Officer, who will significantly influence the future direction and strategy of the Company |
| Steve Ahn, our founder and former CEO, recently transitioned from a full-time executive position to an advisory role and remains on our board of directors; and Chol Chong, our Vice President of Operations, has notified us that he intends to retire in March 2006 |
| We also recently appointed Dr |
| Jose Arreola to the position of Executive Vice President of Engineering |
| As a result, our success will depend in part on our ability to manage these management changes |
| Moreover, if we lose any of our key technical or senior management personnel, or are unable to fill key positions, our business could be harmed |
| There is a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of small panel display drivers, and we may face challenges hiring and retaining these types of employees |
| Our ability to expand our operations to meet corporate growth objectives depends upon our ability to hire and retain additional senior management personnel and qualified technical personnel in our product design team |
| Our ability to compete will be harmed if we are unable to adequately protect our intellectual property |
| We rely primarily on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect our intellectual property |
| These afford only limited protection |
| Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise |
| As of December 31, 2005, we had seven US patent applications pending, six foreign patent applications pending and had been issued one US patent and two Korea patents |
| Our pending patent applications and any future applications may not result in issued patents and any issued patents may not be sufficiently broad to protect our proprietary technologies |
| Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States |
| The enforcement of patents by others may harm our ability to conduct our business |
| Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property |
| Our failure to effectively protect our intellectual property could harm our business |
| Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer |
| The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies |
| Although we are not currently a party to legal action alleging our infringement of third-party intellectual property rights, in the future we may receive letters from various industry participants alleging infringement of patents, trade secrets or other intellectual property rights |
| Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights |
| These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention |
| Any potential intellectual property litigation also could force us to do one or more of the following: • stop selling products or using technology that contain the allegedly infringing intellectual property; • pay damages to the party claiming infringement; • attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; and • attempt to redesign those products that contain the allegedly infringing intellectual property |
| In the future, the outcome of a dispute may be that we would need to develop non-infringing technology or enter into royalty or licensing agreements |
| We may also initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights |
| We have agreed to indemnify certain customers for certain claims of infringement arising out of the sale of our products |
| 17 ______________________________________________________________________ [43]Table of Contents We have significant international activities and customers, and plan to continue such efforts, which subjects us to additional business risks including increased logistical complexity, political instability and currency fluctuations |
| We are incorporated and headquartered in the United States, and we have international subsidiaries in Korea, the Cayman Islands and Hong Kong |
| We have engineering, sales and operations personnel in Korea and sales and operations personnel in China, Hong Kong and Taiwan |
| All of our revenue to date has been attributable to customers located outside of the United States |
| We anticipate that all or substantially all of our revenue will continue to be represented by sales to customers in Asia |
| Our international operations are subject to a number of risks, including: • increased complexity and costs of managing international operations; • protectionist and other foreign laws and business practices that favor local competition in some countries; • difficulties in managing foreign operations, including cultural differences; • difficulty in hiring qualified management, technical sales and applications engineers; • inadequate local infrastructure; • multiple, conflicting and changing laws, regulations, export and import restrictions, and tax schemes; • potentially longer and more difficult collection periods and exposure to foreign currency exchange rate fluctuations; and • political and economic instability |
| Any of these factors could significantly harm our future sales and operations and, consequently, results of operations and financial condition |
| Our inability to effectively manage growth in our operations may prevent us from successfully expanding our business |
| In prior periods, we significantly increased the scope of our operations and expanded our workforce |
| This growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources |
| We anticipate that we will continue to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems |
| We recently implemented enterprise resource planning software and continue to expand the application of this software in our business |
| In some respects this software has not functioned as expected and additional applications have taken significantly longer to implement than anticipated |
| As a result, we may need to expend additional resources to achieve a satisfactory level of functionality |
| We also will need to continue to expand, train, manage and motivate our workforce, manage multiple suppliers and greater levels of inventories |
| If we are unable to effectively manage our expanding operations, our business could be materially and adversely affected |
| Difficulties in collecting accounts receivable could result in significant charges against income and the deferral of revenue recognition from sales to affected customers, which could harm our operating results and financial condition |
| Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers’ businesses and to downturns in the economy and the industry |
| In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations |
| As we seek to expand our customer base, it is possible that new customers may expose us to greater credit risk than our existing customers |
| Accounts receivable owed by foreign customers may be difficult to collect |
| We maintain an allowance for doubtful accounts for estimated losses resulting from 18 ______________________________________________________________________ [44]Table of Contents the inability of our customers to make required payments |
| This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure |
| If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and we may be required to defer revenue recognition on sales to affected customers, which could adversely affect our operating results |
| We may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions in the future, which could negatively impact our financial results |
| We may need to raise additional capital, which might not be available or which, if available, may be on terms that are not favorable to us |
| We believe our existing cash balances and cash expected to be generated from our operations will be sufficient to meet our working capital, capital expenditures and other needs for at least the next twelve months |
| In the future, we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all |
| If we issue equity securities to raise additional funds, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock |
| If we borrow money, we may incur significant interest charges, which could harm our profitability |
| Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock |
| If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, operating results and financial condition |
| We may undertake acquisitions to expand our business that may pose risks to our business, reduce our cash balance and dilute the ownership of our existing stockholders |
| As part of our growth and product diversification strategy, we will continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of markets we can address or enhance our technical capabilities |
| Acquisitions that we may potentially make in the future entail a number of risks that could materially and adversely affect our business, operating and financial results, including: • problems integrating the acquired operations, technologies or products with our existing business and products; • diversion of management’s time and attention from our core business; • need for financial resources above our planned investment levels; • difficulties in retaining business relationships with suppliers and customers of the acquired company; • risks associated with entering markets in which we lack prior experience; • potential loss of key employees of the acquired company; and • potential requirement to amortize intangible assets |
| Future acquisitions also could cause us to expend a substantial portion of our cash balances, incur debt or contingent liabilities or cause us to issue equity securities that would reduce the ownership percentages of existing stockholders, which could impair our financial position |
| In addition, any future acquisitions may not be favorably received by investors or securities analysts, which could cause declines in our stock price |
| 19 ______________________________________________________________________ [45]Table of Contents Our stock price is volatile, which could result in substantial losses for investors and significant costs related to litigation |
| The trading price of our common stock is highly volatile |
| The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control |
| These factors include: • quarterly variations in revenue or operating results; • failure to meet the expectations of securities analysts or investors with respect to our financial performance; • changes in financial estimates by securities analysts; • announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships; • publicity about our company or our products or our competitors; • announcements by mobile handset manufacturers; • actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates; • additions or departures of key personnel; • the trading volume of our common stock; • any future sales of our common stock or other securities; and • stock market price and volume fluctuations of publicly-traded companies in general and semiconductor companies in particular |
| Investors may be unable to resell their shares of our common stock at or above their purchase price |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities, such as the lawsuit filed against us in March 2005 |
| This securities litigation, and any other such litigation, may result in significant costs and diversion of management’s attention and resources, which could seriously harm our business and operating results |
| Our principal stockholders have significant voting power and may influence actions that may not be in the best interests of our other stockholders |
| We believe that our executive officers and directors, in the aggregate, beneficially own approximately 21prca of our outstanding common stock as of March 1, 2006 |
| As a result, these persons, acting together, may have the ability to exert substantial influence over matters requiring approval of our stockholders, including the election and removal of directors and the approval of mergers or other business combinations |
| This concentration of beneficial ownership could be disadvantageous to other stockholders whose interests are different from those of our executive officers and directors |
| For example, our executive officers and directors, acting together with stockholders owning a relatively small percentage of our outstanding stock, could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders |
| Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States |
| We prepare our financial statements in conformity with accounting principles generally accepted in the United States |
| These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles |
| A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of 20 ______________________________________________________________________ [46]Table of Contents transactions completed before the announcement of a change |
| For example, in December 2004, the FASB adopted Statement 123(R), “Share Based Payment– an Amendment of FASB Statements Nodtta 123 and 95,” which will require us, starting in the first quarter of 2006, to measure compensation costs for all stock-based compensation (including stock options and our employee stock purchase plan) at fair value and take a compensation charge equal to that value |
| If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements could be impaired and any failure to maintain our internal controls and provide accurate financial statements could cause our stock price to decrease substantially |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting |
| We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements |
| This legislation is relatively new and companies and accounting firms lack significant experience in complying with its requirements |
| As a result, we have incurred, and expect to continue to incur, increased expense and to devote significant management resources to Section 404 compliance |
| If in the future our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock |
| Anti-takeover provisions of our charter documents and Delaware law could prevent or delay transactions resulting in a change in control |
| Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors |
| These provisions: • establish a classified board of directors, so that not all members of our board may be elected at one time; • set limitations on the removal of directors; • limit who may call a special meeting of stockholders; • establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; • prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and • provide our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval |
| These provisions may have the effect of entrenching our management team and may deprive shareholders of the opportunity to sell their shares to potential acquirors at a premium over prevailing prices |
| This potential inability to obtain a control premium could reduce the price of our common stock |