| MICRO LINEAR CORP /CA/ Item 1A Risk Factors The risks and uncertainties described below are not the only ones we face |
| If any of the following risks actually occurs, our business, financial condition or results of operations could be materially and adversely affected: Our operating results are difficult to predict and are likely to fluctuate significantly |
| They may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline |
| Our operating results are difficult to predict and have fluctuated significantly in the past |
| Some of the factors that may cause these fluctuations include: • the level and timing of spending by our customers, both in the US and in foreign markets; • changes in market demand, including seasonal and cyclical fluctuations; • timing, amount, cancellation or rescheduling of customer orders; • fluctuations in manufacturing yields; • timing of revenue recognition from contracts, which may span several quarters; • competitive market conditions; • the announcement or introduction of new or enhanced products by us, or competitors, or both; • any delay in the introduction of new or enhanced products by us; • market acceptance of our new products and continuing demand for our existing products; • cost and availability of wafers, other components and testing services; • mix of products sold; • fluctuations in end-user demand for wireless products manufactured by our customers which incorporate our technology; • economic conditions specific to the wireless and networking industries and markets, as well as general economic conditions; • ability to hire and retain qualified technical and other personnel; • development of new industry standard communication protocols; and • availability and performance of advanced silicon process technologies from foundry sources |
| We believe that period-to-period comparisons of our operating results will not necessarily be meaningful |
| You should not rely on these comparisons as an indication of our future performance |
| If our operating results in one or more future periods fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock may fluctuate, possibly by a significant amount |
| 9 _________________________________________________________________ [60]Table of Contents The markets in which we operate are intensely competitive, and many competitors are larger and more established |
| If we do not compete successfully, our business could be harmed |
| Intense international and domestic competition, decreasing selling prices, rapid technological change, short product life cycles and cyclical patterns characterize the markets for our products |
| Competitors include significantly larger corporations |
| New entrants in these markets could provide additional competition |
| Most of our competitors are substantially larger and have greater financial, technical, marketing and other resources than we do |
| Many of these large organizations are in a better position to withstand any significant reduction in spending by customers in these markets |
| They often have broader product lines and market focus, and will therefore not be as susceptible to downturns in a particular market |
| In addition, many competitors have focused on the wireless market for longer than we have, and therefore have more long-standing and established relationships with domestic and foreign customers |
| The computer networking equipment and wireless markets have undergone a period of rapid growth and consolidation in recent years |
| We expect our dependence on sales to digital cordless phone and network equipment manufacturers to continue |
| Our business and results of operations would be harmed in the event of a significant slowdown in the digital cordless phone or computer networking equipment market |
| In addition, as a result of competitive pricing pressures, we have experienced lower margins on some of our products |
| Such pricing pressures will continue to have an adverse effect on our results of operations, and our business could suffer unless they can be offset by higher margins on other products or lower operating expenses |
| We do not currently manufacture our own semiconductor wafers |
| As a result, we are vulnerable to process technology advances competitors use to manufacture products offering higher performance and lower cost |
| Larger companies with wafer manufacturing facilities, broader product lines, greater technical and financial resources and greater service and support capabilities have an advantage in this market |
| The market for wireless applications is characterized by rapid technological change |
| Our future success depends on our ability to respond to these changes |
| Rapidly changing technology, frequent product introductions and evolving industry standards make it difficult to accurately predict the market’s future growth rate, size or technological direction |
| In view of the evolving nature of this market, suppliers of wireless products may decide to adopt alternative standards or technologies that are incompatible with our products |
| If we are unable to design, develop, manufacture and sell products that are compatible with these new standards or technologies, our business and operating results would be harmed |
| We need to develop and introduce new and enhanced products in a timely manner to successfully compete in our industry |
| Continuing technological advancement, changes in customer requirements and evolving industry standards characterize the wireless and computer equipment networking markets |
| To compete successfully, we must design, develop, manufacture and sell new or enhanced products that: • provide increasingly higher levels of performance and reliability; • meet performance or other objective specified parameters; • are cost effective; • are brought to market in a timely manner; • are in accordance with existing or evolving industry standards; and • achieve market acceptance |
| 10 _________________________________________________________________ [61]Table of Contents The development of these new circuits is highly complex |
| We have sometimes experienced delays in completing the development of new products |
| Successful product development and introduction depends on many factors, including: • proper new product definition; • timely completion and introduction of new product designs; • availability of foundry capacity; • acceptable manufacturing yields; and • market acceptance of our products and our customers’ products |
| We must be able to adjust to changing market conditions quickly and cost-effectively to compete successfully |
| Furthermore, we must introduce new products in a timely manner, and achieve market acceptance for these products |
| In addition, our customers’ products which incorporate our products must be introduced in a timely manner and achieve market acceptance |
| If we, or our customers, fail to develop and introduce new products successfully, our business and operating results would suffer |
| To successfully develop and market certain of our planned products, we may need to enter into technology development or licensing agreements with third parties |
| If we cannot enter into such agreements on acceptable terms, our ability to develop and market new products could suffer, and our business and operating results would be adversely affected |
| Customers typically take a long time to evaluate our new products |
| It takes three to six months or more for customers to test new products, and at least an additional three to 12 months until customers begin significant production of products incorporating our products |
| We may therefore experience a lengthy delay between product development and the generation of revenue from new products |
| Delays inherent in such a long sales cycle raise additional risks that customers may decide to cancel or change their product plans |
| Our business, financial condition, and results of operations would suffer if customers reduce or delay orders, or choose not to release products incorporating our products |
| We have a history of losses and, because of continued investment in product development, expect to incur losses in the future |
| We have incurred quarterly net losses from June 2000 through December 2005, except for a profit in the third quarter of 2002 which was attributable to an income tax refund, and a profit in the third quarter of 2004 which resulted from the sale of our land and buildings |
| We had an accumulated deficit of dlra30dtta2 million as of December 31, 2005 |
| Successful engineering development and market penetration in the product areas we have chosen to compete in require high levels of engineering and product development expense |
| We intend to continue to spend significant amounts on new product and technology development |
| Our networking products are reaching maturity, and revenue from this product line has declined and may decline further in 2006 |
| We anticipate that our existing cash resources will fund any anticipated operating losses, purchases of capital equipment, and provide adequate working capital for our capital needs in 2006 |
| We may incur losses in the future and may not achieve our goals of positive net income and cash flow |
| To the extent that our existing resources and cash generated from operations are insufficient to fund our future activities, we may need to raise additional capital |
| If funds are not available on acceptable terms, we may not be able to hire or retain employees, fund our operations or compete effectively |
| We believe that our existing capital resources and cash generated from operations will enable us to maintain our operations for at least the next 12 months |
| However, if our capital requirements or results of operations vary materially from those currently planned, we may require additional financing sooner than anticipated |
| If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to our common stock, and the terms of this debt could impose 11 _________________________________________________________________ [62]Table of Contents restrictions on our operations |
| The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders |
| We cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all |
| If adequate funds are not available to us on acceptable terms, our ability to hire, train or retain employees, to fund our operations and sales and marketing efforts, take advantage of unanticipated opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited, which could harm our business, financial condition and operating results |
| We depend on networking, wireless, and telecommunications spending for our revenue |
| Any decrease or delay in spending in these industries would negatively impact future operating results and financial condition |
| Demand for our products in the future will depend on the amount and timing of spending by network providers, manufacturers of wireless consumer products, and telecommunications equipment suppliers |
| Spending in these areas depends upon a variety of factors, including competitive pressures, discretionary consumer spending patterns, and general economic conditions |
| During 2003, 2004 and 2005 new orders slowed, customers cancelled or placed holds on existing orders, and orders dropped from prior periods, due to developments in the general economy and capital markets |
| This situation could recur in the future |
| Because the majority of our revenue comes from sales to a few customers, a delay in orders from one customer could have a significant negative effect on future revenue |
| Relatively short product life cycles characterize the digital cordless telephone and computer network equipment markets |
| If one or more of our significant customers were to select circuits manufactured by a competitor for future products, our business would suffer |
| The loss of one or more of our current customers, failure to attract new customers, or disruption of our sales and distribution channels could harm our business and operating results |
| Our customer base is concentrated |
| The loss of one or more key customers or distributors would harm our business |
| A significant majority of our revenue comes from sales to relatively few customers |
| Sales to the ten largest customers, excluding domestic distributors, in 2005, 2004, and 2003 accounted for approximately 87prca, 82prca, and 77prca of net revenue, respectively |
| Sales to domestic distributors in 2005, 2004, and 2003 accounted for approximately 4prca, 5prca, and 5prca of net revenue |
| We anticipate that a limited number of key customers and distributors will continue to provide a significant portion of our net revenue for the foreseeable future |
| During 2005, three customers each accounted for more than 10prca of our net revenue: Uniden Corporation accounted for 44prca of our total sales, Giant Electronics Limited (a subcontractor for Plantronics) accounted for 15prca of our total sales and Vtech Telecommunications accounted for 12prca of our total sales |
| Our future success depends on our ability to retain our current customers and attract new customers |
| A reduction, delay or cancellation of orders from one or more significant customers could materially harm our operating results |
| In addition, our operating results could be adversely affected if one or more of our major customers were to develop other sources for the products we now supply them |
| Generally, customers may cancel or reschedule orders to purchase standard products without significant penalty until 30 days prior to requested shipment |
| Customers frequently revise delivery schedules, and the quantities of products to be delivered, to reflect changes in their needs |
| Since backlog can be canceled or rescheduled, our backlog at any time is not necessarily indicative of future revenue |
| We depend on international sales and are subject to the risks associated with international operations, which may negatively affect our business |
| Sales to customers outside of the United States in 2005, 2004, and 2003 represented 94prca, 94prca, and 91prca of net revenue, respectively |
| We expect that international sales will continue to generate a substantial 12 _________________________________________________________________ [63]Table of Contents proportion of net revenue for the foreseeable future |
| Our international operations are subject to a number of risks, including: • changes in regulations and laws of foreign governments and telecommunications standards; • import and export legislation and license requirements, tariffs, taxes, quotas and other trade barriers; • compliance with foreign laws, treaties and technical standards; • delays resulting from difficulty in obtaining export licenses for certain technology; • fluctuations in currency exchange rates; • difficulty in collecting accounts receivable; • difficulty in managing foreign operations; • loss of one or more international distributors; • geopolitical risks, changes in diplomatic and trade relationships and economic instability; and • political and economic instability, including wars, acts of terrorism, political unrest, boycotts and any related conflicts or similar events worldwide |
| Substantially all of our international sales must be licensed by the Office of Export Administration of the US Department of Commerce |
| To date, we have not experienced any material difficulties in obtaining export licenses |
| Our international sales are typically denominated in US dollars |
| Fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, while competitors’ products denominated in local currencies become less expensive |
| This may lead to a reduction in sales or profitability in that country, which could adversely affect our business |
| Gains and losses on the conversion to US dollars of accounts receivable, accounts payable and other international assets and liabilities may contribute to fluctuations in operating results |
| In addition, international customers typically take longer to pay for purchases than customers in the United States |
| If foreign markets do not continue to develop, or foreign sales cycles prove unpredictable, our revenue and business would be adversely affected |
| Average selling prices for products in the wireless markets have rapidly declined due to many factors, including: • rapidly changing technologies; • price-performance enhancements; • product introductions by competitors; • price pressure from significant customers; and • product maturity and obsolescence |
| The decline in the average selling prices of our products may cause substantial fluctuations in our operating results |
| We continue to develop and market new products that incorporate valued new features and sell at higher prices |
| Failure to deliver new products offering increased value would result in a decline in both revenue and margins, harming our business, financial condition, and results of operations |
| 13 _________________________________________________________________ [64]Table of Contents Defects in our products, product returns and product liability could result in a decrease in customers and revenue, unexpected expenses and loss of market share |
| Complex products such as ours frequently contain errors, defects, and bugs upon release |
| Despite testing by us, our test houses and customers, these errors, defects and bugs are sometimes discovered after we begin to ship products |
| We expend significant resources to remedy these problems, but occasionally have faced legal claims by customers and others |
| Product defects can also cause interruptions, delays or cancellations of sales to customers, in addition to claims against us, all of which could adversely affect our operating results |
| We depend on the health of the semiconductor industry, which is highly cyclical |
| The decline in demand in the semiconductor industry could affect our financial condition and results of operations |
| The semiconductor industry experiences significant downturns and wide fluctuations in supply and demand |
| The industry also experiences significant fluctuations in anticipation of changes in general economic conditions |
| This causes significant variances in product demand and production capacity, and aggravates both our manufacturing costs and product selling prices |
| These cyclical patterns, which we expect to continue, may substantially harm our business, financial condition, and results of operations |
| If we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventory |
| We regularly request indications from customers as to their future plans and requirements, to ensure that we will be prepared to meet production demand for our products |
| However, we may not receive anticipated purchase orders for our products |
| We must be able to effectively manage the expenses and inventory risks associated with meeting potential demand |
| If we fail to meet customers’ supply expectations, we may lose business from such customers |
| If we expend resources and purchase materials, or enter into commitments to acquire materials and manufacture products, and customers do not purchase these products, our business and operating results would suffer |
| Design wins, which require significant expenditures, often precede the generation of volume sales by a year or more |
| The value of any design win will largely depend upon the commercial success of the customer’s product, and on the extent to which the design of the customer’s product accommodates components manufactured by our competitors |
| We cannot assure that we will achieve design wins, or that any design win will result in significant future revenue |
| We depend on a limited number of outside foundries and test subcontractors in the manufacturing process, and any failure to obtain sufficient foundry or testing capacity could significantly delay our ability to ship our products, damage our customer relationships, and result in reduced revenue |
| We utilize outside foundries for all wafer production |
| We believe that utilizing outside foundries enables us to focus on our design strengths, minimize fixed costs and capital expenditures and access diverse manufacturing technologies |
| We currently intend to continue to rely exclusively upon our outside foundries for our wafer fabrication requirements |
| However, there are significant risks associated with the reliance on outside foundries, including the lack of assured wafer supply and control over delivery schedules, delays in obtaining access to key process technologies, and limited control over manufacturing yields and production costs |
| The manufacture of integrated circuits is a highly complex and technically demanding process |
| We have diversified our sources of wafer supply and have worked closely with our foundries to minimize the likelihood of reduced manufacturing yields |
| However, our foundries have sometimes experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new processes |
| Reduced yields have, at times, negatively affected our operating results, a situation which may recur in the future |
| Dependence on foundries located outside of the United States subjects us to numerous risks, including exchange rate fluctuations, export and import restrictions, trade sanctions, political instability and tariff 14 _________________________________________________________________ [65]Table of Contents increases |
| One of our main foundries is located in Singapore, which presents specific risks due to political instability in that region |
| We generally do not have a guaranteed level of wafer capacity or wafer costs at our foundries |
| Our wafer suppliers could prioritize capacity for other uses, or reduce or eliminate deliveries to us on short notice |
| In addition, we depend upon a limited number of foundries for our wafer requirements |
| Any sudden demand for an increased amount of wafers, or sudden reduction or elimination of any source of wafers, could result in a material delay in the shipment of products |
| Disruptions in supply, which have occurred in the past, may occur in the future |
| If such a disruption occurred, and we were unable to qualify alternative manufacturing sources for our products in a timely manner, or if such sources were unable to produce wafers with acceptable manufacturing yields, our business and operating results would be materially and adversely affected |
| We rely on a limited number of outside test service subcontractors to test our products |
| The same risks described in the paragraphs above, concerning guaranteed capacity, dependence upon a limited number of test service subcontractors, and disruptions in service, also apply to our test and assembly subcontractors |
| Rapid technological change and frequent new product introductions characterize the markets for our products |
| To remain competitive, we must develop or obtain access to new semiconductor process technologies in order to reduce die size, increase die performance and functional complexity, and improve manufacturing yields |
| If we are unable to obtain access to advanced wafer processing technologies, limiting our ability to introduce competitive products on a timely basis, our future operating results would be harmed |
| Minute levels of contaminants in the semiconductor manufacturing environment, defects in the masks used to print circuits on a wafer, difficulties in the fabrication process and other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional |
| Many of these manufacturing problems are difficult to diagnose and time consuming and expensive to remedy |
| Our foundries have, at times, experienced lower than anticipated yields, which have adversely affected production and operating results |
| The manufacturing processes utilized by our foundries are continuously being improved in order to increase yield and product performance |
| Process changes can, however, result in interruptions in production or significantly reduced yields |
| New process technologies and new products are especially susceptible to wide variations in manufacturing yields and efficiency |
| Irregularities, adverse yield fluctuations or other manufacturing problems at our foundries could result in production interruption or delivery delays, which would harm our business and results of operations |
| We have granted nontransferable, limited process licenses to some of our foundries to utilize our processes to manufacture and sell wafers to other customers |
| We protect our proprietary technology, particularly our design methodology, but may not be able to prevent its misappropriation by our foundries or others |
| We and the independent foundries and subcontractors we use to manufacture and test our products are subject to environmental laws |
| Failure to comply with these laws could delay manufacturing of our products and result in unexpected expenses |
| Our wafer suppliers and test and assembly subcontractors are subject to a variety of US and foreign government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in their manufacturing processes |
| Failure by our suppliers or subcontractors to comply with environmental regulations could result in fines, suspension of production or cessation of operations |
| Environmental regulations could also require our suppliers or subcontractors to acquire equipment or incur other expenses to comply with environmental regulations |
| If our suppliers or subcontractors incur substantial additional expenses, product costs could significantly increase, adversely affecting our results of operations |
| We are also subject to a variety of environmental regulations relating to our operations |
| If we fail to comply with present and future regulations, the government could impose fines on us, or compel us to suspend or cease operations |
| If we or our suppliers or subcontractors fail to control the use or discharge of hazardous 15 _________________________________________________________________ [66]Table of Contents substances, we could be subject to civil or criminal liabilities, which could harm our business and operating results |
| Because competition for qualified personnel is intense, we may not be successful in attracting and retaining personnel, which could have an impact upon the development or sales of our products |
| Our future success will depend to a significant extent on our ability to attract, retain and motivate qualified personnel, especially those with engineering design experience and expertise |
| We may not be successful in attracting and retaining such qualified personnel |
| Competitors may attempt to recruit our employees |
| While employees are required to sign standard agreements concerning confidentiality and ownership of inventions, we do not have employment contracts or non-competition agreements with most of our personnel |
| The loss of the services of key employees, the inability to attract or retain qualified personnel, or delays in hiring personnel, particularly engineers and other technical personnel, could negatively affect our business and prevent us from achieving our business goals |
| Our success depends on our ability to protect our intellectual property and proprietary rights |
| As of December 31, 2005, we owned 16 US patents, and have three US patent applications |
| Through a sale of a portion of our assets, we maintain a royalty-free license to several US patents, foreign patents, US patent applications, and foreign patent applications |
| We attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures |
| However, any patent, trademark, copyright or other intellectual property rights we own may be invalidated, circumvented or challenged |
| We cannot be certain that our intellectual property rights will provide competitive advantages, or that any pending or future patent applications will be issued with the scope of the claims sought by us |
| Competitors may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own |
| In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business |
| We believe that the future success of our business will depend on our ability to translate technological expertise and innovation into new and enhanced products |
| We enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and limit access to and distribution of our proprietary information |
| Nevertheless, we may not be able to prevent the misappropriation of our technology |
| In addition, we have taken legal action to enforce our patents and other intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, and defend against claims of infringement or invalidity |
| If a third party makes a valid claim, and we cannot obtain a license to the technology on reasonable terms, our operations could be harmed |
| We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the proprietary rights and other intellectual property rights of third parties |
| Intellectual property litigation is expensive and time-consuming, and could divert our management’s attention away from running our business |
| We have been in the past, and in the future may be, a party to legal proceedings that could have a negative financial impact on us |
| From time to time we have received correspondence from vendors, distributors, customers or end-users of our products regarding disputes with respect to contract rights, product performance or other matters that occur in the ordinary course of business |
| Some of these disputes may involve us in costly litigation or other actions, the outcome of which cannot be determined in advance and may adversely affect our business |
| The defense of lawsuits or other actions could divert our management’s attention away from running our business |
| In addition, negative developments with respect to litigation could cause the price of our common stock to decline significantly |
| 16 _________________________________________________________________ [67]Table of Contents Our stock price has been and will likely continue to be volatile because of stock market fluctuations that affect the price of technology stocks |
| A decline in our stock price could result in securities class action litigation against us, which could divert management’s attention and harm our business |
| Between January 1, 2005 and December 31, 2005, our stock has traded as high as dlra6dtta24 on June 2, 2005, and as low as dlra1dtta50 on October 21, 2005 |
| Our stock price could fluctuate significantly due to a number of factors, including: • variations in our actual or anticipated operating results; • sales of substantial amounts of our stock; • announcements about us or about our competitors, including technological innovation or new products; • litigation and other developments relating to our patents or other proprietary rights or those of our competitors; • conditions in the computer networking equipment and wireless markets; • governmental regulation and legislation; and • changes in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations |
| In addition, the stock markets in general, and the NASDAQ National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations recently |
| These fluctuations often have been unrelated or disproportionate to the operating performance of these companies |
| These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance |
| In the past, companies that have experienced volatility in the market prices of their stock have been the objects of securities class action litigation |
| If we were the objects of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business |
| Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain provisions that could discourage a change in control, even if the change in control would be beneficial to our stockholders |
| Provisions of our amended and restated certificate of incorporation, bylaws, the 1998 Shareholder Rights Plan, our stock option plans and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock |
| Under the Shareholder Rights Plan, adopted in August 1998, each share of our outstanding common stock carries one Right to purchase ^1/1000 of a share of Series A Participating Preferred Stock at an exercise price of dlra30dtta00 per Right |
| If someone acquires 15prca or more of our common stock, each Right not owned by a holder of 15prca or more of our common stock entitles the holder, upon payment of the dlra30dtta00 exercise price, to receive common stock having a current market value of dlra60dtta00 |
| This issuance of additional common stock would significantly reduce the percentage of common stock held by a potential acquirer |
| The Rights expire in August 2008 |
| In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control of Micro Linear |
| Specifically, Section 203 prohibits a Delaware corporation from engaging in any business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder unless specific conditions are met |
| Also, in the event outstanding options granted pursuant to certain of our stock option plans are not assumed by an acquiring corporation, the unvested portion of such options may be accelerated upon a change of control |
| 17 _________________________________________________________________ [68]Table of Contents Recently enacted regulatory changes may cause us to incur increased costs |
| Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and NASDAQ, could cause us to incur increased costs as we evaluate the implications of new rules and respond to new requirements |
| The new rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers |
| We are presently evaluating and monitoring developments with respect to these new and proposed rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs |
| Changes to financial accounting standards may affect our results of operations and cause us to change our business practices |
| We prepare our financial statements in conformance with generally accepted accounting principles, or GAAP, 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 policies |
| A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced |
| Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review |
| The Financial Accounting Standards Board and other agencies have finalized changes to US generally accepted accounting principles that will require us, starting in our first quarter of 2006, to record a charge to earnings for employee stock option grants and other equity incentives |
| We may have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce our overall net income |
| In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees |
| While we believe that we currently have adequate internal controls over financial reporting, we are exposed to risks from recent legislation requiring companies to evaluate those internal controls |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent auditors 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 neither companies nor accounting firms have significant experience in complying with its requirements |
| As a result, we expect to incur increased expense and to devote additional management resources to Section 404 compliance |
| In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal controls over financial reporting are 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 |
| The company is not required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act until 2007 |