| QUICKLOGIC CORPORATION ITEM 1A RISK FACTORS We expect the announced end-of-life of our pASIC1 and pASIC2 products will result in a decline in our revenue Our foundry agreement with the supplier that fabricates our pASIC1 and pASIC2 products expired on December 31, 2005 |
| We announced an end-of-life for these products in 2004 and asked our customers to take delivery of lifetime buy orders before the end of 2005 |
| We believe that a majority of our customers that use pASIC1 and pASIC2 products have purchased enough pASIC1 and pASIC2 product to satisfy demand through the expected life of their products rather than migrate to other QuickLogic products |
| Revenue from these products was dlra6dtta4 million, dlra5dtta1 million, dlra6dtta0 million and dlra3dtta5 million in the first, second, third and fourth quarters of 2005, respectively |
| We believe that revenue from these products may account for less than 10prca of our revenue by the second quarter of 2006 and contribute no revenue by the third quarter of 2006 |
| While we may have limited fabrication capacity for these products in 2006, we currently expect that the supplier will replace the equipment used to fabricate our devices with other equipment by the third quarter of 2006, which would end our ability to purchase additional wafers |
| Our operating results and liquidity will be adversely affected by the end-of-life of our pASIC1 and pASIC2 products |
| To mitigate the affects of the end-of-life of our pASIC1 and pASIC2 products, we plan to: migrate customers to other QuickLogic products; develop customer demand for new products, such as Eclipse II and QuickPCI II, which have strong customer design activity but limited revenue history; and increase revenue and gross profit from our other products |
| The pASIC1 and pASIC2 revenue decline may be more rapid than the revenue growth from our Eclipse II, QuickPCI II, PolarPro and other products |
| While we expect revenue growth from Eclipse II, QuickPCI II, other products and new products, such as PolarPro, will offset the expected decline in pASIC1 and pASIC2 revenue, there is no assurance when this will occur, if at all |
| If we fail to successfully develop, introduce and sell new products, we may be unable to compete effectively in the future We operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products |
| To compete successfully, we must obtain access to advanced fabrication capacity and dedicate significant resources to specify, design, develop, manufacture and sell new or enhanced products and solutions that provide increasingly higher levels of performance, low power consumption, new features, reliability and/or cost savings to our customers |
| We experience a long delay between the time when we expend these product definition and development resources and invest in related long-lived assets, and the time when we begin to generate revenue, if any, from these expenditures |
| We are marketing our Eclipse II, QuickPCI II and PolarPro products to new customers and markets and expect a significant portion of our future revenues to be generated from these new products |
| We believe our low-power Eclipse II, QuickPCI II and PolarPro products have a compelling advantage in low-power applications, and that this business will provide long-term revenue growth for QuickLogic, but there is no assurance when this will occur, if at all |
| Some of these opportunities are in the rapidly changing consumer market, which typically has shorter product life cycles, higher volumes and greater price pressure than our traditional business |
| In order to react quickly to market opportunities, we have made significant investments in Eclipse II and QuickMIPS inventory |
| If we are unable to design, produce and sell new products and solutions that meet design specifications, address customer requirements, and generate sufficient revenue and gross profit, if market demand for our products fails to materialize, or if our customers do not successfully introduce products incorporating our devices, our revenue and gross margin will be materially harmed and we may be required to write-off related inventory and long-lived assets or have other adverse effects on our business |
| For example, in the fourth quarter of 2004 we recorded a dlra3dtta2 million long-lived asset impairment charge related to our QuickMIPS products |
| 20 ______________________________________________________________________ We may be unable to accurately estimate quarterly revenue, which could adversely affect the trading price of our stock We offer our customers a short delivery lead-time and a majority of our shipments during a quarter are ordered by customers in that quarter |
| As a result, we often have low visibility to the current quarter’s revenue, and our revenue levels can change significantly in a short period of time |
| Furthermore, our ability to respond to increased demand is limited to inventory on hand or on order, the capacity available at our contract manufacturers and our capacity to program products to customer specifications |
| In addition, a significant portion of our revenue is deferred until our distributors ship unprogrammed parts to end customers since the price is not fixed or determinable until that time |
| Therefore, we are highly dependent on the accuracy and timeliness of resale and inventory reports from our distributors |
| Inaccurate distributor resale or inventory reports, as well as unanticipated changes in distributor inventory levels, could contribute to our difficulty in predicting and reporting our quarterly revenue and results of operations |
| If we fail to accurately estimate customer demand, record revenue, or if our available capacity is less than needed to meet customer demand, our results of operations could be harmed and our stock price could materially fluctuate |
| Our future results depend on our relationship with Tower We have invested approximately dlra21dtta3 million in Tower |
| In return for our investment, we received equity, prepaid wafer credits and committed production capacity in Tower’s foundry facility |
| We believe that Tower’s long-term operation of this fabrication facility depends on its ability to attract sufficient customer demand, to obtain additional financing, to obtain the release of grants and approvals for changes in grant programs from the Israeli government’s Investment Center, and its ability to remain in compliance with the terms of its grant and credit agreements |
| The current political uncertainty and security situation in the Middle East where Tower’s fabrication facility is located, the cyclical nature of the market for foundry manufacturing services, Tower’s financial condition, or other factors may adversely impact Tower’s business prospects and may discourage future investments in Tower from outside sources |
| We may decide to invest additional funds in Tower, which could have an impact on our cash position and liquidity |
| If Tower is unable to obtain adequate financing and increase production output in a timely manner, the value of our investment in Tower may decline significantly or possibly become worthless, our wafer credit from Tower may decline in value or possibly become worthless, and we would have to identify and qualify a substitute supplier to manufacture our products |
| This could require significant development time, cause product shipment delays, impair long-lived assets and the value of our wafer credits, damage our liquidity and severely harm our business |
| In addition, Tower solely manufactures our Eclipse II, PolarPro, certain QuickPCI II, QuickMIPS and other new products currently under development |
| The value of our investment in Tower and its corresponding wafer credits may also be adversely affected by a deterioration of conditions in the market for foundry manufacturing services and the market for semiconductor products |
| At December 31, 2005, the aggregated value of our Tower investment and wafer credits recorded on our balance sheets was dlra6dtta2 million |
| If the fair value of our Tower investment or our wafer credits are deemed to be impaired, we will record charges to our statement of operations |
| For instance, the fair value of our Tower investment was dlra2dtta26 per share and dlra1dtta17 per share at the end of 2004 and the end of the second quarter of 2005, respectively |
| Since the value of our Tower investment remained below dlra2dtta26 per share for a period of time, we recorded a dlra1dtta5 million write-down of marketable securities in the second quarter of 2005 |
| 21 ______________________________________________________________________ We will be unable to compete effectively if we fail to anticipate product opportunities based upon emerging technologies and standards and fail to develop products that incorporate these technologies and standards in a timely manner We spend significant time and money to design and develop products and customer solutions around an industry standard, such as Peripheral Component Interconnect, or PCI, and Integrated Drive Electronics, or IDE, or emerging technology, such as advanced process technology or lead-free packaging |
| We intend to develop additional products and solutions and adopt new technology in the future |
| If system manufacturers adopt alternative standards or technologies, if an industry standard or emerging technology that we have targeted fails to achieve broad market acceptance, or if we are unable to bring the technology or solutions to market in a timely manner, we may be unable to generate significant revenue from our research and development efforts |
| As a result, our business would be materially harmed and we may be required to write-off related inventory and long-lived assets |
| Our customers may cancel or change their product plans after we have expended substantial time and resources in the design of their products Our customers often evaluate our products for six months or more before designing them into their systems, and they may not commence volume shipments for up to an additional six to twelve months, if at all |
| During this lengthy sales cycle, our potential customers may also cancel or change their product plans |
| In addition, customers may discontinue products incorporating our devices at any time or they may choose to replace our products with lower cost semiconductors |
| If customers cancel, reduce or delay product orders from us or choose not to release equipment that incorporates our products after we have spent substantial time and resources in assisting them with their product design, our business could be materially harmed |
| We are expending substantial time and effort to develop solutions with partners that depend on the availability and success of technology owned by the partner Our approach to developing system solutions for potential customers involves embedded processors or peripheral devices developed by other parties and specific industry standards such as PCI, IDE and Secure Digital Input/Output, or SDIO We have entered into informal partnerships with these other parties that involve the development of solutions that interface with their devices |
| These informal partnerships also may involve joint marketing campaigns and sales calls |
| For example, we have developed a system solution incorporating a specific embedded processor, a micro hard disk drive and our Eclipse II device that lowers the overall power consumption of a system and improves system performance |
| If our solution is not incorporated into customer products, if our partners discontinue production of their products, if our customers do not incorporate our solution into their product, or if the informal partnership is significantly reduced or terminated, our revenue and gross margin will be materially harmed and we may be required to write-off related long-lived assets |
| We depend upon third parties to fabricate, assemble, test and program our products, and they may discontinue manufacturing our products, fail to give our products priority, be unable to successfully manufacture our products to meet performance, volume or cost targets, or inaccurately report inventory to us We contract with third parties to fabricate, assemble, test and program our devices |
| Our devices are generally fabricated, assembled and programmed by single suppliers, and the loss of a supplier, expiration of a supply agreement or the inability of our suppliers to manufacture our products to meet volume, performance and cost targets could have a material adverse effect on our business |
| Tower solely manufactures our Eclipse II, PolarPro, certain QuickPCI II, QuickMIPS and other new products currently under development |
| Furthermore, a single supplier fabricates our pASIC1 and pASIC2 products under an agreement that expired in December 2005 |
| While we may be able to purchase limited pASIC1 and pASIC2 22 ______________________________________________________________________ wafers in 2006, these products contributed 44prca of 2005 revenue and we anticipate that revenue from these products will be zero in the third quarter of 2006 |
| In addition, demand for assembly capacity at one of our suppliers recently increased due to a fire at the facility of another supplier |
| As a result, capacity available to us may be constrained |
| Programming capacity at our suppliers is also dependent on our investment in sufficient programming hardware to meet fluctuating demand |
| Our relationship with our suppliers could change as a result of a merger or acquisition |
| If for any reason these suppliers or any other vendor becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to operate our business or deliver our products to our customers could be severely impaired |
| We would have to identify and qualify substitute suppliers, which could be time consuming and difficult and could result in unforeseen operational problems, or we could announce an end-of-life program for these products, as we did with our pASIC1 and pASIC2 products |
| Alternate suppliers might not be available to fabricate, assemble, test and program our devices or, if available, might be unwilling or unable to offer services on acceptable terms |
| In addition, if competition for wafer manufacturing capacity increases, if we need to migrate to more advanced wafer manufacturing technology, or if competition for backend services increases, we may be required to pay or invest significant amounts to secure access to this capacity |
| The number of companies that provide these services is limited and some of them have limited operating histories and financial resources |
| In the event our current suppliers refuse or are unable to continue to provide these services to us, we may be unable to procure services from alternate suppliers in a timely manner, if at all |
| Furthermore, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current suppliers on commercially reasonable terms, if at all |
| Moreover, our reliance on a limited number of suppliers subjects us to reduced control over delivery schedules, quality assurance and costs |
| This lack of control may cause unforeseen product shortages or may increase our cost to manufacture and test our products, which would adversely affect our operating results and cash flows |
| We record a majority of our inventory transactions based on information from our subcontractors |
| If we do not receive prompt and accurate information from our vendors, we could misstate inventory levels, incorrectly record gross profit, and be unable to meet our delivery commitments to customers or commit to manufacturing inventory that is not required to meet customer delivery commitments, which could materially harm our business |
| We may not have the liquidity to support our future operations and capital requirements Our cash and cash equivalents balance at December 31, 2005 was dlra28dtta3 million |
| At December 31, 2005, our interest-bearing debt consisted of dlra1dtta4 million outstanding from Silicon Valley Bank and dlra1dtta5 million outstanding under a capital lease |
| On June 27, 2005, we modified our credit facility with Silicon Valley Bank |
| Terms of the modified agreement include an dlra8dtta0 million revolving line of credit available through June 2006 and dlra3dtta0 million of borrowing capacity under the equipment line of credit that is available to be drawn through June 2006 |
| The credit facility expires on June 26, 2006 |
| At December 31, 2005, we had approximately dlra5dtta8 million available to borrow under our revolving credit facility and approximately dlra3dtta0 million available to borrow under our equipment line of credit |
| At the end of the fourth quarter of 2005, we held 1cmam344cmam543 Tower Ordinary Shares available for sale valued at approximately dlra2dtta0 million based upon the market closing price of dlra1dtta45 per share on such date |
| Our ability to obtain capacity at competitive pricing from Tower is tied to our ownership of at least 450cmam000 of these Tower shares |
| Capital expenditures, which are largely driven by the introduction and initial manufacturing of new products and development activities, could be up to dlra4dtta0 million in the next twelve months |
| As of December 31, 2005, we had commitments to purchase dlra2dtta7 million of wafer inventory and a dlra1dtta6 million commitment to purchase software for development and resale |
| 23 ______________________________________________________________________ On July 12, 2005, we filed a shelf registration statement on Form S-3, which has been declared effective |
| Under this filing, we may decide to raise up to dlra30dtta0 million, in one or several transactions, by selling common stock, preferred stock, depositary shares, and warrants |
| As a result of potential investments, the expected fluctuation in revenue from our pASIC1 and pASIC2 products, operating expenses, changes in working capital and interest and debt payments, we will need to generate higher revenue and gross profit, especially from our Eclipse II products, QuickPCI II products and products under development such as PolarPro, to maintain positive cash flow |
| Whether we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted |
| Unless such cash flow levels are achieved, we may borrow additional funds or sell debt or equity securities, or some combination thereof, to provide funding for our operations |
| If adequate funds are not available when needed, our financial condition and operating results would be materially adversely affected and we may not be able to operate our business without significant changes in our operations, or at all |
| If we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventory Our agreements with third-party manufacturers require us to provide forecasts of our anticipated manufacturing orders, and place binding manufacturing commitments in advance of receiving purchase orders from our customers |
| This may result in product shortages or excess product inventory because we are limited in our ability to increase or decrease our forecasts under such agreements |
| Other manufacturers supply us product on a purchase order basis |
| The allocation of capacity is determined solely by our suppliers over which we have no direct control |
| Additionally, we provide programming equipment to our suppliers to program our products to customer specifications |
| The programming equipment is manufactured to our specifications and has significant order lead-times |
| Obtaining additional supply in the face of product, programming equipment or capacity shortages may be costly, or not possible, especially in the short term since most of our products and programming equipment are supplied by a single vendor |
| Our failure to adequately forecast demand for our products could materially harm our business |
| Fluctuations in our manufacturing processes and product yields and quality, especially for new products, may increase our costs Difficulties encountered during the complex semiconductor manufacturing process can render a substantial percentage of semiconductor wafers nonfunctional, and manufacturing fluctuations may change the performance distribution of manufactured products |
| We have, in the recent past, experienced manufacturing runs that have contained substantially reduced or no functioning devices, or that generated devices with below normal performance characteristics |
| In addition, manufacturing yield problems may take a significant period of time to analyze and correct |
| Our reliance on third party suppliers may extend the period of time required to analyze and correct these problems |
| Once corrected, our customers may be required to redesign or requalify their products |
| As a result, we may incur substantially higher manufacturing costs, inventory shortages or reduced customer demand |
| Yield fluctuations frequently occur in connection with the manufacture of newly introduced products, with changes in product architecture, with manufacturing at new facilities or on new manufacturing processes |
| Newly introduced products and products that incorporate new intellectual property, such as our Eclipse II and PolarPro products, are often more complex and more difficult to produce, increasing the risk of manufacturing-related defects |
| New manufacturing facilities or processes, such as at Tower, are often more complex and take a period of time to achieve expected quality levels and product costs |
| While we test our products, including our development tools, they may still contain errors or defects that are found after we have commenced commercial production, that occur due to manufacturing variations or as new intellectual property is incorporated into our products |
| If our products contain undetected or unresolved defects, we may lose market share, experience delays in or loss of market acceptance, reserve or 24 ______________________________________________________________________ scrap inventory, or be required to issue a product recall |
| In addition, we would be at risk of product liability litigation if defects in our products were discovered |
| Although we attempt to limit our liability to end users through disclaimers of special, consequential and indirect damages and similar provisions, we cannot assure you that such limitations of liability will be legally enforceable |
| We have significant customers and limited visibility into the long-term demand for our products from these customers A few of our end customers can represent a significant portion of our total revenue in a given reporting period and the likelihood of this occurring will increase in the future as we target high-volume consumer applications |
| As in the past, future demand from these customers may fluctuate significantly |
| These customers typically order products with short requested delivery lead times, and do not provide a firm commitment to purchase product past the period covered by purchase orders |
| In addition, our manufacturing lead times are longer than the delivery lead times requested by these customers, and we make significant inventory purchases in anticipation of future demand |
| For example, a US-based instrumentation and test customer accounted for 13prca of revenue in 2005 |
| If revenue from any significant customer were to decline substantially, we may be unable to offset this decline with increased revenue from other customers and we may purchase excess inventory |
| These factors could severely harm our business |
| In addition, we may make a significant investment in long-lived assets for the production of our products based upon historical and expected demand |
| If demand for or gross margin generated from our products does not meet our expectations, we may be required to write-off inventory or incur charges against long-lived assets, which would materially harm our business |
| We have a history of losses and cannot assure you that we will remain profitable in the future We incurred significant losses in 2004, 2003 and 2002 |
| Our accumulated deficit as of December 31, 2005 was dlra117dtta3 million |
| Although we recorded net income of dlra2dtta4 million for the year ended December 31, 2005, we may not remain profitable in any future periods |
| Our profitability for the year ended December 31, 2005 and in certain years prior to 2001 cannot be relied upon as any indication of our future operating results or prospects |
| We depend upon third party distributors to market and sell our products, and they may discontinue sale of our products, fail to give our products priority or be unable to successfully market, sell and support our products We contract with third-party distributors to market and sell a significant portion of our products |
| We typically have only a few distributors serving each geographic market, and, in the future, we may have a single distributor covering a geographic market |
| Although we have contracts with our distributors, our agreements with them may be terminated on short notice by either party and, if terminated, we may be unable to recruit additional or replacement distributors |
| Additionally, distributors that we have contracted with may acquire, be acquired or merge with other distributors which may result in the termination of our contract or less effort being placed on the marketing, sale and support of our products |
| As a result, our future performance will depend in part on our ability to retain our existing distributors and attract new distributors that will be able to effectively market, sell and support our products |
| The loss of one or more of our principal distributors, or our inability to attract new distributors, could materially harm our business |
| Many of our distributors, including our principal distributors, market and sell products for other companies, and many of these products may compete directly or indirectly with our products |
| We generally are not one of the principal suppliers of products to our distributors |
| If our distributors give higher priority or greater attention to the products of other companies, including products that compete with our products, our business would be materially harmed |
| 25 ______________________________________________________________________ Individual distributors and OEM customers often represent a significant portion of our accounts receivable |
| If we are unable to collect funds due from these distributors and customers, our financial results may be materially harmed |
| Our future operating results are likely to fluctuate and therefore may fail to meet expectations, which could cause our stock price to decline Our operating results have varied widely in the past and are likely to do so in the future |
| Our future operating results will depend on many factors and may fail to meet our expectations for a number of reasons, including those set forth in these risk factors |
| Any failure to meet expectations could cause our stock price to significantly fluctuate or decline |
| Factors that could cause our operating results to fluctuate include: · the effect of end-of-life programs; · a significant change in sales to our largest customers; · successful development and market acceptance of our products and system solutions incorporating our products; · our ability to accurately forecast product volumes and mix, and to respond to rapid changes in customer demand; · changes in product mix, average selling prices or production variances that affect gross profit; · our ability to adjust our manufacturing capacity and costs in response to economic and competitive pressures; · our reliance on subcontract manufacturers for product capacity, yield and quality; · our competitors’ product portfolio and product pricing policies; · timely implementation of efficient manufacturing technologies; · changes in accounting and corporate governance rules; · impact of import and export laws and regulations; · the cyclical nature of the semiconductor industry and general economic, market, political and social conditions in the countries where we sell our products and the related effect on our customers, distributors and suppliers; and · our ability to obtain capital, debt financing and insurance on commercially reasonable terms |
| Although certain of these factors are out of our immediate control, unless we can anticipate and be prepared with contingency plans that respond to these factors, our business may be materially harmed |
| We may encounter periods of industry-wide semiconductor oversupply, resulting in pricing pressure, as well as undersupply, resulting in a risk that we could be unable to fulfill our customers’ requirements The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, its products |
| These fluctuations have resulted in circumstances when supply of and demand for semiconductors have been widely out of balance |
| An industry-wide semiconductor oversupply could result in severe downward pricing pressure from customers |
| In a market with undersupply of manufacturing capacity, we would have to compete with larger foundry and assembly customers for limited manufacturing resources |
| In such an environment, we may be unable to have our products manufactured in 26 ______________________________________________________________________ a timely manner, at a cost that generates adequate gross profit, or in sufficient quantities |
| Since we outsource all of our manufacturing and have only a single-source of wafer supply, test, assembly and programming for most of our products, we are particularly vulnerable to such supply shortages and capacity limitations |
| Any future industry-wide oversupply or undersupply of semiconductors could materially harm our business |
| Customers may cancel or defer significant purchase orders or our distributors may return our products, which would cause our inventory levels to increase and our revenue to decline Our distributors or customers may cancel purchase orders at any time with little or no penalty |
| Contractually, our distributors are generally permitted to return unprogrammed products worth up to 10prca, by value, of the products they purchase from us |
| If our distributors or customers cancel or defer significant purchase orders or return our products, our accounts receivable collections would decrease and inventories would increase, which would materially harm our business |
| Problems associated with international business operations could affect our ability to manufacture and sell our products Most of our products are manufactured outside of the United States at manufacturing facilities operated by our suppliers in Taiwan, South Korea, the Philippines, Israel and Malaysia |
| We expect to manufacture a majority of the products that we currently have under development in Israel and to assemble these products in South Korea, the Philippines, Malaysia, Wales or China |
| As a result, these manufacturing operations and new product introductions are subject to risks of political instability, including the risk of conflict between Taiwan and the People’s Republic of China, between South Korea and North Korea, and conflicts involving Israel or Malaysia |
| A significant portion of our total revenue comes from sales to customers located outside the United States |
| We anticipate that sales to customers located outside the United States will continue to represent a significant portion of our total revenue in future periods |
| In addition, most of our domestic customers sell their products outside of North America, thereby indirectly exposing us to risks associated with foreign commerce and economic instability |
| In addition to overseas sales offices, we have significant research and development activities in Canada and India |
| Accordingly, our operations and revenue are subject to a number of risks associated with foreign commerce, including the following: · managing foreign distributors; · staffing and managing foreign offices; · political and economic instability; · foreign currency exchange fluctuations; · changes in tax laws, import and export regulations, tariffs and freight rates; · timing and availability of export licenses; · supplying products that meet local environmental regulations; and · inadequate protection of intellectual property rights |
| In the past, we have denominated sales of our products to foreign countries exclusively in US dollars |
| As a result, any increase in the value of the US dollar relative to the local currency of a foreign country will increase the price of our products in that country so that our products become relatively more expensive to customers in the local currency of that foreign country |
| To the extent any such risks materialize, our business could be materially harmed |
| 27 ______________________________________________________________________ In addition, we incur costs in foreign countries that may be difficult to reduce quickly because of employee-related laws and practices in those foreign countries |
| Many system manufacturers may be unwilling to switch to our products because of their familiarity with the products offered by our direct competitors, such as Xilinx and Altera, which dominate the programmable logic market The semiconductor industry is intensely competitive and characterized by: · erosion of selling prices over product lives; · rapid technological change; · short product life cycles; and · strong domestic and foreign competition |
| If we are not able to compete successfully in this environment, our business will be materially harmed |
| Many of our competitors have substantially greater financial, technical, manufacturing, marketing, sales, distribution, name recognition and other resources than we do |
| In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of system applications |
| In the past, we have lost potential customers to competitors for various reasons, including, but not limited to, re-programmability and lower price |
| Our current direct competitors include suppliers of complex programmable logic devices and field programmable gate arrays, such as Xilinx, Inc, Altera Corporation, Actel Corporation, and Lattice Semiconductor Corporation |
| Xilinx and Altera together have a majority share of the programmable logic market |
| Many system manufacturers may be unwilling or unable to switch to our products due to their familiarity with competitors’ products or other inhibiting factors |
| We also face competition from companies that offer ASICs, which may be purchased for a lower price at higher volumes and typically have greater logic capacity, additional features and higher performance than those of our products |
| We may also face competition from suppliers of embedded microprocessors, such as Freescale Semiconductor, Inc, or from suppliers of products based on new or emerging technologies |
| Our inability to successfully compete in any of the following areas could materially harm our business: · the development of new products and advanced manufacturing technologies; · the quality, performance characteristics, price and availability of devices, programming hardware and software development tools; · the ability to engage with companies that provide synergistic products and services; · the incorporation of industry standards in our products; · the diversity of product offerings available to customers; or · the quality and cost effectiveness of design, development, manufacturing and marketing efforts |
| We may be unable to successfully grow our business if we fail to compete effectively with others to attract and retain key personnel We believe our future success will depend upon our ability to attract and retain engineers and other highly competent personnel |
| Our employees are at-will and not subject to employment contracts |
| Hiring and retaining qualified sales, technical and financial personnel is difficult due to the limited number of qualified professionals, economic conditions and the size of our company |
| Competition for these types of 28 ______________________________________________________________________ employees is intense |
| In addition, new hires frequently require extensive training before they achieve desired levels of productivity |
| We have in the past experienced difficulty in recruiting and retaining qualified senior management, sales, finance and technical personnel |
| Failure to attract, hire, train and retain personnel could materially harm our business |
| We may be unable to adequately protect our intellectual property rights, and may face significant expenses as a result of future litigation Protection of intellectual property rights is crucial to our business, since that is how we keep others from copying the innovations that are central to our existing and future products |
| From time to time, we receive letters alleging patent infringement or inviting us to license other parties’ patents |
| We evaluate these requests on a case-by-case basis |
| These situations may lead to litigation if we reject the offer to obtain the license |
| We have in the past and are currently involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights |
| This kind of litigation is expensive and consumes large amounts of management’s time and attention |
| Additionally, matters that we initially consider not material to our business could become costly |
| For example, we incurred substantial costs associated with the litigation and settlement of our dispute with Actel, which materially harmed our business |
| In addition, if the letters we sometimes receive alleging patent infringement or other similar matters result in litigation that we lose, a court could order us to pay substantial damages and/or royalties, and prohibit us from making, using, selling or importing essential technologies |
| For these and other reasons, this kind of litigation could materially harm our business |
| Also, although we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms, or at all |
| We have entered into technology license agreements with third parties which give those parties the right to use patents and other technology developed by us, and which give us the right to use patents and other technology developed by them |
| We anticipate that we will continue to enter into these kinds of licensing arrangements in the future; however, it is possible that desirable licenses will not be available to us on commercially reasonable terms |
| If we lose existing licenses to key technology, or are unable to enter into new licenses that we deem important, it could materially harm our business |
| Because it is critical to our success that we continue to prevent competitors from copying our innovations, we intend to continue to seek patent and trade secret protection for our products |
| The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us |
| Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own |
| We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and other third parties |
| However, these parties may breach these agreements, and we may not have adequate remedies for any breach |
| In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States |
| We may engage in manufacturing, distribution or technology agreements that involve numerous risks, including the use of cash, diversion of resources and significant write-offs We have entered into and, in the future, intend to enter into agreements that have involved numerous risks, including the use of significant amounts of our cash; diversion of resources from other development 29 ______________________________________________________________________ projects or market opportunities; our ability to incorporate licensed technology in our products; our ability to introduce related products in a cost-effective and timely manner; our ability to collect amounts due under these contracts; and market acceptance of related products |
| For instance, we have licensed certain microprocessor technology from MIPS Technologies and obtained other elements of our products from third-party companies |
| In the fourth quarter of 2004, we determined that the expected revenue and gross profit from these products would not be sufficient to recover the full carrying value of the related third party elements and other long-lived assets, and we recorded a dlra3dtta2 million long-lived asset impairment charge |
| If we fail to recover the cost of these or other assets from the cash flow generated by the related products, our assets will become impaired and our financial results would be harmed |
| Our business is subject to the risks of earthquakes, other catastrophic events and business interruptions for which we may maintain limited insurance Our operations and the operations of our suppliers are vulnerable to interruption by fire, earthquake, power loss, flood, terrorist acts and other catastrophic events beyond our control |
| In particular, our headquarters is located near earthquake fault lines in the San Francisco Bay area |
| In addition, we rely on sole suppliers to manufacture our products and would not be able to qualify an alternate supplier of our products for several quarters |
| Our suppliers often hold significant quantities of our inventory which, in the event of a disaster, could be destroyed |
| In addition, our business processes and systems are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering |
| Any catastrophic event, such as an earthquake or other natural disaster, the failure of our computer systems, war or acts of terrorism, could significantly impair our ability to maintain our records, pay our suppliers, or design, manufacture or ship our products |
| The occurrence of any of these events could also affect our customers, distributors and suppliers and produce similar disruptive effects upon their business |
| If there is an earthquake or other catastrophic event near our headquarters, our customers’ facilities, our distributors’ facilities or our suppliers’ facilities, our business could be seriously harmed |
| We do not have a detailed disaster recovery plan |
| In addition, we do not maintain sufficient business interruption and other insurance policies to compensate us for all losses that may occur |
| Any losses or damages incurred by us as a result of a catastrophic event or any other significant uninsured loss could have a material adverse effect on our business |
| Our principal stockholders have significant voting power and may vote for actions that may not be in the best interests of our other stockholders Our officers, directors and principal stockholders together control a significant portion of our outstanding common stock |
| As a result, these stockholders, if they act together, will be able to significantly influence our operations, affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership may have the effect of delaying or preventing a change in control and might affect the market price of our common stock |
| This concentration of ownership may not be in the best interest of our other stockholders |
| Our Shareholder Rights Plan, Certificate of Incorporation, Bylaws and Delaware law contain provisions that could discourage a takeover that is beneficial to stockholders Our Shareholder Rights Plan as well as provisions of our Certificate of Incorporation, our Bylaws and Delaware law could make it difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| 30 ______________________________________________________________________ The market price of our common stock may fluctuate significantly and could lead to securities litigation Stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations that have often been unrelated to the operating performance of such companies |
| 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 |
| In the future, we may be the target of similar litigation |
| Securities litigation could result in substantial costs and divert management’s attention and resources |
| Changes to existing accounting pronouncements or taxation rules or practices may cause adverse revenue fluctuations, affect our reported results of operations or how we conduct our business New accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future |
| Any future changes in accounting pronouncements or taxation rules or practices may have a significant effect on how we report our results and may even affect our reporting of transactions completed before the change is effective |
| This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, FASB has issued Statement 123R, “Share-Based Payment,” which will require us to measure compensation costs for all stock based compensation (including our stock options and our employee stock purchase plan, as currently constructed) at fair value and record compensation expense equal to that value beginning in January 2006 |
| If this accounting pronouncement had been in effect during the current period, we estimate that we would have reported a significantly lower net income |
| Compliance with changing regulations related to corporate governance and public disclosure may result in additional expenses Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the Nasdaq National Market rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from profit-generating activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed and the market price of our common stock could be affected |
| While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002 As of December 2005, we have evaluated our internal control systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act |
| We performed the system and process evaluation and testing required in an effort to comply with the management certification and independent registered public accounting firm attestation requirements of Section 404 |
| As a result, we incurred additional expenses and a diversion of management’s time |
| While we believe that our internal control procedures are adequate and we intend to continue to fully comply with the requirements relating 31 ______________________________________________________________________ to internal control and all other aspects of Section 404, our controls necessary for continued compliance with the Act may not operate effectively at all times and may result in a material control disclosure |
| The identification of a material weakness in internal controls over financial reporting, if any, could indicate a lack of proper controls to generate accurate financial statements |
| Furthermore, we cannot be certain as to the outcome of future evaluations, testing and remediation actions or the impact of the same on our operations |
| If we are not able to remain in compliance with the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the Nasdaq National Market |
| Any such action could adversely affect our financial results and the market price of our common stock |
| We have implemented import and export control procedures to comply with United States regulations but we are still exposed to potential risks from import and export activity Our products, technology and software are subject to import and export control laws and regulations which, in some instances, may impose restrictions on business activities, or otherwise require licenses or other authorizations from agencies such as the US Department of State, US Department of Commerce and US Department of the Treasury |
| We have import and export licensing and compliance procedures in place for purposes of conducting our business consistent with US and applicable international laws and regulations, and we periodically review these procedures to maintain compliance with the requirements relating to import and export regulations |
| If we are not able to remain in compliance with import and export regulations, we might be subject to investigation, sanctions or penalties by regulatory authorities |
| Such penalties can include civil, criminal or administrative remedies (such as loss of export privileges) |
| We cannot be certain as to the outcome of an evaluation, investigation, inquiry or other action or the impact of these items on our operations |
| Any such action could adversely affect our financial results and the market price of our common stock |