| RAMTRON INTERNATIONAL CORP Item 1A Risk Factors |
| 19 Item 1A RISK FACTORS We have historically incurred losses from operations since our inception and our achievement of sustained profitability is uncertain |
| Our ability to achieve and maintain our profitable operations is subject to significant risks and uncertainties, including, but not limited to, our ability to successfully sell our products at prices that are sufficient to cover our operating costs, to enter into additional technology development and license arrangements, to obtain sufficient contract manufacturing capacity and, if and as may be necessary, to raise additional financing to fund our increased operations |
| There is no guarantee that we will be successful in addressing such risks successfully |
| We have spent substantial amounts of money in developing our products in our efforts to obtain commercial manufacturing capabilities for those products |
| Our ability to increase revenue or achieve profitability in the future will depend substantially on our ability to increase sales of our products by gaining new customers and increasing sales to our existing customers, to reduce manufacturing costs, to increase significantly sales of existing products and to introduce and sell new products successfully |
| We have limited cash flows, and we may have limited ability to raise additional funds to finance our operation |
| In view of our expected future working capital requirements in connection with the fabrication and sale of our nonvolatile memory, microcontroller and integrated semiconductor products, as well as our projected research and development and other operating expenditures, we may be required to seek additional equity or debt financing |
| We cannot be sure that any additional financing or other sources of capital will be available to us on acceptable terms, or at all |
| The inability to obtain additional financing when needed would have a material adverse effect on our business, financial condition and operating results and could adversely affect our ability to continue our business operations |
| If additional financing is obtained, any issuance of common or preferred stock to obtain funding would result in further dilution of our existing stockholders &apos interests |
| If we fail to protect our intellectual property, or if others use our proprietary technology without authorization, our competitive position may suffer |
| Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology used in our products |
| We protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and employee and third party non-disclosure and assignment agreements |
| We cannot be assured that any of our patent applications will be approved or that any of the patents that we own will not be challenged, invalidated or circumvented by others or be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage |
| Page-19 Policing the unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States |
| In addition, we cannot be certain that we will be able to prevent other parties from designing and marketing semiconductor products or that others will not independently develop or otherwise acquire the same or substantially equivalent technologies as ours |
| We may be subject to intellectual property infringement claims that result in costly litigation and could harm our business and ability to compete |
| Our industry is characterized by the existence of a large number of patents, as well as frequent claims and related litigation regarding these patents and other intellectual property rights |
| In particular, many leading semiconductor memory companies have extensive patent portfolios with respect to manufacturing processes, product designs, and semiconductor memory technology, including ferroelectric memory technology |
| We may be involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity of property rights of others, or to defend against claims of invalidity |
| This type of litigation can be expensive, regardless of whether we win or lose |
| Also, we cannot be certain that third parties will not make a claim of infringement against us or against our company licensees in connection with their use of our technology |
| Any claims, even those without merit, could be time consuming to defend, result in costly litigation and diversion of technical and management personnel, or require us to enter into royalty or licensing agreements |
| These royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all |
| A successful claim of infringement against us or one of our semiconductor manufacturing licensees in connection with our use of our technology could harm our business |
| Earthquakes, other natural disasters and power shortages or interruptions may damage our business |
| Some of our contract manufacturers &apos facilities are located near major earthquake faults |
| If a major earthquake or other natural disaster occurs which damages those facilities or restricts their operations, our business, financial condition and results of operations would be materially adversely affected |
| A major earthquake or other natural disaster near one or more of our major suppliers, like the one that occurred near the manufacturing facility of our FRAM foundry wafer supplier, Fujitsu, Ltd |
| (Fujitsu), in Iwate, Japan in May 2003, could disrupt the operations of those suppliers, which could limit the supply of our products and harm our business |
| Our future success depends in part on the continued service of a relatively small number of key design engineering, sales, marketing and executive personnel, and if we are unable to attract additional personnel or retain our key personnel, our business will suffer |
| Page-20 Our future success depends, among other factors, on the continued service of our key technical and management personnel and on our ability to continue to attract and retain qualified employees |
| We are particularly dependent on the highly skilled design, process, materials and testing engineers involved in the development and manufacture of our semiconductor products and processes |
| The competition for these personnel is intense, and the loss of key employees, including executive officers, or our inability to attract additional qualified personnel in the future, could have both an immediate and a long-term adverse effect on us |
| In addition, none of our US employees have entered into post-employment, non-competition agreements with us and, therefore, our employees are not contractually restricted from providing services to our competitors |
| Risks Related to Our Products - ----------------------------- Our products are complex and may contain defects that could lead to product liability, an increase in our costs or a reduction in our revenue |
| Our products are complex and may contain defects, particularly when first introduced or as new versions are released |
| If we develop integrated semiconductor products containing functions in addition to memory as planned, the overall complexity of our products will increase substantially |
| We rely primarily on our in-house testing personnel to design test operations and procedures to detect any defects prior to delivery of our products to our customers |
| Because our products are manufactured by third parties, should problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers |
| These defects also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems |
| Any defects could require product replacement or recall or we could be obligated to accept product returns |
| Any of the foregoing could impose substantial costs and harm our business |
| Product liability claims may be asserted with respect to our products |
| Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated |
| A defect or failure in our product could cause failure in our customerapstas end-product, so we could face claims for damages that are disproportionately higher than the revenue and profits we receive from the products involved |
| There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims |
| Because our products typically have lengthy sales cycles, we experience substantial delays between incurring expenses related to development of our products and the generation of revenue from those products |
| Page-21 Product sales cycle usually requires more than 18 months to realize volume shipments after we first identify a customer opportunity |
| We first work with customers to achieve a design "e win "e (inclusion of our product in the customerapstas product design), which may take several months or longer |
| Our customers then complete their product design, testing and evaluation process and begin to ramp-up production, a period that typically lasts an additional six months or longer |
| As a result, a significant period of time may elapse between our development of product and our realization of revenue, if any, from volume purchasing of our products by our customers |
| A delay or cancellation of a customerapstas plans after a design win could significantly adversely affect our financial results because we may have incurred significant expense and generated no revenue |
| We depend on a small number of suppliers for the supply of our products and the success of our business may be dependent on our ability to maintain and expand our relationships with foundries and other suppliers |
| We currently rely on a single unaffiliated foundry at Fujitsu to manufacture all of our FRAM products and other contract manufacturers and unaffiliated semiconductor foundries to manufacture our microcontroller and HVDAC products |
| Reliance on this foundries involves several risks, including capacity constraints or delays in the timely delivery of our products, reduced control over delivery schedules and the cost of our products, variations in manufacturing yields, dependence on the foundry for quality assurance, and the potential loss of production due to seismic activity, weather conditions and other factors beyond our control |
| Although we continuously evaluate sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all |
| We are also subject to the risks of service disruptions and raw material shortages affecting our foundry supplier, which could also result in price increases to us |
| The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on our revenue and results of operations |
| We also rely on domestic and foreign subcontractors for die assembly and testing of products, and are subject to risks of disruption of these services and possible quality problems |
| We cannot provide any assurance that foundry or packaging and testing services will be available to us on terms and conditions, and at the times, acceptable to us |
| If we are unable to obtain foundry and packaging and testing services meeting our needs, we may be unable to produce products at the times and for the costs we anticipate and our financial condition and results of operations will be materially adversely affected |
| Page-22 To address our FRAM wafer supply concerns, we plan to continue to seek to expand our primary foundry capability at Fujitsu and to acquire secondary foundry capability |
| To obtain additional manufacturing capacity, we may be required to make deposits, equipment purchases, loans, joint ventures, equity investments or technology licenses in or with wafer fabrication companies |
| Even if we were able to make such an arrangement, these transactions could involve a commitment of substantial amounts of our capital and technology licenses in return for production capacity |
| We may be required to seek additional debt or equity financing if we need substantial capital in order to secure this capacity and we cannot assure you that we will be able to obtain such financing on acceptable terms, if at all |
| Even if we enter into a secondary foundry relationship any new manufacturing capacity is not likely to be available for at least 18 to 24 months after reaching an agreement, due to significant effort required to develop and qualify for manufacturing a FRAM technology process |
| Our financial condition and results of operations could be materially adversely affected by the loss of Fujitsu as a supplier or our inability to obtain additional foundry capacity |
| We are a relatively small company with limited resources, compared with some of our current and potential competitors, and we may not be able to compete effectively and increase market share |
| Our nonvolatile memory, microcontrollers and integrated semiconductor products, which presently account for substantially all of our revenue, compete against products offered by ST Micro, Renasas, Freescale, Microchip, NEC, Atmel, Philips and Zilog as well as specialized product companies like Atmel Corporation, Intersil Corp, Catalyst Semiconductor, Microchip, Maxim, and Integrated Silicon Solution Inc |
| Our standard microcontroller products compete directly with industry standard products offered by established semiconductor manufacturers such as Renasas, ST Micro, Freescale Semiconductor, Inc, Microchip, NEC Corporation (NEC), Atmel and Zilog, as well as any new entrants to the market |
| Many of our current and potential competitors have longer operating histories, significantly greater financial and personnel resources, better name recognition and a larger base of customers than we have |
| In addition, many of our competitors have their own facilities for the production of semiconductor memory components or have recently added significant production capacity |
| As a result, these competitors may have greater credibility with our existing and potential customers |
| They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours |
| In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers |
| These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products |
| These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business |
| Competition could decrease our prices, reduce our sales, lower our gross profits or decrease our market share |
| Page-23 Emerging technologies and standards may pose a threat to the competitiveness of our products |
| Competition affecting our FRAM products may also come from alternative nonvolatile technologies such as magnetic random access memory or phase change memory, or other developing technologies |
| We cannot assure you that we will be able to identify new product opportunities successfully, develop and bring to market new products, achieve design wins or respond effectively to new technological changes or product announcements by our competitors |
| In addition, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance |
| Our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace or provide lower-cost or higher-performance alternatives to our products |
| The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable |
| Success of our future products is substantially dependent on widespread market acceptance of FRAM memory products rather than a different industry standard for memory products |
| Substantially all of our current revenue is from sales of our FRAM stand-alone nonvolatile memory devices or devices containing embedded FRAM nonvolatile memory |
| Some of our integrated semiconductor memory solutions will likely include FRAM memory |
| A memory technology other than FRAM nonvolatile memory technology may be adopted as an industry standard |
| Our competitors are generally in a better financial and marketing position than we are from which to influence industry acceptance of a particular memory technology |
| In particular, a primary source of competition may come from alternative technologies such as magnetic random access memory or phase change memory devices or technology |
| To the extent our competitors are able to promote a nonvolatile memory technology other than FRAM as an industry standard; our business will be seriously harmed |
| Our research and development efforts are focused on a limited number of new technologies and products, and any delay in the development, or the abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position |
| Our FRAM semiconductor memory, microcontroller and integrated semiconductor products are used as components in electronic devices in various markets |
| As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future |
| Our research and development expense for the year ended December 31, 2005, was dlra7dtta6 million, or 22prca of our revenue |
| A number of large companies are actively involved in the development of new technologies and standards for semiconductor memories |
| Page-24 Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value |
| In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would |
| Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate |
| We cannot be certain that any product we develop for these standards will achieve market acceptance |
| If we do not continually develop new generations of FRAM and integrated semiconductor products that achieve market acceptance, our revenue may decline |
| We need to develop new product designs and new process technology and continue to develop our ferroelectric materials and manufacturing processes |
| We design our FRAM products, which we have manufactured at our contract manufacturerapstas facilities using 0dtta5 and 0dtta35 micron manufacturing processes |
| We believe that our ability to compete in the markets in which we expect to sell our FRAM, microcontroller and integrated semiconductor products will depend, in part, on our ability to produce products in smaller feature sizes and also our ability to incorporate effectively mixed-signal and other semiconductor functions with our FRAM products |
| Our inability to successfully produce new generations of FRAM, microprocessor and integrated semiconductor products would harm our ability to compete and our operating results |
| We have a limited operating history in creating and marketing mixed-signal products and have had very limited revenue from those products |
| If we fail to introduce new products in a timely manner or are unable to manufacture such products successfully, or if our customers do not successfully introduce new systems or products incorporating our products, or if market demand for our new products does not develop as anticipated, our business, financial condition and results of operations could be seriously harmed |
| Risks Related to Our Sales - -------------------------- We are subject to risks relating to product concentration and lack of revenue diversification |
| Continued market support of these products is, therefore, critical to our future success |
| In addition, substantially all of our FRAM products that we have sold include technology related to one or more of our issued US patents |
| If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our products |
| Our business, operating results, financial condition and cash flows could therefore be adversely affected |
| We must build products based on demand forecasts; if such forecasts are inaccurate, we may incur significant losses |
| Although we consider the market demand for our products to be less volatile than is the case with standard memory components, we must order products and build inventory substantially in advance of product shipments, and there is a risk that, because customers &apos requirements for our products is subject to fluctuation, we will forecast incorrectly and produce excess or insufficient inventories of particular products |
| Our customers &apos ability to reschedule or cancel orders without significant penalty could adversely affect our liquidity, as we may be unable to adjust our purchases from independent foundries to match such customer changes and cancellations |
| We have in the past produced excess quantities of certain products, which has had an adverse effect on our results of operations for the period |
| There can be no assurance that in the future we will not produce excess quantities of any of our products |
| To the extent we produce excess or insufficient inventories of particular products, our results of operations could be adversely affected |
| We compete in various markets with our FRAM technology licensees, which may reduce our product sales |
| We have licensed the right to fabricate products based on our FRAM technology and memory architecture to certain independent semiconductor device manufacturers |
| Fujitsu, on which we depend for our FRAM wafer supply, markets certain FRAM memory products that compete with certain of our FRAM products |
| Some of our licensees have suspended or terminated their FRAM initiatives, while others may still be pursuing a possible FRAM-based technology initiative or product development without our knowledge |
| We expect manufacturers that develop products based on our technology will sell such products worldwide |
| We are entitled to royalties from sales of FRAM products by some but not all of these licensees, and we have the right under certain of our licensing agreements to negotiate an agreement for a fraction of the licenseeapstas FRAM manufacturing capacity |
| Our licensees may, however, give the development and manufacture of their own FRAM products a higher priority than ours |
| Any competition in the marketplace from FRAM products manufactured and marketed by our licensees, could reduce our product sales and harm our operating results |
| Page-26 We may not be able to replace our expected reduced revenue from ENEL in a timely manner, which could adversely affect our business |
| In 2005, 2004, and 2003, approximately 16prca, 46prca, and 60prca, respectively, of our FRAM product sales were generated from one customer, ENEL Distribuzione SpA (ENEL) of Italy |
| Our FRAM product sales to ENEL are expected to end substantially by mid-2006 |
| The reduction of product sales to ENEL, without a corresponding increase in revenue from other customers, may result in significant decreases in our revenue, which would harm our cash flows, operating results and financial condition |
| We rely on distributors for a substantial portion of our revenue and if our relationships with one or more of those distributors were to terminate, our operating results may be harmed |
| We market and distribute our products primarily through authorized independent distributors, which typically offer competing products |
| These distribution channels have been characterized by rapid change, including consolidations and financial difficulties |
| Distributors have accounted for a significant portion of our net revenue in the past |
| In 2005, approximately 62prca of our product sales were generated through distributors |
| If we were to lose our distributors, we might not be able to obtain other distributors to represent us or new distributors might not have sufficiently strong relationships with the current end customers to maintain our current level of net sales |
| Additionally, the time and resources involved with the changeover and training could have an adverse impact on our business in the short term |
| We do not typically enter into long-term arrangements with our distributors and resellers, and we cannot be certain as to future order levels from our distributors and resellers |
| When we do enter into long-term arrangements, the contracts are generally terminable at the convenience of either party and it may be difficult to replace that source of revenue in the short-term upon cancellation |
| Our business depends on these third parties to sell our products |
| As a result, our operating results and financial condition could be materially adversely affected by the loss of one or more of our current distributors and resellers, additional volume pricing arrangements, order cancellations, delay in shipment by one of our distributors or resellers or the failure of our distributors or sellers to successfully sell our products |
| Failure to manage our distribution channel relationships could impede our future growth |
| Page-27 The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors, to develop additional channels for the distribution and sale of our products, and to manage these relationships |
| As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts |
| For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor |
| The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth |
| Management of our sales channels requires a significant amount of our managementapstas time and system resources to manage properly |
| If we fail to manage our sales channels, including the sales channels we must develop for current and future products, we will not be able to increase our sales and our results of operations will be materially adversely affected |
| International sales comprise a significant portion of our product sales, which exposes us to foreign political and economic risks |
| The increase in export sales as a percentage of total sales is in part due to an increase in the utilization of contract manufacturing services in Asia by our customers in the US and Europe |
| We expect that international sales will continue to represent a significant portion of our product sales in the future |
| As a result of the large foreign component of our revenue, we are subject to a number of risks resulting from such operations |
| Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws |
| There can be no assurance that such factors will not adversely impact our results of operations in the future or require us to modify our current business practices |
| The majority of our revenue, expense and capital purchasing activities is transacted in US dollars |
| However, because a portion of our operations consists of activities outside of the United States, we have commenced certain transactions in other currencies, the Japanese Yen and Canadian dollars |
| As part of our risk management strategy, we frequently evaluate our foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations |
| As a result, we may in the future engage in transactions involving the short-term hedging of foreign currencies, with maturities generally not exceeding two years to hedge assets, liabilities, revenue and purchases dominated in foreign currencies |
| Page-28 Our business is also subject to risks generally associated with doing business with foreign subcontractors including, but not limited to foreign government regulations and political and financial unrest which may cause disruptions or delays in shipments to our customers or access to our inventories |
| Our business, financial condition and results of operations may be materially adversely affected by these or other factors related to our international operations |
| Risks Related to Our Acquisitions - --------------------------------- Any acquisitions we make could disrupt our business and harm our financial condition |
| As part of our strategy to increase our revenue and expand our product lines, we continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities |
| We funded our recent acquisition of Goal Semiconductor, Inc |
| ( "e Goal "e ) by issuing our common stock and used our available cash resources, including our line of credit |
| Future acquisitions that we may make or joint ventures that we may enter into with other companies, could require us to incur debt or contingent liabilities or require us to issue equity securities that could cause the trading price of our stock to decline |
| Our acquisitions, including the acquisition of Goal, and other potential acquisitions that we may make, or joint ventures that we may enter into, entail a number of risks that could materially and adversely affect our business and operating results, including: - - problems integrating the acquired operations, technologies or products with our existing business and products; - - the diversion of managementapstas time and attention from our core business; - - the 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; - - risks associated with the transfer of rights and licenses of intellectual property; - - the potential loss of key employees of the acquired company; and - - the potential impairment of related goodwill and intangible assets |
| Page-29 We expect that our recent acquisition of Goal will reduce our net income per share and may cause us to incur losses |
| Goal was not profitable at the time of acquisition, and we expect that the acquisition will result in a decrease in our net income and reduction in our gross margin for the foreseeable future |
| The acquisition could fail to produce the longer term product synergies and operational benefits that we anticipate and could have other adverse effects that we currently do not foresee |
| As a result of those or other factors, the acquisition may not produce the financial results that we expect and may cause our future financial results to be worse than we would have achieved on a stand-alone basis |
| Our acquisition of Goal results in increased demands on our management that we may not successfully accomplish |
| In order to operate successfully as a combined organization, we must employ common information and communication systems, operating procedures, financial controls and human resources practices |
| The successful and timely design, development, qualification and production of products may be hindered by management obstacles that we face in integrating of Goal |
| The demands on management resulting from the acquisition may divert their attention from our ongoing operations, causing our results of operation to be adversely affected |
| The difficulties we face are exacerbated by doing business in a foreign country where the business culture is different from ours and where many communications are conducted in the French language, which our management does not speak fluently |
| Although we performed due diligence investigation before the acquisition, we may not have identified Goalapstas material financial reporting weaknesses or deficiencies in financial controls, nor undisclosed liabilities and obligations, which may result in losses and liabilities for which we will not have indemnification |
| We may also discover that Goal is subject to product and other liabilities that were not disclosed to us and which exceed Goalapstas shareholders &apos indemnification obligation to us |
| Our recourse to the Goal shareholders for most claims we may have under the acquisition agreement for defaults and misrepresentations is limited to dlra0dtta5 million, and we have no recourse after one year following the date of acquisition, except for fraud, tax and certain other claims as to certain of the Goal shareholders |
| If we are required to expend costs in excess of our expectation to implement upgraded internal financial controls systems, or to satisfy liabilities for which we are not indemnified, our financial condition and results of operations would be materially adversely affected |
| Page-30 Risks Related to Foreign Operations - ----------------------------------- We may not be successful in managing foreign operations |
| We have limited experience in operating a business in a foreign country |
| Foreign operations involve us in a variety of risks, including the following risks that, if not successfully overcome, will materially adversely affect our financial condition and results of operations: - - unanticipated changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions; - - differing regulations with regard to maintaining operations, products and public information in different languages; - - differing labor regulations, where labor laws are generally more advantageous to employees, compared with the United States; - - more stringent regulations relating to data privacy and the unauthorized use of, or access to, commercial and personal information; - - greater difficulty in supporting the development and qualification of customer-specific products addressing large markets, which we foresee will be required if our new products are to be marketed in commercial volumes; and - - challenges inherent in efficiently managing an increased number of employees over the larger geographic distances and in a foreign country, including the need to implement appropriate systems, policies, benefits and compliance programs |
| Accounting and Regulatory Risks - ------------------------------- Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations as well as the listing standards of The Nasdaq Stock Market, are creating uncertainty for public companies |
| We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs |
| 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 |
| This Page-31 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 have invested resources to comply with evolving laws, regulations and standards |
| This investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance 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, regulatory authorities may initiate legal proceedings against us and we may be harmed |
| Should we, or our independent public accounting firm, determine in future fiscal periods that we have material weaknesses in our internal controls over financial reporting, the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed and the price of our common stock may decline |
| We typically plan our production and inventory levels based on our internal forecasts of customer demand, which are unpredictable even though our products are often specified in our customers &apos product designs |
| Our customers &apos order volumes can fluctuate materially in advance of product shipments |
| The value of our inventory is dependent on our estimate of future average selling prices, and, if our projected average selling prices are over estimated, we may be required to adjust our inventory value to reflect the lower of cost or market |
| Recent changes in accounting standards regarding stock option plans could limit the desirability of granting stock options, which could harm our ability to attract and retain employees, and could also negatively impact our results of operations |
| On December 16, 2004, the Financial Accounting Standards Board issued FASB Statement Nodtta 123R, Share Based Payment, which requires all companies to treat the fair value of stock options granted to employees as an expense |
| As a result of this standard, effective for periods beginning after January 1, 2006, we and other companies are required to record a compensation expense equal to the fair value of each stock option granted |
| We are currently assessing our valuation options allowed in this standard |
| This change in accounting standards reduces the attractiveness of granting stock options because of the additional expense associated with these grants, which would negatively impact our results of operations |
| Nevertheless, stock options are Page-32 an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program |
| Accordingly, even though we have not quantified the dollar amount of this standard at this time, the result will have a negative impact on our earnings starting with the accounting period beginning January 1, 2006 |
| In addition, the new standard could negatively impact our ability to use stock options as an employee recruitment and retention tool in the future |
| We are subject to environmental laws which are subject to change and may restrict the marketability of certain of our products, which could adversely impact our financial performance or expose us to future liabilities |
| We are subject to laws and regulations relating to the use of and human exposure to hazardous materials |
| Our failure to comply with these laws and regulations could subject us to future liabilities or result in the limitation or suspension of the sale or production of product, including without limitation, products that do not meet the various regulations relating to use of lead-free components in products |
| These regulations include the European Unionapstas Restrictions on Hazardous Substances (RoHS), Directive on Waste Electrical and Electronic Equipment, and the directive on End of Life for Vehicles (ELV); Californiaapstas SB20 and SB50 which mimic RoHS; and Chinaapstas WEEE adopted by the State Development and Reform Commission |
| New electrical and electronic equipment sold after that date in the European Union may not exceed specified concentration levels of any of the six RoHS substances (lead, cadmium, hexavalent chromium, mercury, PBB, and PBDE) unless the equipment falls outside the scope of RoHS or unless one of the RoHS exemptions is satisfied |
| Our products as manufactured contain lead, but in ceramic form (the ferroelectric memory capacitor) and at levels below the threshold concentration levels specified by RoHS and similar directives |
| However, these directives are still subject to amendment and such changes may be unfavorable to our products |
| Any supply of products that infringe applicable environmental laws may subject us to penalties, customer litigation or governmental sanctions, which may result in financial harm to us |
| Our business is subject to strict environmental regulations and legal uncertainties, which could impose unanticipated requirements on our business in the future and subject us to liabilities |
| Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases used in the manufacturing processes of our third-party foundry and contract manufacturers |
| Compliance with these regulations can be costly |
| Increasing public attention has been focused on the environmental impact of semiconductor operations |
| Any changes in environmental rules and regulations may impose the need for additional investments in capital equipment and the implementation of compliance programs in the future |
| Page-33 Any failure by us or our foundries or contract manufacturers to comply with present or future environmental rules and regulations regarding the discharge of hazardous substances could subject us to serious liabilities or cause our foundries or contract manufacturers to suspend manufacturing operations, which could seriously harm our business, financial condition and results of operations |
| In addition to the costs of complying with environmental, health and safety requirements, in the future we may incur costs defending against environmental litigation brought by government agencies and private parties |
| We may be defendants in lawsuits brought by parties in the future alleging environmental damage, personal injury or property damage |
| A significant judgment against us could harm our business, financial condition and results of operations |