| SEMTECH CORP ITEM 1A RISK FACTORS You should carefully consider and evaluate all of the information in this Form 10-K, including the risk factors listed below |
| The risks described below are not the only ones facing our company |
| Additional risks not now known to us or that we currently deem immaterial may also impair our business operations |
| If any of these risks actually occur, our business could be materially harmed |
| If our business is harmed, the trading price of our common stock could decline |
| As discussed in “Forward Looking and Cautionary Statements” earlier in this report, this Form 10-K contains forward-looking statements that involve risks and uncertainties |
| Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors including the risks faced by us described below and elsewhere in this Form 10-K, in our other filings with the SEC, and in material incorporated herein and therein by reference |
| We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |
| Economic decline may have adverse consequences for our business We sell our products into several commercial markets, primarily the computer, communication and industrial end-markets, whose performance is tied to the overall economy |
| Many of these industries were severely impacted in calendar years 2001 and 2002 due to an economic slowdown in the United States and globally |
| Our business during these periods reflected the weak economic conditions |
| Market research analysts have claimed that historically the semiconductor industry is impacted by broad economic factors, such as United States gross domestic product (GDP) and worldwide oil prices |
| If economic conditions were to once again worsen or a wider global slowdown were to occur, demand for our products may be reduced |
| In addition, economic slowdowns may also affect our customers’ ability to pay for our products |
| Accordingly, economic slowdowns may harm our business |
| 11 ______________________________________________________________________ [38]Table of Contents The cyclical nature of the electronics and semiconductor industries may limit our ability to maintain or increase revenue and profit levels during industry downturns The semiconductor industry is highly cyclical and has experienced significant downturns, which are characterized by reduced product demand, production overcapacity, increased levels of inventory, industry-wide fluctuations in the demand for semiconductors and the significant erosion of average selling prices |
| The occurrence of these conditions has adversely affected our business in the past |
| In fiscal year 2002, our net sales declined by 26prca compared to the prior year as a result of a dramatic slowdown in the industry |
| Past downturns in the semiconductor industry have resulted in a sudden impact on the semiconductor and capital equipment markets |
| Consequently, any future downturns in the semiconductor industry may harm our business |
| We compete against larger, more established entities and our market share may be reduced if we are unable to respond to our competitors effectively The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, and design and other technological obsolescence |
| We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products |
| Some of these competitors include: Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor, Advanced Analogic Technologies, Monolithic Power Systems and Intersil Semiconductor, with respect to our power management products; ST Microelectronics NV, Philips and California Micro Devices, with respect to our protection products; Analog Devices and Maxim Integrated Products, with respect to our test and measurement products; Zarlink Semiconductor and Silicon Laboratories, with respect to our advanced communications products; and Marvell and Micrel Semiconductor, with respect to our wireless and sensing products |
| We expect continued competition from existing competitors as well as competition from new entrants in the semiconductor market |
| Our ability to compete successfully in the rapidly evolving area of integrated circuit technology depends on several factors, including: • success in designing and manufacturing new products that implement new technologies; • protection of our processes, trade secrets and know-how; • maintaining high product quality and reliability; • pricing policies of our competitors; • performance of competitors’ products; • ability to deliver in large volume on a timely basis; • marketing, manufacturing and distribution capability; and • financial strength |
| To the extent that our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could harm our business |
| A majority of our net sales are into larger, vertical end-market applications |
| Fluctuations, seasonality and economic downturns in any of our end-markets may have adverse consequences for our business A majority of our net sales are into larger, vertical end-market applications such as notebook computers, desktop computers and cellular phones |
| Vertical end-market applications tend to be highly cyclical over time and highly competitive given the significant unit opportunities they represent |
| Horizontal markets tend to be less cyclical, but unit volume opportunities are much lower |
| We consider the industrial market to be a horizontal end-market, because it is much more broad-based and comprised of many non-standardized end-applications |
| Many of our products are used in personal computers and related peripherals |
| For fiscal year 2006, we estimate that 30prca of our sales were used in computer applications, including 18prca tied to notebook computers and PDAs |
| Industry-wide fluctuations in demand for desktop and notebook computers have in the past, and may in the future, harm our business |
| In addition, our past results have reflected some seasonality, with demand levels being higher in computer segments during the third and fourth quarters of the year in comparison to the first and second quarters |
| 12 ______________________________________________________________________ [39]Table of Contents For fiscal year 2006, shipment of our products to ATE customers represented approximately 4prca of our net sales |
| In recent years, shipment of our products to ATE customers have represented 10prca or more of net sales |
| Consequently, downturns in the ATE market and declines in the sales of our products used in ATE systems may adversely affect our business |
| We estimate that sales related to cellular phone applications represented 27prca of our sales in fiscal year 2006 |
| In fiscal year 2005, sales tied to cellular phone applications were estimated at 32prca of our sales |
| Any decline in the number of cellular phones made, especially feature-rich phones with color displays, could adversely affect our business |
| We obtain many essential components and materials and certain critical manufacturing services from a limited number of suppliers and subcontractors, which are principally foreign-based entities Our reliance on a limited number of outside subcontractors and suppliers for silicon wafers, packaging, test and certain other processes involves several risks, including potential inability to obtain an adequate supply of required components and reduced control over the price, timely delivery, reliability and quality of components |
| These risks are attributable to several factors, including limitations on resources, labor problems, equipment failures or the occurrence of natural disasters |
| There can be no assurance that problems will not occur in the future with suppliers or subcontractors |
| Disruption or termination of our supply sources or subcontractors could significantly delay our shipments and harm our business |
| Delays could also damage relationships with current and prospective customers |
| Any prolonged inability to obtain timely deliveries or quality manufacturing or any other circumstances that would require us to seek alternative sources of supply or to manufacture or package certain components internally could limit our growth and harm our business |
| Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, Korea, the Philippines and Germany |
| For fiscal year 2006, approximately 58prca of our silicon in terms of finished wafers, was supplied by a third-party foundry in China, and this percentage could be even higher in future periods |
| For fiscal year 2005, approximately 59prca of our silicon in terms of finished wafers was supplied by this third-party foundry in China |
| While we do have some redundancy of fab processes by using multiple outside foundries, any interruption of supply by one or more of these foundries could materially impact us |
| Likewise, we maintain some amount of business interruption insurance to help reduce the risk of wafer supply interruption, but we are not fully insured against such risk |
| A majority of our package and test operations are performed by third-party contractors based in Malaysia, Korea, the Philippines and China |
| Our international business activities, in general, are subject to a variety of potential risks resulting from political and economic uncertainties |
| Any political turmoil or trade restrictions in these countries, particularly China, could limit our ability to obtain goods and services from these suppliers and subcontractors |
| The effect of an economic crisis or a political turmoil on our suppliers located in these countries may impact our ability to meet the demands of our customers |
| If we find it necessary to transition the goods and services received from our existing suppliers or subcontractors to other firms, we would likely experience an increase in production costs and a delay in production associated with such a transition, both of which could have a significant negative effect on our operating results, as these risks are substantially uninsured |
| We may be unsuccessful in developing and selling new products required to maintain or expand our business We operate in a dynamic environment characterized by price erosion, rapid technological change, and design and other technological obsolescence |
| Our competitiveness and future success depend on our ability to achieve design wins for our products with current and future customers and introduce new or improved products that meet customer needs while achieving favorable margins |
| A failure to achieve design wins, to introduce these new products in a timely manner, or to achieve market acceptance for these products could harm our business |
| The introduction of new products presents significant business challenges because product development commitments and expenditures must be made well in advance of product sales |
| The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including: • timely and efficient completion of process design and development; 13 ______________________________________________________________________ [40]Table of Contents • timely and efficient implementation of manufacturing and assembly processes; • product performance; • the quality and reliability of the product; and • effective marketing, sales and service |
| • The failure of our products to achieve market acceptance due to these or other factors could harm our business |
| Our products may be found to be defective, product liability claims may be asserted against us and we may not have sufficient liability insurance One or more of our products may be found to be defective after shipment, requiring a product replacement, recall, or a software solution that would cure the defect but impede performance of the product |
| We may also be subject to product returns which could impose substantial costs and harm our business |
| Beyond the potential direct cost associated with product failures, loss of confidence by major customers could cause sales of our other products to drop significantly |
| Product liability claims may be asserted with respect to our technology or products |
| Our products are typically sold at prices that are significantly lower than the cost of the modules or end-products into which they are incorporated |
| A defect or failure in our product could give rise to failures in the module or the ultimate end-product, so we may face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved, especially if our customer seeks to recover for damage claims made against it by its own customers |
| While we maintain some insurance for such events, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims not covered by insurance |
| The costs associated with our general product warranty policy and our indemnification of certain customers, distributors, and other parties could be higher in future periods Our general warranty policy provides for repair or replacement of defective parts |
| In some cases a refund of the purchase price is offered |
| In certain instances, we have agreed to other warranty terms, including some indemnification provisions, that could prove to be significantly more costly than repair, replacement or refund |
| If there is a substantial increase in the rate of customer claims, if our estimate of probable losses relating to identified warranty exposures prove inaccurate, or if our efforts to contractually limit liability prove inadequate, we may record a charge against future cost of sales |
| In the normal course of our business, we indemnify other parties, including customers, distributors, and lessors, with respect to certain matters |
| These obligations typically arise pursuant to contracts under which we agree to hold the other party harmless against losses arising from a breach of representations and covenants related to certain matters, such as acts or omissions of our employees, infringement of third-party intellectual property rights, and certain environmental matters |
| We have also entered into agreements with our directors and certain of our executives indemnifying them against certain liabilities incurred in connection with their duties, and our Certificate of Incorporation and Bylaws contain similar indemnification obligations with respect to our directors and employees |
| In some cases there are limits on and exceptions to our potential indemnification liability |
| We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements |
| Over at least the last decade, we have not incurred any significant expense as a result of agreements of this type |
| Accordingly, we have not accrued any amounts for such indemnification obligations |
| However, there can be no assurances that we will not incur expense under these indemnification provisions in the future |
| Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares The market for the stock of high technology companies has been volatile, and the market price of our common stock has been and may continue to be subject to significant fluctuations |
| Fluctuations could be in response to items such 14 ______________________________________________________________________ [41]Table of Contents as operating results, announcements of technological innovations, or market conditions for technology stocks in general |
| Additionally, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of individual companies |
| These market fluctuations, as well as general economic conditions, may adversely affect the price of our common stock |
| In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company’s stock price |
| This type of litigation, if filed against us, could result in substantial costs and divert our management’s attention and resources |
| In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders or option holders (including directors, officers, and employees) may have an adverse impact on the market price of the shares of common stock |
| There can be no assurance that the trading price of our common stock will remain at or near its current level |
| We sell and trade with foreign customers, which subjects our business to increased risks applicable to international sales Sales to foreign customers accounted for approximately 73prca of net sales in the fiscal year ended January 29, 2006 |
| Sales to our customers located in Taiwan and Korea constituted 29prca and 26prca, respectively, of net sales for fiscal year 2006 |
| International sales are subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing foreign subsidiary and branch operations and potentially adverse tax consequences |
| These factors may harm our business |
| Our use of the Semtech name may be prohibited or restricted in some countries, which may negatively impact our sales efforts |
| In addition, substantially all of our foreign sales are denominated in US dollars and currency exchange fluctuations in countries where we do business could harm us by resulting in pricing that is not competitive with prices denominated in local currencies |
| The outbreak of an avian influenza (bird flu) pandemic, severe acute respiratory syndrome (SARS), or other heath related issues, could impact our customer or supply base, especially in Asia A large percentage of our sales are to customers located in Asia and a large percentage of our products are manufactured in Asia |
| Our largest wafer source is located in China |
| SARS or other health related issues, such as an avian influenza (bird flu) pandemic, could have a negative impact on consumer demand, on travel needed to secure new business or manage our operations, on transportation of our products from our suppliers or to our customers, or on workers needed to sell or manufacture our products or our customers’ products |
| Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon financial results As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates |
| Certain of our assets, including certain bank accounts, exist in non US dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations |
| The non US dollar-denominated currencies are principally the Euro, Swiss Francs, and British Pounds Sterling |
| We also have a significant number of employees that are paid in foreign currency, the largest groups being United Kingdom-based employees who are paid in British Pounds Sterling and Swiss-based employees who are paid in Swiss Francs |
| If the value of the US dollar weakens relative to these specific currencies, as it has done in recent years, the cost of doing business in terms of US dollars rises |
| With the growth of our international business, our foreign currency exposures may grow and under certain circumstances, could harm our business |
| Changes in foreign currency exchange rates, particularly Swiss Francs, also impacts our provision for income taxes and other tax-related balance sheet accounts |
| By impacting our provision for income taxes, foreign currency exchange rates also impact our reported earnings per share |
| In fiscal year 2004, we purchased forward contracts that locked in our right to purchase Swiss Francs at an agreed upon rate |
| As a means of managing our foreign exchange exposure, we routinely convert US dollars into foreign currency in advance of the expected payment |
| Any future use of forward contracts to hedge foreign exchange exposure may be required to be marked-to-market each quarter and can create volatility in net income not directly tied to our operating results |
| Our future results may fluctuate, fail to match past performance or fail to meet expectations Our results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors |
| Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of: • general economic conditions in the countries where we sell our products; • seasonality and variability in the computer market and our other end-markets; • the timing of new product introductions by us and our competitors; • product obsolescence; • the scheduling, rescheduling or cancellation of orders by our customers; • the cyclical nature of demand for our customers’ products; • our ability to develop new process technologies and achieve volume production; • changes in manufacturing yields; • capacity utilization; • product mix and pricing; • movements in exchange rates, interest rates or tax rates; • the availability of adequate supply commitments from our outside suppliers; • the manufacturing and delivery capabilities of our subcontractors; and • litigation and regulatory matters |
| As a result of these factors, our past financial results are not necessarily indicative of our future results |
| We receive a significant portion of our revenues from a small number of customers and the loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position The identity of our largest customers has varied from year to year |
| Historically, we have had significant customers that individually accounted for 10prca or more of consolidated revenues in certain quarters or represented 10prca or more of net accounts receivables at any given date |
| One of our end-customers, a major manufacturer of cellular phone handsets and other electronic equipment, accounted for 11prca of net sales in fiscal year 2006 |
| In addition, we had several end-customers in fiscal year 2006 that on an annual basis accounted for more than 5prca of net sales, but less than 10prca of net sales |
| Several of our authorized distributors have regularly accounted for more than 10prca of net sales on an annual basis |
| Depending on the authorized distributor and their strategic focus, they can support anywhere from a few end-customers to many end-customers |
| For fiscal year 2006, two of our Asian distributors accounted for approximately 12prca and 9prca, respectively, of net sales |
| As of the end of fiscal year 2006, these two Asian distributors accounted for approximately 12prca and 11prca, respectively, of our net accounts receivable |
| Sales to our customers are generally made on open account, subject to credit limits we may impose, and the receivables are subject to the risk of being uncollectible |
| 16 ______________________________________________________________________ [43]Table of Contents We primarily conduct our sales on a purchase order basis, rather than pursuant to long-term contracts |
| The loss of any significant customer, any material reduction in orders by any of our significant customers, the cancellation of a significant customer order or the cancellation or delay of a customer’s significant program or product could harm our business |
| Most of our authorized distributors, which together represent more than half of our net sales, can terminate their contract with us with little or no notice |
| The termination of a distributor could negatively impact our business, including net sales and accounts receivable In fiscal year 2006, authorized distributors accounted for approximately 57prca of our net sales |
| We generally do not have long-term contracts with our distributors and most can terminate their agreement with us with little or no notice |
| For fiscal year 2006, our two largest distributors were based in Asia |
| The termination of any distributor could impact our net sales and limit our access to certain end-customers |
| It could also result in the return of excess inventory of our product they hold as the distributor |
| Since many distributors simply resell finished products, they generally operate on very thin profit margins |
| If a distributor were to terminate its agreement with us or go out of business, our unsecured accounts receivable from it would be subject to significant collection risk |
| We face risks associated with companies we have acquired in the past and may acquire in the future We have expanded our operations through strategic acquisitions, such as the acquisition of XEMICS SA in June 2005, and we may continue to expand and diversify our operations with additional acquisitions |
| Acquisitions could use a significant portion of our available liquid assets and/or we could incur debt or issue equity securities to fund acquisitions |
| Issuance of equity securities could be dilutive to existing shareholders |
| Debt financing could subject us to restrictive covenants that could have an adverse effect on our business |
| Although we undertake detailed reviews of proposed acquisition candidates and attempt to negotiate acquisition terms favorable to us, we may encounter difficulties or incur liabilities for which we have no recourse against the selling party |
| We cannot provide any assurance that any acquisition will have a positive impact on our future performance |
| If we are unsuccessful in integrating acquired companies into our operations or if integration is more difficult than anticipated, then we may not achieve anticipated cost savings or synergies and may experience disruptions that could harm our business |
| Some of the risks that may affect our ability to successfully integrate acquired companies include those associated with: • conforming the acquired company’s standards, processes, procedures and controls with our operations; • coordinating new product and process development, especially with respect to highly complex technologies; • assuring acquired products meet our quality standards; • loss of key employees or customers of the acquired company; • hiring additional management and other critical personnel; • increasing the scope, geographic diversity and complexity of our operations; • consolidation of facilities and functions; • the geographic distance between the companies; and • disparate corporate cultures |
| Acquisitions could have a negative impact on our future earnings by way of poor performance by the acquired company or, if we later conclude we are unable to use or sell an acquired product or technology, we could be required to write down the related intangible assets and goodwill |
| If such write-downs are significant, they could materially harm our business |
| 17 ______________________________________________________________________ [44]Table of Contents We must commit resources to product production prior to receipt of purchase commitments and could lose some or all of the associated investment Sales are made primarily on a current delivery basis, pursuant to purchase orders that may be revised or cancelled by our customers without penalty, rather than pursuant to long-term contracts |
| Some contracts require that we maintain inventories of certain products at levels above the anticipated needs of our customers |
| Our inability to sell products after we devote significant resources to them could harm our business |
| The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could impair our ability to grow our business Our future success depends upon our ability to attract and retain highly qualified technical, marketing and managerial personnel |
| We are dependent on a relatively small group of key technical personnel with analog and mixed-signal expertise |
| Personnel with highly skilled managerial capabilities, and analog and mixed-signal design expertise, are scarce and competition for personnel with these skills is intense |
| There can be no assurance that we will be able to retain key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel in the future |
| If we are unable to retain the services of key employees or are unsuccessful in attracting new highly qualified employees, our business could be harmed |
| We are subject to government regulations and other standards that impose operational and reporting requirements We, our suppliers, and our customers are subject to a variety of United States federal, foreign, state and local governmental laws, rules and regulations, including those related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals and the incorporation of such substances into products available for sale |
| If we or our suppliers were to incur substantial additional expenses to acquire equipment or otherwise comply with environmental regulations, product costs could significantly increase, thus harming our business |
| We are also subject to laws, rules, and regulations related to export licensing and customs requirements, including the North American Free Trade Agreement and State Department and Commerce Department rules |
| The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices |
| The SEC and NASDAQ have revised, and continue to revise, their regulations and listing standards |
| These developments have increased, and may continue to increase, our legal compliance and financial reporting costs |
| These developments also may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| This, in turn, could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers |
| Failure to comply with present or future laws, rules and regulations of any kind that govern our business could result in suspension of all or a portion of production, cessation of all or a portion of operations, or the imposition of significant administrative, civil, or criminal penalties, any of which could harm our business |
| Earthquakes or other natural disasters may cause us significant losses; the aftermath of Hurricane Katrina could interrupt our supply chain or disrupt our customer base Our corporate headquarters, a portion of our assembly and research and development activities and certain other critical business operations are located near major earthquake fault lines |
| We do not maintain earthquake insurance and could be harmed in the event of a major earthquake |
| We generally do not maintain flood coverage, including in our Asian locations where we have certain operations support and sales offices |
| Such flood coverage has become very expensive; as a result the Company has elected not to purchase this coverage |
| Our business could be harmed if natural disasters interfere with production of wafers by our suppliers, assembly and testing of products by our subcontractors, or our distribution network |
| We maintain some business interruption insurance to help reduce the effect of such business interruptions, but we are not fully insured against such risks |
| Likewise, our business could be adversely impacted if a natural disaster were to shut down or significantly curtail production at one or more of our end customers |
| Any such loss of revenue due to a slowdown or cessation of end customer demand is uninsured |
| 18 ______________________________________________________________________ [45]Table of Contents None of our facilities was affected by Hurricane Katrina that struck in August 2005 or by the subsequent flooding |
| We do not have a significant customer base in the devastated portions of the southeastern States |
| An issue related to potential disruption of the hydrogen supply for our Rectifier, Assembly and Other Products segment due to the hurricane has been favorably resolved |
| Terrorist attacks, war and other acts of violence may negatively affect our operations and your investment Terrorist attacks, such as the attacks that took place on September 11, 2001, wars, such as the war in Iraq, and other acts of violence, such as those that may result from the tension in the Middle East and the Korean peninsula, or any other national or international crisis, calamity or emergency, may result in interruption to the business activities of many entities, business losses and overall disruption of the US economy at many levels |
| These events may directly impact our physical facilities or those of our customers and suppliers |
| Additionally, these events or armed conflicts may cause some of our customers or potential customers to reduce the level of expenditures on their services and products that ultimately may reduce our revenue |
| The consequences of these reductions are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business |
| For example, as a result of these events, insurance premiums for businesses may increase and the scope of coverage may be decreased |
| Consequently, we may not be able to obtain adequate insurance coverage for our business and properties |
| A “high” or “Orange” or “severe” or “Red” threat condition announced by the Homeland Security Advisory System or similar agency and any consequent effect on the transportation industry may adversely affect our ability to timely import materials from our suppliers located outside the United States or impact our ability to deliver our products to our customers without incurring significant delays |
| To the extent that these disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending, or our inability to effectively market our services and products, our business and results of operations could be harmed |
| We may be unable to adequately protect our intellectual property rights We pursue patents for some of our new products and unique technologies, but we rely primarily on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our know-how and processes |
| We intend to continue protecting our proprietary technology, including through trademark and copyright registrations and patents |
| Despite this intention, we may not be successful in achieving adequate protection |
| Our failure to adequately protect our material know-how and processes could harm our business |
| There can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or circumvented by others |
| Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States |
| The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights |
| Due to the number of competitors, intellectual property infringement is an ongoing risk since other companies in our industry could have intellectual property rights that may not be identifiable when we initiate development efforts |
| Litigation may be necessary to enforce our intellectual property rights and we may have to defend ourselves against infringement claims |
| Any such litigation could be very costly and may divert our management’s resources |
| If one of our products is found to infringe, we may have liability for past infringement and may need to seek a license going forward |
| We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business The Investment Company Act of 1940 requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities, or which are engaged in the business of investing, reinvesting, owning, holding or trading in securities and which own or propose to acquire investment securities with a value of more than 40prca of the company’s assets on an unconsolidated basis (other than US government securities and cash) |
| We are not engaged primarily in the business of investing, reinvesting or trading in securities, and we intend to invest our cash and cash equivalents in US government securities to the extent necessary to take advantage of the 40prca safe harbor |
| To manage our cash holdings, we invest in short-term instruments consistent 19 ______________________________________________________________________ [46]Table of Contents with prudent cash management and the preservation of capital and not primarily for the purpose of achieving investment returns |
| US government securities generally yield lower rates of income than other short-term instruments in which we have invested to date |
| Accordingly, investing substantially all of our cash and cash equivalents in US government securities could result in lower levels of interest income and net income |
| If we were deemed an investment company and were unable to rely upon a safe harbor or exemption under the Investment Company Act, we would among other things be prohibited from engaging in certain businesses or issuing certain securities |
| Certain of our contracts might be voidable, and we could be subject to civil and criminal penalties for noncompliance |
| We are subject to review by taxing authorities, including the Internal Revenue Service We are subject to review by domestic and foreign taxing authorities, including the Internal Revenue Service (IRS) |
| In fiscal year 2005, the IRS completed a routine review of our 1995 through 2001 tax filings |
| The final audit adjustments did not have a material impact on our financial statements |
| However, future audits by taxing authorities could impact us |
| Changes in stock option accounting rules will impact our reported operating results prepared in accordance with generally accepted accounting principles, and may impact our stock price and our competitiveness in the employee marketplace |
| Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace |
| Statement of Financial Accounting Standards Nodtta 123, “Accounting for Stock-Based Compensation” (SFAS 123) allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board (APB) Opinion Nodtta 25, “Accounting for Stock Issued to Employees” (“APB 25”), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method |
| We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant |
| A revised standard, SFAS Nodtta 123 (revised 2004), “Share Based Payment” (“SFAS 123(R)”), which requires all companies to measure compensation cost for all share-based payments (including stock options) at fair value, is effective beginning with a company’s first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005 |
| This means SFAS 123(R) is effective for us beginning with the first quarter of fiscal year 2007, which began on January 30, 2006 |
| We have adopted the new standard using the modified prospective transition method |
| Had we adopted SFAS 123(R) in prior periods, the impact of this pronouncement would approximate the impact of SFAS 123 described in the disclosure of the pro forma results in Note 1, under the heading “Stock-Based Compensation” in our Notes to Financial Statements included elsewhere in this Form 10-K We estimate that stock option expense under SFAS 123(R) for the first quarter of fiscal year 2007 will reduce earnings by dlra4dtta3 to dlra4dtta8 million, pre-tax, or approximately 4 cents per share |
| The implementation of SFAS 123(R) will result in lower reported (GAAP) earnings per share, which could negatively impact our future stock price |
| In addition, this could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace |
| Failure to maintain effective internal controls could have a material adverse effect on our business and stock price |
| Section 404 of the Sarbanes-Oxley Act requires an annual management assessment of the effectiveness of internal controls over financial reporting and an annual report by our independent registered public accounting firm addressing the assessment |
| 20 ______________________________________________________________________ [47]Table of Contents Management’s report for fiscal year 2006, and the required attestation report of our independent registered public accounting firm, are included in Part II, Item 8 of this Form 10-K Our controls and procedures are also discussed in Part II, Item 9A of this Form 10-K If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting |
| Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud |
| If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price |
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this Form 10-K and in the documents that are incorporated by reference, including the risk factors in this section, contains forward-looking statements |
| Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance, and our plans, objectives and expectations |
| Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes”, “projects”, “should”, “will”, “plans” and similar words |
| In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by the Company or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized |
| Financial results could differ materially from those projected in forward-looking statements |
| We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |