| SILICON LABORATORIES INC Item 1A Risk Factors RISKS RELATED TO OUR BUSINESS WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH AND MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICE Although we have generally experienced revenue growth in our history, we may not be able to sustain this growth |
| We may also experience significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate |
| It is likely that in some future period our revenues or operating results will be below the expectations of public market analysts or investors |
| If this occurs, our stock price may drop, perhaps significantly |
| A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our revenues and operating results, including: · the timing and volume of orders received from our customers; · the timeliness of our new product introductions and the rate at which our new products may cannibalize our older products; · the rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the products manufactured by such customers, which we refer to as “design wins”; · the time lag and realization rate between “design wins” and production orders; · the demand for, and life cycles of, the products incorporating our ICs; · the rate of adoption of mixed-signal ICs in the markets we target; · deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of ICs; · changes in product mix; · the average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing, especially with respect to our mobile handset and modem products; · the average selling prices for our products generally decline over time; · changes in market standards; · impairment charges related to inventory, equipment or other long-lived assets; · the software used in our products and provided by third-party software providers must meet the needs of our customers; · significant legal costs to defend our intellectual property rights or respond to claims against us; and · the rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets |
| 17 ______________________________________________________________________ The markets for mobile handsets, personal computers, satellite television set-top boxes and VoIP applications are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our products that are incorporated in such devices |
| Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance |
| Once a new IC achieves market acceptance, demand for the new IC can quickly accelerate to a point and then level off such that rapid historical growth in sales of a product should not be viewed as indicative of continued future growth |
| In addition, demand can quickly decline for a product when a new IC product is introduced and receives market acceptance |
| For example, mobile handset transceivers that provide some of the functionality provided by our RF Synthesizers have been introduced to market by us and our competitors |
| The introduction of these competing transceivers, including our Aero Transceiver, resulted in a rapid decline in our sales of RF Synthesizers for mobile handsets |
| Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance |
| WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business |
| During fiscal 2005, our ten largest customers accounted for 51prca of our revenues |
| We had one customer, Samsung, which represented 14prca of our revenues |
| Most of the markets for our products are dominated by a small number of potential customers |
| Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products |
| In the future, these customers may decide not to purchase our ICs at all, purchase fewer ICs than they did in the past or alter their purchasing patterns, particularly because: · we do not have material long-term purchase contracts with our customers; · substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty; · some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our ICs; and · some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could affect our customers’ purchasing decisions in the future |
| While we have been a significant supplier of ICs used in many of our customers’ products, our customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to secure these components |
| We believe that any expansion of our customers’ supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell to our customers, which would negatively affect our revenues and operating results |
| Continued market acceptance of these products, is therefore, critical to our future success |
| In addition, substantially all of our 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 by: · a decline in demand for any of our more significant products, including our Aero Transceiver, modem products or ProSLIC; · failure of our products to achieve continued market acceptance; · an improved version of our products being offered by a competitor; · technological standard or change that we are unable to address with our products; · a failure to release new products or enhanced versions of our existing products on a timely basis; and · the failure of new products, such as our recently introduced AeroFONE and FM tuner products, to achieve market acceptance |
| We are particularly dependent on sales of our mobile handset products, which constituted 44prca of our total revenues in fiscal 2005 and 50prca of our total revenues in fiscal 2004 |
| In particular, our Aero Transceiver mobile handset product and its subsequent derivatives represented 44prca of our total revenues in fiscal 2005 and 48prca of our total revenues in fiscal 2004 |
| If the market for the Aero Transceiver or the market for GSM/GPRS or EDGE mobile handsets in which these products are incorporated deteriorates, our operating results would be materially and adversely affected |
| IF WE ARE UNABLE TO DEVELOP OR ACQUIRE NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION COULD BE HARMED Our future success will depend on our ability to reduce our dependence on a few products by developing or acquiring new ICs and product enhancements that achieve market acceptance in a timely and cost-effective manner |
| The development of mixed-signal ICs is highly complex, and we have at times experienced delays in completing the development and introduction of new products and product enhancements |
| Successful product development and market acceptance of our products depend on a number of factors, including: · changing requirements of customers; · accurate prediction of market and technical requirements, such as the shift of GSM/GPRS to EDGE and WCDMA; · timely completion and introduction of new designs; · timely qualification and certification of our ICs for use in our customers’ products; · commercial acceptance and volume production of the products into which our ICs will be incorporated; · availability of foundry, assembly and test capacity; 19 ______________________________________________________________________ · achievement of high manufacturing yields; · quality, price, performance, power use and size of our products; availability, quality, price and performance of competing products and technologies; · our customer service, application support capabilities and responsiveness; · successful development of our relationships with existing and potential customers; · changes in technology, industry standards or end-user preferences; and · cooperation of third-party software providers and our semiconductor vendors to support our chips within a system |
| We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance |
| We have introduced to market or are in development of many ICs |
| If our ICs fail to achieve market acceptance, or if we fail to develop new products on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected |
| For example, in October 2005, we introduced the AeroFONE single-chip phone |
| This product is in the early stages of customer adoption and we cannot be certain that it will achieve market acceptance |
| OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION Our ICs 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 |
| Research and development expense during fiscal 2005 was dlra101dtta2 million, or 23dtta8prca of revenues |
| A number of large companies are actively involved in the development of these new technologies and standards |
| 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 |
| For example, we have introduced to market the Aero Transceiver product for use in wireless phones operating on the GSM/GPRS standard |
| We believe this market is now in the early stages of adopting the EDGE and WCDMA standards, which allow for enhanced data generation and transmission using mobile handsets |
| Forecasters expect the EDGE and WCDMA markets to further develop and expand in 2006 and 2007 |
| In September 2005, we extended our Aero family to meet the EDGE standard with the Aero IIe single-chip EDGE Radio |
| However, we cannot be certain that the use of this technology will not change in the future and thereby make our products unsuitable |
| Furthermore, we cannot be certain that any product we develop for these standards will achieve market acceptance |
| 20 ______________________________________________________________________ WE HAVE INCREASED OUR INTERNATIONAL ACTIVITIES SIGNIFICANTLY AND PLAN TO CONTINUE SUCH EFFORTS, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL AND FINANCIAL COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS We have established additional international subsidiaries and have opened additional offices in international markets to expand our international activities in Europe and the Pacific Rim region |
| This has included the establishment of a headquarters in Singapore for non-US operations |
| The percentage of our revenues to customers located outside of the United States was 91prca in fiscal 2005, 89prca in fiscal 2004 and 80prca in fiscal 2003 |
| We may not be able to maintain or increase international market demand for our products |
| Our international operations are subject to a number of risks, including: · increased complexity and costs of managing international operations and related tax obligations, including our headquarters for non-US operations in Singapore; · protectionist laws and business practices that favor local competition in some countries; · multiple, conflicting and changing tax laws and regulations that may impact both our international and domestic tax liabilities and result in increased complexity and costs; · longer sales cycles; · greater difficulty in accounts receivable collection and longer collection periods; · high levels of distributor inventory subject to price protection and rights of return to us; · political and economic instability; · greater difficulty in hiring and retaining qualified technical sales and applications engineers and administrative personnel; and · the need to have business and operations systems that can meet the needs of our international business and operating structure |
| To date, all of our sales to international customers and purchases of components from international suppliers have been denominated in US dollars |
| As a result, an increase in the value of the US dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less competitive |
| FAILURE TO MANAGE OUR DISTRIBUTION CHANNEL RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and sales representatives, develop additional channels for the distribution and sale of our products and 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 |
| In addition, relationships with our distributors often involve the use of price protection and inventory return rights |
| This often requires a significant amount of sales management’s time and system resources to manage properly |
| 21 ______________________________________________________________________ WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE ORDERS FOR THE PRODUCTS In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers |
| However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer |
| As a result, we incur inventory and manufacturing costs in advance of anticipated sales |
| Because demand for our products may not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs, increased obsolescence and increased operating costs |
| These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate because this causes us to have less visibility regarding the accumulated levels of inventory for such customers |
| A resulting write-off of unusable or excess inventories would adversely affect our operating results |
| OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN ERRORS WHICH COULD LEAD TO PRODUCT LIABILITY, AN INCREASE IN OUR COSTS AND/OR A REDUCTION IN OUR REVENUES Our products are complex and may contain errors, particularly when first introduced or as new versions are released |
| We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors 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 ICs, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers |
| These errors 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 customer’s end-product, so we could face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved |
| Furthermore, product liability risks are particularly significant with respect to medical and automotive applications because of the risk of serious harm to users of these products |
| There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims |
| An increasing number of our new product developments are being designed in even more complex processes |
| 13 micron CMOS process, which adds cost, complexity and elements of experimentation and development, particularly in the area of advanced mixed-signal design |
| 22 ______________________________________________________________________ OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE QUALIFICATION PROCESS WITHOUT ANY ASSURANCE OF PRODUCT SALES Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the customer’s system as well as rigorous reliability testing |
| This qualification process may continue for six months or longer |
| However, qualification of a product by a customer does not ensure any sales of the product to that customer |
| Even after successful qualification and sales of a product to a customer, a subsequent revision to the IC or software, changes in the IC’s manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory |
| After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products |
| We experienced this lengthy introduction to volume production cycle time with our CMOS Power Amplifier, which was introduced in the early part of fiscal 2004 and did not contribute to our revenues until the fourth quarter of fiscal 2005 |
| Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales |
| If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer |
| WE RELY ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS AND THE FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND SUBCONTRACTORS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS We do not have our own wafer fab manufacturing facilities |
| Therefore, we rely principally on one third-party vendor, TSMC, to manufacture the ICs we design |
| We also currently rely principally on two Asian third-party assembly subcontractors, Advanced Semiconductor Engineering (ASE) and Amkor Technology, to assemble and package the silicon chips provided by the wafers for use in final products |
| Additionally, we rely on these offshore subcontractors for a substantial portion of the testing requirements of our products prior to shipping |
| We expect utilization of third-party subcontractors to continue in the future |
| The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors |
| On occasion, we have been unable to adequately respond to unexpected increases in customer demand due to capacity constraints and, therefore, were unable to benefit from this incremental demand |
| We may be unable to obtain adequate foundry, assembly or test capacity from our third-party subcontractors to meet our customers’ delivery requirements even if we adequately forecast customer demand |
| There are significant risks associated with relying on these third-party foundries and subcontractors, including: · failure by us, our customers or their end customers to qualify a selected supplier; · potential insolvency of the third-party subcontractors; · reduced control over delivery schedules and quality; · limited warranties on wafers or products supplied to us; · potential increases in prices or payments in advance for capacity; · increased need for international-based supply, logistics and financial management; 23 ______________________________________________________________________ · their inability to supply or support new or changing packaging technologies; and · low test yields |
| We typically do not have long-term supply contracts with our third-party vendors which obligate the vendor to perform services and supply products to us for a specific period, in specific quantities, and at specific prices |
| Our third-party foundry, assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time required to meet demand for our products |
| Such a transition may also require qualification of the new providers by our customers or their end customers |
| Since our inception, most of the silicon wafers for the products that we have shipped were manufactured either by TSMC or its affiliates |
| Our customers typically complete their own qualification process |
| If we fail to properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to support the fab line transition, which would adversely affect our operating results |
| OUR PRODUCTS INCORPORATE TECHNOLOGY LICENSED FROM THIRD PARTIES We incorporate technology (including software) licensed from third parties in our products |
| We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology |
| Although a third party licensor is typically obligated to indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent |
| See “SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS” Furthermore, any failure of third party technology to perform properly would adversely affect sales of our products incorporating such technology |
| OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS In recent periods, we have increased the scope of our operations and expanded our workforce from 588 employees at the end of fiscal 2004 to 651 employees at the end of fiscal 2005 |
| This growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources |
| We anticipate that we will need to implement a variety of new and upgraded sales, operational and financial enterprise-wide systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and other internal management systems to manage this growth and maintain compliance with regulatory guidelines, including Sarbanes-Oxley Act requirements |
| As our business grows our internal management systems and processes will need to improve to ensure that we remain in compliance |
| We also expect that we will need to continue to expand, train, manage and motivate our workforce |
| All of these endeavors will require substantial management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to plan for the succession from time to time of certain persons who have been key management and technical personnel |
| If we are unable to effectively manage our expanding global operations, including our international headquarters in Singapore, our business could be materially and adversely affected |
| 24 ______________________________________________________________________ WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR PRODUCTS COULD BE HARMED We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel |
| We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur |
| For example, in September 2005, Navdeep Sooch, our chairman of the board, departed from his role as interim CEO when Necip Sayiner was appointed as president and CEO There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signal ICs |
| In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense |
| Our key technical personnel represent a significant asset and serve as the primary source for our technological and product innovations |
| We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth |
| The loss of any of our key employees or the inability to attract or retain qualified personnel both in the United States and internationally, including engineers, sales, applications and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products |
| ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION As part of our growth and product diversification strategy, 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 |
| The Cygnal Integrated Products (Cygnal) and Silicon MAGIKE acquisitions and other acquisitions that we may potentially make in the future 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; · diversion of management’s time and attention from our core business; · need for financial resources above our planned investment levels; · difficulties in retaining business relationships with suppliers and customers of the acquired company; · risks associated with entering markets in which we lack prior experience; · risks associated with the transfer of licenses of intellectual property; · acquisition-related disputes, including disputes over earn-outs and escrows; · potential loss of key employees of the acquired company; and · potential impairment of related goodwill and intangible assets |
| Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the ownership percentages of existing shareholders |
| 25 ______________________________________________________________________ OUR STOCK PRICE MAY BE VOLATILE The market price of our common stock has been volatile in the past and may be volatile in the future |
| The market price of our common stock may be significantly affected by the following factors: · actual or anticipated fluctuations in our operating results; · changes in financial estimates by securities analysts or our failure to perform in line with such estimates; · changes in market valuations of other technology companies, particularly semiconductor companies; · announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments; · introduction of technologies or product enhancements that reduce the need for our products; · the loss of, or decrease in sales to, one or more key customers; · a large sale of stock by a significant shareholder; · dilution from the issuance of our stock in connection with acquisitions; · the addition or removal of our stock to or from a stock index fund; · departures of key personnel; and · the required expensing of stock options |
| The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies |
| These market fluctuations may cause our stock price to fall regardless of our performance |
| MOST OF OUR CURRENT MANUFACTURERS, ASSEMBLERS, TEST SERVICE PROVIDERS, AND CUSTOMERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION, WHICH INCREASES THE RISK THAT A NATURAL DISASTER, EPIDEMIC, LABOR STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR OPERATIONS OR SALES Most of TSMC’s foundries and one of our assembly and test subcontractor’s sites are primarily located in the same region within Taiwan and our other assembly and test subcontractors are located in the Pacific Rim region |
| In addition, many of our customers, particularly mobile handset manufacturers, are located in the Pacific Rim region |
| The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area |
| We are not currently covered by insurance against business disruption caused by earthquakes as such insurance is not currently available on terms that we believe are commercially reasonable |
| Earthquakes, fire, flooding, lack of water or other natural disasters in Taiwan or the Pacific Rim region, or an epidemic, political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturer, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test capacity |
| There can be no assurance that such alternate capacity could be obtained on favorable terms, if at all |
| 26 ______________________________________________________________________ A natural disaster, epidemic, labor strike, war or political unrest where our customers’ facilities are located would likely reduce our sales to such customers |
| For example, Samsung, our largest customer, is based in South Korea and represented 14prca of our revenues during fiscal 2005 |
| North Korea’s decision to withdraw from the nuclear Non-Proliferation Treaty and related geopolitical maneuverings has created unrest |
| Such unrest could create economic uncertainty or instability, could escalate to war or otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results |
| In addition, a significant portion of the assembly and testing of our mobile handset products occurs in South Korea |
| Any disruption resulting from these events could also cause significant delays in shipments of our products until we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third party vendor |
| WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products |
| Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business |
| We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights |
| We also enter into confidentiality or license agreements with our employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other proprietary information |
| Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology |
| Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States |
| We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products |
| For example, issued patents may be circumvented or challenged and declared invalid or unenforceable |
| We also cannot be certain that others will not develop effective competing technologies on their own |
| THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS, WHICH COULD RESULT IN OUR INABILITY TO SATISFY DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER The manufacture of our products is a highly complex and technologically demanding process |
| Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries from time to time have experienced lower than anticipated manufacturing yields |
| Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies |
| If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet our customers’ demand for our products in a timely manner, which would adversely affect our operating results and damage our customer relationships |
| 27 ______________________________________________________________________ WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS, AND SOME OF OUR CUSTOMERS OFFER COMPETING PRODUCTS Our products are currently used by our customers to produce modems, telephony equipment, mobile handsets, networking equipment and a broad range of other devices |
| We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products supplied by our customers |
| If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that incorporate our products may diminish or we may otherwise be materially adversely affected |
| Any reduction in the demand for these devices would significantly reduce our revenues |
| In certain products such as the DAA, some of our customers (including Agere Systems and Conexant) offer their own competitive products |
| These customers may find it advantageous to support their own offerings in the marketplace in lieu of promoting our products |
| SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights |
| From time to time, we receive letters from various industry participants alleging infringement of patents, trademarks or misappropriation of trade secrets or from customers requesting indemnification for claims brought against them by third parties |
| The exploratory nature of these inquiries has become relatively common in the semiconductor industry |
| We respond when appropriate and as advised by legal counsel |
| We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future |
| For example, in April 2003, we paid dlra17 million to settle patent infringement claims brought against us by TDK Semiconductor Corporation |
| In February 2004, we filed a lawsuit against a former employee and Axiom Microdevices alleging theft of trade secrets |
| In September 2004, we added claims for patent infringement to such suit |
| In December 2005, Power-One, Inc |
| filed a lawsuit against us alleging patent infringement related to our digital power supply products |
| In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers |
| Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights |
| Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us |
| Any litigation, regardless of its outcome, would likely be time-consuming and expensive to resolve and would divert our management’s time and attention |
| Most intellectual property litigation also could force us to take specific actions, including: · cease selling products that use the challenged intellectual property; · obtain from the owner of the infringed intellectual property a right to a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; · redesign those products that use infringing intellectual property; or · pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests |
| 28 ______________________________________________________________________ WE COULD SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF EQUITY OR DEBT SECURITIES, BUT ADDITIONAL CAPITAL MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US, OR AT ALL We believe that our existing cash, cash equivalents and investments will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months |
| However, it is possible that we may need to raise additional funds to finance our activities or to facilitate acquisitions of other businesses, products, intellectual property or technologies |
| We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors |
| In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons |
| However, we may not be able to obtain additional funds on favorable terms, or at all |
| If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced |
| WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND INCREASE MARKET SHARE Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have |
| 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 |
| Our competitors may also offer bundled chipset kit arrangements offering a more complete product despite the technical merits or advantages of our products |
| These competitors may elect not to support our products which could complicate our sales efforts |
| 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 |
| PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable |
| For example, our certificate of incorporation and bylaws provide for: · the division of our board of directors into three classes to be elected on a staggered basis, one class each year; · the ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders; · a prohibition on stockholder action by written consent; · elimination of the right of stockholders to call a special meeting of stockholders; · a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders; and 29 ______________________________________________________________________ · a requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation |
| We also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of our common stock |
| WE ARE SUBJECT TO CREDIT RISKS RELATED TO OUR ACCOUNTS RECEIVABLE We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers |
| Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities |
| Our ten largest customers or distributors represent a substantial majority of our accounts receivable |
| If any such customer or distributor were to become insolvent or otherwise not satisfy their obligations to us, we could be materially harmed |
| THE PERFORMANCE OF OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUES For example, although our DSL AFE and modem related products are compliant with published specifications, these established specifications might not adequately address all conditions that must be satisfied in order to operate in harsh environments |
| This includes environments where there are wide variations in electrical quality, telephone line quality, static electricity and operating temperatures or that may be affected by lightning or improper handling by customers and end users |
| These environmental factors may result in unanticipated returns of our products |
| Any necessary modifications 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 |
| RISKS RELATED TO OUR INDUSTRY WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY, WHICH HAS BEEN SUBJECT TO SIGNIFICANT FLUCTUATIONS The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand |
| The industry has experienced significant fluctuations, often connected with, or in anticipation of, maturing product cycles and new product introductions of both semiconductor companies’ and their customers’ products and fluctuations in general economic conditions |
| Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices |
| For example, in fiscal 2001, the semiconductor industry suffered a downturn due to reductions in the actual unit sales of personal computers and wireless phones as compared to previous robust forecasts |
| This downturn resulted in a material adverse effect on our business and operating results in fiscal 2001 |
| Upturns have been characterized by increased product demand and production capacity constraints created by increased competition for access to third party foundry, assembly and test capacity |
| We are dependent on the availability of such capacity to manufacture, assemble and test our ICs |
| None of our third party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us |
| 30 ______________________________________________________________________ THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY NEGATIVELY IMPACT OUR REVENUES AND GROSS PROFITS We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices, particularly for mobile handset products |
| We have reduced the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our competitors and other factors |
| If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes, increasing our sales content per application or reducing production costs, our gross profits and revenues will suffer |
| To maintain our gross profit percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs |
| Our failure to do so would cause our revenues and gross profit percentage to decline |
| COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE MARKET SHARE The markets for semiconductors in general, and for mixed signal ICs in particular, are intensely competitive |
| We expect that the market for our products will continually evolve and will be subject to rapid technological change |
| In addition, as we target and supply products to numerous markets and applications, we face competition from a relatively large number of competitors |
| Across all of our product areas, we compete with Agere Systems, Atmel, Analog Devices, Broadcom, Conexant, Cypress, Freescale, Fujitsu, Infineon Technologies, Legerity, Maxim Integrated Products, MediaTek, Microchip, National Semiconductor, Philips, Renesas, RF Micro Devices, Semtech, Skyworks Solutions, Texas Instruments and others |
| We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and start-up semiconductor design companies |
| Some of our customers, such as Agere Systems, Intel, and Samsung, are also large, established semiconductor suppliers |
| Our sales to and support of these customers may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights |
| As the markets for communications products grow, we also may face competition from traditional communications device companies |
| These companies may enter the mixed signal semiconductor market by introducing their own ICs or by entering into strategic relationships with or acquiring other existing providers of semiconductor products |
| In addition, large companies may restructure their operations to create separate companies or may acquire new businesses that are focused on providing the types of products we produce or acquire our customers |
| Conexant has sought, and will likely continue to seek, to supplant our silicon DAA products that have been incorporated in PC-Tel products with Conexant’s own competing DAA product |
| In 2004, Motorola separated its semiconductor operations into Freescale Semiconductor, a publicly traded company focused on communications and integrated electronic systems |
| As an additional example, in February 2004, Conexant and GlobespanVirata merged to form a company focused on communication semiconductors |
| This combined entity will focus on all broadband applications and may compete with our DAA, ISOmodem and asymmetric digital subscriber line (ADSL) product lines |
| 31 ______________________________________________________________________ OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS AND TECHNOLOGY IN ORDER TO BE ACCEPTED BY END USERS IN OUR MARKETS Generally, our products comprise only a part of a device |
| All components of such devices must uniformly comply with industry standards in order to operate efficiently together |
| We depend on companies that provide other components of the devices to support prevailing industry standards |
| Many of these companies are significantly larger and more influential in affecting industry standards than we are |
| Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users |
| If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business |
| Products for communications applications are based on industry standards that are continually evolving |
| For example, GSM mobile handsets now commonly use the GPRS specification for enabling data communications, but there is an accelerating trend toward the EDGE protocol |
| Other suppliers, including us, are now offering mobile handset devices utilizing the EDGE protocol to support higher data communication rates on GSM networks |
| In addition, certain suppliers are now offering mobile handset devices utilizing the WCDMA protocol to support higher data communication rates on WCDMA networks |
| We do not currently have a WCDMA mobile handset product |
| Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards |
| The emergence of new industry standards could render our products incompatible with products developed by other suppliers |
| As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards |
| If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins |
| Our pursuit of necessary technological advances may require substantial time and expense |
| We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance |
| If our ICs fail to achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected |
| AVAILABLE INFORMATION Our Internet website address is http://www |
| Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC) |
| Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K |