| TVIA INC Item 1A Risk Factors We expect continuing losses and may not achieve profitability, which could affect our ability to expand our business |
| We have incurred significant operating losses in each year since our inception, except in fiscal year 2004 |
| The net income reported in fiscal year 2004 was primarily due to the sale of our software business |
| We expect to continue to incur net losses for the foreseeable future |
| Our losses increased as we transitioned our focus away from the personal computer market toward the advanced television and display markets in 1996 |
| If we continue to incur net losses, we may not be able to expand our business as quickly as we would like |
| We do not know when or if we will become profitable and if we do become profitable, we may not be able to sustain or increase our profitability |
| 8 _________________________________________________________________ [36]Table of Contents A slow down in the DTV market could significantly affect our revenue growth |
| Our current product development efforts are focused on 17 inch to 42 inch LCD and Plasma digital televisions |
| According to an SDI Marketing Study the DTV market size for 2006 is 63 million units and growing to 89 million units in 2007 |
| If this market growth were to slow down significantly, the demand for our products would also drop off, materially affecting our continued revenue growth |
| A significant amount of our revenues comes from a few customers and any decrease in revenues from these customers could significantly impact our financial results |
| Historically we have been, and we expect to continue to be, dependent on a relatively small number of customers for a significant portion of our total revenues |
| Sales to Shenzhen Ricom Industrial Development Co, Ltd, Micro Network Korea Co, Ltd, Sharp Trading Corporation and Universal Technology represented 13prca, 13prca, 11prca and 10prca of total revenues in fiscal year ended March 31, 2006, respectively |
| represented 34prca, 17prca and 10prca of total revenues in fiscal year ended March 31, 2005, respectively |
| Sales to Kanematsu Devices Corporation, SMS Electronics, Ltd, Weikeng Industrial Co, and Fujitsu-Siemens Computers Gmbh represented 15prca, 12prca, 12prca and 10prca of total revenues for the fiscal year ended March 31, 2004, respectively |
| We may not be able to retain our largest customers or to obtain additional key accounts |
| Any reduction or delay in sales of our products to any key customer or our inability to successfully develop relationships with additional key customers could negatively impact our financial results |
| Our operating expenses may increase as we build our business and these increased expenses may impact our ability to become profitable |
| We have made substantial expenditures on research and development and organizational infrastructure consisting of an executive team, finance, sales, marketing and management information systems departments and our design center located in the People’s Republic of China |
| For the fiscal years ended March 31, 2006, 2005 and 2004, research and development expenses represented 73prca, 178prca and 295prca of our revenues, respectively |
| We expect to continue to spend financial and other resources on developing and introducing new products and services, and on our research and development activities in China |
| We base our expense levels in part on our expectations regarding future revenues |
| If our revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter |
| Because of our long product development process and sales cycle, we incur substantial expenses before we generate revenues and may not recover our expenditures |
| To develop market acceptance of our products, we must dedicate significant resources to research and development, production and sales and marketing |
| We develop products based on forecasts of demand and we incur substantial product development expenditures prior to generating associated revenues |
| Our customers typically perform numerous tests and extensively evaluate our products before incorporating them into their systems |
| The time required for testing, evaluating and designing our products into a customer’s equipment can take up to nine months or more, with an additional three to nine months or more before an OEM customer commences volume production of equipment incorporating our products, if ever |
| Because of this lengthy development cycle, we may experience a delay between the time we incur expenses for research and development and sales and marketing efforts and the time when we generate revenues, if any |
| Furthermore, achieving a design win with a customer does not necessarily mean that this customer will order large volumes of our products |
| A design win is not a binding commitment by a customer to purchase our products |
| Rather, it is a decision by a customer to use our products in the design process |
| In addition, our customers can choose at any time to discontinue using our products in that customer’s 9 _________________________________________________________________ [37]Table of Contents designs or product development efforts |
| If our products are chosen to be incorporated into a customer’s products, we may still not realize significant revenues from that customer if that customer’s products are not commercially successful |
| As a result, our profitability from quarter to quarter and from year to year may be materially affected by the number and timing of our new product introductions in any period and the level of acceptance gained by these products |
| If we fail to successfully develop, introduce and sell new products, we may be unable to effectively compete in the future |
| We operate in a highly competitive, quickly changing environment marked by new and emerging products and technologies |
| Our success depends on our ability to develop, introduce and successfully market new products and enhance our existing products in the advanced television and emerging interactive display markets |
| The development of these new products is highly complex and, from time to time, we have experienced delays in completing their development and introduction |
| Any one of the following factors could affect our ability to develop, introduce and sell new products and could materially harm our business: • our failure to complete new product designs in a timely manner; • our inability to manufacture our new products according to design specifications; • our inability to deliver our products to our customers in a timely manner for any reason, including lack of manufacturing capacity or the failure of our contracted foundries to meet targeted-manufacturing yields; and • our sales force’s and independent distributors’ inability to create adequate demand for our products |
| Our future operating results are likely to fluctuate and may fail to meet expectations, which could cause our stock price to decline |
| Our operating results have varied in the past and are likely to do so in the future as we attempt to meet consumer demand in the markets for advanced televisions and emerging interactive displays |
| Our future operating results will depend on many factors and may fail to meet our expectations for a number of reasons |
| Any failure to meet these expectations or those of securities analysts and investors could cause our stock price to fluctuate or decline significantly |
| A number of factors, including those listed below, may cause fluctuations in our operating results and stock price: • the general condition of the semiconductor industry market; • fluctuations in the volume of product sales, changes in product mix and pricing concessions on sales; • the timing, rescheduling or cancellation of significant customer orders; • the timing of investments in, and the results of, research and development; • changes in industry standards; • introduction of interactive television services by service providers; • availability of manufacturing capacity and raw materials, and inventory write-offs; • product introductions and price changes by our competitors; • our ability to specify, develop, introduce and market new products with smaller geometries, more features and higher levels of design integration in accordance with design requirements and design cycles; • the level of orders received that can be shipped in a given period; • changes in earning estimates or investment recommendations by analysts; 10 _________________________________________________________________ [38]Table of Contents • changes in investors perceptions; and • the effect of the terrorist attacks in the United States and any related conflicts or similar events worldwide |
| Our industry is highly competitive, and we cannot assure you that we will be able to effectively compete |
| The market for advanced televisions and emerging interactive displays in particular, and the semiconductor industry in general, are highly competitive |
| We compete with a number of domestic and international suppliers of semiconductors in our targeted markets |
| We expect competition to intensify as current competitors expand their product offerings and new competitors enter our targeted markets |
| We believe that we must compete on the basis of a variety of factors, including: • functionality; • performance; • time to market; • price; • conformity to industry standards; • product road maps; and • technical support |
| We currently compete with Genesis Microchip, Inc, Pixelworks, Inc, and Trident Microsystems, Inc |
| In addition to these competitors, we expect other major semiconductor manufacturers will enter our targeted markets as the DTV and information access device markets become more established |
| A number of companies, including STMicroelectronics NV, LSI Logic and Philips Electronics NV have announced that they are developing or plan to introduce competing products in the advanced television and emerging interactive display markets which could result in significant competition |
| Some of our current and potential competitors operate their own fabrication facilities or have a longer operating history and significantly greater financial, sales and marketing resources |
| They may also have pre-existing relationships with our customers or potential customers |
| As a result, these competitors may be able to adapt more quickly to new or emerging products, develop new technologies, or address changes in customer requirements or devote greater resources to the development and promotion of strategic relationships among themselves or with existing or potential customers |
| It is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share |
| Increased competition could harm our business, results of operations and financial condition by, for example, increasing pressure on our profit margin or causing us to lose sales opportunities |
| We depend on two independent foundries to manufacture our products based on our forecasts, which could result in an oversupply or undersupply of products |
| We do not own or operate our own fabrication facility |
| We currently depend upon two outside foundries for the manufacture of our products, United Manufacturing Corporation, or UMC, located in Taiwan and HuaHong NEC in the People’s Republic of China |
| We do not have long term supply agreements with these foundries to manufacture our semiconductor products and each has limited manufacturing capacity |
| The foundries require us to provide forecasts of our anticipated manufacturing orders in advance of receiving purchase orders from our customers |
| This may result in product shortages or excess product inventory |
| Obtaining additional supply in the face of product shortages may be costly or not possible, especially in the short term |
| Our failure to adequately forecast demand for our products would materially harm our business |
| The foundries may allocate capacity to the production of other companies’ products while reducing delivery to us on short notice |
| 11 _________________________________________________________________ [39]Table of Contents We may encounter periods of semiconductor oversupply, resulting in pricing pressure, as well as undersupply, resulting in a risk that we could be unable to fulfill our customers’ requirements |
| The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, its products |
| These fluctuations have resulted in circumstances when supply and demand for the industry’s products have been widely out of balance |
| Our operating results may be materially harmed by industry wide semiconductor oversupply, which could result in severe pricing pressure or inventory write-downs |
| Conversely, in a market with undersupply, we would have to compete with larger companies for limited manufacturing capacity |
| If material shortages occur, we may incur additional costs to procure the scarce components or be unable to have our products manufactured in a timely manner or in quantities necessary to meet our requirements |
| Since we outsource all of our manufacturing, we are particularly vulnerable to supply shortages |
| Any future industry wide oversupply or undersupply of semiconductors would materially harm our business and have a negative impact on our earnings |
| If we have to qualify new independent foundries for any of our products and do not have sufficient supply of our products on hand, we may lose revenues and damage our customer relationships |
| Processes used to manufacture our products are complex, customized to our specifications and can only be performed by a limited number of manufacturing facilities |
| The foundries we use have from time to time experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start up of new process technologies |
| In addition, the foundries we use are located in a seismically active area, and earthquakes have caused these foundries to close for repairs, resulting in a delay in manufacturing our products |
| Although we primarily utilize two independent foundries, most of our components are not manufactured at both foundries at any given time |
| The inability of one of the foundries to provide components could result in significant delays and harm our business |
| In the event either foundry experienced manufacturing or financial difficulties or suffered any damage or destruction to its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner |
| For example, in September 1999, Taiwan experienced a major earthquake |
| The earthquake and its resulting aftershocks caused power outages and significant damage to Taiwan’s infrastructure |
| Similarly, in September 2001, a typhoon hit Taiwan causing businesses in Taipei and the financial markets to close for two days |
| In addition, as a result of the rapid growth of the semiconductor industry based in the industrial park where both foundries are located, severe constraints have been placed on the water and electricity supply in that region |
| Any shortages of water or electricity or a natural disaster could adversely affect these foundries’ ability to supply our products, which could have a material adverse effect on our operating results |
| Even our current outside foundries would need to have manufacturing processes qualified in the event of a disruption at the other foundry, which we may not be able to accomplish in a timely manner sufficient to prevent an interruption in the supply of the affected products |
| We cannot provide assurance that any existing or new foundries would be able to produce integrated circuits with acceptable manufacturing yields in the future, or will continue to have sufficient capacity to meet our needs |
| If our manufacturing requirements are not satisfied, our business would be materially harmed |
| Our semiconductors are complex to manufacture and may have errors or defects, which could be costly to correct |
| The manufacture of semiconductors is a complex process |
| Foundries may not achieve acceptable product yields from time to time due to the complexity of the integrated circuit design, inadequate manufacturing processes and other reasons |
| We refer to the proportion of final acceptable integrated circuits that have been processed, assembled and tested relative to the gross number of integrated circuits 12 _________________________________________________________________ [40]Table of Contents that could have been produced from the raw materials as our product yields |
| Identifying defects and determining the reason for low yields may be discovered after production has begun and at various stages of the production cycle |
| Our failure to discover defects early in the production cycle will result in higher costs and may require a diversion of our technical personnel and resources away from product development in order to correct the defect |
| In addition, defective products that have been released into the market and distributed to our customers and end users, and may result in harm to our reputation, significant warranty costs, diversion of our technical resources and potential product liability claims that would be costly to defend and divert managerial resources |
| Our software is complex and may have bugs or defects which could be costly to correct |
| Our products depend on complex software that we develop internally and license from others |
| Complex software often contains defects, particularly when first introduced or when new versions are released |
| Determining whether our software has defects may occur after our products are released into the market and distributed to our customers and end users, and may result in harm to our reputation, significant warranty costs, diversion of our technical resources and potential product liability claims that would be costly to defend and divert managerial resources |
| We face foreign business, political and economic risks because a majority of our sales are to customers outside of the United States |
| Sales of our products to customers located outside the United States accounted for 85prca, 89prca and 76prca of our total revenues in fiscal years ended 2006, 2005 and 2004 and will continue to represent a significant portion of our total sales in future periods |
| In addition, many of our domestic customers sell their products outside of North America, thereby indirectly exposing us to risks associated with foreign commerce |
| Asian economic instability impacts the sales of products manufactured by our customers, as does the Chinese New Year, during which time many manufacturers and businesses close their operations |
| We may be negatively impacted by the terrorist attacks on the United States and the resulting conflicts worldwide |
| We could also experience greater difficulties collecting accounts receivable from customers outside of the United States |
| Accordingly, our operations and revenues are subject to a number of risks associated with foreign commerce |
| To date, we have denominated sales of our products in foreign countries exclusively in United States dollars |
| As a result, any increase in the value of the United States dollar relative to the local currency of a foreign country will increase the price of our products in that country so that our products become relatively more expensive to customers in the local currency of that foreign country |
| To the extent any of these types of risks materialize, our business would be materially harmed |
| If the industries into which we sell our products experience recession or other cyclical effects impacting our customers’ budgets, our operating results could be negatively impacted |
| The primary customers for our products are companies in the advanced television and emerging display device markets |
| Any significant downturn in these particular markets or in general economic conditions which result in the cutback of research and development budgets or capital expenditures would likely result in the reduction in demand for our products and services and could harm our business |
| In the past, the United States economy, including the semiconductor industry, has experienced a recession, which has negatively impacted our business and operating results |
| A future decline in the United States economy could result from new terrorist attacks in the United States |
| If the economy declines as a result of the economic, political and social turmoil, existing and perspective customers may reduce their design budgets or delay implementation of our products, which could harm our business and operating results |
| In addition, the markets of semiconductor products are cyclical |
| In recent years, some Asian countries have experienced significant economic difficulties, including devaluation and instability causing business failures and a depressed business environment |
| In addition, the electronics industry has historically been 13 _________________________________________________________________ [41]Table of Contents subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future |
| These industry downturns have been, and my continue to be, characterized by diminished product demand, excess manufacturing capacity and subsequent erosion of average selling prices |
| As a result, our future operating results may reflect substantial fluctuations from period to period as a consequence of these industry patterns, general economic conditions affecting the timing of orders from customers and other factors |
| Any negative factors affecting the semiconductor industry, including the downturns described here, could significantly harm our business, financial condition and results of operations |
| The rapid growth of our business and operations has strained and may continue to strain our administrative, operational and financial resources, and our failure to manage our future growth could affect our operations and our future ability to expand |
| We have in the past and may in the future experience rapid growth and expansion in our business and operations |
| Our growth has placed, and may continue to place, a significant strain on our administrative, operational and financial resources and increased demands on our systems and controls |
| Our future growth may require the implementation of a variety of new and upgraded operational and financial systems, procedures and controls, including improvement of our accounting and other internal management systems, all of which may require substantial managerial effort |
| We cannot provide assurance that these efforts would be accomplished successfully |
| Our growth has resulted in a continuing increase in the level of responsibility for both existing and new management personnel, and may require that we recruit, hire and train a substantial number of new personnel |
| Our failure to manage our past and future growth could prevent us from successfully achieving market acceptance for our products, disrupt our operations, delay our expansion and harm our business |
| We depend on key personnel, the loss of whom would impair or inhibit the growth of our business |
| Our success depends on the skills, experience and performance of our executive officers and other key management and technical personnel, many of whom would be difficult to replace |
| We are particularly dependent on Eli Porat, our Chief Executive Officer and President |
| The competition for employees with technical skills is intense, particularly in the San Francisco Bay Area, and we may not be able to attract and retain a sufficient number of such qualified new personnel in the future |
| The loss of the service of one or more of our key employees, or our failure to attract, retain and motivate qualified personnel would inhibit the growth of our business |
| We rely on strategic relationships to commercialize our products, and these relationships may require that we expend significant resources without guarantees that our endeavors will be profitable |
| We rely on strategic relationships with some of our customers who we believe are the market leaders in our target markets |
| These relationships often involve the proposed development by us of new products involving significant technological challenges |
| Since the proposed products under development may offer potential competitive advantages to our customers, considerable pressure is frequently placed on us to meet development schedules |
| While an essential element of our strategy involves establishing such relationships, these projects require substantial amounts of our limited resources, with no guarantee of revenues to us, and could materially detract from or delay the completion of other important development projects |
| Delays in development could impair the relationship between our customers and us and negatively impact sales of the products under development |
| Moreover, our customers may develop their own solutions for products currently supplied by us, which could have an adverse effect on our business |
| We depend on third-party subcontractors for assembly of our semiconductors which reduces our control over the delivery, quantity, quality, or cost of our products |
| Substantially all of our products are assembled by one of three subcontractors, two of which are located in Taiwan, and one in Shanghai, People’s Republic of China |
| Typically, we procure services from 14 _________________________________________________________________ [42]Table of Contents these subcontractors on a purchase order basis |
| Their availability to assemble our products could be adversely affected if either subcontractor experiences financial difficulties or suffers any damage or destruction to its facilities or any other disruption of its assembly capacity |
| Because we rely on third party subcontractors for assembly of our products, we cannot directly control product delivery schedules |
| We have experienced in the past, and may experience in the future, product shortages or quality assurance problems that could increase the cost of manufacturing or testing of our products |
| It is time consuming and difficult to find and qualify alternative assemblers |
| If we are forced to find substitute subcontractors, shipments of our products could be delayed |
| Any problems associated with the delivery, quantity or cost of our products could harm our business |
| Political instability in the People’s Republic of China or Taiwan could harm our manufacturing and research and development capabilities and negatively impact our product sales |
| We operate our research and development facility in the People’s Republic of China |
| Our products are manufactured and assembled outside of the United States at facilities operated by third parties in Taiwan and China |
| The political and economic conditions in the region, including the People’s Republic of China’s dispute with Taiwan, may adversely impact our operations including manufacture and assembly of our products and research and development efforts |
| We cannot provide assurance that restrictive laws or policies on the part of either the People’s Republic of China or the United States will not constrain our ability to operate in both countries |
| If we are required to relocate our facilities, our business will be disrupted and our costs associated with research and development will increase |
| If our competitors use our intellectual property and proprietary rights, our ability to compete would be impaired |
| Our success depends in part upon our rights in proprietary technology and processes that we develop and license from, and to, others |
| We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements with our employees, consultants and strategic partners in order to protect proprietary technologies that use our products |
| We cannot assure you that these measures will provide meaningful protection for our proprietary technologies and processes, and they do not prevent independent third party development of competitive products |
| In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign countries where laws may not protect our proprietary rights as fully as in the United States |
| We currently have two patents in the United States, and we may seek additional patents in the future |
| Because the content of patent applications in the United States is not publicly disclosed until the patent is issued, applications may have been filed which relate to our products or processes |
| We cannot provide assurance that our current patent applications or any future patent applications will result in a patent being issued with the scope of the claims we seek, if at all, or whether any patents we have or may receive will be challenged or invalidated |
| The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products |
| We may face intellectual property infringement claims that could be costly and could result in the loss of proprietary rights which are necessary to our business |
| Other parties may assert patent infringement claims against us, including claims against technology that we license from others, and our products or processes may infringe issued patents of others |
| Litigation is common in the semiconductor industry and any litigation could result in significant expense to us |
| Litigation would also divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor |
| Litigation could also require us to develop non-infringing technology or enter into royalty or license agreements |
| These royalty or license agreements may not be available on acceptable terms, including limitations on representations and warranties regarding infringement and indemnification in the event of infringement claims |
| Our failure or inability to develop non-infringing technology, license the proprietary rights on a timely basis or receive appropriate protection on licensed technology would harm our business |
| The Federal Communications Commission, or the FCC, has broad jurisdiction over our target markets |
| Various international entities or organizations may also regulate aspects of our business or the business of our customers |
| Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation |
| For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations |
| Accordingly, the effects of regulation on our customers or the industries in which our customers operate may, in turn, harm our business |
| FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products |
| In addition, our business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on systems of suppliers or by the imposition of export restrictions on products that we sell internationally |
| Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business |