| AIRSPAN NETWORKS INC ITEM 1A RISK FACTORS In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its business |
| If we continue to incur substantial losses and negative operating cash flows, we may not succeed in achieving or maintaining profitability in the future |
| We have incurred net losses since we became an independent company, and as of December 31, 2005 we had an accumulated deficit of dlra203 million |
| We anticipate that we will continue to experience negative cash flows over the next 12 months |
| Our operating losses have been due in part to the commitment of significant resources to our research and development and sales and marketing organizations |
| We expect to continue to devote resources to these areas and, as a result, we will need to continue increasing our quarterly revenues to achieve and maintain profitability |
| We cannot be certain that we will achieve sufficient revenues for profitability |
| If we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future |
| Any reduction in expenditures by communications service providers could have a negative impact on our results of operations |
| We believe telecommunications carriers and service providers continue to spend less annually on capital investments and network expansions than they did at the end of the prior decade |
| Service providers have operated at reduced capital spending levels for a number of years, and there is no indication that they will increase spending to earlier levels in the foreseeable future |
| Any further decline in their capital spending may reduce our sales, increase the need for inventory write-offs and could result in downward pressure on the price of our products, all of which would have a material adverse effect on our results of operations and stock price |
| Since a significant percentage of our expenses are fixed and do not vary with revenues, our quarterly operating results are volatile and difficult to predict, and our stock price could decline |
| We believe that period-to-period comparisons of our operating results are not necessarily meaningful |
| Since our customers are not typically required to purchase a specific number of our products in any given quarter, we may not be able to accurately forecast our quarterly revenues |
| Revenues are further affected if major deployments of our products do not occur in any particular quarter as we anticipate and/or our customers delay shipments or payments due to their inability to obtain licenses or for other reasons |
| As a result, our quarterly operating results have fluctuated in the past and will likely vary in the future |
| This could cause the market price of our common stock to decline |
| Other factors that may affect our quarterly operating results and our stock price include the loss of a major customer, our ability to react quickly to new competing technologies, products and services which may cause us to lose our customers, or if our suppliers and manufacturers are not able to fulfill our orders as a result of a shortage of key components that leads to a delay in shipping our products |
| We incur expenses in significant part based on our expectations of future revenue, and we expect our operating expense, in particular salaries and lease payments, to be relatively fixed in the short run |
| Accordingly, any unanticipated decline in revenue for a particular quarter could have an immediate negative effect on results for that quarter, possibly resulting in a change in financial estimates or investment recommendations by securities analysts, which could result in a fall in our stock price |
| The results of any one quarter should not be relied upon as an indication of future performance |
| If we are not able to implement a program to reduce costs over time, introduce new products or increase sales volume to respond to declines in the average selling prices of our products, our gross margin may decline |
| We expect the average selling prices of our products to decline due to a number of factors, including competitive pricing pressures, rapid technological change, industry standardization and volume sales discounts |
| Accordingly, to maintain or increase our gross margin, we must develop and introduce new products or product enhancements with higher gross margins and implement cost reductions |
| If our average selling prices continue to decline and we are not able to maintain or increase our gross margin, our results of operations could be harmed |
| 21 _________________________________________________________________ Our industry is subject to change as a result of emerging new technologies and industry standards |
| The market for BWA equipment has historically been characterized by rapid technological developments and evolving industry standards |
| Our future success will therefore depend on our ability to adapt to these new standards and to successfully introduce new technologies that meet customer preferences |
| Accordingly, our success selling certain types of BWA equipment in one year should not be considered indicative of our future sales efforts |
| Although we have been marketing BWA equipment for many years, our experience marketing and supplying WiMAX equipment has only been developed since August 2005 |
| Although our ASMAX products have performed to date in accordance with our expectations, the ASMAX products are still relatively new products and their future commercial success is not yet certain |
| Some of our competitors have developed and are currently marketing WiMAX equipment |
| Although we believe our ASMAX products compare favorably to the existing competitive products in terms of price, performance, features and ease of use, we do not have enough information at this time to determine if our potential customers will share our perceptions |
| If WiMAX does become a principal standard for the BWA industry, we face the risk that our non-WiMAX products will become obsolete |
| In such event, we anticipate that our results of operations would be materially adversely affected unless our sales of ASMAX products compensate for the loss of sales of non-WiMAX products |
| In the course of committing to research and development, enhancing our existing products and developing the ASMAX product line, we have made projections and assumptions about the potential demand for our various product lines |
| If our projections or assumptions are incorrect for any reason, we anticipate that our product lines will not sell as projected and our results of operations will be materially adversely affected |
| Since we incur most of our expenses and a portion of our cost of goods sold in foreign currencies, fluctuations in the values of foreign currencies could have a negative impact on our profitability |
| Although 96prca of our sales in 2005 and a majority of our cost of goods sold were denominated in US dollars, we incur most of our operating expenses in British pounds and, to a lesser extent, New Israeli Shekels |
| We expect these percentages to fluctuate over time |
| Fluctuations in the value of foreign currencies could have a negative impact on the profitability of our global operations and our business and our currency hedging activities may not limit these risks |
| The value of foreign currencies may also make our products more expensive than local products |
| We operate in highly dynamic and volatile industries characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles |
| The markets for our products have been characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles |
| Our success depends, in substantial part, on the timely and successful introduction of high quality new products and upgrades, as well as cost reductions on current products to address the operational speed, bandwidth, efficiency and cost requirements of our customers |
| With the adoption by the wireless broadband industry of the IEEE 802dtta16 and ETSI HiperMAN wireless MAN standards, our success will also depend on our ability to comply with these and other emerging industry standards, to operate with products of other suppliers |
| With the acquisition of our new ASTONE and ASNET product portfolios, we are moving more and more of our products to IP (Internet Protocol) based operating systems |
| The development of new, technologically advanced IP-optimized networking solutions and software products is a complex and uncertain process requiring high levels of innovation, as well as the anticipation of technological and market trends |
| Our commitment to develop and refine our IP based operating systems may result in our expenses growing at a faster rate than our revenues, particularly since the initial investment to bring a new or enhanced product to market may be high |
| We may not be successful in targeting new market opportunities, in developing and commercializing new products in a timely manner or in achieving market acceptance for our new products |
| The success of new or enhanced products depends on a number of other factors, including the timely introduction of those products, market acceptance of new technologies and industry standards, the perceived quality and robustness of new or enhanced products, competing product offerings, the pricing and marketing of our products and the availability of funding for those networks |
| Products and technologies developed by our competitors may render our products obsolete |
| If we fail to respond in a timely and effective manner to unanticipated changes in one or more of the technologies affecting telecommunications and data networking or our new products or product enhancements fail to achieve market acceptance, our ability to compete effectively in our industry, and our sales, market share and customer relationships could be materially and adversely affected |
| 22 _________________________________________________________________ In addition, unanticipated changes in market demand for products based on a specific technology, particularly lower than anticipated demand for IP-optimized networking solutions in either broadband wireless applications or on a stand-alone basis, could have a material adverse effect on our business, results of operations and financial condition if we fail to respond to those changes in a timely and effective manner |
| The adoption of open standards in the broadband wireless communications industry could result in increased competition |
| Prior to the adoption of the WiMAX standards, we sold products that operated on our own, proprietary operating technologies |
| We anticipate that we and other BWA equipment suppliers will increasingly sell products that are WiMAX Forum Certified |
| With the adoption of WiMAX as the new industry standard for broadband wireless communications, many of those proprietary technologies will no longer be used in Airspan products |
| As a result, as it brings its new WiMAX-based systems to market, Airspan may face we expect that we will face increased competition from a number of other manufacturers who are no longer restricted by our Airspan intellectual property rights from building competing products |
| To remain competitive, we believe we will need to must continue to invest significant resources in research and development, sales and marketing and customer support for WiMAX We cannot be certain that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to remain competitive |
| In developing products that conform to defined wireless-industry standards, we recognize that, by diminishing product differentiation, standardization may lower the barriers to entry by other manufacturers in the markets in which we seek to sell our products |
| If companies with greater resources than us choose to manufacture any standards-based products to compete with us, this may cause competition to be based on criteria such as the relative size, resources, marketing skills and financial incentives provided by our competitors, where we may be weaker than if competition is based on product differentiation alone |
| If we are unable to maintain our position as a technology leader in this market of open standards and broader competition, we may suffer reductions in revenues and margins and loss of market share, revenues and operating margins, which could result in reduced stock prices |
| If we are not able to implement a program to conform our products to industry standards or to successfully market and sell our standards-based products, our revenues may decline We have developed and continue to develop certain of our products in accordance with existing, emerging and anticipated wireless-industry standards |
| In particular, we develop our ASMAX wireless products and product features to conform to IEEE 802dtta16-2004 and IEEE 802dtta16e standards |
| If our products fail to comply with these standards, we may not be able to sell them |
| Industry standards are subject to change from time to time by their regulatory bodies |
| If, as a result of any changes, the products we have developed fail to meet industry standards, as revised, we may not be able to sell such products |
| Our future success depends in part on the successful adoption by our customers of products that meet these industry standards |
| In developing products that conform to defined wireless-industry standards, we recognize that, by diminishing product differentiation, standardization may lower the barriers to entry by other manufacturers in the markets in which we seek to sell our products |
| If companies with greater resources than us choose to manufacture any standards-based products to compete with us, this may cause competition to be based on criteria such as the relative size, resources, marketing skills and financial incentives provided by our competitors, where we may be weaker than if competition is based on product differentiation alone |
| Competition from larger, better-capitalized or emerging competitors could result in price reductions, reduced gross margins and loss of or inhibited growth of market share |
| We compete in a relatively new, rapidly evolving and highly competitive and fragmented market |
| We now compete with companies that are producing both mobile and fixed wireless communications systems, wired DSL, cable networks, fiber optic cable and occasionally satellite technologies and other new entrants to this industry, as well as traditional communications companies |
| 23 _________________________________________________________________ Competitors vary in size and scope, in terms of products and services offered |
| With respect to the fixed broadband wireless solutions we offer today to serve in licensed and unlicensed frequencies, we believe we compete directly with Siemens, Alcatel, Motorola, Alvarion, Terabeam, SR Telecom, with a number of smaller privately-held companies and with the divisions of a number of institutional telecommunication equipment companies |
| We also believe we compete indirectly with a number of large telecommunication equipment suppliers such as Alcatel and Harris |
| Many of our competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing and other resources and more established distribution channels |
| These competitors may be able to respond more rapidly to new or emerging technologies such as WiMAX and changes in customer requirements, or to devote greater resources to the development, promotion, sale and financing of their products than we can |
| Furthermore, some of our competitors have made or may make strategic acquisitions or establish cooperative relationships among themselves or with third parties to increase their ability to gain customer market share rapidly |
| These competitors may enter our existing or future markets with systems that may be less expensive, provide higher performance or contain additional features |
| We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that may supplant or provide lower-cost alternatives to our systems |
| This or other factors may result in changes in the market valuations of our competitors, which have been volatile recently, and could cause our stock price to fall |
| To remain competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support |
| We cannot be certain that we will have sufficient resources to make these investments or that we will be able to make the technological advances necessary to remain competitive |
| An inability to overcome competition from alternative communication systems could adversely affect our results of operations |
| We believe we encounter, and may increasingly encounter, competition from competing wireless technologies such as cellular technology |
| Cellular networks are now capable of delivering both voice and broadband data connectivity to fixed, mobile, nomadic and portable applications |
| These technologies, such as 1XRTT and EVDO, have the ability to provide for multiple voice channels and rate data services at transmission rates of 512Kbps on the uplink and 2dtta4 Mbps on the down link |
| Their data rates speeds continue to improve as they are modified |
| In addition, our technology competes with other high-speed solutions, such as wired DSL, cable networks, fiber optic cable and occasionally satellite technologies |
| The performance and coverage area of our wireless systems are dependent on certain factors that are outside of our control, including features of the environment in which the systems are deployed, such as the amount of clutter (natural terrain features and man-made obstructions) and the radio frequency available |
| Any inability to overcome these obstacles may make our technology less competitive in comparison with other technologies and make other technologies less expensive or more suitable |
| Our business may also compete in the future with products and services based on other wireless technologies and other technologies that have yet to be developed |
| We currently depend on a few key customers for substantially all of our sales |
| A loss of one or more of those customers could cause a significant decrease in our net revenue |
| We currently derive, and expect to continue to derive, a substantial percentage of our net sales from fewer than ten customers |
| In fiscal 2005, 71prca of our revenue was derived from our top ten customers |
| In fiscal 2005, Axtel accounted for approximately 56prca of our annual revenue and was the only customer that individually accounted for more than 10prca of our annual revenue |
| It is possible that in fiscal 2006, Axtel and Yozan Inc of Japan may account for greater than 50prca of our projected annual revenue |
| We believe that there are certain economies of scale inherent in our industry |
| Accordingly, the loss of Axtel or Yozan as a customer or the loss of any large percentage of our customer contracts could negatively impact our gross profit margins, our profitability and efforts to preserve cash resources |
| Axtel has the right to terminate the Axtel supply agreement if we fail to comply with the terms and conditions of the agreement and such breach is not cured |
| For instance, if we fail to meet delivery schedules or if we fail to deliver products and services that meet the contract specifications, Axtel may claim we breached the agreement |
| Even if such failures are solely attributable to the acts or failures to act of third parties, Axtel may have the right to terminate the agreement |
| Additionally, Axtel itself has a limited operating history having only commenced operations in 1999, and is subject to its own competitive pressures and operating constraints in the Mexican economy |
| If Axtel should fail for any reason, or fail to have access to debt and equity markets for liquidity, it may not be able to continue to make purchases at the same levels as prior years |
| 24 _________________________________________________________________ Yozan also has the right to terminate our supply agreement if we fail to comply with the terms and conditions of the agreement and such breach is not cured |
| For instance, if we fail to meet delivery schedules or if we fail to deliver products and services that meet the contract specifications, Yozan may claim we breached the agreement |
| Yozan is subject to its own competitive pressures and operating constraints in the Japanese economy |
| If Yozan should fail for any reason, or fail to have access to debt and equity markets for liquidity, it may not be able to make the purchases that we have forecast commitments under our supply agreement |
| The amount of revenue we derive from a specific customer is likely to vary from period to period, and a major customer in one period may not produce significant additional revenue in a subsequent period |
| We anticipate that our operating results will continue to depend on sales to a small number of key customers in the foreseeable future |
| In general, our contracts with our customers involve major deployments that require several months to fulfill, so our results may depend on the same major customers for consecutive quarters |
| It is necessary therefore for us to continually seek new customers in order to increase our revenue |
| To the extent that any major customer terminates its relationship with us, our revenues could decline significantly |
| Our customer contracts vary widely in terms and duration, with a many of our customers executing only short-term purchase orders, and allow our customers to terminate without significant penalties |
| Our contracts and purchase orders are separately negotiated with each of our customers and the terms vary widely |
| A majority of our customers may only execute short-term purchase orders for a single or a few systems at one time instead of long-term contracts for large-scale deployment of our systems |
| These contracts and purchase orders do not ensure that they will purchase any additional products beyond that specifically listed in the order |
| Moreover, since we often believe that these purchase orders may represent the early portion of longer-term customer programs, we often expend significant financial, personnel and operational resources to fulfill these orders |
| If our customers fail to purchase additional products to fulfill their programs as we hope, we may be unable to recover the costs we incur and our business could suffer |
| In addition, our general framework contracts are generally non-exclusive and contain provisions allowing our customers to terminate the agreement without significant penalties |
| Our contracts also may specify the achievement of shipment, delivery and installation commitments |
| If we fail to meet these commitments or negotiate extensions in a timely manner, our customers may choose to terminate their contracts with us or impose monetary penalties |
| Changes in telecommunications regulation or delays in receiving licenses could adversely affect many of our customers and may lead to lower sales |
| Many of our customers are subject to extensive regulation as communications service providers |
| Changes in legislation or regulation that adversely affect those existing and potential customers could lead them to delay, reduce or cancel expenditures on communications access systems, which actions would harm our business |
| In the past, we have suffered the postponement of anticipated customer orders because of regulatory issues |
| We have also received orders in the past from customers that were contingent upon their receipt of licenses from regulators, the timing of which were uncertain |
| The receipt of licenses by our customers may occur a year or more after they initially seek those licenses, or even after they place orders with us |
| At present there are few laws or regulations that specifically address our business of providing communications access equipment |
| However, future regulation may include access or settlement charges or tariffs that could impose economic burdens on our customers and us |
| We are unable to predict the impact, if any, that future legislation, judicial decisions or regulations will have on our business |
| 25 _________________________________________________________________ Our sales cycle is typically long and unpredictable, making it difficult to accurately predict inventory requirements, forecast revenues and control expenses |
| Typically our sales cycle can range from one month to two years and varies by customer |
| The length of the sales cycle with a particular customer may be influenced by a number of factors |
| Before we receive orders, our customers typically test and evaluate our products for a period that can range from a month to more than a year |
| In addition, the emerging and evolving nature of the communication access market may cause prospective customers to delay their purchase decisions as they evaluate new and/or competing technologies or, wait for new products or technologies to come to market |
| As the average order size for our products increases, our customers’ processes for approving purchases may become more complex, leading to a longer sales cycle |
| We expect that our sales cycle will continue to be long and unpredictable |
| Accordingly, it is difficult for us to anticipate the quarter in which particular sales may occur, to determine product shipment schedules and to provide our manufacturers and suppliers with accurate lead-time to ensure that they have sufficient inventory on hand to meet our orders |
| Therefore, our sales cycle impairs our ability to forecast revenues and control expenses |
| Our international sales may be difficult and costly as a result of the political, economic and regulatory risks in those regions |
| Sales to customers based outside the US have historically accounted for a substantial majority of our revenues |
| In 2005, our international sales (sales to customers located outside the US which includes a small percentage of US customers where the final destination of the equipment is outside of the US) accounted for 93prca of our total revenue, with sales to customers in Latin America, particularly Mexico, accounting for 65prca of total revenue, and sales to customers in Europe, Asia and Africa accounting for 13prca, 10prca and 5prca, respectively, of total revenue |
| In many international markets, long-standing relationships between potential customers and their local suppliers and protective regulations, including local content requirements and type approvals, create barriers to entry |
| In addition, pursuing international opportunities may require significant investments for an extended period before returns on such investments, if any, are realized and such investments may result in expenses growing at a faster rate than revenues |
| The following risks inherent in international business could reduce the international demand for our products, decrease the prices at which we can sell our products internationally or disrupt our international operations, which could adversely affect our operations: · the imposition of tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries; · import or export controls, including licensing or product-certification requirements; · unexpected changes in government policies or regulatory requirements in the Unites States or in foreign governments and delays in receiving licenses to operate; · political instability and acts of war or terrorism; · economic instability, including the impact of economic recessions; · difficulty in staffing and managing geographically diverse operations, including our reluctance to staff and manage foreign operations as a result of political unrest even though we have business opportunities in a country; · any limitation on our ability to limited ability to enforce intellectual property rights or agreements in regions where the judicial legal systems may be less developed or less protective of intellectual property or contractual rights; · capital and exchange control programs; · challenges caused by distance, language and cultural differences; · fluctuations in currency exchange rates; · labor unrest; · restrictions on the repatriation of cash; · the nationalization of local industry; and · potentially adverse tax consequences |
| 26 _________________________________________________________________ We may not be able to expand our sales and distribution capabilities, including establishing relationships with distributors and major system integrators and telecommunications equipment OEMs, which would harm our ability to generate revenue |
| We believe that our future success, particularly with respect to WiMAX, will depend upon our ability to expand our direct and indirect sales operations, including establishing relationships with distributors and major system integrators and telecommunications equipment OEMs |
| While we have been at times successful in signing country-specific OEM agreements with major suppliers such as Siemens and LM Ericsson, we cannot be certain that we will be successful in maintaining or expanding these agreements |
| Our operations in Israel may be disrupted by political and military tensions in Israel and the Middle East |
| We conduct various activities related to the WipLL, WiMAX and ASTONE products in Israel, including: research and development; design; raw material procurement; and manufacturing through manufacturing subcontractors based in Israel |
| Our operations could be negatively affected by the political and military tensions in Israel and the Middle East |
| Israel has been involved in a number of armed conflicts with its neighbors since 1948 and a state of hostility, varying in degree and intensity, has led to security and economic problems in Israel |
| Since September 2000, a continuous armed conflict with the Palestinian Authority has been taking place |
| While these conflicts have not had a material adverse effect on our operations in the past, conditions in Israel could, in the future, disrupt the development, manufacture and/or distribution of our products |
| Our dependence on key suppliers and contract manufacturers may result in product delivery delays if they do not have components in stock or terminate their non-exclusive arrangements with us |
| Some of the key components of our products are purchased from single vendors, including printed circuit board assemblies, application specific integrated circuits and radio frequency filters, for which alternative sources are generally not readily available in the short to medium term |
| If our vendors fail to supply us with components because they do not have them in stock when we need them, if the supply of the components in the market is limited, or if our vendors reduce or eliminate their manufacturing capacity for these components or enter into exclusive relationships with other parties which prevent them from selling to us, we could experience significant delays in shipping our products while we seek other supply sources, which may result in our customers claiming damages for delays |
| At times we have been forced to purchase these components from distributors instead of from the manufacturers, which has significantly increased our costs |
| During the second quarter of 2005, as a result of a temporary shortage of components, we experienced temporary difficulty manufacturing enough products to meet certain existing orders in a timely manner |
| We do not have long-term contracts with all of our suppliers |
| Instead, we execute purchase orders approximately three to six months in advance of when we believe we may need the components |
| These purchase orders are non-exclusive, and we are generally not required to purchase any minimum volume of components from any of these suppliers |
| In those instances in which we do not have a long-term contract with a supplier, the supplier may terminate our relationship upon six months’ prior notice |
| In addition, we generally outsource our manufacturing processes to subcontractors all of whom rely on our forecasts of future orders to make purchasing and manufacturing decisions |
| We provide them with forecasts on a regular basis |
| If a forecast turns out to be inaccurate, it may lead either to excess inventory that would increase our costs or a shortage of components that would delay shipments of our systems |
| Our contracts with our major manufacturing subcontractors are non-exclusive and most contracts may be terminated with six months notice by either party without significant penalty |
| Other than agreeing to purchase the materials we request in the forecasts, we do not have any agreements with them to purchase any minimum volume |
| If we lose Eric Stonestrom or any of our other executive officers, we may encounter difficulty replacing their expertise, which could impair our ability to implement our business plan successfully |
| We believe that our ability to implement our business strategy and our future success depends on the continued employment of our senior management team, in particular our president and chief executive officer, Eric Stonestrom |
| Our senior management team, who have extensive experience in our industry and are vital to maintaining some of our major customer relationships, may be difficult to replace |
| The loss of the technical knowledge and management and industry expertise of these key employees could make it difficult for us to execute our business plan effectively, could result in delays in new products being developed, lost customers and diversion of resources while we seek replacements |
| 27 _________________________________________________________________ We may not have adequate protection for our intellectual property, which may make it easier for others to misappropriate our technology and enable our competitors to sell competing products at lower prices and harm our business |
| Our success has historically depends in part on proprietary technology |
| We have historically relied on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights associated with our products other than ASMAX Despite our efforts to protect our proprietary rights, we cannot be certain that the steps we have taken will prevent misappropriation of our technology, and we may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights |
| The laws of some foreign countries, particularly in Asia, do not protect our proprietary rights to the same extent as the laws of the US and the UK, and we may encounter substantial infringement problems in those countries |
| In addition, we do not file for patent protection in every country where we conduct business |
| In instances where we have licensed intellectual property from third parties, we may have limited rights to institute actions against third parties for infringement of the licensed intellectual property or to defend any suit that challenges the validity of the licensed intellectual property |
| If we fail to adequately protect our intellectual property rights, or fail to do so under applicable law, it would be easier for our competitors to copy our products and sell competing products at lower prices, which would harm our business |
| Our products may infringe on the intellectual property rights of third parties, which may result in lawsuits that could be costly to defend and prohibit us from selling our products |
| Third parties could assert exclusive patent, copyright, trademark and other intellectual property infringement claims against the technologies that are important to us |
| If any inquiry from a third party relating to patents or trademarks leads to a proceeding against us and we are unable to defend ourselves successfully, our ability to sell our products may be adversely affected and our business would be harmed |
| In addition, third parties may assert claims, or initiate litigation against us, or our manufacturers, suppliers or customers with respect to existing or future products, trademarks or other proprietary rights |
| Any claims against us, or customers that we indemnify against intellectual property claims, with or without merit, may: · be time-consuming, costly to defend and harm our reputation; · divert management’s attention and resources; · cause delays in the delivery of our products; · require the payment of monetary damages; · result in an injunction, which would prohibit us from using these technologies and require us to stop shipping our systems until they could be redesigned, if possible; and · require us to enter into license or royalty agreements, which may not be available on acceptable terms or require payment of substantial sums |
| A material defect in our products that either delays the commencement of services or affects customer networks could seriously harm our credibility and our business, and we may not have sufficient insurance to cover any potential liability |
| Fixed wireless devices are highly complex and frequently contain undetected software or hardware errors when first introduced or as new versions are released |
| We have detected and are likely to continue to detect errors and product defects in connection with new product releases and product upgrades |
| In the past, some of our products have contained defects that delayed the commencement of service by our customers |
| If our hardware or software contains undetected errors, we could experience: · delayed or lost revenues and reduced market share due to adverse customer reactions; 28 _________________________________________________________________ · higher costs and expenses due to the need to provide additional products and services to a customer at a reduced charge or at no charge; · claims for substantial damages against us, regardless of our responsibility for any failure, which may lead to increased insurance costs; · negative publicity regarding us and our products, which could adversely affect our ability to attract new customers; and · diversion of management and development time and resources |
| Our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims or our insurer may disclaim coverage as to any future claim |
| The successful assertion of any large claim against us could adversely affect our business |
| We have made, and may continue to make, strategic acquisitions or enter into joint ventures |
| If we are not successful in operating or integrating these acquisitions or joint ventures, our business, results of operations and financial condition may be materially and adversely affected |
| We may make selective opportunistic acquisitions of companies or businesses with resources and product or service offerings capable of providing us with additional product and/or market strengths |
| Acquisitions involve significant risks and uncertainties, including: · the industry may develop in a different direction than anticipated and the technologies we acquire may not prove to be those we need; · the future valuations of acquired businesses may decrease from the market price we paid for these acquisitions; · the revenues of acquired businesses may not offset increased operating expenses associated with these acquisitions; · potential difficulties in integrating new products, software, businesses and operations in an efficient and effective manner; · our customers or customers of the acquired businesses may defer purchase decisions as they evaluate the impact of the acquisitions on our future product strategy; · potential loss of key employees of the acquired businesses; · diversion of the attention of our senior management from the operation of our daily business; · entering new markets in which we have limited experience and where competitors may have a stronger market presence; · the potential adverse effect on our cash position as a result of all or a portion of an acquisition purchase price being paid in cash; · potential issuance of securities that are superior to the right of holders of our common stock, or that would dilute our shareholders’ percentage ownership; · potential assumption and/or incurrence of liabilities and the increased risk of costly and time-consuming litigation, including stockholder lawsuits; and · the potential assumption of significant amounts of debt |
| Our inability to successfully operate and integrate newly acquired businesses in a timely manner could have a material adverse effect on our ability to take advantage of further growth in demand for IP-optimized network solutions, if any, and other advances in technologies and ultimately our results of operations and/or financial condition |
| 29 _________________________________________________________________ Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition |
| Failure to manage and successfully integrate acquisitions could materially harm our business and operating results |
| If our stock price falls below dlra1dtta00 per share, our common stock may be de-listed from the Nasdaq National Market |
| has established certain standards for the continued listing of a security on the Nasdaq National Market |
| These standards require, among other things, that the minimum bid price for a listed security be at least dlra1dtta00 per share |
| Under Nasdaq’s listing maintenance standards, if the closing bid price of our common stock remains below dlra1dtta00 per share for 30 consecutive trading days, Nasdaq will issue a deficiency notice to us |
| If the closing bid price subsequently does not reach dlra1dtta00 per share or higher for a minimum of ten consecutive trading days during the 180 calendar days following the issuance of the deficiency notice from Nasdaq, Nasdaq may de-list our common stock from trading on the Nasdaq National Market |
| If our common stock is to be de-listed from the Nasdaq National Market, we may apply to have our common stock listed on the Nasdaq SmallCap Market |
| In the event that such application is accepted, of which there can be no assurance, we anticipate the change in listings may result in a reduction in some or all of the following, each of which could have a material adverse effect on our investors: · the liquidity of our common stock; · the market price of our common stock; · the number of institutional investors that will consider investing in our common stock; · the number of investors in general that will consider investing in our common stock; · the number of market makers in our common stock; · the availability of information concerning the trading prices and volume of our common stock; · the number of broker-dealers willing to execute trades in shares of our common stock; and · our ability to obtain financing for the continuation of our operations |
| Should our application to the Nasdaq SmallCap Market be rejected or if we fail to continue to satisfy the Nasdaq SmallCap Market’s continued listing requirements, our common stock could be delisted entirely or relegated to trading on the over-the-counter-market |
| For 2004 and 2005, our independent registered public accounting firm reported material weaknesses in our internal control over financial reporting |
| If such material weaknesses were to recur, they could result in a material misstatement in our financial statements that would not be prevented or detected, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our stock |
| In connection with the audits of our financial statements for 2004 and 2005, our independent registered public accounting firm reported to our Audit Committee a "e material weakness "e in our internal control over financial reporting |
| In general, a material weakness is defined as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| The material weakness reported in 2004 was that that the Company’s internal control pertaining to the review and evaluation of the accounting treatment required for complex and non-standard Stockholders’ Equity transactions, in particular the Company’s issuance of Series A Preferred Stock, was ineffective |
| The material weakness reported in 2005 was that our processes and procedures relating to the appropriate accounting treatment for the recognition of revenue under certain types of extended payment arrangements in our sales contracts did not operate effectively |
| 30 _________________________________________________________________ Although we believe we have remediated the material weakness identified above, the measures we have taken to date or any future measures we may take might not sufficiently allow us to maintain adequate controls over our financial processes and reporting in the future |
| As discussed further in Item 9A below, we identified an additional material weakness in 2005 |
| Following the performance of a physical inventory count at our Israeli subsidiary in January 2006, significant differences were identified between the count and the inventory subledger |
| The differences were for the most part due to inventory movements that had not been recorded or were recorded incorrectly |
| We also identified at our Israeli subsidiary insufficient segregation of duties in the Logistics department, inadequate security access controls and failure to perform effective and timely reviews of reconciliations by individuals with appropriate levels of experience, which contributed to the delay in the differences being detected |
| We are in the process of remediating this material weakness |
| Furthermore, additional material weaknesses in our internal control over financial reporting could be discovered in the future |
| To the extent we identify any additional weaknesses in our internal control over financial reporting, significant resources from our management team and additional expenses may be required to implement and maintain effective controls and procedures |
| In addition, we may need to hire additional employees and outside consultants and further train our existing employees |
| If the material weaknesses previously reported by our independent registered public accounting firm were to recur, if we fail to implement required new or improved controls, or if we encounter difficulties in their implementation, our operating results could be adversely affected |
| If such an event were to occur, we may fail to meet our reporting obligations or we may have material misstatements in our financial statements |
| Any such failure also could adversely affect the results of the periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting |
| Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock |