| SIRF TECHNOLOGY HOLDINGS INC Item 1A Risk Factors In evaluating SiRF Technology Holdings, Inc |
| and our business, you should carefully consider the following factors in addition to the other information in this annual report on Form 10-K Any one of the following risks could seriously harm our business, financial condition, and results of operations, causing the price of our stock to decline |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations |
| RISKS RELATED TO OUR BUSINESS We have a history of losses, have only become profitable since the third quarter of fiscal 2003 and may not sustain or increase profitability in the future |
| We have only been profitable since the third quarter of fiscal 2003 and may not sustain or increase profitability in the future |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra31 million |
| We intend to increase our research and development, sales and marketing and general and administrative expenses |
| We also expect to incur substantial stock-based compensation charges and charges related to amortization of acquired intangible assets associated with the acquisition of Kisel, Impulsesoft and Motorola’s GPS chip set product line |
| If we do not sustain or increase profitability or otherwise meet the expectations of securities analysts or investors, the market price of our common stock will likely decline |
| The revenue and income potential of our business and market are unproven |
| Our revenue may not continue to increase at historical rates |
| The market for Global Positioning System, or GPS-based location awareness capabilities in high-volume consumer and commercial applications is emerging, and if this market does not develop as quickly as we expect, the growth and success of our business will be limited |
| The market for GPS-based location awareness technology in high-volume consumer and commercial applications is new and its potential is uncertain |
| Many of these GPS-based applications have not been commercially introduced or have not achieved widespread acceptance |
| Our success depends on the rapid development of this market |
| We cannot predict the growth rate, if any, of this market |
| The development of this market depends on several factors, including government mandates such as E911 mandate in the US and E110 mandate in Japan, the development of location awareness infrastructure by wireless network operators and the availability of location-aware content and services |
| The failure of the market for high-volume consumer and commercial GPS-based applications to develop in a timely manner would limit the growth and success of our business |
| 10 ______________________________________________________________________ [34]Table of Contents If we are unable to fund the development of new products to keep pace with rapid technological change, we will be unable to expand our business |
| The market for high-volume consumer and commercial GPS-based applications is characterized by rapidly changing technology, such as low power or smaller form factors |
| This requires us to continuously develop new products and enhancements for existing products to keep pace with evolving industry standards and rapidly changing customer requirements |
| We may not have the financial resources necessary to fund future innovations |
| If we are unable to successfully define, develop and introduce competitive new products and enhance existing products, we may not be able to compete successfully in our markets |
| Development and delivery schedules for technology products are difficult to predict, and if we do not achieve timely initial customer shipments of new products, our reputation may suffer and our net revenue may decline |
| Our ability to develop and deliver new products successfully will depend on various factors, including our ability to: • accurately predict market requirements and evolving industry standards for the high-volume GPS-based applications industry; • anticipate changes in technology standards, such as wireless technologies; • develop and introduce new products that meet market needs in a timely manner; and • attract and retain engineering and marketing personnel |
| If we do not timely deliver new products or if these products do not achieve market acceptance, our reputation may suffer and our net revenue may decline |
| For example, in 2004 we introduced three new products: SiRFstarIII, SiRFSoft and SiRFLoc Server |
| While the first product line based on our SiRFstarIII architecture is now in high-volume production and one of our operator customers has commenced deployment of our SiRFLoc server platform in their network, our SiRFSoft is not yet in high-volume commercial production |
| In 2005 we launched a range of new products based on both SiRFstarII and SiRFstarIII architectures |
| While the product lines based on our SiRFstarIII architecture are now in high-volume production, only one of our SiRFstar II based products is in high-volume commercial production |
| If these or other products we introduce do not achieve market acceptance in a timely manner, our business would suffer |
| Our quarterly revenue and operating results are difficult to predict, and if we do not meet quarterly financial expectations, our stock price will likely decline |
| Our quarterly revenue and operating results are difficult to predict, and have in the past, and may in the future, fluctuate from quarter to quarter |
| It is possible that our operating results in some quarters will be below market expectations |
| This would likely cause the market price of our common stock to decline |
| Our quarterly operating results may fluctuate because of many factors, including: • our ability to successfully develop, introduce and sell new or enhanced GPS-based products in a timely manner; • changes in the relative volume of sales of our chip sets, our premium software offerings and our intellectual property cores, or IP cores, or other products, which have significantly different average selling prices and gross margins; • unpredictable volume and timing of customer orders; • the availability, pricing and timeliness of delivery of other components, such as flash memory and crystal oscillators, used in our customers’ products; 11 ______________________________________________________________________ [35]Table of Contents • the timing of new product announcements or introductions by us or by our competitors; • the introduction of our customers’ products using our technology; • seasonality in our various target markets; • product obsolescence and our ability to manage product transitions; • decreases in the average selling prices of our products; and • fluctuations and estimations inherent in predicting our tax rates |
| We base our planned operating expenses in part on our expectations of future revenue, and our expenses are relatively fixed in the short term |
| If revenue for a particular quarter is lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter |
| We have relied, and expect to continue to rely, on a limited number of customers for a significant portion of our net revenue, and our net revenue could decline due to the delay or loss of significant customer orders |
| We expect that a small number of customers may constitute a significant portion of our net revenue for the foreseeable future |
| We had two customers, Promate and Gateway, which each accounted for 10prca or more of our net revenue in 2005 |
| These two customers collectively accounted for approximately 56prca and 36prca of our net revenue in 2005 and 2004, respectively |
| In addition, in June 2005 we purchased Motorola’s GPS chip set product line |
| Motorola had historically been one of our customers and we cannot assure you that they will continue to be a customer in the future |
| If we fail to successfully sell our products to one or more of our significant customers in any particular period, or if a large customer purchases fewer of our products, defers orders or fails to place additional orders with us, our net revenue could decline, and our operating results may not meet market expectations |
| We have derived a substantial majority of our net revenue from sales to the automotive, mobile phone and consumer device markets |
| If we fail to generate continued revenue from these markets or from additional markets, our revenue could decline |
| We believe that over 90prca of our net revenue during fiscal 2005 and 2004 was attributable to products which were eventually incorporated into the automotive, mobile phone and consumer device markets |
| If we cannot sustain or increase sales of our products into these markets or if we fail to generate revenue from additional markets, our net revenue could decline |
| Our lengthy sales cycle makes it difficult for us to forecast revenue and increases the variability of quarterly fluctuations, which could cause our stock price to decline |
| We have a lengthy sales process in some of our target markets and our sales cycles typically range from six months to two years, depending on the market |
| We typically need to obtain a design win, where our product is incorporated into a customer’s initial product design |
| In some cases, due to the rapid growth of new GPS applications and products and our prospective customers’ inexperience with GPS technology, this process can be time-consuming and requires substantial investment of our time and resources |
| After we have developed and delivered a product to a customer, our customer often tests and evaluates our product before designing its own product to incorporate our technology |
| Our customers may need three to six months or longer to test and evaluate our technology and an additional 12 months or more to begin volume production of products that incorporate our technology |
| Because of this lengthy sales cycle, we may experience delays from the time we increase our operating expenses and our investments in committing capacity until the time that we generate revenue from these products |
| It is possible that we may not generate sufficient, if any, revenue from these products to offset the cost of selling and completing the design work |
| 12 ______________________________________________________________________ [36]Table of Contents Our success depends upon our customers’ ability to successfully sell their products incorporating our technology |
| Even if a customer selects our technology to incorporate into its product, the customer may not ultimately market and sell its product successfully |
| A cancellation or change in plans by a customer, whether from lack of market acceptance of its products or otherwise, could cause us to lose sales that we had anticipated |
| Also, our business and operating results could suffer if a significant customer reduces or delays orders during our sales cycle or chooses not to release products that contain our technology |
| Our operating results depend significantly on sales of our SiRFstarII and SiRFstarIII product lines and our ability to develop and achieve market acceptance of new GPS products |
| We currently derive most of our revenue from sales of our SiRFstarII and SiRFstarIII product lines |
| If we fail to develop or achieve market acceptance of new GPS products, we will continue to depend on sales of our SiRFstarII and SiRFstarIII product lines |
| Any decline in sales of our SiRFstarII and SiRFstarIII product lines or decreases in average selling prices will adversely affect our net revenue and operating results |
| The average selling prices of products in our markets have historically decreased rapidly and will likely do so in the future, which could harm our revenue and gross profits |
| As is typical in the semiconductor industry, the average selling price of a product historically declines significantly over the life of the product |
| In addition, the products we develop and sell are used for high-volume applications |
| In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors |
| We expect that we will have to similarly reduce prices in the future for mature products |
| Reductions in our average selling prices to one customer could also impact our average selling prices to all customers |
| A decline in average selling prices would harm our gross margins |
| Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs, adding new features to our existing products or developing new or enhanced products on a timely basis with higher selling prices or gross margins |
| We intend to evaluate acquisitions or investments in complementary technologies and businesses, and we may not realize the anticipated benefits of these acquisitions or investments |
| As part of our business strategy, we plan to evaluate acquisitions of, or investments in, complementary technologies and businesses |
| For example, in March 2003, we acquired Enuvis, a developer of wireless aided-GPS, or AGPS, technology |
| AGPS is an operational mode of a GPS receiver operating in a network that receives aiding from the network to help determine the user’s position |
| In April 2005, we acquired Kisel, an independent European design house for complex integrated transceiver circuits |
| In June 2005, we acquired Motorola’s GPS chip set product line |
| Motorola has historically been one of our customers and as a result of this transaction we cannot assure you that they will continue to be a customer in the future |
| In December 2005, we acquired Impulsesoft, an expert in Bluetooth stereo solutions and embedded software |
| We may be unable to identify suitable acquisition candidates or investment opportunities in the future or be able to make these acquisitions or investments on a commercially reasonable basis, or at all |
| If we are unable to identify and successfully complete suitable acquisitions or investments, we may be required to expand our internal research and development efforts, which could harm our competitive position or result in negative market perception |
| Any future acquisitions and investments would have several risks, including: • our inability to successfully integrate acquired technologies, product lines or operations; • diversion of management’s attention; • potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities; 13 ______________________________________________________________________ [37]Table of Contents • expenses related to amortization of intangible assets; • potential write-offs of acquired assets; • loss of key employees of acquired businesses; and • our inability to recover the costs of acquisitions or investments |
| We may not realize the anticipated benefits of any acquisition or investment |
| Our reliance on third-party distributors subjects us to certain risks that could negatively impact our business |
| We market and sell our products directly and through third-party distributors pursuant to agreements that can generally be terminated for convenience by either party upon prior notice to the other party |
| These agreements are non-exclusive and permit our distributors to offer our competitors’ products |
| In addition, our third party distributors have been a significant factor in our ability to increase sales of our products |
| In 2005, one of our distributors, Promate, accounted for approximately 45prca of our net revenues |
| Accordingly, we are dependent on our distributors to supplement our direct marketing and sales efforts |
| If a significant distributor terminated its relationship with us or decided to market our competitors’ products over our products, this could have an adverse impact on our ability to bring our products to market |
| Additionally, distributors typically maintain an inventory of our products |
| In most instances, our agreements with distributors protect their inventory of our products against price reductions |
| Some agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns |
| We defer the gross margins on our sales to distributors, resulting from both our deferral of revenue and related product costs, until the applicable products are re-sold by the distributors |
| However, in the event of an unexpected significant decline in the price of our products, the price protection rights we offer to our distributors could materially adversely affect us because our revenue would decline |
| Because competition for qualified personnel is intense in our industry and in our geographic regions, we may not be able to recruit and retain necessary personnel, which could impact the development or sales of our products |
| Our success will depend on our ability to attract and retain senior management, engineering, sales, marketing and other key personnel, such as GPS, radio frequency, or RF, and application-specific integrated circuit, or ASIC, engineers |
| Because of the intense competition for these personnel, particularly in the San Francisco Bay Area, Los Angeles Area and Phoenix Area, we may be unable to attract and retain key technical and managerial personnel |
| If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products |
| The loss of any of these key employees could slow our product development processes and sales efforts or harm investors’ perception of our business |
| We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel |
| Also, we may have more difficulty attracting personnel as a public company because of the perception that the stock option component of our compensation package may not be as valuable |
| We depend primarily on three independent foundries to manufacture substantially all of our current products, and any failure to obtain sufficient foundry capacity could significantly delay our ability to ship our products and damage our customer relationships |
| We do not own or operate a fabrication facility |
| We rely on third parties to manufacture our semiconductor products |
| Three outside foundries, Samsung in South Korea, IBM in the US and STMicroelectronics in Italy, currently manufacture substantially all of our products |
| 14 ______________________________________________________________________ [38]Table of Contents Because we rely on outside foundries, we face several significant risks, including: • lack of manufacturing capacity and higher prices; • limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and • the unavailability of, or potential delays in obtaining access to, key process technologies |
| The ability of each foundry to provide us with semiconductors is limited by its available capacity |
| We do not have a guaranteed level of production capacity with any of these foundries and it is difficult to accurately forecast our capacity needs |
| We do not have long-term agreements with any of these foundries and we place our orders on a purchase order basis |
| We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice |
| It is possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with the foundries, may induce our foundries to reallocate capacity to them |
| Any reallocation could impair our ability to secure the supply of semiconductors that we need |
| Each of our semiconductor products is manufactured at only one foundry and if any one foundry is unable to provide the capacity we need, we may be delayed in shipping our products, which could damage our customer relationships and result in reduced revenue |
| Although we substantially use three separate foundries, each of our semiconductor products is manufactured at one of these foundries |
| If one of our foundries is unable to provide us with capacity as needed, we could experience significant delays delivering the semiconductor product being manufactured for us solely by that foundry |
| Also, if any of our foundries experiences financial difficulties, if they suffer damage to their facilities or in the event of any other disruption of foundry capacity, we may not be able to qualify an alternative foundry in a timely manner |
| If we choose to use a new foundry or process for a particular semiconductor product, we believe that it would take us several months to qualify the new foundry or process before we can begin shipping products |
| If we cannot accomplish this qualification in a timely manner, we may experience a significant interruption in supply of the affected products |
| The facilities of the independent foundries upon which we rely to manufacture all of our semiconductors are located in regions that are subject to earthquakes and other natural disasters, as well as geopolitical risk and social upheaval |
| The outside foundries and their subcontractors upon which we rely to manufacture most of our semiconductors are located in countries that are subject to earthquakes and other natural disasters, as well as geopolitical risks and social upheavals |
| Any earthquake or other natural disaster in these countries could materially disrupt these foundries’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of our products |
| In addition, these facilities are subject to risks associated with uncertain political, economic and other conditions in Asia, such as political turmoil in the region and the outbreak of SARS, which could disrupt the operation of these foundries and in turn harm our business |
| For example, South Korea is a neighboring state to North Korea, which is currently in discussions with the United States and other countries regarding its nuclear weapons program |
| Any geographical or social upheaval in these countries could materially disrupt the production capabilities of our foundries and could result in our experiencing a significant delay in delivery, or a substantial shortage of our products |
| 15 ______________________________________________________________________ [39]Table of Contents We place binding manufacturing orders based on our forecasts and if we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventory |
| Our third-party manufacturers require us to provide forecasts of our anticipated manufacturing orders and place binding manufacturing orders in advance of receiving purchase orders from our customers |
| This may result in product shortages or excess product inventory because we cannot easily increase or decrease our manufacturing orders |
| Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders |
| In addition, our chip sets have rapidly declining average selling prices |
| Our failure to adequately forecast demand for our products could cause our quarterly operating results to fluctuate and cause our stock price to decline |
| We may experience lower than expected manufacturing yields, which would delay the production of our semiconductor products |
| The manufacture of semiconductors is a highly complex process |
| Minute impurities in a silicon wafer can cause a substantial number of wafers to be rejected or cause numerous die on a wafer to be nonfunctional |
| Semiconductor companies often encounter difficulties in achieving acceptable product yields from their manufacturers |
| Our foundries have from time to time experienced lower than anticipated manufacturing yields, including for our products |
| This often occurs during the production of new products or the installation and start-up of new process technologies |
| We may also experience yield problems as we migrate our manufacturing processes to smaller geometries |
| If we do not achieve planned yields, our product costs could increase, and product availability would decrease |
| The loss of any of the five primary third-party subcontractors that assemble and test all of our current products could disrupt our shipments, harm our customer relationships and reduce our sales |
| If any of these subcontractors experiences capacity constraints or financial difficulties, if any subcontractor suffers any damage to its facilities or if there is any other disruption of assembly and testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner |
| We do not have long-term agreements with any of these subcontractors |
| We typically procure services from these suppliers on a per-order basis |
| Because of the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our semiconductor products |
| Any problems that we may encounter with the delivery, quality or cost of our products could damage our reputation and result in a loss of customers |
| We use a third party to warehouse and ship a significant portion of our products and any failure to adequately store and protect our products or to deliver our products in a timely manner could harm our business |
| We use a third party, JSI Shipping, located in Singapore, for a significant portion of our product warehousing and shipping |
| As a result, we rely on this third-party to adequately protect and ensure the timely delivery of our products |
| Our warehoused products are insured under a general insurance policy, including the portion of products warehoused by JSI, which may not always sufficiently cover the entire value of inventory held by JSI at any given time |
| If our products are not delivered in a timely manner or are not sufficiently protected prior to delivery, our business could suffer |
| 16 ______________________________________________________________________ [40]Table of Contents If our value-added manufacturer customers do not provide sufficient support, our business could be harmed |
| Our products are highly technical and, as a result, may require a high level of customer support |
| We rely on our value-added manufacturers to support our products |
| If these value-added manufacturers cannot successfully support our products, which are embedded in their products, our reputation could be harmed and future sales of our products could be adversely affected |
| Our future success depends on building relationships with customers that are market leaders |
| If we cannot establish these relationships or if these customers develop their own systems or adopt competitors’ products instead of buying our products, our business may not succeed |
| We intend to continue to pursue customers who are leaders in our target markets |
| We may not succeed in establishing these relationships because these companies may develop their own systems or adopt one of our competitors’ products |
| These relationships often require us to develop new premium software that involves significant technological challenges |
| These types of customers also frequently place considerable pressure on us to meet their tight development schedules |
| We may have to devote a substantial amount of our limited resources to these relationships, which could detract from or delay our completion of other important development projects |
| Delays in development of these projects could impair our relationships with other customers and negatively impact sales of the products under development |
| Recent changes to our senior management could negatively effect our operations and relationships with manufacturers, customers and employees |
| Our chief financial officer plans to retire at the end of March 2006 |
| We have hired a new senior vice president finance who will assume the role of chief financial officer at the beginning of April 2006 |
| This change could negatively affect our operations and our relationships with our manufacturers, third-party subcontractors, customers, employees and market leaders |
| If the integration of this new member to our senior management team does not go as smoothly as anticipated, it could negatively affect our business |
| We have significantly expanded our operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations |
| As we continue to grow, we may be unable to expand our business at the same growth rate as we have in the past |
| To manage our growth, we must implement and improve additional and existing administrative, financial and operations systems, procedures and controls |
| Our failure to manage growth could disrupt our operations and could limit our ability to pursue potential market opportunities |
| Defects in our products could result in a decrease of customers and revenue, unexpected expenses and loss of market share |
| Our products are complex and must meet stringent quality requirements |
| Products as complex as ours may contain undetected errors or defects, especially when first introduced or when new versions are released |
| For example, our products may contain errors, which are not detected until after they are shipped because we cannot test for all possible scenarios |
| Errors or defects may not be detected until after commercial shipments |
| In addition, errors or defects in our server software could cause our customers to experience a loss of network service effecting end-users |
| Any errors or defects in our products, or the perception that there may be errors or defects in our products, could result in customers’ rejection of our products, damage to our reputation, a decline in our stock price, lost revenue, diverted development resources and increased customer service and support costs and warranty claims |
| 17 ______________________________________________________________________ [41]Table of Contents The limited warranty provisions in our agreements with some customers expose us to risks from product liability claims |
| Our agreements with some customers contain limited warranty provisions, which provide the customer with a right to damages if a defect is traced to our products or if we cannot correct errors reported during the warranty period |
| If our contractual limitations are unenforceable in a particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a successful claim could require us to pay substantial damages |
| We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses |
| Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology |
| As of December 31, 2005, we had 123 patents granted in the United States, 116 patent applications pending in the United States, 25 patents granted in foreign countries and 141 foreign patent applications pending |
| Our patent applications may not provide protection of all competitive aspects of our technology or may not result in issued patents |
| Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future patents that may be issued may not provide competitive advantages to us |
| Also, patent protection in foreign countries may be limited or unavailable where we need this protection |
| It is possible that competitors may independently develop similar technologies or design around our patents and competitors could also successfully challenge any issued patent |
| We also rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, it could harm our ability to compete and generate revenue |
| We also rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights |
| Our ability to compete and grow our business could suffer if these rights are not adequately protected |
| We seek to protect our source code for our software, and design code for our chip sets, documentation and other written materials under trade secret and copyright laws |
| We license our software and IP cores under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software and IP cores |
| We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements |
| The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology |
| Our proprietary rights may not be adequately protected because: • laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and • policing unauthorized use of our intellectual property is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use |
| The laws of other countries in which we market our products, such as some countries in the Asia/Pacific region, may offer little or no protection of our proprietary technologies |
| As we increase our international sales, it may be more difficult to protect our intellectual property rights |
| Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which would harm our competitive position and market share |
| We have agreed to indemnify some customers for certain costs and damages of intellectual property infringement in some circumstances |
| This practice may subject us to significant indemnification claims by our customers or others |
| In addition to indemnification claims by our customers, we may also have to defend related 18 ______________________________________________________________________ [42]Table of Contents third-party infringement claims made directly against us |
| In some instances, our GPS products are designed for use in devices used by potentially millions of consumers, such as cellular telephones, and our server software is placed on servers providing wireless network services to end-users, both of which could subject us to considerable exposure should an infringement claim occur |
| In the past we have received notice from a major customer informing us that this customer received notice from one of our competitors that the inclusion of our chip sets into our customer’s products requires the payment of patent license fees to the competitor |
| We may receive similar notices from our customers or directly from our competitors in the future |
| We cannot assure you that such claims will not be pursued or that these claims, if pursued, would not harm our business |
| Any potential dispute involving our patents or intellectual property could be costly, time-consuming and result in our loss of significant rights |
| Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties |
| From time to time we and our customers receive letters, including letters from various industry participants, alleging infringement of patents |
| For example, in September 2000, we entered into a settlement and cross-licensing agreement with a third party regarding patent infringement under which we agreed to pay approximately dlra5dtta0 million and issued a warrant to purchase shares of our preferred stock |
| As we increase our international sales, we may become more susceptible to these types of infringement claims |
| Litigation may be necessary in the future to enforce our patents or any patents we may receive and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and we may not prevail in any future litigation |
| Litigation, whether or not determined in our favor or settled, could be costly and time-consuming and could divert management’s attention from our business |
| If there is a successful claim of infringement, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all |
| Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business |
| Also, we may be unaware of filed patent applications that relate to our products |
| Parties making infringement claims may be able to obtain an injunction, which could prevent us from selling our products or using technology that contains the allegedly infringing intellectual property |
| Parties making infringement claims may also be able to bring an action before the International Trade Commission that could result in an order stopping the importation into the United States of our products |
| Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition |
| Although a substantial majority of our net revenue is derived from sales of our chip sets, in recent periods, we have had a portion of our net revenue from large customers in the wireless markets come from royalties paid by licensees of our technology |
| Royalty payments are based on the number of semiconductor chips shipped which contain our GPS technology or our premium software |
| We depend on our ability to structure, negotiate and enforce agreements for the determination and payment of royalties |
| We face risks inherent in a royalty-based business model, many of which are outside of our control, including, but not limited to, the following: • the rate of adoption and incorporation of our technology by wireless handset makers and wireless infrastructure vendors; • the demand for products incorporating our licensed technology; and • the cyclicality of supply and demand for products using our licensed technology |
| 19 ______________________________________________________________________ [43]Table of Contents It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenue |
| The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis |
| Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time-consuming and potentially detrimental to our ongoing business relationship with our licensees |
| As a result, to date, we have relied exclusively on the accuracy of reports supplied by our licensees without independently verifying the information in them |
| Any significant inaccuracy in the reporting by our licensees or our failure to audit our licensees’ books and records may result in our receiving less royalty revenue than we are entitled to under the terms of our license agreements |
| Some of our customers could eventually become our competitors |
| Many of our customers are also large integrated circuit suppliers and some of our large customers already have GPS expertise in-house |
| These large customers have longer operating histories, significantly greater resources and name recognition, and a larger base of customers than we do |
| The process of licensing our technology and support of such customers to effectuate the transfer of technology may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights |
| We cannot sell to some customers who compete with us |
| For example, STMicroelectronics, a customer of ours, has internally developed a GPS solution for the automotive market in which we compete |
| Further, each new design by a customer presents a competitive situation |
| We in the past have lost design wins to divisions within our customers and this may occur again in the future |
| We cannot provide assurance that these customers will not continue to compete with us, that they will continue to be our customers or that they will continue to license products from us at the same volumes |
| Competition could increase pressure on us to lower our prices and profit margins |
| Our operations are primarily located in California and, as a result, are subject to earthquakes and other catastrophes |
| Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in San Jose, California and in Santa Ana, California |
| San Jose and Santa Ana exist on or near known earthquake fault zones |
| Should an earthquake or other catastrophe, such as a fire, flood, power loss, communication failure or similar event, disable our facilities, we do not have readily available alternative facilities from which to conduct our business |
| Changes to financial accounting standards may affect our results of operations and cause us to change our business practices |
| We prepare our financial statements to conform with US generally accepted accounting principles, or GAAP These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies |
| A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced |
| Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review |
| The Financial Accounting Standards Board and other agencies have finalized changes to GAAP that will require us, starting in our first quarter of 2006, to record a charge to earnings for the fair value of employee stock option grants and other equity incentives |
| We may have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce our overall net income |
| In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could 20 ______________________________________________________________________ [44]Table of Contents make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees |
| See Note 1 of the “Notes to Consolidated Financial Statements” in Item 8 for a discussion of the impact on our financial results if we were to use the fair value method |
| RISKS RELATED TO OUR INDUSTRY Because many companies sell in the market for GPS-based products, we must compete successfully to gain market share |
| The market for our products is competitive and rapidly evolving |
| We expect competition to increase |
| Increased competition may result in price reductions, reduced margins or loss of market share |
| We may be unable to compete successfully against current or future competitors |
| Some of our customers are also competitors of ours |
| Within each of our markets, we face competition from public and private companies as well as our customers’ in-house design efforts |
| For chip sets, our main competitors include Analog Devices, Philips, QUALCOMM, Infineon, Sony, STMicroelectronics, Texas Instruments and Trimble, as well as several private companies |
| For modules based on our products, the main competitors are Furuno, JRC, Sony, u-blox and Trimble |
| For licensed IP cores, our competitors include QUALCOMM, Ceva and several private companies |
| Licensees of our competitors’ products may also compete against us |
| In the wireless market, we also compete against products based on alternative location technologies that do not rely on GPS, such as wireless infrastructure-based systems |
| These systems are based on technologies that compute a caller’s location by measuring the differences of signals between individual base stations |
| If these technologies become more widely adopted, market acceptance of our products may decline |
| Competitors in these areas include Andrew, Cambridge Positioning Systems and TruePosition |
| Further, alternative satellite-based navigation systems such as Galileo, which is being developed by European governments, may reduce the demand for GPS-based applications or cause customers to postpone decisions on whether to integrate GPS capabilities into their products |
| Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do |
| Also in 2005, many of our private competitors raised additional financing |
| We also believe that our success depends on our ability to establish and maintain relationships with established system providers and industry leaders |
| Our failure to establish and maintain these relationships, or the preemption of relationships by the actions of other competitors, will harm our ability to penetrate emerging markets |
| Cyclicality in the semiconductor industry may affect our revenue and, as a result, our operating results could be adversely affected |
| The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand |
| From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories and declines in general economic conditions |
| This cyclicality could cause our operating results to decline dramatically from one period to the next |
| In addition to the sale of chip sets, our business depends on the volume of production by our technology licensees, which, in turn, depends on the current and anticipated market demand for semiconductors and products that use semiconductors |
| As a result, if we are unable to control our expenses adequately in response to lower revenue from our chip set customers and technology licensees, our operating results will suffer and we might experience operating losses |
| We derive a substantial portion of our revenue from international sales and conduct some of our business internationally, and economic, political and other risks may harm our international operations and cause our revenue to decline |
| We derived approximately 80prca, 75prca and 87prca of our net revenue on export sales from the United States in fiscal 2005, 2004, and 2003, respectively |
| Export sales from the United States to the Asia/Pacific region 21 ______________________________________________________________________ [45]Table of Contents accounted for approximately 72prca, 63prca and 62prca of our net revenue in fiscal 2005, 2004, and 2003, respectively |
| We maintain sales offices in Europe and the Asia/Pacific region and may expand our international operations |
| Risks we face in conducting business internationally include: • multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses; • difficulties and costs in staffing and managing foreign operations as well as cultural differences; • international terrorism, particularly in emerging markets; • trade restrictions or high tariffs that favor local competition in some countries; • laws and business practices favoring local companies; • potentially adverse tax consequences, such as withholding tax obligations on license revenue that we may not be able to offset fully against our US tax obligations, including the further risk that foreign tax authorities may recharacterize license fees or increase tax rates, which could result in increased tax withholdings and penalties; • potentially reduced protection for intellectual property rights, for example, in China; • inadequate local infrastructure and transportation delays; • financial risks, such as longer sales and payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange and rate fluctuations; • failure by us or our customers to gain regulatory approval for use of our products; and • political and economic instability, including wars, acts of terrorism, political unrest, a recurrence of the SARS outbreak, boycotts, curtailments of trade and other business restrictions |
| Also, there may be reluctance in some foreign markets to purchase products based on GPS technology, due to the control of GPS by the United States government |
| Any of these factors could significantly harm our future international sales and operations and, consequently, our business |
| We may have difficulty in protecting our intellectual property rights in foreign countries, which could increase the cost of doing business or cause our revenue to decline |
| Our intellectual property is used in a large number of foreign countries |
| There are many countries, such as China, in which we have no issued patents, or that may have reduced intellectual property protection |
| In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries |
| It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries |
| For example, if our foundries lose control of our intellectual property, it would be more difficult for us to take remedial measures because our foundries are located in countries that do not have the same protection for intellectual property that is provided in the United States |
| Furthermore, we expect this to become a greater problem for us as our technology licensees increase their manufacturing in countries, which provide less protection for intellectual property |
| Our inability to enforce our intellectual property rights in some countries may harm our business |
| The GPS market could be subject to governmental and other regulations that may increase our cost of doing business or decrease demand for our products |
| GPS technology is restricted and its export is controlled |
| The United States government may restrict specific uses of GPS technology in some applications for privacy or other reasons |
| The United States government may also block the civilian GPS signal at any time or in hostile areas |
| In addition, the policies of the United States government for the use of GPS without charge may change |
| The growth of the GPS market could be limited by 22 ______________________________________________________________________ [46]Table of Contents government regulation or other action |
| For example, the President of the United States authorized a new national policy on December 8, 2004 that establishes guidance and implementation actions for space-based positioning, navigation, timing programs, augmentations and activities for US national and homeland security, civil, scientific, and commercial purposes |
| These regulations or actions could interrupt or increase our cost of doing business |
| Reallocation of the radio frequency bands used by GPS technology may harm the utility and reliability of our products |
| GPS technology uses radio frequency bands that are globally allocated for radio navigation satellite services |
| International allocations of radio frequency bands are made by the International Telecommunications Union, a specialized technical agency of the United Nations |
| These allocations are further governed by radio regulations which have treaty status and which are subject to modification every two to three years by the World Radio Communication Conference |
| Any reallocation of radio frequency bands, including frequency band segmentation or spectrum sharing, may negatively affect the utility and reliability of GPS-based products |
| Also, unwanted emissions from mobile satellite services and other equipment operating in adjacent frequency bands or inband from licensed and unlicensed devices may negatively affect the utility and reliability of GPS-based products |
| The Federal Communications Commission continually receives proposals for new technologies and services which may seek to operate in, or across, the radio frequency bands currently used by the GPS and other public services |
| For example, in May 2000, the Federal Communications Commission issued a proposed rule for the operation of ultra-wideband radio devices on an unlicensed basis in the same frequency bands |
| These ultra-wideband devices might cause interference with the reception of GPS signals |
| This could reduce demand for GPS-based products, which could reduce our sales and revenue |
| Adverse decisions by the Federal Communications Commission that result in harmful interference to the delivery of the GPS signals may harm the utility and reliability of GPS-based products |
| Our technology relies on the GPS satellite network, and any disruption in this network would impair the viability of our business |
| The satellites and ground support systems that provide GPS signals are complex electronic systems subject to electronic and mechanical failures and possible sabotage |
| The satellites were originally designed to have lives of six to seven years and are subject to damage by the hostile space environment in which they operate |
| However, some of the satellites currently deployed have already been in place for 15 years |
| Repairing damaged or malfunctioning satellites is currently not economically feasible |
| If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites, or they may not be replaced at all |
| A reduction in the number of operating satellites would impair the operations or utility of GPS, which would have a material negative effect on our business |
| The United States government may not remain committed to the maintenance of GPS satellites over a long period |
| Personal privacy concerns may limit the growth of the high-volume consumer and commercial GPS-based applications and demand for our products |
| GPS-based consumer and commercial applications rely on the ability to receive, analyze and store location information |
| Consumers may not accept some GPS applications because of the fact that their location can be tracked by others and that this information could be collected and stored |
| Also, federal and state governments may disallow specific uses of GPS technology for privacy or other reasons or could subject this industry to regulation |
| If consumers view GPS-based applications as a threat to their privacy, demand for some GPS-based products could decline |
| We may experience a decrease in market demand due to uncertain economic conditions in the United States and in international markets, which has been further exacerbated by the concerns of terrorism, war and social and political instability |
| Economic growth in the United States and international markets has slowed significantly, and the United States economy has recently been in a recession |
| The timing of a full economic recovery is uncertain |
| In addition, 23 ______________________________________________________________________ [47]Table of Contents the terrorist attacks in the United States and turmoil in the Middle East have increased the uncertainty in the United States economy and may contribute to a decline in economic conditions, both domestically and internationally |
| Terrorist acts and similar events, or war in general, could contribute further to a slowdown of the market demand for goods and services, including demand for our products |
| If the economy declines as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our products, which may harm our operating results |
| OTHER RISKS RELATED TO US Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy |
| We believe that our existing cash, investments, amounts available under our bank line of credit and cash generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months |
| The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including: • market acceptance of our products; • the need to adapt to changing technologies and technical requirements; • the existence of opportunities for expansion; and • access to and availability of sufficient management, technical, marketing and financial personnel |
| If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing |
| The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders |
| Additional debt would result in increased expenses and could result in covenants that would restrict our operations |
| We have not made arrangements to obtain additional financing, and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all |
| We will incur increased costs as a result of being a public company |
| The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, have required changes in corporate governance practices of public companies |
| These rules and regulations have increased our legal and financial compliance costs, and made some activities more time-consuming and costly |
| We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain similar coverage |
| These rules and regulations could also make it may be more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers |
| We are exposed to risks from legislation requiring companies to evaluate internal controls over financial reporting |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent auditors to attest to, the effectiveness of our internal control structure and procedures for financial reporting for the fiscal year ending December 31, 2005 and subsequent years |
| We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements |
| This legislation is relatively new and neither companies nor accounting firms have significant experience in complying with its requirements |
| As a result, we have and expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance |
| In the future, if our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock |