1219210--2/27/2006--IKANOS

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Risks Related to Our Business We have a limited operating history and our quarterly operating results may fluctuate significantly. As a result, we may fail to meet or exceed our forecasts or the expectations of securities analysts or investors, which could cause our stock price to decline. In addition, we have experienced high growth rates in our net revenue in recent fiscal quarters. We do not expect similar growth rates in future periods. We recently completed the NPA acquisition and if we are not successful in integrating the technology and employees from the acquisition into our existing business, then our operating results may be harmed. We have a history of losses, and future losses may cause the market price of our common stock to decline. We may not be able to generate sufficient net revenue in the future to achieve or sustain profitability. If demand for our chipsets declines or does not grow, we will be unable to increase or sustain our net revenue and our operating results will be harmed. The average selling prices of our products are subject to rapid declines, which may harm our net revenue and profitability. Because we depend on a few significant customers for a substantial portion of our net revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities or our failure to attract new significant customers could adversely impact our net revenue and harm our business. Because of the rapid nature of technological development in our industry and the intense competition we face, our products become outmoded in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing products. If we do not successfully manage the transition process to next generation chipset products, our operating results may be harmed. We rely on a limited number of independent subcontractors to manufacture, package and test our current products, and our failure to secure and maintain sufficient capacity with these subcontractors could impair our relationships with customers and decrease sales, which would negatively impact our market share and operating results. When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which may be costly and negatively impact our operating results. In the event we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve the anticipated cost reductions. If our subcontractors' manufacturing facilities do not achieve satisfactory yields or quality, our relationships with our customers and our reputation will be harmed and, if this were to occur, our net revenue and operating income could decline and our cost of revenue as a percentage of net revenue could increase. We base orders for inventory on our forecasts of our OEM customers' demand and if our forecasts are inaccurate, our financial condition and liquidity would suffer. To remain competitive, we need to continue to transition our semiconductor chips to increasingly smaller sizes, and our failure to do so may harm our business. We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively impact our net revenue. Other data transmission technologies and network processing technologies may compete effectively with the carrier services addressed by our products, which could adversely affect our product sales and business. We rely on third-party technologies for the development of our products and our inability to use such technologies in the future would harm our ability to remain competitive. We may be unable to attract, retain and motivate key senior management and technical personnel, which could harm our development of technology and ability to be competitive. If we are unable to develop, introduce or to achieve market acceptance of our new chipset products, our operating results would be adversely affected. Our success is dependent on achieving design wins into commercially successful OEM systems. Acquisitions, strategic partnerships, joint ventures or investments may impair our capital and equity resources, divert our management's attention or otherwise negatively impact our operating results. We rely on third-party sales representatives to assist in selling our products, and the failure of these representatives to perform as expected could reduce our future sales. Rapidly changing standards and regulations could make our products obsolete, which would cause our sales and operating results to suffer. If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our net revenue or increase our costs. Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and harm our business. In addition, any litigation required to defend such claims could result in significant costs and diversion of our resources. Any potential dispute involving our patents or other intellectual property could also include our manufacturing subcontractors and OEM customers, which could trigger our indemnification obligations to them and result in substantial expense to us. Our products typically have lengthy sales cycles, which may cause our operating results to fluctuate and result in volatility in the price of our common stock. An OEM customer or a carrier may decide to cancel or change its product plans, which could cause us to lose anticipated sales. As our international manufacturing, sales and research and development operations expand, we will be increasingly exposed to various legal, business, political and economic risks associated with our international operations. Significant fluctuations or a slowdown in deployment of fiber extension over copper and broadband over copper in Asia would adversely affect our operating results. We are in the process of implementing a new ERP system, which could disrupt our operations, negatively impact our sales volume and net revenue and adversely affect our ability to integrate the assets we acquired in the NPA acquisition. Fluctuations in exchange rates between the Japanese yen, the Korean won, the Indian rupee, the U.S. dollar, the Canadian dollar and the euro, as well as other currencies in which we do business, may adversely affect our operating results. We have historically derived a substantial amount of our net revenue from Asia, and with the NPA acquisition, we expect to derive a majority of our network processing revenues from a single customer in Europe. If we fail to diversify the geographic sources and customer base of our net revenue in the future, our operating results could be harmed. The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could damage our reputation with current or prospective customers and adversely affect the market acceptance of new products. Recent changes to environmental laws and regulations applicable to manufacturers of electrical and electronic equipment are causing us to redesign our products, and may result in increases to our costs and greater exposure to liability. We have incurred increased costs as a result of being a public company. Compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act could harm our operating results, our ability to operate our business and investors' view of us. Due to the cyclical nature of the semiconductor and telecommunications industries, our operating results may fluctuate significantly, which could adversely affect the market price of our common stock. Several of the facilities that manufacture our products, most of our OEM customers and the carriers they serve, and our California facility are located in regions that are subject to earthquakes and other natural disasters. Changes in our tax rates could affect our future results. The requirement to expense stock options in our income statement could have a significant adverse effect on our reported results, and we do not know how the market will react to reduced earnings. Risks Related to our Common Stock Our stock price is volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all. Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management's attention and resources. If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline. Substantial future sales of our common stock in the public market could cause our stock price to fall. Our corporate actions are substantially controlled by our directors, executive officers and their affiliated entities who could exert control over our company in a manner that may be contrary to the interests of other investors. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Full 10-K form ▸

1219210--2/27/2006--IKANOS_COMMUNICATIONS