3Ware 2005 Annual Report Download - page 46

The closing of our internal wafer fabrication facility could result in unanticipated liability and reduced
revenues.
In the past we have derived a significant portion of our revenues from products manufactured in our internal
wafer fabrication facility. This facility was closed during fiscal 2003 and we no longer have the ability to
manufacture products in the facility, which subjects us to substantial risks, including:
• we may be unable to repair or replace defective products;
• we may be unable to fulfill customer orders for products which are not in our inventory;
• if we have not built or effectively stored products which we have committed to customers, we may incur
liability to these customers; and
• if we are unable to successfully design and sell products manufactured in external foundries, our
revenues will decline.
Our dependence on third-party manufacturing and supply relationships increases the risk that we will not
have an adequate supply of products to meet demand or that our cost of materials will be higher than
expected.
We depend upon third parties to manufacture, assemble or package certain of our products. As a result, we
are subject to risks associated with these third parties, including:
• reduced control over delivery schedules and quality;
• inadequate manufacturing yields and excessive costs;
• difficulties selecting and integrating new subcontractors;
• potential lack of adequate capacity during periods of excess demand;
• limited warranties on products supplied to us;
• potential increases in prices; and
• potential misappropriation of our intellectual property.
Our outside foundries generally manufacture our products on a purchase order basis, and we have very few
long-term supply arrangements with these suppliers. We have less control over delivery schedules,
manufacturing yields and costs than competitors with their own fabrication facilities. A manufacturing disruption
experienced by one or more of our outside foundries or a disruption of our relationship with an outside foundry,
including discontinuance of our products by that foundry, would negatively impact the production of certain of
our products for a substantial period of time.
Our IC products are generally only qualified for production at a single foundry. These suppliers can allocate,
and in the past have allocated, capacity to the production of other companies’ products while reducing deliveries
to us on short notice. There is also the potential that they may discontinue manufacturing our products or go out
of business. Because establishing relationships, designing or redesigning ICs, and ramping production with new
outside foundries may take over a year, there is no readily available alternative source of supply for these
products.
Difficulties associated with adapting our technology and product design to the proprietary process
technology and design rules of outside foundries can lead to reduced yields of our IC products. The process
technology of an outside foundry is typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be effectively determined or resolved until
an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until well into the production process, and
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