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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the yearly period ended December 30, 2000
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Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number:
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SILICON LABORATORIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 74-2793174
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4635 Boston Lane, Austin, Texas 78735
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(Address of principal executive offices) (Zip Code)
(512) 416-8500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /x/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / / Yes / / No
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $215,114,889 as of December 30, 2000, based upon
the closing sale price on the Nasdaq National Market System reported for such
date. Shares of common stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 48,237,230 shares of the Registrant's common stock issued and
outstanding as of January 17, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
SILICON LABORATORIES, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business and Factors Affecting Future Operating Results......... 1
ITEM 2. Properties...................................................... 22
ITEM 3. Legal Proceedings............................................... 22
ITEM 4. Submission of Matters to a Vote of Security Holders............. 23
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 23
ITEM 6. Selected Consolidated Financial Data............................ 24
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...... 31
ITEM 8. Financial Statements and Supplementary Data..................... 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 31
PART III.
ITEM 10. Directors and Executive Officers of the Registrant.............. 31
ITEM 11. Executive Compensation.......................................... 31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 32
ITEM 13. Certain Relationships and Related Transactions.................. 32
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 32
PART I
Item 1. Business
GENERAL
Silicon Laboratories Inc. designs, manufactures and markets proprietary
high-performance mixed-signal integrated circuits (ICs) for the wireless,
wireline and optical communications industries. Mixed-signal ICs are electronic
components that convert real-world analog signals, such as sound and radio
waves, into digital signals that electronic products can process. Therefore,
mixed-signal ICs are critical components of numerous communications products,
including wireless phones, cable and satellite set-top boxes, modems and fax
machines. To develop our business rapidly, we initially focused our efforts on
developing ICs for the personal computer modem market. We are now applying our
mixed-signal and communications expertise to the development of ICs for other
high growth communications devices such as wireless telephones and optical
network applications. Our world-class, mixed-signal design engineers use
standard complementary metal oxide semiconductor, or CMOS, technology to create
innovative ICs that can dramatically reduce the cost, size and system power
requirements of devices that our customers sell to their end-user customers. Our
expertise in analog CMOS and mixed-signal IC design allows us to develop new and
innovative products rapidly, which enables our customers to improve their
time-to-market with end products that respond to consumer demand in the
communications industry.
INDUSTRY BACKGROUND
According to Dataquest, the overall worldwide analog and mixed-signal IC
market, which includes as a subset the mixed-signal communications IC markets
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that we target, surpassed $21.2 billion in 1998 and is expected to grow to more
than $39.1 billion by 2003. This growth is being driven in part by the demand
for communications services, which has increased at a rapid rate in recent
years due to a number of factors, including the growth of Internet usage,
development of new communications technologies, availability of improved
communications services at lower costs, broad deployment of optical networks
and remote access requirements for corporate networks. This demand has fueled
tremendous growth in the number of wireless and wireline communications devices
and optical networking applications. For example, in wireless markets, the
demand for wireless phones and other wireless devices, such as pagers and
personal digital assistants, has grown rapidly as digital wireless services
have become increasingly popular and affordable. In wireline markets, demand
has increased for communications capabilities in a wide range of products,
including personal computers, cable and satellite set-top boxes, fax machines,
credit card verification machines, automated teller machines and remote gaming
systems. The demand for greater and faster Internet access by households and
businesses has increased the need to significantly upgrade the communications
backbone to handle this traffic, increasing the need for smaller, faster and
better performing optical networking systems that route this traffic.
Digital communications devices typically require mixed-signal circuits
that provide analog-to-digital functionality to access the communications
networks to which they are connected. Traditional designs for communications
devices have used mixed-signal circuits built with numerous discrete analog
and digital components. While these traditional designs provide the required
functionality, they can be inefficient and inadequate for use in markets
where size, price and performance are increasingly important product
differentiators. In order to improve their competitive position,
communications device manufacturers need advanced mixed-signal ICs that
reduce the number of discrete components and required board space to create
smaller products with improved price/performance characteristics.
Additionally, these manufacturers require programmable ICs that can be
reconfigured to comply with numerous and constantly evolving international
communications standards without altering the fundamental design of a product.
Manufacturers of communications devices face accelerating time-to-market
demands and must adapt to evolving industry standards and new technologies.
Because analog-intensive, mixed-signal IC design expertise is difficult to
find, these manufacturers increasingly are turning to third parties to
provide advanced mixed-signal ICs. Designing the analog component of a
mixed-signal IC involves great complexity and difficulty, because the
performance of an analog IC depends on the creative analog expertise of
engineers to optimize speed, power, amplitude and resolution within the
constraints of standard manufacturing processes. The development of analog
design expertise typically requires years of practical analog design
experience under the guidance of a senior engineer, and engineers with the
required level of skill and expertise are in short supply.
Many third-party IC providers lack sufficient analog expertise to develop
compelling mixed-signal ICs. As a result, manufacturers of communications
devices are often faced with inadequate mixed-signal ICs and are challenged
to find third-party providers that can supply them with mixed-signal ICs with
greater functionality, smaller size and lower power requirements all at a
reduced cost and time-to-market.
PRODUCTS
We provide mixed-signal ICs for use in wireline, wireless and optical
communication applications. Our products integrate the numerous discrete
components required by most existing mixed-signal circuits for communications
devices into single chips or chipsets. By doing so, we are able to create
products that:
- require less board space;
- can offer superior performance;
- provide increased reliability;
- reduce system power requirements; and
- reduce costs.
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Wireline Products
Many of our wireline products are designed for use in analog modems, which
enable the transmission of digital data signals over wireline telephone networks
and are used in the vast majority of Internet connections. Three fundamental
components of the modem provide the requisite functionality: software
algorithms; a direct access arrangement, or DAA; and an analog/digital
converter, or codec. Complex software algorithms mitigate the impairments found
in the telephone network, such as noise interference and echoes. Since telephone
lines fundamentally transmit analog signals and computers use digital
transmissions, modems require analog-to-digital and digital-to-analog
converters, or coders/decoders, that are referred to as codecs. A modem
transmits analog signals from a codec to the telephone line through a DAA. We
offer a variety of modem products which include the DAA and codec functions and
which are software programmable to meet international regulatory specifications.
Digital Subscriber Lines, DSL, are increasing their presence in the wireline
marketplace. It is our belief that DSL Modem Cards for personal computers will
have back-up standard traditional 56 kilobyte per second analog modem
capability. Our existing DAA is suitable for these backup applications. We
intend to introduce an analog front end product for a segment of the DSL market
over the next 12 months.
- - DAA FUNCTIONS. Government regulation requires electrical isolation between
the telephone line and the local electrical power system. Isolation is
required for safety, sound quality, and to prevent harm to the telephone
network from electrical surges. With the introduction of telecommunications
deregulation, consumers were allowed to connect directly to the telephone
network. However, they were required to use a device that met FCC part 68
specifications, which govern all electronic products sold in the United
States intended for connection to the telephone network. Traditional DAA
products met FCC requirements, but were designed inefficiently and contained
a variety of discrete components. Our silicon DAA is the first to integrate
the bulky transformer, relays, and opto-isolators traditionally found in a
modem's isolation circuitry, and achieve FCC part 68 compliance. Our silicon
DAA may be used with digital signal processors, or DSPs, currently used in
traditional analog modems. We were able to design our product in CMOS,
creating a silicon DAA with attractive process characteristics for our
customers. Our DAA products are lower in cost, use substantially less board
space than alternative products and are programmable to meet international
standards.
- - CODEC FUNCTIONS. Traditionally, analog modems included specialized hardware
chips known as a digital signal processor, or DSP, which contained the
modem's software algorithms. The DSP is typically the most expensive
hardware component in traditional analog modems. In an effort to reduce
costs and as a result of capabilities offered by more powerful
microprocessors introduced during the mid-1990's, a new generation of
modems, known as soft modems, evolved. When soft modems are used, the main
microprocessor in a personal computer runs the software algorithms required
to operate a modem, thus eliminating the need for a DSP chip. The software
modem's digital interface between the codec and the personal computer in a
soft modem eliminates the need for additional interface chips.
We also design innovative products for network access applications. In
January 2000, we announced the ProSLIC, our first product targeting this market.
- - SUBSCRIBER LINE INTERFACE CIRCUIT, OR SLIC. Subscriber line interface
circuits, or SLICs, provide the analog telephone interface on the source
end of the telephone line. The primary functions of a SLIC are to ring and
provide power and signaling (such as caller ID, dial tone and busy tone) to
the telephone. Traditionally, SLICs have been produced with an expensive
high voltage IC accompanied by a CMOS codec IC and requiring as many as
five voltage sources. Our ProSLIC has been designed as one integrated CMOS
chip, eliminating the need for a high voltage IC and requiring only two
voltage sources. The result is a smaller, more reliable and less expensive
product.
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The following table summarizes the ICs for the wireline market that we
currently offer to customers:
WIRELINE PRODUCTS
PRODUCT AREA DESCRIPTION APPLICATIONS
Digital Interface Silicon Direct Access Arrangement (DAA) Provides both the
functionality of a DAA and a codec. A DAA provides electrical - personal computer modems
isolation between a wireline device, such as a modem, - Audio Modem Riser Cards
and the telephone line to guard against power surges in - Mobile Daughter Cards
the telephone line, while codec provides analog-to-digital - Communication and Network
and digital-to-analog conversion. Traditional DAA products Riser (CNR) Cards
contain as many as 35 discrete components to provide - Modem on Motherboard
functionality comparable to that which we provide in a - Mini PCI cards
single chipset. Some versions of this chipset are - fax machines
programmable for differing international telephone - host modems
standards, which enables manufacturers to distribute their - handheld organizers
products globally without costly country-specific design - set-top boxes
modifications. The most recent addition to this product - embedded modems
family, the DAA for the Communication and Net-working Riser
(CNR) provides the same functionality as the International
chipset, but eases integration and simplifies modem design.
Analog Interface Silicon DAA
Provides the same functionality as the digital international DAA, - personal computer modems
but with an analog interface. Ideal for applications requiring - fax machines
client premises equipment such as high speed analog modems - host modems
connecting to the Public Switched Telephone Network. Provides an - embedded modems
analog interface with different transmit and receive inputs/outputs - PBXs
for easy connection to many widely available codecs and modem - answering machines
chipsets.
Voice Codec Encodes analog signals within the voice frequency range into - data/fax/voice modems
digital signals and decodes digital voice signals back into analog - speaker phones
signals. When combined with the DAA chipset, the Voice Codec - fax machines
permits voice communications to be digitized and carried - voice recognition system
simultaneously with data traffic. - Web telephony products
- video conferencing systems
ISOmodem The ISOmodem is a miniaturized modem that uses our DAA - set-top boxes
technology and operates at a speed of up to 2400 bits per - credit card verification
second. The systems ISOmodem is designed to provide quick systems
network access for devices with limited data transmission - industrial power meters
requirements. For such devices, a low access transmission speed - pay-per-view systems
of 2400 bits per second is generally sufficient to sustain - postage meters
performance while also providing rapid connect times. The - pay phones
ISOmodem contains a programmable line interface that meets - smart vending machines
global telephone line requirements. - security systems
- remote medical monitoring
ProSLIC The ProSLIC provides the analog telephone interface on the - telephone switchboard systems
source end of the telephone which provides dial tone, busy - cable telephony
tone, caller ID and ring signal. Telephone source end - wireless local loop providing remote
electronics have historically been at the telephone company access for a wireline system
central office and has been migrating to the customer - voice over Internet protocol
premises. Our ProSLIC product is currently designed for - digital broadband to analog
short-haul applications suitable for the customer premises. telephone adapters
- voice over digital subscriber lines
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WIRELESS PRODUCTS
A variety of mobile communications standards are employed around the world.
The most popular standard used today is the Global System for Mobile
Communications, or GSM, standard, which was first deployed in Europe and is now
available in several countries throughout the world. Manufacturers continue to
introduce new wireless phone models that offer smaller form factors and longer
battery life at lower costs. These market dynamics drive a need for new,
highly-integrated electronics that reduce component count and consume less
power. Our products are designed to serve this need.
We are developing and intend to introduce other components of the radio
frequency, or RF, section of the wireless handset such as the transceiver. We
anticipate that these products will provide the same advantages as the first
critical building block we designed for the RF section, the synthesizer, by
offering smaller form factors at reduced costs.
The following table summarizes the ICs for the wireless market that we
currently offer to customers:
WIRELESS PRODUCTS
PRODUCT AREA DESCRIPTION APPLICATIONS
RF Synthesizer for General Application
A frequency synthesizer generates high frequency - wireless local area networking
signals that are used in wireless communications - wireless modems
systems to select a particular radio channel. Existing - wireless meter readers
frequency synthesizers contain discrete voltage control - handheld point-of-sale terminals
modules and as many as 30 discrete electronic components to
provide functionality comparable to what we provide in a
monolithic IC. Our general purpose synthesizer can be
programmed to address multiple wireless communications
applications.
RF Synthesizer for GSM/GPRS
Provides the same functionality as the RF Synthesizer for - GSM wireless phones
General Application but has been optimized for wireless - GPRS data communications devices
phones operating on the GSM standard. This synthesizer
is capable of providing dual-band synthesis to use one or
both of the separate radio bands available to GSM phones.
Additionally, this synthesizer has very fast settling times,
allowing the phone to quickly lock to a desired channel.
This RF synthesizer is compatible with General Packet
Radio Service, or GPRS standard, which is the data
communications protocol employed by the GSM standard. GPRS
brings wireless Internet access to GSM users through data
transfer and signaling over GSM radio networks.
RF Synthesizer for ISM Applications
Provides the same functionality as the RF Synthesizer for - Wireless modems
General Application but has been optimized for Industrial - Cordless phones
Scientific Medical (ISM) band applications that operate in - Wireless headsets
the 2.0 to 2.6 GHz range. This is used for price-sensitive, - Security systems
low-power, high-performing personal wireless communications - Wireless LAN and WAN
applications.
RF Synthesizer for Third Generation (3G) Applications
Provides the same functionality as the RF Synthesizer for - 3G wireless communications
General Application but addresses the high performance - W-CDMA mobile handsets
requirements for Wideband Code Division Multiple Access - High speed wireless data terminals
(W-CDMA) applications. - Broadband wireless communications
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OPTICAL NETWORKING PRODUCTS
The increasing popularity of the Internet has fueled an explosive demand for
bandwidth in the wide area network (WAN). This rapidly growing fiber-optic
communications market is quite large and still developing. This market fits our
target market criteria because we believe it is a large growing market, requires
significant intellectual property using mixed-signal expertise, offers long
product life-cycles and involves technology that complements our wireline and
wireless divisions. With our entry into fiber-optic communications, we are able
to offer a comprehensive portfolio of products that provide the required
interfaces between the analog world and the digital domain in communications
systems. Synchronous Optical Network (SONET) is the predominant standard for
transmitting high-speed data over the fiber optic network and specifications
within this standard are extremely demanding. This new division will focus on
developing a family of high-speed physical layer ICs that are a part of the
high-speed SONET.
The first product developed, the Clock and Data Recovery (CDR)IC, is one of
the key building blocks and one of the more difficult ICs to design in the
physical layer of the optical network. From this product, we intend to fill out
our physical layer product line in the optical networking division to include
receivers, transmitters and transceivers at speeds up to OC-192. While initially
our focus will be on filling out the physical layer product line, we intend to
subsequently concentrate on related areas leveraging this technology.
The following table summarizes the ICs for the optical networking market
that we currently offer to customers:
OPTICAL NETWORKING PRODUCTS
PRODUCT AREA DESCRIPTION APPLICATIONS
Multi-Rate SONET/SDH Clock and Data Recovery IC
Recovers timing information and data that is transferred over - SONET/SDH/ATM routers
the telephone optical network up to OC-48 data rates. This - Add/drop multiplexers
IC utilizes our proprietary digital signal processing technology - Digital cross connects
to reduce the device's sensitivity to board-level noise - SONET/SDH test equipment
and improve performance. - Optical transceiver modules
- SONET/SDH regenerators
- Board-level serial links
OC-3/12 SONET/SDH Clock and Data Recovery IC
Provides same functionality of the multi-rate CDR at lower speeds. - Same as Multi-Rate CDR
CUSTOMERS, SALES AND MARKETING
We market our products to original equipment manufacturers and other
providers of applications in the wireline, wireless and optical networking
communications markets. The following is a list of customers that have purchased
our products and incorporated them into products or devices offered to their
customers:
- - 3Com - Motorola - Smart Link - Topic
- - Lucent - PC-TEL - Sony
To date, we have sold a predominant portion of our ICs through our direct
sales force. We maintain four sales offices in North America and conduct
European direct sales through our United Kingdom subsidiary. Our direct sales
force includes regional sales managers in the field and area business managers
at our headquarters to further support customer communications. Many of these
managers have engineering degrees. Our password-protected field sales
organization Web site, which includes technical documentation, backlog
information, order status, product availability and new product introduction
information, supports communications with our field sales organization.
Additionally, we provide direct communication to all field sales personnel as
part of a structured sales communications program.
We also utilize independent sales representatives and distributors to
generate sales of our products. We have relationships with many independent
sales representatives and distributors worldwide whom we have selected based
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on their understanding of the mixed-signal IC marketplace and their ability to
provide effective field sales support for our products. To date, sales to these
representatives and distributors have accounted for a modest portion of our
sales.
Our marketing efforts are targeted at both identified industry leaders and
emerging market participants. Marketing activities are supported by a focused
communications effort that targets editorial coverage in leading trade and
business publications. Our external Web site includes data sheets and supporting
product information, press releases and a company overview. These activities, in
conjunction with customer contacts, help prompt requests for evaluation boards
and sample products, which are fulfilled through our corporate headquarters as
an integrated part of our sales efforts.
Due to the complex and innovative nature of our ICs, we employ experienced
applications engineers who work closely with each customer to support the
design-win process, and can significantly accelerate the customer's time
required to bring a product to market. A design-win occurs when a customer has
designed our ICs into its product architecture. A considerable amount of effort
to assist the customer in incorporating our ICs into its products typically is
required prior to any sale. In many cases, our innovative ICs require
significantly different implementations than existing approaches and, therefore,
successful implementations may require extensive communication with potential
customers. The amount of time required to achieve a design-win can vary
substantially depending on a customer's development cycle, which can be
relatively short (such as three months) or very long (such as two years) based
on a wide variety of customer factors. Due to this extensive design-win process,
once a completed design architecture has been implemented and produced in high
volumes, our customers are reluctant to significantly alter their designs. We
believe this promotes relatively long product life cycles for our ICs and high
barriers to entry for competitive products, even at lower price levels for such
competing products. Finally, our close collaboration with our customers provides
us with knowledge of derivative product ideas or completely new product line
offerings that may not otherwise arise in other new product discussions.
RESEARCH AND DEVELOPMENT
Through our research and development efforts, we apply our world-class
analog and mixed-signal engineering talent and expertise to create new ICs that
integrate functions typically performed inefficiently by multiple discrete
components. This integration generally results in lower costs, smaller die
sizes, lower power demands and enhanced price/performance characteristics. We
attempt to reuse successful techniques for integration in new applications where
similar benefits can be realized. Reliable and precise analog and mixed-signal
ICs can only be developed by teams of engineers under the direction of senior
engineers with significant analog experience who are familiar with the
intricacies of designing these ICs for commercial volume production. The
development of test methodologies is a critical activity in releasing a new
product for commercial success. We believe that we have attracted some of the
best engineers in our industry. As of December 30, 2000, we had 101 employees
involved in research and development.
Research and development expenses were $19.4 million, $8.3 million, and $4.6
million in fiscal 2000, 1999, and 1998, respectively.
TECHNOLOGY
Our product development process facilitates the design of highly innovative
mixed-signal ICs. Our senior engineers start the product development process by
forming an understanding of our customers' products and then design alternatives
for decreasing power, size and cost requirements. Our engineers' deep knowledge
of existing and emerging communications standards and performance requirements
help us to assess the technical feasibility of a particular IC. We target areas
where Silicon Laboratories can provide compelling product improvements. Once we
have solved the primary challenges, our field engineers continue to work closely
with our customers' design teams to maintain and develop an understanding of our
customers' needs, allowing us to formulate derivative products and features.
In providing mixed-signal ICs for our customers, we believe our key
competitive advantages are: (1) analog CMOS design expertise; (2) digital signal
processing design expertise; and (3) our broad understanding of communication
systems technology and trends. To fully capitalize on these advantages, we have
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assembled a world-class development team with exceptional analog and
mixed-signal design expertise led by accomplished senior engineers.
ANALOG CMOS DESIGN EXPERTISE
We believe that our most significant core competency is our world-class
analog design capability. Additionally, we strive to design all of our ICs in
CMOS processes. There are several modern process technologies for
manufacturing semiconductors including CMOS, Bipolar, BiCMOS, silicon
germanium and gallium arsenide. While it is significantly more difficult to
design analog ICs in CMOS, CMOS provides multiple benefits versus existing
alternatives, including significantly reduced cost, reduced technology risk
and greater worldwide foundry capacity. CMOS is the most commonly used process
technology for manufacturing digital ICs and as a result is most likely to be
used for the manufacturing of ICs with finer line geometries, which enable
smaller and faster ICs. By designing our ICs in CMOS, we enable our products
to benefit from this trend towards finer line geometries, which lowers the
cost of the digital circuitry in our products and allows us to integrate more
digital functionality into our mixed-signal IC's.
Designing analog ICs is significantly more complicated than designing
digital ICs. While advanced software tools exist to help automate digital IC
design, there are far fewer tools for advanced analog IC design. In many
cases, our analog circuit design efforts begin at the fundamental transistor
level. We believe that we have a demonstrated ability to design the most
difficult analog and RF circuits using standard CMOS technologies. For
example, our DAA product family replaces bulky, discrete modem components,
such as transformers, relays and opto-isolators, with highly integrated CMOS
mixed-signal ICs. Similarly, bulky wireless phone components such as
oscillators are replaced by our integrated CMOS frequency synthesizer
products. Our design expertise in the technically challenging optical
networking market has allowed us to reduce the number of supplemental
components used in our customers' products while providing lower levels of
noise in the circuit operation. This is a key technical consideration in high
speed optical networks.
DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE
We consider the partitioning of a circuit's functionality to be a
proprietary and creative design technique. Our digital signal processing
design expertise maximizes the price/performance characteristics of both the
analog and digital functions and allows our ICs to work in an optimized manner
to accomplish particular tasks. Generally, we surround core analog circuitry
with inexpensive digital CMOS transistors, which allows our ICs to perform the
required analog functions with increased digital capabilities. For example,
our ProSLIC product is designed to function more efficiently than traditional
products for the source end of the telephone line which involve a two chip
combination requiring more board space and numerous external components. The
ProSLIC product is partitioned by combining a core analog design that provides
analog-to-digital conversion and digital-to-analog conversion with optimized
digital signal processing functions such as data compression, data expansion,
filtering and tone generation. In this manner, we can isolate the higher
voltage required to ring a telephone in low-cost, off-chip high voltage
transistors, thereby enabling us to fulfill the remaining core functions with
a single chip. As a further example, our Clock and Data Recovery product used
to re-construct signals in an optical network application utilizes an
architecturally advanced phase locked loop circuit based principally on
digital signal processing. By performing a significant portion of this
function in the digital domain in a monolithic chip, the circuit has been able
to satisfy the demanding specifications of the optical network SONET standard
using inexpensive CMOS transistors.
UNDERSTANDING OF COMMUNICATION SYSTEMS TECHNOLOGY AND TRENDS
Our focused expertise in communications ICs is rooted in our founders'
previous experience at AT&T Bell Labs working in CMOS design for
communications applications. This expertise, which we consider a competitive
advantage, is the foundation of our in-depth understanding of the technology
and trends that impact communications systems and markets. We believe we have
a unique ability to predict product evolution and design compelling ICs for
communications manufacturers. Our expertise spans from single line plain old
telephone communications (POTS) to high speed SONET based optical networks. We
have also expanded our knowledge base into wireless communications. Our
understanding of the role of analog/digital interfaces within
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communications systems and the key domestic and international
telecommunications standards that must be supported are particular areas of
our expertise.
MANUFACTURING
As a fabless IC manufacturer, we conduct IC design and development in our
facilities in the United States and electronically transfer our proprietary IC
designs to third-party semiconductor fabricators who process silicon wafers to
produce the ICs that we design. Our IC designs use industry-standard
complementary metal oxide semiconductor, or CMOS, manufacturing process
technology to achieve a level of performance normally associated with more
expensive special-purpose IC fabrication technology. We believe the use of
CMOS technology facilitates the rapid production of our ICs within a lower
cost framework. Our IC production employs submicron process geometries which
are readily available from leading foundry suppliers worldwide, thus ensuring
the availability of manufacturing capability over our products' life cycles.
We currently rely on Taiwan Semiconductor Manufacturing Co. and its affiliate,
Vanguard International Semiconductor, to manufacture substantially all of our
semiconductor wafers.
Once the silicon wafers have been produced, they are shipped directly to
our third-party assembly subcontractors. The assembled ICs are then forwarded
for final testing, typically to our facilities, prior to shipping to our
customers. We believe that our fabless manufacturing model significantly
reduces our capital requirements and allows us to focus our resources on the
design, development and marketing of our ICs.
COMPETITION
The markets for semiconductors generally, and for analog and mixed-signal
ICs in particular, are intensely competitive. We believe the principal
competitive factors in our industry are:
- - level of integration; - intellectual property;
- - product capabilities; - customer support;
- - reliability; - reputation; and
- - price; - ability to rapidly introduce new
- - performance products to market.
We believe that we are competitive with respect to these factors,
particularly because our ICs typically are smaller in size, are highly
integrated, achieve high performance specifications at lower price points than
competitive products and are manufactured in standard CMOS which generally
enables us to supply them on a relatively rapid basis to customers to meet
their product introduction schedules. Our DAA product is an example of our
competitive positioning. Traditional DAA isolation techniques rely on relays,
optical isolators and transformers, transfer analog signals across the
isolation barrier, and/or require numerous external components to achieve
their functionality. Our silicon DAA reduces costs by eliminating the need for
these bulky and/or numerous discrete components. Our DAA ICs also reduce board
area and power consumption, while improving performance. However,
disadvantages we face in our markets include our short operating history and
the need for customers to redesign their products and modify their software to
implement our ICs in their products.
We anticipate that the market for our products will continually evolve and
will be subject to rapid technological change. In addition, as we target and
supply products to numerous wireline, wireless, and optical networking
communications markets and applications, we face competition from a relatively
large number of competitors. Across our product offerings, we compete with
AMCC, Analog Devices, Broadcom (through its acquisition of NewPort
Communications, Inc.), Conexant, CP Claire, Delta Integration, ESS, Fujitsu,
Infineon Technologies, Legerity (formerly the Advanced Micro Devices telecom
division), Lucent, Maxim Integrated Products, National Semiconductor, Philips,
Texas Instruments, Vitesse Semiconductor Corp, and others. We expect to face
competition in the future from our current competitors, other manufacturers
and designers of semiconductors, and innovative start-up semiconductor design
companies. In addition, our customers could develop products or technologies
internally that would replace their need for our products and would become a
9
source of competition. As the markets for communications products grow, we also
may face competition from traditional communications device companies. These
companies may enter the mixed-signal semiconductor market by introducing their
own products, including components within their products that would eliminate
the need for our ICs, or by entering into strategic relationships with or
acquiring other existing IC providers.
Many of our competitors and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than us. Current and potential
competitors have established or may establish financial and strategic
relationships between themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share.
INTELLECTUAL PROPERTY
Our future success depends in part upon our proprietary technology. We
seek to protect our technology through a combination of patents, copyrights,
trade secrets, trademarks and confidentiality procedures. As of December 30,
2000, we had been granted 16 United States patents in the IC field. We also
have filed 78 applications for additional patents covering our wireline,
wireless, and optical networking product areas. There can be no assurance that
patents will ever be issued for these applications. Furthermore, it is
possible that any patents held by us may be invalidated, circumvented,
challenged or licensed to others. In addition, there can be no assurance that
such patents will provide us with competitive advantages or adequately
safeguard our proprietary rights.
In addition, we claim copyright protection for proprietary documentation
used in our products. We have filed for registration, or are in the process of
filing for registration, the visual image of each IC that we have manufactured
in commercial quantities with the United States Copyright Office. We have
registered the "Silicon Laboratories" logo as a trademark in the United
States. All other trademarks, service marks or trade names appearing in this
report are the property of their respective owners. We also attempt to protect
our trade secrets and other proprietary information through agreements with
our customers, suppliers, employees and consultants, and through other
security measures. We intend to protect our rights vigorously, but there can
be no assurance that our efforts will be successful. In addition, the laws of
other countries in which our products are sold may not protect our products
and intellectual property rights to the same extent as the laws of the United
States.
While our ability to effectively compete depends in large part on our
ability to protect our intellectual property, we believe that our technical
expertise and ability to introduce new products in a timely manner will be an
important factor in maintaining our competitive position.
Many participants in the semiconductor and communications industries have
a significant number of patents and have frequently demonstrated a readiness
to commence litigation based on allegations of patent and other intellectual
property infringement. From time to time, third parties may assert
infringement claims against us. We may not prevail in any such litigation or
may not be able to license any valid and infringed patents from third parties
on commercially reasonable terms, if at all. Litigation, regardless of the
outcome, is likely to result in substantial cost and diversion of our
resources, including our management's time. Any such litigation could
materially adversely affect us. Other than industry standard licenses with our
vendors, such as wafer fabrication tool libraries, computer-aided design
applications and business software applications, we do not have material
licenses.
EMPLOYEES
As of December 30, 2000, we employed 256 people, including 61 in
manufacturing, 101 in engineering development, 54 in marketing, 18 in sales
and 22 in administration. Our success depends on the continued service of our
key technical and senior management personnel and on our ability to continue
to attract, retain and motivate highly skilled analog and mixed-signal
engineers. The competition for such personnel is intense. We have never had a
work stoppage and none of our employees are represented by a labor
organization. We consider our employee relations to be good.
10
ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various environmental controls
on the storage, use, discharge and disposal of certain chemicals and gases
used in the semiconductor industry. Compliance with these laws and regulations
has not had a material impact on the Company's financial position or results
of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
SALES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY
CUSTOMER COULD SIGNIFICANTLY REDUCE OUR SALES
In fiscal 2000, PC-TEL accounted for 46% of our revenue. Many markets for
our products are dominated by a small number of potential customers. Our
operating results in the foreseeable future will continue to depend on sales
to a relatively small number of customers, as well as the ability of these
customers to sell products that use our integrated circuit, or IC, products.
In the future, these customers may decide not to purchase our ICs at all,
purchase fewer ICs than they did in the past or alter their purchasing
patterns, particularly because:
- we do not have any material long-term purchase arrangements
with these or any of our other customers;
- substantially all of our sales to date have been made on a
purchase order basis, which permits our customers to cancel,
change or delay product purchase commitments with little or no
notice to us and without penalty; and
- some of our customers have sought or are seeking relationships
with current or potential competitors which may affect our
customers' purchasing decisions.
On January 4, 2001, our largest customer PC-TEL announced that its revenue
for the quarter ended on December 31, 2000 would be below PC-TEL's previous
expectations due to the rapid deterioration in PC demand industry wide. PC-TEL
characterized this revenue shortfall as significantly below previous company
forecasts and further indicated that they believe this weak demand creates
uncertainty for the first half of 2001. We believe that this revenue shortfall
by PC-TEL will have a sizable impact on the Company's results, particularly
in the Wireline Products Division, and creates uncertainty for the first half
of fiscal year 2001. Revenues for the March 2001 quarter are expected to be in
the range of $16 million to $18 million.
On October 17, PC-TEL announced that the U.S. International Trade
Commission (ITC) voted to investigate trade practices involving certain host
signal processing modems, also known as soft modems, arising from a complaint
filed by PC-TEL alleging that Smart Link's solutions infringe PC-TEL's patents.
Both PC-TEL and Smart Link are significant customers for us. Should our two
customers fail to settle their dispute, the ITC could take action that could
result in the loss of sales by us to Smart Link, disruption of our ongoing
supply relationships and obsolescence of inventory specifically manufactured
for Smart Link. Should our two customers arrive at a settlement that would
increase our revenue concentration from PC-TEL, we would anticipate that it may
result in our revenue, gross profit, gross margin percentage and net income
decreasing, reflecting PC-TEL's increased ability to negotiate lower prices due
to higher sales volume and favorable negotiating position.
While we have been the sole supplier of the direct access arrangement, or
DAA, IC used in PC-TEL's products, we anticipate that PC-TEL would consider
alternative sources in the future in order to diversify its supplier base
which would increase its negotiating leverage with us and protect its ability
to secure DAA components. We have a volume purchase agreement with PC-TEL, but
the agreement does not require PC-TEL to purchase any minimum number of units
from us during fiscal 2001. We believe that any second source of DAA ICs for
PC-TEL could have an adverse effect on the prices we are able to charge PC-TEL
and the volume of DAA ICs that we sell to PC-TEL, which would negatively
affect our sales and operating results.
11
On March 20, 2000, 3Com announced a substantial restructuring of its
businesses. This restructuring resulted in 3Com exiting the desktop analog
modem and PC card modem businesses through a sale to a new venture formed with
Accton Technology and NatSteel Electronics. This new venture, which included
the U.S. Robotics business previously acquired by 3Com, uses our DAA IC
products. This business transition by 3Com and the subsequent business
activities of this new venture may disrupt our supplier relationships and
adversely affect our operating results. 3Com accounted for 10% of revenues in
fiscal 1999 and less than 10% in fiscal 2000.
The loss of any of our key customers, or a significant reduction in sales
to any one of them, would significantly reduce our sales and adversely affect
our business.
WE HAVE DEPENDED ON OUR DIRECT ACCESS ARRANGEMENT, OR DAA, FAMILY OF PRODUCTS
FOR SUBSTANTIALLY ALL OF OUR SALES TO DATE, AND SIGNIFICANT REDUCTIONS IN
ORDERS FOR DAA PRODUCTS WOULD SIGNIFICANTLY REDUCE OUR SALES
A significant majority of our sales to date have been derived from sales
of our DAA family of ICs. This product family, in turn, is highly dependent on
sales to the PC industry which currently faces uncertain demand. Until we are
able to diversify our sales through the introduction of new products, we will
continue to rely on sales of our DAA products. A decline in overall demand for
personal computers, reduced market acceptance of our DAA products or the
introduction of products with superior price/performance characteristics by
our competitors could significantly reduce our sales. In addition,
substantially all of our DAA products that we have sold include technology
related to one or more of our issued U.S. patents. If these patents are found
to be invalid or unenforceable, our competitors could introduce competitive
products that could reduce both the volume and price per unit of our products.
WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS
Our products are currently used by our customers to produce modems for
personal computers and wireless telephones. We rely on our customers to
provide hardware, software and other technical support for the modems and
wireless telephones that use our products. If our customers do not provide the
required functionality or if our customers do not provide satisfactory support
for their products, the demand for modems and wireless telephones that
incorporate our products may diminish. Any reduction in the demand for modems
and wireless telephones would significantly reduce our sales.
IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION
COULD BE HARMED
Our future success will depend on our ability to reduce our dependence on
our DAA products by developing new ICs and product enhancements that achieve
market acceptance in a timely and cost-effective manner. The development of
mixed-signal ICs is highly complex, and we occasionally have experienced
delays in completing the development and introduction of new products and
product enhancements. Successful product development and market acceptance of
our products depend on a number of factors, including:
- changing requirements of customers within the wireline,
wireless communications and optical networking markets;
- accurate prediction of market requirements;
- timely completion and introduction of new designs;
- timely qualification and certification of our ICs for use in
our customers' products;
- commercial acceptance and volume production of the products
into which our ICs will be incorporated;
- availability of foundry and assembly capacity;
- achievement of high manufacturing yields;
- quality, price, performance, power use and size of our
products;
12
- availability, quality, price and performance of competing
products and technologies;
- our customer service and support capabilities and
responsiveness;
- successful development of our relationships with existing and
potential customers; and
- changes in technology, industry standards or end-user
preferences.
We cannot provide any assurance that new products which we recently have
developed or may develop in the future will achieve market acceptance. We have
introduced to market four new ICs:
- an RF synthesizer, which is used to generate high frequency
signals that are used in wireless communications systems to
select a particular radio channel;
- an ISOmodem, which is a miniaturized modem that can be
embedded in electronic devices with low transmission
requirements, such as credit card verification devices, to
provide quick network access;
- a ProSLIC product, which provides dial tone, busy tone, caller
ID and ring signal functions at the source end of the
telephone; and
- a high speed optical network product, which is a fully
integrated low-power clock and data recovery circuit designed
for SONET/ATM routers, multiplexers, digital cross connects
and optical transceiver modules.
We also are actively developing other ICs. If our recently introduced or
other ICs fail to achieve market acceptance, our operating results and
competitive position could be adversely affected.
DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY BOTH IN ACCURATELY
PREDICTING OUR FUTURE SALES AND APPROPRIATELY BUDGETING FOR OUR EXPENSES
We were incorporated in 1996 and did not begin generating sales until the
second quarter of 1998. As a result, we have only a short history from which to
predict future sales. This limited operating experience combined with the
rapidly evolving nature of the markets in which we sell our products, as well as
other factors which are beyond our control, reduce our ability to accurately
forecast quarterly or annual sales. Additionally, because most of our expenses
are fixed in the short term or incurred in advance of anticipated sales, we may
not be able to decrease our expenses in a timely manner to offset any shortfall
of sales. During fiscal year 2000, we have expanded our staffing and increased
our expense levels in anticipation of future sales growth. If our sales do not
increase as anticipated, significant losses could result due to our higher
expense levels. As mentioned in FACTORS AFFECTING FUTURE OPERATING RESULTS - "WE
DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR SALES,
AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY CUSTOMER
COULD SIGNIFICANTLY REDUCE OUR SALES", we expect a sequential decline of our
overall quarterly revenues for the March 2001 quarter which will materially
adversely affect our gross profits, gross margin percentage and net income.
WE RELY ON THIRD PARTIES TO MANUFACTURE AND ASSEMBLE OUR PRODUCTS AND THE
FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
ASSEMBLERS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS
We do not have our own manufacturing facilities. Therefore, we must rely on
third-party vendors to manufacture the ICs we design. We also currently rely on
two third-party assembly contractors, Advanced Semiconductor Engineering and
Amkor, to assemble and package the silicon chips provided by the wafers for use
in final products. Additionally, we rely on third-party vendors for a minor
portion of the testing requirements of our products prior to shipping.
13
There are significant risks associated with relying on these third-party
contractors, including:
- failure by us, our customers or their end customers to qualify
a selected supplier;
- capacity shortages during periods of high demand;
- reduced control over delivery schedules and quality;
- limited warranties on wafers or products supplied to us; and
- potential increases in prices.
We currently do not have long-term supply contracts with any of our
third-party vendors, and therefore, they are not obligated to perform services
or supply products to us for any specific period, or in any specific quantities,
except as may be provided in a particular purchase order. Although we believe
that other semiconductor foundries or assembly contractors can adequately
address our needs, we expect that it would take approximately two to nine months
to transition performance of these services from our current providers to new
providers. Such a transition may also require a qualification process by our
customers or their end customers. We generally place orders for products with
some of our suppliers approximately four months prior to the anticipated
delivery date, with order volumes based on our forecasts of demand from our
customers. Accordingly, if we inaccurately forecast demand for our products, we
may be unable to obtain adequate foundry or assembly capacity from our
third-party contractors to meet our customers' delivery requirements, or we may
accumulate excess inventories. On occasion, we have been unable to adequately
respond to unexpected increases in customer purchase orders, and therefore, were
unable to benefit from this incremental demand. None of our third-party foundry
or assembly contractors have provided assurances to us that adequate capacity
will be available to us within the time required to meet additional demand for
our products.
From our inception through fiscal 2000, substantially all of the silicon
wafers for the products that we shipped were manufactured either by Taiwan
Semiconductor Manufacturing Co. or Vanguard International Semiconductor, an
affiliate of Taiwan Semiconductor Manufacturing Co. Our customers typically
complete their own qualification process. If we fail to balance customer demand
across semiconductor fabrications properly, we might not be able to fulfill
demand for our products, which would adversely affect our operating results.
Additionally, a resulting write-off of unusable inventories would contribute to
a decline in earnings.
THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO
TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS WHICH COULD RESULT IN
OUR INABILITY TO TIMELY SATISFY DEMAND FOR OUR PRODUCTS.
The manufacture of silicon wafers for our products is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries from
time to time have experienced lower than anticipated manufacturing yields.
Changes in manufacturing processes or the inadvertent use of defective or
contaminated materials by our foundries could result in lower than anticipated
manufacturing yields or unacceptable performance deficiencies. If our foundries
fail to timely deliver fabricated silicon wafers of satisfactory quality, we
will be unable to timely meet our customers' demand for our products, which
would adversely affect our operating results and damage our customer
relationships.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
As part of our growth strategy, we will continue to evaluate opportunities
to acquire other businesses or technologies that would complement our current
offerings, expand the breadth of our markets or enhance our technical
capabilities. On August 9, 2000, we completed the acquisition of Krypton
Isolation, Inc. (Krypton) for $42 million in cash and common stock. On October
2, 2000, we completed the acquisition of SNR Semiconductor for $3.7 million in
cash and stock. These acquisitions and any other potential future
14
acquisitions entail a number of risks that could materially and adversely
affect our business and operating results, including:
- problems integrating the acquired operations, technologies or
products with our existing business and products;
- diversion of management's time and attention from our core
business;
- difficulties in retaining business relationships with
suppliers and customers of the acquired company;
- risks associated with entering markets in which we lack prior
experience; and
- potential loss of key employees of the acquired company.
OUR CURRENT MANUFACTURERS AND ASSEMBLERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC
REGION WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR
POLITICAL UNREST COULD DISRUPT OUR OPERATIONS
Our current semiconductor manufacturers are located in the same region
within Taiwan and our assembly contractors are located in the Pacific Rim
region. The risk of earthquakes in Taiwan and the Pacific Rim region is
significant due to the proximity of major earthquake fault lines in the area. We
are not currently covered by insurance against business disruption caused by
earthquakes as such insurance is not currently available on terms that we
believe are commercially reasonable. Earthquakes, fire, flooding or other
natural disasters in Taiwan or the Pacific Rim region, or political unrest, war,
labor strikes or work stoppages in countries where our semiconductor
manufacturers' and assemblers' facilities are located, likely would result in
the disruption of our foundry or assembly capacity. Any disruption resulting
from these events could cause significant delays in shipments of our products
until we are able to shift our manufacturing or assembling from the affected
contractor to another third-party vendor. There can be no assurance that such
alternate capacity could be obtained on favorable terms, if at all.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR
PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE
ORDERS FOR THE PRODUCTS
In order to assure availability of our products for some of our largest
customers, we start the manufacturing of our products in advance of receiving
purchase orders based on forecasts provided by these customers. However, these
forecasts do not represent binding purchase commitments and we do not recognize
sales for these products until they are shipped to the customer. As a result, we
incur inventory and manufacturing costs in advance of anticipated sales. Because
demand for our products may not materialize, manufacturing based on forecasts
subjects us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.
WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATE
Although we have experienced sales and earnings growth in our recent
quarterly and annual periods, we may not be able to sustain these growth rates.
In particular, we may gain significant market share in a relatively short period
of time following the introduction of a new product, resulting in sales growth.
However, incremental gains in market share for these newly introduced products
may not occur. Accordingly, you should not rely on the results of any prior
quarterly or annual periods as an indication of our future operating
performance. On January 4, 2001, our largest customer, PC-TEL, announced that
its revenue for the quarter ended on December 31, 2000 would be significantly
below previous PC-TEL forecasts. This will result in a significant shortfall in
revenue for us in the March, 2001 quarter with uncertainty for the future
sequential quarterly periods.
WE MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD QUARTERLY AND ANNUAL FLUCTUATIONS
IN OUR SALES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK
PRICE
We may experience significant period-to-period fluctuations in our sales
and operating results in the future due to a number of factors, and any such
variations may cause our stock price to fluctuate. It is likely that in some
future period our operating results will be below the expectations of
15
public market analysts or investors. If this occurs, our stock price may
drop, perhaps significantly. A number of factors, in addition to those cited
in other risk factors applicable to our business, may contribute to
fluctuations in our sales and operating results, including:
- the timing and volume of orders from our customers;
- the rate of acceptance of our products by our customers,
including the acceptance of new products we may develop for
integration in the products manufactured by such customers,
which we refer to as "design wins";
- the demand for and life cycles of the products incorporating
our ICs;
- the rate of adoption of mixed-signal ICs in the markets we
target;
- deferrals of customer orders in anticipation of new products
or product enhancements from us or our competitors or other
providers of ICs;
- changes in product mix; and
- the rate at which new markets emerge for products we are
currently developing or for which our design expertise can be
utilized to develop products for these new markets.
For example, the personal computer modem market is characterized by rapid
fluctuations in demand which results in corresponding fluctuations in the demand
for our DAA products that are incorporated in personal computer modems.
Additionally, the rate of technology acceptance by our customers results in
fluctuating demand for our products as customers are reluctant to incorporate a
new IC into their products until the new IC has achieved market acceptance.
However, once a new IC achieves market acceptance, demand for the new IC quickly
accelerates and demand quickly declines for the product that the new IC
replaces. We believe that the sequential decline of our overall quarterly
revenues for the March 2001 quarter as set forth in the FACTORS AFFECTING FUTURE
OPERATING RESULTS - "WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A
SUBSTANTIAL PORTION OF OUR SALES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN
ORDERS FROM, ANY KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR SALES", will
materially adversely affect our gross profits, gross margin percentage and net
income.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
AND INCREASE MARKET SHARE
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have greater
credibility with our existing and potential customers. They also may be able to
adopt more aggressive pricing policies and devote greater resources to the
development, promotion and sale of their products than we can to ours. In
addition, some of our current and potential competitors have already established
supplier or joint development relationships with the decision makers at our
current or potential customers. These competitors may be able to leverage their
existing relationships to discourage their customers from purchasing products
from us or persuade them to replace our products with their products. Our
competitors may also offer bundled chipset kit arrangements offering a more
complete product despite the technical merits or advantages of our products.
These competitors may elect not to support our products which could complicate
our sales efforts.
In addition, our largest competitors may restructure their operations to
create separate companies that are more focused on providing the types of
products we produce. For example, Rockwell's restructuring led to the
creation of Conexant which is a significant competitor. Additionally, Siemens
spun off its semiconductor business to create a more focused company named
Infineon Technologies. In July 2000, Lucent Technologies announced its plans
to spin off its microelectronics business with includes the optoelectronics
components and integrated circuits division, into a separate company in order
to accelerate the growth of the business and alleviate strategic conflicts
with Lucent's competitors. Increased competition could decrease our prices,
16
reduce our sales, lower our margins or decrease our market share. These and
other competitive pressures may prevent us from competing successfully against
current or future competitors, and may materially harm our business.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR
PRODUCTS COULD BE HARMED
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. Specifically, we believe that our future success is highly
dependent on Navdeep Sooch, our co-founder, Chief Executive Officer and Chairman
of the Board, Jeffrey Scott, our co-founder and Vice President of Engineering,
and David Welland, our co-founder and Vice President of Technology. There is
currently a shortage of qualified personnel with significant experience in the
design, development, manufacturing, marketing and sales of analog and
mixed-signal communications ICs. In particular, there is a shortage of engineers
who are familiar with the intricacies of the design and manufacturability of
analog elements, and competition for such personnel is intense. Our key
technical personnel represent a significant asset and serve as the source of our
technological and product innovations. We may not be successful in attracting
and retaining sufficient numbers of technical personnel to support our
anticipated growth. The loss of any of our key employees or the inability to
attract or retain qualified personnel, including engineers and sales and
marketing personnel, could delay the development and introduction of, and
negatively impact our ability to sell, our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW
TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO
ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION
Our ICs are used as components in communications devices in the wireline,
wireless and optical networking markets. As a result, we have devoted and expect
to continue to devote a large amount of resources to develop products based on
new and emerging technologies and standards that will be commercially introduced
in the future. In fiscal 2000, our research and development expense was $19.4
million, which represented 18.8% of our sales compared to $8.3 million, or 17.7%
of our sales for fiscal year 1999. A number of large companies in the wireline,
wireless and optical networking industries are actively involved in the
development of these new technologies and standards. Should any of these
companies delay or abandon their efforts to develop commercially available
products based on new technologies and standards, our research and development
efforts with respect to these technologies and standards likely would have no
appreciable value. In addition, if we do not correctly anticipate new
technologies and standards, or if the products that we develop based on these
new technologies and standards fail to achieve market acceptance, our
competitors may be better able to address market demand than would we.
Furthermore, if markets for these new technologies and standards develop later
than we anticipate, or do not develop at all, demand for our products that are
currently in development would suffer, resulting in lower sales of these
products than we currently anticipate. We have introduced to market a RF
synthesizer product for use in wireless phones operating on the Global System
for Mobile Communications, or GSM, standard. The RF synthesizer is also
compatible with General Packet Radio Service, which is the emerging data
communications protocol for GSM based wireless phones. We cannot be certain
whether manufacturers of wireless phones using these standards will incorporate
our RF synthesizer or that these standards will not change, thereby making our
products unsuitable or impractical. In the area of Optical Networking, our
recently introduced clock and data recovery integrated circuit operates within
stringent specifications for high speed communications systems known as SONET.
Changes to this standard could make our products uncompetitive or unsuitable to
changing system requirements and result in the inability to sell these products.
OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED
ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES
Our products are complex and may contain errors when first introduced or as
new versions are released. We rely primarily on our in-house testing personnel
to design test operations and procedures to detect any errors prior to delivery
of our products to our customers. Because our products are manufactured
17
by third parties, should problems occur in the operation or performance of
our ICs, we may experience delays in meeting key introduction dates or
scheduled delivery dates to our customers. These errors also could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from our product development efforts and cause
significant customer relations and business reputation problems.
THE PERFORMANCE OF OUR DIRECT ACCESS ARRANGEMENT PRODUCTS MAY BE ADVERSELY
AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES
Although our direct access arrangement products are compliant with published
specifications, these established specifications might not adequately address
all conditions that must be satisfied in order to operate in harsh environments.
This includes environments where there are wide variations in electrical
quality, telephone line quality, static electricity and operating temperatures
or that may be affected by lightning or improper handling by customers and end
users. Our products have had a limited period of time in the field under
operation, and these environmental factors may result in unanticipated returns
of our products. Any necessary modifications could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.
We have a large installed base of direct access arrangement products in the
field. As part of our ongoing support of this product line, we verify the
performance of our products through regulatory agency qualifications, customer
acceptance procedures, evaluation of end customer technical support information,
and analysis of field returns. Certain customer modem implementations of our
direct access arrangement products have been identified to be susceptible to a
particular class of electrical surges originating from lightning strikes that
are not adequately described in regulatory agency qualifications. We have
provided application guidelines to our customers to enhance their implementation
of the modem function to protect our devices from these lightning strike
electrical surges.
Damage from these electrical surges could result in product liability claims
against our customers that produce these modems or against us. Our customers may
seek indemnification or other compensation from us with respect to any liability
that they incur. Even if our DAA product is not the source of the problem and we
are not contractually liable for such indemnification, we may incur costs in an
effort to maintain good relations with our customers. If we are held liable for
these claims or incur other costs in order to maintain good relations, this
problem could adversely affect our operating results.
A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED
INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS
In fiscal 2000, substantially all of our test operations were performed
in-house. A minor portion of test operations was provided by our contract
manufacturers or other third parties. While we expect that performing this
testing in-house should provide us with advantages in terms of lower per unit
cost, quality control and shorter time required to bring a product to market, we
may encounter difficulties and delays in maintaining or expanding our internal
test capabilities. In addition, final testing of complex semiconductors requires
substantial resources to acquire state-of-the-art testing equipment and hiring
additional qualified personnel, which has increased our fixed costs. If demand
for our products does not support the effective utilization of these employees
and additional equipment, we may not realize any benefit from foregoing the use
of outside vendors and utilizing internal final testing. Any decrease in the
demand for our products could result in the underutilization of our testing
equipment and personnel. If our internal test operations are underused or
mismanaged, we may incur significant costs that could adversely affect our
operating results.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL
COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS
We intend to open additional sales offices in international markets to
expand our international sales activities in Europe and the Pacific Rim region.
Our planned international sales growth will be limited if we are unable to hire
additional personnel and develop relationships with international
18
distributors. We may not be able to maintain or increase international market
demand for our products. Our international operations are subject to a number
of risks, including:
- increased complexity and costs of managing international
operations;
- protectionist laws and business practices that favor local
competition in some countries;
- multiple, conflicting and changing laws, regulations and tax
schemes;
- longer sales cycles;
- greater difficulty in accounts receivable collection and
longer collection periods; and
- political and economic instability.
To date, all of our sales to international customers and purchases of
components from international suppliers have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive for our international
customers to purchase, thus rendering them less competitive.
OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS
During the past 24 months, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
256 employees at December 30, 2000. This growth has placed, and any future
growth of our operations will continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of our accounting and other
internal management systems. We also expect that we will need to continue to
expand, train, manage and motivate our workforce. All of these endeavors will
require substantial management effort. If we are unable to effectively manage
our expanding operations, our business could be materially and adversely
affected.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
Our products rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to sustain market acceptance
of our products. Therefore, we believe that the protection of our intellectual
property rights is and will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and business partners, and control access to and
distribution of our documentation and other proprietary information. Despite
these efforts, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. Monitoring unauthorized use of our technology is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
cannot be certain that patents will be issued as a result of our pending
applications nor can we be certain that any issued patents would protect or
benefit us or give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or
unenforceable. We also cannot be certain that others will not develop effective
competing technologies on their own.
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time, we
receive letters from various industry participants alleging infringement of
patents or misappropriation of trade secrets. The exploratory nature of these
inquiries has become relatively common in the semiconductor industry. We
typically respond when appropriate and as advised by legal counsel.
19
We have been involved in litigation to protect our intellectual property
rights in the past and may become involved in such litigation again in the
future. We may also become involved in litigation to defend allegations of
infringement asserted by others. Legal proceedings could subject us to
significant liability for damages or invalidate our proprietary rights. Legal
proceedings initiated by us to protect our intellectual property rights could
also result in counterclaims or countersuits against us. Any litigation,
regardless of its outcome, would likely be time consuming and expensive to
resolve and would divert our management's time and attention. Any intellectual
property litigation also could force us to take specific actions, including:
- cease selling products that use the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
or
- redesign those products that use infringing intellectual
property.
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH
The future growth of our business will depend in part on our ability to
expand our existing relationships with distributors and sales representatives,
develop additional channels for the distribution and sale of our products and
manage these relationships. As part of our channel sales strategy, we intend to
expand our relationships with distributors and sales representatives. As we
develop our indirect sales capabilities, we will need to manage the potential
conflicts that may arise with our direct sales efforts. The inability to
successfully execute or manage a multi-channel sales strategy could impede our
future growth.
RISKS RELATED TO OUR INDUSTRY
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, including wireline, wireless and optical networking communications
markets, we face competition from a relatively large number of competitors.
Across all of our product areas, we compete with AMCC, Analog Devices, Broadcom
(through its acquisition of NewPort Communications, Inc.), Conexant, CP Claire,
Delta Integration, ESS, Fujitsu, Infineon Technologies, Legerity (formerly the
Advanced Micro Devices telecom division), Lucent, Maxim Integrated Products,
National Semiconductor, Philips, Texas Instruments, Vitesse Semiconductor Corp,
and others. We expect to face competition in the future from our current
competitors, other manufacturers and designers of semiconductors, and innovative
start-up semiconductor design companies. Some of our customers, such as Intel,
Lucent, Motorola, and Texas Instruments are also large, established
semiconductor suppliers. Our sales to and support of these customers may enable
them to become a source of competition to us, despite our efforts to protect our
intellectual property rights. As the markets for communications products grow,
we also may face competition from traditional communications device companies.
These companies may enter the mixed-signal semiconductor market by introducing
their own ICs or by entering into strategic relationships with or acquiring
other existing providers of semiconductor products.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND SALES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. We have
reduced the average unit price 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 do so again in the
future. If we are unable to offset any such reductions in our average selling
prices by increasing our sales volumes, our gross profits and sales will suffer.
To maintain gross margins, we will need to develop and introduce new products
and product enhancements on a timely basis and continually reduce our costs. Our
20
failure to do so would cause our sales and gross margins to decline. We
believe the rapid deterioration in PC demand industry wide and the resulting
impact on our March 2001 quarter revenues, as set forth in FACTORS AFFECTING
FUTURE OPERATING RESULTS - "WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A
SUBSTANTIAL PORTION OF OUR SALES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION
IN ORDERS FROM, ANY KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR SALES", will
materially adversely affect our gross profits, gross margin percentage and
net income.
OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES
Prior to purchasing our products, our customers require that our products
undergo an extensive qualification process, which involves testing of the
products in the customer's system as well as rigorous reliability testing. This
qualification process may continue for six months or longer. However,
qualification of a product by a customer does not assure any sales of the
product to that customer. Even after successful qualification and sales of a
product to a customer, a subsequent revision to the IC, changes in its
manufacturing process or the selection of a new supplier by us may require a new
qualification process, which may result in delays and in us holding excess or
obsolete inventory. After our products are qualified, it can take an additional
six months or more before the customer commences volume production of components
or devices that incorporate our products. Despite these uncertainties, we devote
substantial resources, including design, engineering, sales, marketing and
management efforts, toward qualifying our products with customers in
anticipation of sales. If we are unsuccessful or delayed in qualifying any of
our products with a customer, such failure or delay would preclude or delay
sales of such product to the customer, which may impede our growth and cause our
business to suffer.
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often connected with, or in anticipation of, maturing product cycles of both
semiconductor companies' and their customers' products and declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Any future downturns could have a material
adverse effect on our business and operating results. Furthermore, any upturn in
the semiconductor industry could result in increased competition for access to
third-party foundry and assembly capacity. We are dependent on the availability
of such capacity to manufacture and assemble our ICs. Except for non-contractual
assurances of support for specifically identified customer accounts, none of our
third-party foundry or assembly contractors have provided assurances that
adequate capacity will be available to us.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY END
USERS IN OUR MARKETS
Generally, our products comprise only a part of a communications device. All
components of such devices must uniformly comply with industry standards in
order to operate efficiently together. We depend on companies that provide other
components of the devices to support prevailing industry standards. Many of
these companies are significantly larger and more influential in effecting
industry standards than we are. Some industry standards may not be widely
adopted or implemented uniformly, and competing standards may emerge that may be
preferred by our customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, market
acceptance of our products could be adversely affected which would harm our
business.
Products for communications applications are based on industry standards
that are continually evolving. Our ability to compete in the future will depend
on our ability to identify and ensure compliance with these evolving industry
standards. The emergence of new industry standards could render our products
incompatible with products developed by other suppliers. As a result, we could
be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards.
If our products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies or
21
in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.
Item 2. Properties
Our central, administrative and test operation facility occupies
approximately 37,800 square feet in Austin, Texas under a lease that expires in
April 2006, with one five year renewal option. We have a lease for 34,610 square
feet of office space in Austin, Texas used principally for design engineering
and product marketing. This lease expires in April, 2006 with one five year
renewal option.
We have a master lease for 34,548 square feet of office space in Austin,
Texas. Approximately half of this office is used for design engineering and
product marketing. The remaining half of the lease space has been subleased to
two subtenants with one term for approximately one year and the other term for
two years. This master lease expires in January, 2007 with one five year renewal
option.
We have a lease for 2,826 square feet of office space in Nashua, New
Hampshire used as a northeast design center for engineering activities. This
lease expires in October, 2005.
We have a lease for 4,191 square feet of office space in Pleasanton,
California used for operations obtained through our acquisition of Krypton
Isolation, Inc. in August, 2000. This lease expires in December, 2001.
We maintain office leases in various locations for sales, marketing and
design activities. Each of these leases is for less than 1,000 square feet and
for terms typically for one year or less. These offices are maintained in
Allentown, Pennsylvania; Atlanta, Georgia; Broomfield, Colorado; Columbia,
Maryland; Kenilworth, England and San Jose, California.
We believe that these facilities are sufficient to meet our needs through
December 2001.
Item 3. Legal Proceedings
On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com in
the United States District Court for the Western District of Texas (Austin
Division). The complaint, as subsequently amended, asserted that Analog Devices
and 3Com had infringed, and were continuing to infringe, on our U.S. Patents
5,870,046 and 6,107,948, both entitled "Analog Isolation System With Digital
Communication Across A Capacitive Barrier," by making, using, selling, offering
to sell and/or importing silicon DAAs that embody or use inventions claimed by
our patent. The complaint also asserted, among other things, that Analog Devices
and 3Com misappropriated our confidential information, know-how and trade
secrets relating to our DAA technology, tortiously interfered with our business
relations with our existing and prospective customers, and were unjustly
enriched by this misappropriation. Subsequently, the complaint was amended to
add additional patent infringement claims. Analog Devices and 3Com answered the
complaints and asserted counterclaims.
On December 20, 2000, Analog Devices, 3 Com and Silicon Laboratories
announced that they had settled the pending lawsuits. The settlement was
completed without admission of fault or liability by any party and did not serve
as an adjudication with respect to any issue raised in the action. The
settlement did not limit our right to sell our products. Nothing in the
settlement agreement is construed as granting any licenses of intellectual
property between parties. A stipulated order of dismissal was filed in the
United States District Court for the Western District of Texas, Austin Division
on December 27, 2000. The parties remain subject to the jurisdiction of the
court for the limited purpose of enforcing the settlement agreement. Pursuant to
the execution of this settlement agreement, we received a one-time
non-refundable payment from Analog Devices in December 2000 for $2.5 million and
recorded the payment as revenue in the quarter ended December 30, 2000. Any
future payments pursuant to this settlement agreement are not anticipated by
management to represent a material portion of our revenue on a prospective
basis.
For a description of risks associated with this legal proceeding, please see
"We depend on a limited number of customers for the vast majority of our sales,
and the loss of, or a significant reduction in orders from, any key customer
could significantly reduce our sales" and "Significant litigation over
intellectual property in our industry may cause us to become involved in costly
22
and lengthy litigation which could seriously harm our business" in the risk
factors included at the end of Part I, Item 1 of this report on Form 10-K.
We are not currently a party to any material legal proceedings.
Item 4. Submission of Matter to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock has been quoted on the Nasdaq National Market under the
symbol "SLAB" since our initial public offering on March 24, 2000. The table
below shows the high and low per-share sales prices of our common stock for the
periods indicated, as reported by the Nasdaq National Market. As of December 30,
2000, there were 272 holders of record of our common stock. Upon consummation of
the initial public offering, all outstanding shares of our convertible preferred
stock were automatically converted into an aggregate of 13,884,190 shares of our
common stock.
Year Ended December 30, 2000 HIGH LOW
---------- ----------
First Quarter................................... $105.75 $62.98
Second Quarter.................................. 102.75 45.50
Third Quarter................................... 78.00 36.00
Fourth Quarter.................................. 42.13 10.13
For Fiscal 2000................................... $105.75 $10.13
We have never declared or paid any cash dividends on our common stock and we
do not intend to pay cash dividends in the foreseeable future. We currently
expect to retain any future earnings to fund the operation and expand of our
business. In addition, our credit agreements with our bank lender prohibit us
from paying cash dividends on our capital stock without the prior consent of the
lender.
On August 9, 2000, we issued 384,100 shares of Silicon Laboratories common
stock in exchange for the outstanding capital stock of Krypton Isolation, Inc.
The issuance of Silicon Laboratories common stock in connection with the
acquisition of Krypton was deemed exempt from registration under Section 5 of
the Securities Act of 1933 in reliance upon Section 3(a)(10) thereof, pursuant
to a fairness hearing conducted by the California Department of Corporations. As
a result of this filing, these shares are freely tradeable.
On October 2, 2000, we issued 55,556 shares of Silicon Laboratories common
stock in connection with the acquisition of SNR Semiconductor Incorporated. The
issuance of Silicon Laboratories common stock in connection with the acquisition
was deemed exempt from registration under Section 5 of the Securities Act of
1933 pursuant to Section 4(2) thereof. These shares are restricted stock and are
not freely tradeable.
Our registration statement (Registration No. 333-94853) under the Securities
Act of 1933, as amended, relating to our initial public offering of our common
stock became effective on March 23, 2000. A total of 3,680,000 shares of common
stock were registered. We sold a total of 3,200,000 shares of our common stock
and selling stockholders sold a total of 480,000 to an underwriting syndicate.
The managing underwriters were Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and was
completed on March 24, 2000, at a price to the public of $31.00 per share. The
initial public offering resulted in net proceeds to us of $90.6 million, after
deducting underwriting commissions of $6.9 million and offering expenses of $1.7
million. We used $15 million of the proceeds as part of the consideration paid
in the acquisition of Krypton Isolation Inc. on August 9, 2000. Another $4.3
million was used to pay off the equipment loans at Imperial Bank. We used
another $1.0 million of the proceeds as part of the consideration paid in the
acquisition of SNR Semiconductor Incorporated on October 2, 2000. As of December
30, 2000, the remaining proceeds were invested in government securities and
23
other short-term, investment-grade, interest bearing instruments.
Item 6. Selected Consolidated Financial Data
The selected consolidated balance sheet data as of fiscal year end 2000 and
1999 and the selected consolidated statement of operations data for fiscal 2000,
1999 and 1998 have been derived from audited consolidated financial statements
included in this Form 10-K. The selected consolidated balance sheet data as of
fiscal year end 1998, 1997 and 1996 and the selected consolidated statement of
operations data for fiscal 1997 and the period from inception (August 19, 1996)
to December 31, 1996 have been derived from audited consolidated financial
statements not included in this Form 10-K. You should read this selected
consolidated financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and the notes to those statements included in this Form
10-K. (In thousands, except per share data).
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Period from
Inception
(August 19,
1996)
Fiscal Year Through
------------------------------------------------------- December 31,
2000 1999 1998 1997 1996
------------ ----------- ---------- ----------- -------------
Revenues......................... $103,103 $46,911 $ 5,609 $ -- $ --
Cost of revenues................. 35,601 15,770 2,371 -- --
------------ ----------- ---------- ----------- -------------
Gross profit..................... 67,502 31,141 3,238 -- --
Operating expenses:
Research and development 19,419 8,297 4,587 1,364 10
Selling, general and
administrative............. 17,648 7,207 2,095 627 10
Write off of in-process
research & development..... 394 -- -- -- --
Goodwill amortization...... 3,307 -- -- -- --
Amortization of deferred
stock compensation......... 3,761 976 8 -- --
------------ ----------- ---------- ----------- -------------
Operating expenses............... 44,529 16,480 6,690 1,991 20
Operating income (loss).......... 22,973 14,661 (3,452) (1,991) (20)
Other (income) and expenses:
Interest Income................ (4,038) (402) (261) (178) --
Interest Expense............... 1,162 699 206 22 --
------------ ----------- ---------- ----------- -------------
Income (loss) before tax
expenses....................... 25,849 14,364 (3,397) (1,835) (20)
Income tax expense............... 11,832 3,324 -- -- --
------------ ----------- ---------- ----------- -------------
Net income (loss)................ $ 14,017 $11,040 $(3,397) $(1,835) $(20)
============ =========== ========== =========== =============
Net income (loss) per share:
Basic.......................... $ .37 $ .73 $ (.37) $ (1.04) $ --
Diluted........................ $ .29 $ .25 $ (.37) $ (1.04) $ --
Weighted average common shares
outstanding:
Basic.......................... 38,326 15,152 9,129 1,760 --
Diluted........................ 48,788 43,657 9,129 1,760 --
CONSOLIDATED BALANCE SHEET December 30, January 1, January 2, January 3, December 31,
DATA: 2000 2000 1999 1998 1996
------------ ----------- ---------- ----------- -------------
Cash, cash equivalents and
short-term investments....... $ 96,438 $14,706 $ 5,824 $ 3,778 $132
Working capital................ 103,347 14,281 5,209 2,045 (62)
Total assets................... 184,840 41,958 14,014 6,023 181
Long-term obligations.......... 5,125 6,223 2,153 747 --
Redeemable convertible
preferred stock.............. -- 12,750 12,750 5,250 --
Total stockholders' equity
(deficit).................... 162,951 8,003 (5,149) (1,776) (19)
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES WHICH APPEAR ELSEWHERE IN
THIS THIS REPORT. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE
IN THIS REPORT, PARTICULARLY UNDER THE HEADING "RISK FACTORS." PLEASE ALSO
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." OUR FISCAL YEAR-END
FINANCIAL REPORTING PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY
CLOSEST TO DECEMBER 31ST. FISCAL 1998 HAD 52 WEEKS AND ENDED ON JANUARY 2,
1999. FISCAL 1999 HAD 52 WEEKS AND ENDED ON JANUARY 1, 2000. FISCAL 2000 HAD
52 WEEKS AND ENDED ON DECEMBER 30, 2000.
OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal ICs for
the rapidly growing communications industry. Our innovative ICs can dramatically
reduce the cost, size and system power requirements of the products that our
customers sell to their end-user customers. We currently offer ICs that can be
incorporated into communications devices, such as modems and wireless phones, as
well as cable and satellite set-top boxes, residential communication gateways
for cable or DSL, cable modems, optical network equipment and remote gaming
devices. Customers during fiscal 2000 included 3Com, Lucent, Motorola,
PC-TEL, and Smart Link.
Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 256 at the
end of fiscal 2000, from 148 at the end of fiscal 1999, 42 at the end of fiscal
1998 and 17 at the end of fiscal 1997. As a "fabless" semiconductor company, we
rely on third-party semiconductor fabricators to manufacture the silicon wafers
that reflect our IC designs. Each wafer contains numerous die, which are cut
from the wafer to create a chip for an IC. We also rely on third-party
assemblers to assemble and package these die prior to final product testing and
shipping.
Our company is organized into three principal divisions, the Wireline
Products Division, the Wireless Products Division, and the Optical Networking
Division. Our Wireline Products Division commenced research and development for
our first IC product, the direct access arrangement, or DAA, in October 1996. We
introduced our DAA product in the first quarter of fiscal 1998, and first
received acceptance of this product for inclusion in a customer's device, which
we refer to as a "design win", in March 1998. The first commercial shipment of
our DAA product was made in April 1998. Based on the success of our family of
DAA products, we became profitable in the fourth quarter of fiscal 1998 and have
been profitable in each succeeding quarter. A significant majority of our sales
to date have been derived from sales of our various DAA products and we expect
to remain dependent on continued sales of DAA products for a majority of our
sales until we are able to diversify sales with new products. In fiscal 1999,
our Wireline Products Division introduced two additional ICs, a voice codec
product, which encodes analog signals within the voice frequency range into
digital signals and decodes digital voice signals back into analog signals, and
our ISO modem product. In addition, our Wireless Products Division introduced
our RF synthesizer product in fiscal 1999. In January 2000, our Wireline
Products Division introduced our ProSLIC product. In fiscal 2000, our Optical
Networking Products Division introduced a clock and data recovery product
suitable for SONET physical layer applications. We will be less dependent on our
DAA products for future sales to the extent that these products, or other
products that we may introduce, are incorporated into devices sold by our
customers. For a further description of our products, please see "Part I, Item
1. Business--Products."
Since our inception, a few customers have accounted for a substantial
portion of our revenues. During fiscal 2000, PC-TEL accounted for 46% of our
revenues. In fiscal 1999, our three largest customers accounted for 84% of our
revenues, including 62% for PC-TEL, 12% for Smart Link and 10% for 3Com. In
fiscal 1998, PC-TEL accounted for 78% and 3Com accounted for 20% of our
revenues. No other customer accounted for more than 10% of our revenues in any
of these years. To date, a significant portion of our revenues has been
generated through our direct sales force. In fiscal 1998, we began to establish
a network of independent sales representatives and distributors worldwide to
support our sales and marketing activities. We anticipate that sales through
these representatives and distributors will increase as a percentage of our
revenues in future periods. However, we expect to continue to experience
significant customer concentration in direct sales to key customer accounts
until we are able to diversify revenues with new customers.
On January 4, 2001, our largest customer PC-TEL announced that its revenue
for the quarter ended on December 31, 2000 would be below PC-TEL's previous
expectations due to the rapid deterioration in PC demand industry wide. PC-TEL
characterized this revenue shortfall as significantly below previous company
forecasts and further indicated that they believe this weak demand creates
uncertainty for the first half of 2001. We believe that this revenue shortfall
by PC-TEL will have a sizable impact on the Company's results, particularly
in the Wireline Products Division, and creates uncertainty for the first half
of fiscal year 2001. Revenues for the March 2001 quarter are expected to be
in the range of $16 million to $18 million.
25
The percentage of our revenues to customers located outside of the United
States was 21% in fiscal 2000, 7% in fiscal 1999 and insignificant in fiscal
1998. All of our revenues to date have been denominated in U.S. dollars. We
believe that a greater percentage of our revenues will be made to customers
outside of the United States as our products receive greater acceptance in
international markets.
The sales cycle for the test and evaluation of our ICs can range from 1
month to 12 months or more. An additional 3 to 6 months or more may be required
before a customer ships a significant volume of devices that incorporate our
ICs. Due to this lengthy sales cycle, we may experience a significant delay
between incurring expenses for research and development and selling, general and
administrative efforts, and the generation of corresponding sales, if any. We
intend to continue to increase our investment in research and development,
selling, general and administrative functions and inventory as we expand our
operations in the future. Consequently, if sales in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
and our operating results for that quarter and, potentially, future quarters
would be adversely affected.
Our limited operating history and rapid growth makes it difficult for us to
assess the impact of seasonal factors on our business. Because many of our ICs
are designed for use in consumer products such as PCs and wireless telephones,
we expect that the demand for our products will be subject to seasonal demand
resulting in increased sales in the third and fourth quarters of each year when
customers place orders to meet holiday demand. We expect to experience seasonal
fluctuations in the demand for our products as customer demand increases in
greater volume across our product offerings.
The following describes the line items set forth in our consolidated
statements of income:
REVENUES. Revenues are generated principally by sales of our ICs. We
recognize revenue upon the transfer of title, which generally occurs upon
shipment to our customers. Revenues are deferred on shipments to distributors
until they are resold by such distributors. Our products typically carry a
one-year warranty. Our revenues are subject to variation from period to period
due to the volume of shipments made within a period and the prices we charge for
our products. The vast majority of our revenues were conducted at prices that
reflect a discount from the list prices for our products. These discounts are
made for a variety of reasons, including to establish a relationship with a new
customer, as an incentive for customers to purchase products in larger volumes
or in response to competition. In addition, as a product matures, we expect that
the average selling price for that product will decline. Therefore, our ability
to increase revenues in the future is dependent on increased demand for our
established products and our ability to ship larger volumes of products in
response to such demand, as well as customer acceptance of newly introduced
products.
COST OF REVENUES. Cost of revenues includes the cost of purchasing finished
silicon wafers processed by independent foundries; costs associated with
assembly, test and shipping of those products; costs of personnel and equipment
associated with manufacturing support, logistics and quality assurance; an
allocated portion of our occupancy costs; and allocable depreciation of testing
equipment and leasehold improvements. Generally, we depreciate equipment over
four years on a straight line basis. We also depreciate our leasehold
improvements over the applicable lease term. Recently introduced products tend
to have higher cost of revenues per unit due to initially low production volumes
required by our customers and higher costs associated with new package
variations. Generally, as production volumes for a product increase, unit
production costs tend to decrease as our semiconductor fabricators and
assemblers achieve greater economies of scale for that product. Additionally,
the cost of wafer procurement, which is a significant component of cost of goods
sold, varies cyclically with overall demand for semiconductors. The
semiconductor industry experienced a period of high demand in 2000, resulting in
higher wafer procurement costs.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of compensation and related costs of employees engaged in research and
development activities, as well as an allocated portion of our occupancy costs
26
for such operations. We depreciate our research and development equipment over
four years and amortize our purchased software from computer-aided design tool
vendors over four years. Development activities include the creation of test
methodologies to assure compliance with required specifications and design of
new products. We have granted stock options or directly issued stock to patent
attorneys and outside technical consultants for services previously rendered. We
recognize stock-based compensation expense for these non-employees based on the
deemed fair value of the options or stock at the date of grant.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of personnel-related expenses, related allocable
portion of our occupancy costs, sales commissions to independent sales
representatives, professional fees, directors and officers liability insurance,
other promotional and marketing expenses and reserves for bad debt. Write-offs
of bad debt have been insignificant to date.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development reflects the write off of in-process research and
development costs acquired in connection with the acquisition of Krypton
Isolation, Inc.
GOODWILL AMORTIZATION. Goodwill amortization includes the amortization of
goodwill purchased in connection with the acquisition of Krypton Isolation, Inc.
and SNR Semiconductor Incorporated. Goodwill is amortized using the straight
line method over the assets estimated useful lives.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of
stock options and direct issuances of stock to our employees, we recorded
deferred stock compensation of approximately $9.5 million, $15.9 million, and
$.4 million in fiscal 2000, fiscal 1999, and fiscal 1998 respectively,
representing, for accounting purposes, the difference between the deemed fair
market value of the common stock and the respective exercise prices at the date
of grant. The difference is amortized over the vesting period of the applicable
option or share, generally five to eight years, resulting in amortization
expense of $3.8 million and $1.0 million in fiscal 2000 and 1999, respectively.
The amortization of deferred stock compensation is recorded as an operating
expense.
INTEREST INCOME. Interest income reflects interest earned on average cash,
cash equivalents and investment balances.
INTEREST EXPENSE. Interest expense consists of interest on our long-term
debt and capital lease obligations.
INCOME TAX EXPENSE. We accrue a provision for federal and state income tax
at the applicable statutory rates.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 2000 TO FISCAL 1999
REVENUES. Revenues increased $56.2 million, or 120%, to $103.1 million in
fiscal 2000 from $46.9 million in fiscal 1999. The increase was attributable to
the continued strong acceptance of our DAA family of products, and new product
revenues from our Iso-modem, ProSLIC, voice codec, and RF synthesizer products.
These new products represented 13.2% of total revenues in fiscal 2000 and 21.6%
of revenues in the quarter ended December 30, 2000. Increased revenues reflected
an increase in the number of customers that purchased our IC products and an
increase in the volume that those customers bought.
GROSS PROFIT. Cost of revenues increased $19.8 million, or 126%, to $35.6
million in fiscal 2000 from $15.8 million in fiscal 1999, and represented 34.5%
of revenues in fiscal 2000 and 33.6% of revenues in fiscal 1999, respectively.
Gross profit increased $36.4 million, or 117%, to $67.5 million in fiscal 2000
from $31.1 million in fiscal 1999. Gross margins declined to 65.5% in fiscal
2000 from 66.4% in fiscal 1999. The decline in gross margin percentage from
fiscal 1999 to 2000 was due to increased capital equipment costs for our Austin,
Texas based test facility to ensure adequate test capacity, and year-to-year
declines in average selling prices as is customary in the semiconductor
industry. These factors were partially offset by leveraging production tooling
and inbound freight expenses over higher sales volume. Our gross margins may
decline due to the expected introduction of products competitive to our
products. If demand for silicon wafer capacity within the semiconductor
27
industry increases faster than supply, higher wafer costs and lower gross
margins for our product may result.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$11.1 million or 134%, to $19.4 million in fiscal 2000 from $8.3 million in
fiscal 1999, and represented 18.8% of revenues in fiscal 2000 and 17.7% of
revenues in fiscal 1999. The increased research and development expense was due
to product development activities in all divisions to develop new products and
new test methodologies. We expect that research and development expense will
increase in absolute dollars in future periods as we develop new ICs, and may
fluctuate as a percentage of revenues due to significant changes in our sales
volume and new product development initiatives.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased $10.4 million or 145%, to $17.7 million in fiscal 2000 from
$7.2 million in fiscal 1999, and represented 17.1% of revenues in fiscal 2000
and 15.4% of revenues in fiscal 1999. The increase in the dollar amount of
selling, general and administrative expense was attributable to our legal
expenses of $2.8 million, or 2.7% of revenues, related to the infringement
lawsuit we filed against Analog Devices and 3Com in January 2000 and settled
during the quarter ended December 30, 2000 (See Part I, Item 3. Legal
Proceedings). Increases in staffing in all areas of selling, general and
administration also contributed to the rise in spending. Promotional activities
for new product introductions and expenses related to operating as a public
company, such as increased legal, investor relations and directors and officers
liability insurance, added to these higher levels of expense as compared to the
prior year. Selling, general and administrative expense, excluding the legal
fees associated with the infringement lawsuit, decreased as a percentage of
revenue due to substantially higher revenue levels in fiscal 2000. We expect
selling, general and administrative expenses to fluctuate as a percentage of
sales because of (1) the likelihood that indirect distribution channels, which
entail the payment of commissions, will account for a larger portion of our
revenues in future periods and, therefore, increase our selling, general and
administrative expense relative to a direct sales force performing at
satisfactory levels of productivity; (2) fluctuating usage of advertising to
promote our products and, in particular, our newly introduced products; and (3)
potential significant variability in our future revenue volume.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred stock
compensation for the difference between the exercise price of option grants, or
the issuance price of direct issuances of stock, and the deemed fair value of
our common stock at the time of such grants or issuances. We are amortizing this
amount over the vesting periods of the applicable options or restricted stock,
which resulted in amortization expense of $3.8 million for fiscal 2000 and $1.0
million for fiscal 1999. Our amortization expense increased in fiscal 2000 due
to an increase in deferred stock compensation for options and restricted stock
issued in fiscal 2000 and fiscal 1999.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development was $.4 million in fiscal 2000 as a result of the current
fiscal year acquisition of Krypton Isolation, Inc.
GOODWILL AMORTIZATION. Goodwill amortization was $3.3 million in fiscal
2000 as a result of the current fiscal year acquisitions of Krypton Isolation,
Inc. and SNR Semiconductor Incorporated.
INTEREST INCOME. Interest income was $4.0 million in fiscal 2000 as compared
to $.4 million in fiscal 1999. The increase in interest income was primarily due
to higher cash balances invested in short-term investments reflecting the
proceeds of our initial public offering completed in March of 2000.
INTEREST EXPENSE. Interest expense was $1.2 million in fiscal 2000 as
compared to $.7 million in fiscal 1999. The increase in interest expense was
primarily due to higher average levels of debt and lease financing during the
year used to finance capital expenditures, particularly relating to the
acquisition of IC testing equipment and leasehold improvements.
INCOME TAX EXPENSE. Our effective tax rate excluding the impact of
non-deductible goodwill, deferred compensation and write-off of in-process
research & development was 35.5% and 21.7% for fiscal 2000 and fiscal 1999,
respectively. Our tax rate increased in fiscal 2000 because we had
28
substantially utilized all of our net operating loss carryforwards by the end
of the prior fiscal year.
COMPARISON OF FISCAL 1999 TO FISCAL 1998
REVENUES. Revenues increased $41.3 million, or 736%, to $46.9 million in
fiscal 1999 from $5.6 million in fiscal 1998. The increase was attributable to
the strong acceptance of our DAA family of products. This increase reflected an
increase in the number of customers that purchased our IC products and an
increase in the volume that those customers bought.
GROSS PROFIT. Cost of revenues increased $13.4 million, or 565%, to $15.8
million in fiscal 1999 from $2.4 million in fiscal 1998, and represented 33.6%
of revenues in fiscal 1999 and 42.3% of revenues in fiscal 1998, respectively.
Gross profit increased $27.9 million, or 862%, to $31.1 million in fiscal 1999
from $3.2 million in fiscal 1998. Gross margins improved to 66.4% in fiscal
1999 from 57.7% in fiscal 1998. The increase in gross profit was primarily due
to the substantial increase in sales volume. The improvement in gross margin
from fiscal 1998 to 1999 was due to volume discounts on wafer and assembly
services purchases that resulted from substantial increases in our production
and attractive pricing conditions for silicon wafers and assembly services due
to the availability of capacity within the semiconductor manufacturing industry
during the period. Additionally, we were able to spread the fixed manufacturing
costs related to our final test operations over a larger volume of sales.
RESEARCH AND DEVELOPMENT. Research and development expense increased $3.7
million or 80.9%, to $8.3 million in fiscal 1999 from $4.6 million in fiscal
1998, and represented 17.7% of revenues in fiscal 1999 and 81.8% of revenues in
fiscal 1998. The increased research and development expense was principally due
to continued product development activities in the Wireline Division, as well
as significant increases in product development activity in the Wireless
Division. Both divisions increased spending to develop test methodologies for
new products. During fiscal 1999, we recorded approximately $.2 million of
stock-based compensation expense in connection with grants of stock options and
direct issuances to outside patent attorneys and technical consultants.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased $5.1 million or 244.0%, to $7.2 million in fiscal 1999 from
$2.1 million in fiscal 1998, and represented 15.4% of revenues in fiscal 1999
and 37.4% of revenues in fiscal 1998. The increase in the dollar amount of
selling, general and administrative expense was principally attributable to
increased staffing. The decrease in selling, general and administrative expense
as a percentage of revenues was due to substantially higher sales levels in
fiscal 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred
stock compensation for the difference between the exercise price of option
grants, or the issuance price of direct issuances of stock, and the deemed fair
value of our common stock at the time of such grants or issuances. We are
amortizing this amount over the vesting periods of the applicable options or
restricted stock, which resulted in amortization expense of $1.0 million for
fiscal 1999. Our amortization expense increased in fiscal 1999 due to an
increase in deferred stock compensation for options and direct stock issuances
in fiscal 1999.
INTEREST INCOME. Interest income was $.4 million in fiscal 1999 as compared
to $.3 million in fiscal 1998. The increase in interest income was primarily
due to higher cash balances invested in short-term investments.
INTEREST EXPENSE. Interest expense was $.7 million in fiscal 1999 as
compared to $.2 million in fiscal 1998. The increase in interest expense was
primarily due to higher levels of debt and lease financing used to finance
capital expenditures, particularly relating to the acquisition of IC testing
equipment and leasehold improvements.
INCOME TAX EXPENSE. Our effective tax rate excluding the impact of
non-deductible goodwill, deferred compensation and write-off of in-process
research and development was 21.7% for fiscal 1999. We had sufficient net
operating loss tax carryforwards available from our development stage
operations to offset any tax liability during fiscal 1998. For fiscal 1999,
utilization of the remaining net operating loss carryforward and, to a lesser
extent, full utilization of prior and current year research and
29
development tax credits reduced our effective tax rates from full corporate
rates.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of December 30, 2000 consisted of
$96.4 million in cash, cash equivalents and short-term investments in addition
to our bank credit facilities. We have a revolving line of credit available for
borrowings and letters of credit of up to the lesser of $5.0 million or 80.0%
of eligible accounts receivable at the bank's prime lending rate. At December
30, 2000, a letter of credit for $0.5 million related to a building lease was
outstanding under the revolving line of credit. At December 30, 2000, $4.5
million in borrowings were available under the revolving line of credit.
The bank facility is secured by our accounts receivable, inventories,
capital equipment and all other unsecured assets (excluding intellectual
property). The line of credit and the separate letter of credit facility
contain provisions that prohibit the payment of cash dividends and require the
maintenance of tangible net worth and compliance with financial ratios, which
measure our immediate liquidity and our ongoing ability to pay back our
outstanding obligations. Any default on one of the bank facilities will cause
all of the bank facilities to be in default under these agreements.
We also have entered into agreements with three institutional lenders for
equipment financing to purchase or lease equipment, leasehold improvements and
software. At December 30, 2000, the amount outstanding under these agreements
was $5.5 million. This indebtedness bears effective interest rates (including
end-of-term interest payments of $1.3 million) ranging from 6.7% to 10.2% per
annum, is secured by certain equipment, and is repayable over approximately the
next three years.
Prior to receiving the net proceeds from our initial public offering, we
funded our operations primarily through sales of preferred stock (which
resulted in gross aggregate proceeds to us of approximately $12.8 million),
debt financing under the bank facility and lease obligations described above
and cash generated from operations. We raised $90.6 million through our initial
public offering in March 2000. During fiscal 2000, cash provided by operating
activities was $22.6 million. This compares to cash provided by operating
activities of $12.3 million during fiscal 1999 and cash used by operating
activities of $4.5 million in fiscal 1998.
Due to the nature of our business, we experience working capital needs in
the areas of accounts receivable and inventory. Typically, we invoice our
customers on an open account basis on net 30 day payment terms or other
specific terms that may vary from account to account as individually negotiated
with customers. As of December 30, 2000, we had an accounts receivable balance
of $13.6 million dollars. If sales levels were to increase or customers delayed
their payments to us, it is likely that the level of receivables would also
increase. Our level of inventory varies based principally upon either orders
received from customers or our forecast of demand for these products. Other
considerations in determining inventory levels may include the product life
cycle stage of our products and competitive situations in the marketplace. Such
considerations are balanced against risk of obsolescence or potentially excess
inventory levels. As of December 30, 2000, we had inventory of $7.2 million
which we deemed adequate to address these inventory considerations.
Capital expenditures were $15.8 million in fiscal 2000 and $9.9 million in
fiscal 1999. These expenditures were incurred to purchase semiconductor test
equipment, design software and engineering tools, other computer equipment,
leasehold improvements and software to support our business expansion. We
anticipate further capital expenditures in fiscal 2001 of approximately $7
million to fund test floor operations and expand engineering product
development activities.
Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and extent
of research and development projects and the expansion of our sales and
marketing activities. We believe the net proceeds received from our initial
public offering, together with our existing cash balances, availability under
our credit facilities and cash generated by our operations, are sufficient to
meet our capital requirements through at least the next 12 months, although we
could be required, or could elect, to seek additional funding prior to that
time. We may enter into acquisitions or strategic arrangements in the future
which also could require us to seek additional equity or debt financing.
30
There can be no assurances that additional equity or debt financing, if
required, will be available to us on acceptable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 31, 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, an interpretation of APB Opinion No. 25. The interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The interpretation
has been applied prospectively to new awards, modifications to outstanding
awards, and changes in employee status on or after July 1, 2000, except as
follows: (i) requirements related to the definition of an employee apply to new
awards granted after December 15, 1998; (ii) modifications that directly or
indirectly reduce the exercise price of an award apply to modifications made
after December 15, 1998; and (iii) modifications to add a reload feature to an
award apply to modifications made after January 12, 2000. The adoption of this
pronouncement had no impact on the earnings or the financial condition of the
Company, other than the impact on the valuation of stock options assumed as
part of the Krypton acquisition.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income. The adoption of SFAS No. 133 will not have a
material impact on our financial statements since the Company does not utilize
derivative instruments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and supplementary data required by this item are
included in part IV, Item 14 of this Form 10-K and are presented beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Certain information required by Part III is omitted from this report
because we will file a definitive Proxy Statement pursuant to Regulation 14A
(the "Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this report, and certain information to be included therein is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal 1 -- Election of
Directors", "Executive Compensation" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
Item 11. Executive Compensation
The information under the caption "Executive Compensation" appearing in the
Proxy Statement, is incorporated herein by reference.
31
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Ownership of Securities," appearing in
the Proxy Statement, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
SILICON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-1
Consolidated balance sheets at December 30, 2000 and January 1, 2000 F-2
Consolidated statements of operations for the years ended
December 30, 2000, January 1, 2000, and January 2, 1999 F-3
Consolidated statements of changes in stockholders' equity for the
years ended December 30, 2000, January 1, 2000, and January 2, 1999 F-4
Consolidated statements of cash flows for the years ended
December 30, 2000, January 1, 2000, and January 2, 1999 F-5
Notes to consolidated financial statements F-6
2. Schedules
All schedules have been omitted since the information required
by the schedule is not applicable, or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements and notes thereto.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the financial statements are filed as part of,
or hereby incorporated by reference into, this Form 10-K
(b) Reports on Form 8-K.
We filed a report on Form 8-K (Item 5) on December 21, 2000 announcing the
settlement of our lawsuit against Analog Devices, Inc. and 3Com
Corporation.
(c) Exhibits
Exhibit
Number
------
2.1* Merger Agreement and Plan of Reorganization dated as of
June 22, 2000, by and among Silicon Labs, Karst
Corporation, a California corporation and wholly-owned
subsidiary of Silicon Labs, and Krypton Isolation, Inc., a
California corporation, and with respect to Section 7.2 of
the Merger Agreement only, Charles Welch, as Shareholder
Agent. (filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated August 11, 2000).
32
Exhibit
Number
------
3.1* Form of Fourth Amended and Restated Certificate of
Incorporation of Silicon Laboratories Inc. filed as
Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 (SEC File No. 333-94853 (the "IPO Registration
Statement")).
3.2* Form of Amended and Restated Bylaws of Silicon Laboratories
Inc. (filed as Exhibit 3.2 to the IPO Registration
Statement).
4.1* Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the IPO Registration Statement).
10.1* Form of Indemnification Agreement between Silicon
Laboratories Inc. and each of its directors and executive
officers (filed as Exhibit 10.1 to the IPO Registration
Statement).
10.2* Silicon Laboratories Inc. 2000 Stock Incentive Plan (filed as
Exhibit 10.2 to the IPO Registration Statement).
10.3* Silicon Laboratories Inc. Employee Stock Purchase Plan (filed
as Exhibit 10.3 to the IPO Registration Statement).
10.4* Amended and Restated Investors' Rights Agreement dated June 2,
1998 by and among Silicon Laboratories Inc. and certain
holders of preferred stock or common stock (filed as Exhibit
10.4 to the IPO Registration Statement).
10.5* Lease Agreement dated June 26, 1998 by and between Silicon
Laboratories Inc. and S.W. Austin Office Building Ltd. (filed
as Exhibit 10.5 to the IPO Registration Statement).
10.6* Lease Agreement dated October 27, 1999 by and between
Silicon Laboratories Inc. and Stratus 7000 West Joint
Venture (filed as Exhibit 10.6 to the IPO Registration
Statement).
10.7* Master Loan and Security Agreement dated April 22, 1999 by
and between Silicon Laboratories Inc. and FINOVA Capital
Corporation (filed as Exhibit 10.7 to the IPO Registration
Statement).
10.8* Commitment Letter dated April 19, 1999 by and between
Silicon Laboratories and Imperial Bank (filed as Exhibit
10.8 to the IPO Registration Statement).
10.9* Security and Loan Agreement dated June 25, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank (filed
as Exhibit 10.9 to the IPO Registration Statement).
10.10* Letter of Credit Agreement dated July 30, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank (filed
as Exhibit 10.10 to the IPO Registration Statement).
10.11* Letter of Credit Agreement dated November 19, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank (filed
as Exhibit 10.11 to the IPO Registration Statement).
10.12* Commitment Letter dated December 9, 1999 by and between
Silicon Laboratories and Imperial Bank (filed as Exhibit
10.12 to the IPO Registration Statement).
10.13* First Amendment to Credit Terms and Conditions and Attachment
Thereto dated December 16,1999 by and between Silicon
Laboratories Inc. and Imperial Bank (filed as Exhibit 10.13
to the IPO Registration Statement).
10.14* Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank (filed as Exhibit
10.14 to the IPO Registration Statement).
33
Exhibit
Number
------
10.15* Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank (filed as Exhibit
10.15 to the IPO Registration Statement).
10.16* Preferred Stock Purchase Warrant dated November 20, 1997 by
and between Silicon Laboratories and Imperial Bank (filed as
Exhibit 10.16 to the IPO Registration Statement).
10.17* Preferred Stock Purchase Warrant dated September 4, 1998 by
and between Silicon Laboratories and Imperial Bank (filed as
Exhibit 10.17 to the IPO Registration Statement).
10.18* Volume Purchase Agreement dated June 1, 1998 by and between
Silicon Laboratories Inc. and PC-TEL, Inc. (filed as Exhibit
10.18 to the IPO Registration Statement).
10.19* Lease Agreement dated June 29, 2000 by and between Silicon
Laboratories Inc. and Stratus 7000 West Joint Venture.
(filed as Exhibit 10.19 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 1, 2000)
21. Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ----------------
* Incorporated herein by reference to the indicated filing.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Austin, Texas,
on January 22, 2001.
SILICON LABORATORIES INC.
By: /s/ NAVDEEP S. SOOCH
----------------------------
Navdeep S. Sooch
CHIEF EXECUTIVE
OFFICER AND CHAIRMAN
OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
Chief Executive Officer and
/s/ NAVDEEP S. SOOCH Chairman of the Board January 22, 2001
- ------------------------------- (principal executive officer)
Navdeep S. Sooch
Vice President and Chief
/s/ JOHN W. MCGOVERN Financial Officer January 22, 2001
- ------------------------------- (principal financial and
John W. McGovern accounting officer)
/s/ JEFFREY W. SCOTT Vice President of January 22, 2001
- ------------------------------- Engineering and Director
Jeffrey W. Scott
/s/ DAVID R. WELLAND Vice President of January 22, 2001
- ------------------------------- Technology and Director
David R. Welland
/s/ WILLIAM P. WOOD Director January 22, 2001
- -------------------------------
William P. Wood
/s/ H. BERRY CASH Director January 22, 2001
- -------------------------------
H. Berry Cash
/s/ WILLIAM G. BOCK Director January 22, 2001
- -------------------------------
William G. Bock
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Laboratories Inc.
We have audited the accompanying consolidated balance sheets of Silicon
Laboratories Inc. as of December 30, 2000 and January 1, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Silicon
Laboratories Inc. at December 30, 2000 and January 1, 2000, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Austin, Texas
January 17, 2001
F-1
SILICON LABORATORIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 30, JANUARY 1,
2000 2000
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents.................... $51,902 $8,197
Short-term investments....................... 44,536 6,509
Accounts receivable, net of allowance for
doubtful accounts of $758 at December 30,
2000 and $569 at January 1, 2000........... 13,616 10,322
Inventories.................................. 7,219 2,837
Deferred income taxes........................ 1,719 963
Prepaid expenses and other................... 1,119 435
------------------- ------------------
Total current assets............................ 120,111 29,263
Property, equipment and software, net........... 22,625 12,350
Goodwill and other intangible assets............ 39,686 --
Other assets.................................... 2,418 345
------------------- ------------------
Total assets.................................... $184,840 $41,958
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $8,728 $7,374
Accrued expenses............................. 2,406 1,083
Deferred revenue............................. 2,640 1,006
Current portion of long-term obligations..... 2,078 2,697
Income taxes payable......................... 912 2,822
------------------- ------------------
Total current liabilities....................... 16,764 14,982
Long-term debt and leases....................... 3,390 6,081
Other long-term obligations..................... 1,735 142
------------------- ------------------
Total liabilities............................... 21,889 21,205
Redeemable convertible preferred stock.......... -- 12,750
Stockholders' equity:
Common stock--$.0001 par value; 250,000 and
52,000 shares authorized and 48,117 and
30,016 shares issued and outstanding at
December 30, 2000 and January 1, 2000,
respectively................................ 5 3
Additional paid-in capital................... 165,404 19,014
Stockholder notes receivable................. (1,202) (1,472)
Deferred stock compensation.................. (21,061) (15,330)
Retained earnings............................ 19,805 5,788
------------------- ------------------
Total stockholders' equity...................... 162,951 8,003
------------------- ------------------
Total liabilities and stockholders' equity...... $184,840 $41,958
=================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-2
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
----------------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
----------------- --------------- ---------------
Revenues............................... $103,103 $46,911 $5,609
Cost of revenues....................... 35,601 15,770 2,371
----------------- --------------- ---------------
Gross profit........................... 67,502 31,141 3,238
Operating expenses:
Research and development............ 19,419 8,297 4,587
Selling, general and administrative 17,648 7,207 2,095
Write off of in-process research &
development....................... 394 -- --
Goodwill amortization............... 3,307 -- --
Amortization of deferred stock
compensation...................... 3,761 976 8
----------------- --------------- ---------------
Operating expenses..................... 44,529 16,480 6,690
----------------- --------------- ---------------
Operating income (loss)................ 22,973 14,661 (3,452)
Other (income) and expenses:
Interest income..................... (4,038) (402) (261)
Interest expense.................... 1,162 699 206
----------------- --------------- ---------------
Income (loss) before tax expense....... 25,849 14,364 (3,397)
Income tax expense..................... 11,832 3,324 --
----------------- --------------- ---------------
Net income (loss) ..................... $14,017 $11,040 $(3,397)
================= =============== ===============
Net income (loss) per share:
Basic............................... $0.37 $0.73 $(0.37)
Diluted............................. $0.29 $0.25 $(0.37)
Weighted average common shares outstanding:
Basic............................... 38,326 15,152 9,129
Diluted............................. 48,788 43,657 9,129
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock
-----------------------------
Total
Number Additional Stockholder Deferred Retained Stockholders'
Of Par Paid-In Notes Stock Earnings Equity
Shares Value Capital Receivable Compensation (Deficit) (Deficit)
-------- -------- ----------- ----------- ------------ --------- ------------
Balance as of January 3, 1998.... 27,704 $ 3 $ 143 $ (67) $ -- $ (1,855) $ (1,776)
Exercises of stock options...... 938 -- 164 (148) -- -- 16
Deferred stock compensation..... -- -- 414 -- (414) -- --
Amortization of deferred stock
compensation................... -- -- -- -- 8 -- 8
Net loss........................ -- -- -- -- -- (3,397) (3,397)
-------- -------- ----------- ----------- ------------ --------- ------------
Balance as of January 2, 1999.... 28,642 3 721 (215) (406) (5,252) (5,149)
Exercises of stock options...... 1,411 -- 2,047 (1,267) -- -- 780
Income tax benefit from
exercise of stock options...... -- -- 91 -- -- -- 91
Repurchase and cancellation of
unvested shares................ (37) -- (10) 10 -- -- --
Compensation expense related
to stock options and direct
stock issuances to
non-employees.................. -- -- 266 -- -- -- 266
Deferred stock compensation..... -- -- 15,899 -- (15,899) -- --
Amortization of deferred stock
compensation................... -- -- -- -- 975 -- 975
Net income...................... -- -- -- -- -- 11,040 11,040
-------- -------- ----------- ----------- ------------ --------- ------------
Balance as of January 1, 2000.... 30,016 3 19,014 (1,472) (15,330) 5,788 8,003
Conversion of Preferred
Stock to Common Stock.......... 13,884 2 12,849 -- -- -- 12,851
Net Proceeds from Initial
Public Offering................ 3,200 -- 90,646 -- -- -- 90,646
Compensation expense related
to warrants.................... -- -- 153 -- -- -- 153
Exercises of stock options...... 573 -- 1,705 -- -- -- 1,705
Income tax benefit from
exercise of stock options...... -- -- 1,685 -- -- -- 1,685
Repurchase and cancellation
of unvested shares............. (25) -- (70) -- -- -- (70)
Repayment of stockholder
notes.......................... -- -- -- 270 -- -- 270
Employee Stock Purchase Plan.... 29 -- 700 -- -- -- 700
Deferred stock compensation..... -- -- 9,458 -- (9,458) -- --
Amortization of deferred
stock compensation............. -- -- -- -- 3,761 -- 3,761
Purchase acquisitions........... 440 -- 29,264 -- (34) -- 29,230
Net income...................... -- -- -- -- -- 14,017 14,017
-------- -------- ----------- ----------- ------------ --------- ------------
Balance as of December 30, 2000.. 48,117 $ 5 $165,404 $ (1,202) $ (21,061) $ 19,805 $ 162,951
======== ======== =========== =========== ============ ========= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
--------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
2000 2000 1999
--------------- -------------- -------------
OPERATING ACTIVITIES
Net income (loss)................................ $ 14,017 $ 11,040 $ (3,397)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization expense.......... 9,750 1,972 816
Amortization of deferred stock compensation.... 3,761 975 8
Amortization of note/lease end-of-term
interest payments............................ 323 142 --
Compensation expense related to stock options,
direct stock issuance, and warrants to non-
employees.................................... 153 266 --
Income tax benefit from exercise of stock
options...................................... 1,685 91 --
Investment interest receivable................. (608) -- --
Changes in operating assets and liabilities:
Prepaid expenses and other................... (557) (300) (65)
Accounts receivable.......................... (3,105) (7,447) (2,875)
Inventories.................................. (3,847) (2,202) (635)
Other assets................................. (811) (218) (120)
Accounts payable............................. 847 4,232 1,643
Accrued expenses............................. 1,136 854 175
Deferred revenue............................. 1,634 1,006 --
Deferred income taxes........................ (302) (963) --
Income taxes payable......................... (1,466) 2,822 --
--------------- -------------- -------------
Net cash provided by (used in) operating
activities.................................... 22,610 12,270 (4,450)
INVESTING ACTIVITIES
Purchases of short-term investments............. (63,012) (9,385) (5,616)
Maturities of short-term investments............ 25,593 5,833 5,728
Purchases of property and equipment............. (15,843) (9,904) (3,066)
Purchase of software license.................... (1,250) -- --
Acquisition of businesses, net of cash acquired (14,433) -- --
--------------- -------------- -------------
Net cash used in investing activities........... (68,945) (13,456) (2,954)
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 3,532 6,424 1,499
Payments on long-term debt...................... (6,350) (1,274) (249)
Proceeds from equipment lease financing......... -- 976 825
Payments on capital leases...................... (493) (390) (30)
Proceeds from repayment of stockholder notes... 270 -- --
Proceeds from exercise of warrants.............. 100 -- --
Proceeds from Employee Stock Purchase Plan...... 700 -- --
Repurchase and cancellation of common stock..... (70) -- --
Net proceeds from initial public offering....... 90,646 -- --
Net proceeds from issuances of convertible
preferred stock............................... -- -- 7,500
Net proceeds from exercises of stock options.... 1,705 780 17
--------------- -------------- -------------
Net cash provided by financing activities....... 90,040 6,516 9,562
--------------- -------------- -------------
Increase in cash and cash equivalents........... 43,705 5,330 2,158
Cash and cash equivalents at beginning of period 8,197 2,867 709
--------------- -------------- -------------
Cash and cash equivalents at end of period...... $ 51,902 $ 8,197 $ 2,867
=============== ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................... $ 827 $ 593 $ 199
=============== ============== =============
Income taxes paid............................... $ 11,855 $ 1,489 $ --
=============== ============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 30, 2000
1. ORGANIZATION
Silicon Laboratories Inc. (the Company), a Delaware corporation, develops
and markets mixed-signal analog/intensive integrated circuits or ICs. The
Company's products serve the wireline, wireless, and optical communications
markets. Within the semiconductor industry, the Company is known as a "fabless"
company meaning that the ICs are manufactured by third-party semiconductor
companies. The Company was incorporated in 1996, and emerged from the
development stage in fiscal 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares financial statements on a 52-53 week year that ends on
the Saturday closest to December 31. Fiscal year 2000 ended on December 30,
2000, fiscal year 1999 ended on January 1, 2000, and fiscal year 1998 ended on
January 2, 1999. All of the periods presented have 52 weeks.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Silicon Laboratories Isolation,
Inc. and Silicon Laboratories UK Limited. All significant intercompany balances
and transactions have been eliminated. The functional currency of the Company's
foreign subsidiary, Silicon Laboratories UK Limited, is the U.S. dollar,
accordingly, all translation gains and losses resulting from transactions
denominated in currencies other than U.S. dollars are included in net income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash deposits and investments with a
maturity of three months or less when purchased.
SHORT-TERM INVESTMENTS
The Company's short-term investments have original maturities greater than
ninety days and less than one year and have been classified as
available-for-sale securities in accordance with Statement of Financial
Accounting Standard (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. The carrying value of all available-for-sale securities
approximates their fair value. Short-term investments at December 30, 2000 and
January 1, 2000 consist of the following (in thousands):
Carrying Value
--------------------------------
December 30, January 1,
2000 2000
--------------------------------
Municipal Securities $17,529 $ --
Auction Rate Securities 11,242 --
U.S. Treasury Bills 15,765 6,509
--------------------------------
$44,536 $6,509
================================
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, receivables, accounts payable, and
borrowings. The Company believes all of these financial instruments are recorded
at their current market values.
F-6
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consist of the following (in
thousands):
December 30, January 1,
2000 2000
---------------- --------------
Work in progress $ 4,302 $ 1,902
Finished goods 2,917 935
---------------- --------------
$ 7,219 $ 2,837
================ ==============
PROPERTY, EQUIPMENT, AND SOFTWARE
Property, equipment, and software are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets (generally four to
five years). Amortization of assets recorded under capital leases is computed
using the straight-line method over the shorter of the asset's useful life or
the term of the lease and such amortization is included with depreciation
expense (See also Note 5). Leasehold improvements are depreciated over the
contractual obligation of the lease period or their useful life, whichever is
shorter. Property, equipment and software consist of the following (in
thousands):
December 30, January 1,
2000 2000
------------------ ---------------
Equipment.......................... $ 21,618 $ 10,014
Computers and purchased software... 7,147 3,779
Furniture and fixtures............. 885 326
Leasehold improvements............. 1,979 1,155
------------------ ---------------
31,629 15,274
Accumulated depreciation........... (9,004) (2,924)
------------------ ---------------
$ 22,625 $ 12,350
================== ===============
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.
F-7
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts
and U.S. Treasury bills. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from
its customers. The Company provides an allowance for doubtful accounts
receivable based upon the expected collectibility of such receivables. The
following table summarizes the changes in the allowance for doubtful accounts
receivable (in thousands):
Balance at January 3, 1998....................... $ --
Additions charged to costs and expenses.......... 56
Write-off of uncollectible accounts.............. --
-------
Balance at January 2, 1999....................... 56
Additions charged to costs and expenses.......... 513
Write-off of uncollectible accounts.............. --
-------
Balance at January 1, 2000....................... 569
Balance acquired from Krypton Isolation purchase 56
Additions charged to costs and expenses.......... 133
Write-off of uncollectible accounts.............. --
-------
Balance at December 30, 2000..................... $ 758
=======
All of the Company's products are currently fabricated by two companies in
Taiwan. A fabrication disruption experienced by either of these partners could
impact the production of the Company's products for a substantial period of
time, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The following is a detail of customers that accounted for greater than 10%
of revenue in the respective fiscal years:
Year Ended
--------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
-------------- ------------ ------------
Customer A...................... 46% 62% 78%
Customer B...................... -- 12 --
Customer C...................... -- 10 20
REVENUE RECOGNITION
Revenue from product sales direct to customers is recognized upon title
transfer, which generally occurs upon shipment. Certain of the Company's sales
are made to distributors under agreements allowing certain rights of return and
price protection on products unsold by distributors. Accordingly, the Company
defers revenue and gross profit on such sales until the product is sold by the
distributors.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
$718,000, $296,700, and $66,800 in the fiscal years ended December 30, 2000,
January 1, 2000, and January 2, 1999, respectively.
F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Financial Accounting Standards Board (FASB) SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
SFAS No. 123, the Company has elected to continue to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
On March 31, 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION NO. 25. The Interpretation clarifies guidance for certain issues that
arose in the application of Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The interpretation has been applied
prospectively to new awards, modifications to outstanding awards, and changes
in employee status on or after July 1, 2000, except as follows: (i)
requirements related to the definition of an employee apply to new awards
granted after December 15, 1998; (ii) modifications that directly or indirectly
reduce the exercise price of an award apply to modifications made after
December 15, 1998; and (iii) modifications to add a reload feature to an award
apply to modifications made after January 12, 2000. The adoption of this
pronouncement had no impact on the earnings or the financial condition of the
Company, other than the impact on the valuation of stock options assumed as
part of the Krypton acquisition.
OTHER COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. There were no material
differences between net income (loss) and comprehensive income (loss) during
any of the periods presented.
SEGMENT INFORMATION
The Company has one operating segment with three product divisions (the
Wireline, Wireless, and Optical Networking Divisions). The chief operating
decision maker allocates resources and assesses performance of the business and
other activities at the operating segment level. The Wireline Division
accounted for a significant majority of the revenues in all periods.
Approximately $22,059,000, $3,372,000, and $4,000 of the Company's revenues
were from export sales for the fiscal years ended December 30, 2000, January 1,
2000, and January 2, 1999, respectively. The operations and assets of Silicon
Laboratories UK Limited were immaterial in all periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
statements to conform with current year presentation.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share data):
Year Ended
--------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
--------------- ------------ -------------
Net income (loss).......................... $14,017 $11,040 $(3,397)
Basic:
Weighted-average shares of common stock
outstanding........................... 43,628 29,177 28,245
Weighted-average shares of common stock
subject to repurchase................. (5,302) (14,025) (19,116)
--------------- ------------ -------------
Shares used in computing basic net
income (loss) per share............... 38,326 15,152 9,129
--------------- ------------ -------------
Effect of dilutive securities:
Weighted-average shares of common stock
subject to repurchase................. 5,131 13,370 --
Convertible preferred stock and warrants 3,235 13,965 --
Stock options........................... 2,096 1,170 --
--------------- ------------ -------------
Shares used in computing diluted net
income (loss) per share............... 48,788 43,657 9,129
=============== ============ =============
Basic net income (loss) per share.......... $0.37 $0.73 $(0.37)
Diluted net income (loss) per share........ $0.29 $0.25 $(0.37)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income. The adoption of SFAS No. 133 will not have a
material impact on the Company's financial statements since the Company does
not utilize derivative instruments.
3. ACQUISITIONS
On August 9, 2000, the Company consummated a merger with Krypton Isolation,
Inc., a company specializing in patented total solid state all-silicon Data
Access Arrangement, or DAA devices. The purchase price of $42.0 million
consisted of $15.0 million in cash, 384,100 shares of the Company's common
stock valued at $21.9 million, 90,449 options to purchase the Company's common
stock valued at $4.8 million, and direct acquisition costs of $0.3 million. The
direct acquisition costs consist primarily of legal, accounting, and appraisal
fees incurred by the Company that are directly related to the merger. There can
be no assurance that the Company and Krypton will not incur additional charges
related to the merger or that management will be successful in its efforts to
integrate the operations of the two companies. To determine the value
associated with the stock and stock option portion of the consideration paid to
Krypton shareholders, management used the average of the closing prices of the
Company's common stock for the three days before and after the measurement
date, August 4, 2000, in accordance with Emerging Issues Task Force (EITF)
99-12, ACCOUNTING FOR FORMULA ARRANGEMENTS UNDER EITF 95-19, DETERMINATION OF
THE MEASUREMENT DATE FOR THE MARKET PRICE OF ACQUIRER SECURITIES ISSUED IN A
PURCHASE BUSINESS COMBINATION. The average of these closing prices was $56.96
per share. The number of shares tendered was based on the average of the
closing prices of the Company's common stock in the ten trading days ending on
August 4, 2000 in accordance with the terms of the agreement.
F-10
3. ACQUISITIONS (CONTINUED)
The acquisition of Krypton was accounted for under the purchase method of
accounting. The purchase price was allocated to the estimated fair value of
assets acquired and liabilities assumed based on independent appraisals and
management estimates as follows (in thousands):
Amortization Period
---------------------
Intangibles:
Workforce $ 214 3 years
Customer base 1,006 5 years
Acquired technology 952 4-7 years
Patents 120 3 years
Goodwill 37,229 5 years
-------------
39,521
Net fair value of tangible assets acquired and
liabilities assumed 2,415
Net deferred tax liabilities assumed (373)
Deferred stock compensation 35
In-process research and development 394
-------------
Total purchase price $41,992
=============
Since this acquisition was accounted for using the purchase method, the
results of operations of Krypton have been included with those of the Company
subsequent to the acquisition date, August 9, 2000.
The following presents the unaudited pro forma combined results of
operations of the Company with Krypton for the years ended December 30, 2000
and January 1, 2000, after giving effect to certain pro forma adjustments, as
if Krypton had been acquired as of the beginning of the respective fiscal
years. The unaudited pro forma financial information for the year ended
December 30, 2000 combines the audited historical results of operations of the
Company for the year ended December 30, 2000 and the unaudited historical
results of operations of Krypton for the twelve-months ended October 31, 2000.
The unaudited pro forma financial information for the year ended January 1,
2000 combines the audited results of operations for the year ended January 1,
2000 for the Company and the unaudited results of operations for the
twelve-months ended October 31, 1999 for Krypton. (in thousands, except per
share data)
Year Ended Year Ended
December 30, 2000 January 1, 2000
---------------------------- -----------------------------
Revenue $103,861 $48,853
Net income 2,278 3,036
Diluted net income per share $0.05 $0.07
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the respective fiscal years, nor is it necessarily indicative of future
operating results or financial position of the Company.
Approximately $394,000 of the Krypton purchase price was allocated to
in-process research and development based upon an independent third party
appraisal and expensed upon the consummation of the transaction. The proforma
adjustments do not include a charge for this expense as it does not have a
continuing impact on the operations of the Company. Further, the unaudited pro
forma financial information does not include the realization of cost savings
F-11
3. ACQUISITIONS (CONTINUED)
from operating efficiencies, synergies or other restructurings that may result
from the merger.
On October 2, 2000, the Company acquired SNR Semiconductor, Inc. (SNR),
an engineering design firm specializing in the design of analog and
mixed-signal core technology in CMOS, with particular emphasis on technology
for communications applications. The purchase price of $3.7 million consisted
of $1.0 million in cash, 55,556 shares of the Company's common stock valued
at $2.6 million and direct acquisition costs of $0.1 million. Of the purchase
price, $27,000 was allocated to tangible assets based upon their respective
fair values, and $131,000 was allocated to the intangible asset "workforce"
based on management's estimates. The resulting excess purchase price of $3.5
million was allocated to goodwill. Workforce is being amortized over 5 years
and goodwill is being amortized over 4 years. The historical operating
results of SNR are not significant to the Company's consolidated financial
statements.
4. GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles is computed using the
straight line method over the assets estimated useful lives ranging from 4 to 7
years. Activity in goodwill and other intangibles during the year ended
December 30, 2000 is as follows (amounts in thousands):
Customer Acquired
Workforce Base Technology Patents Goodwill Total
--------- ------ ---------- ------- -------- --------
Balance at January 1, 2000 $ -- $ -- $ -- $ -- $ -- $ --
Acquisition of assets 345 1,006 952 120 40,794 43,218
Amortization (36) (84) (89) (16) (3,306) (3,532)
--------- ------ ---------- ------- -------- --------
Net balance at December 30, 2000 $309 $922 $863 $104 $37,488 $39,686
========= ====== ========== ======= ======== ========
5. LONG-TERM OBLIGATIONS
The Company has a revolving line of credit agreement (the Agreement) with
a commercial bank. Under the provisions of the Agreement, the line of credit
allows for borrowings of up to $5 million or 80% of eligible accounts
receivable at the bank's prime lending rate. The bank facility is secured by
the Company's accounts receivable, inventory, capital equipment and other
unsecured assets (excluding intellectual property). At December 30, 2000, a
letter of credit for $.5 million relating to a building lease was outstanding
under the facility. There were no amounts outstanding under this facility as of
January 1, 2000. As a result, available borrowings under this facility were
$4.5 million and $3.0 million at December 30, 2000 and January 1, 2000,
respectively. There are covenants related to net worth and liquidity associated
with this line of credit, with which the Company is in compliance as of
December 30, 2000.
F-12
5. LONG-TERM OBLIGATIONS (CONTINUED)
Long-term debt and leases consist of the following:
December 30, January 1,
2000 2000
---------------- -------------
(in thousands)
Bank term loans paid off in September 2000........................................ $ -- $1,456
Note payable, at 9.08%, payable in monthly installments of $24,800 through
March 1, 2003 with a $200,600 interest payment due at maturity.................. 604 835
Note payable, at 9.77%, payable in monthly installments of $4,100 through
June 1, 2003.................................................................... 109 146
Note payable, at 9.91%, payable in monthly installments of $14,000 through
September 1, 2003............................................................... 404 526
Note payable, at 10.22%, payable in monthly installments of $5,800 through
December 1, 2003................................................................ 180 231
Note payable, at 6.71%, payable in monthly installments of $30,600 through
February 28, 2003 with a $243,200 interest payment due at maturity.............. 739 1,046
Note payable, at 6.92%, payable in monthly installments of $19,300 through
July 31, 2003 with a $152,900 interest Payment due at maturity.................. 548 719
Note payable, at 7.13%, payable in monthly installments of $40,000 to $46,000
through April 30, 2004 with a $399,200 interest payment due at maturity......... 1,605 1,956
Note payable, at 7.5%, payable in monthly installments of $9,900 to $11,400
through April 30, 2004 with a $98,100 interest payment due at maturity.......... 395 481
Capital lease obligations......................................................... 884 1,382
---------------- -------------
5,468 8,778
Current portion................................................................... (2,078) (2,697)
---------------- -------------
Long-term portion................................................................. $3,390 $6,081
================ =============
The notes payable and capital lease obligations are borrowings with three
institutional financing providers for equipment financing. The indebtedness is
secured by a security interest in the underlying equipment.
Periodically, the Company will purchase or make advance deposits toward the
purchase of machinery and equipment; and within one to three months enter into
leasing arrangements to finance these assets. These leasing arrangements result
in the reimbursement of the amounts initially paid by the Company and do not
result in any gains or losses. Such reimbursements have been reflected in the
statement of cash flows as proceeds from equipment lease financings.
The Company has financed the acquisition of certain computers and other
equipment under capital lease transactions which are accounted for as financings
and mature through fiscal year 2003. As of December 30, 2000 and January 1,
2000, equipment under capital lease included in property, equipment and software
was $884,000, and $1,382,000, respectively.
At December 30, 2000, contractual maturities of debt and future minimum
annual payments due under capital lease obligations are as follows (in
thousands):
Capital
Fiscal Year Debt Leases Total
---------- ---------- ----------
2001.............................................. $ 1,535 $633 $ 2,168
2002.............................................. 1,698 343 2,041
2003.............................................. 1,125 12 1,137
2004.............................................. 226 -- 226
---------- ---------- ----------
4,584 988 5,572
Less amount representing interest................. -- (104) (104)
---------- ---------- ----------
4,584 884 5,468
Less current portion.............................. (1,535) (543) (2,078)
---------- ---------- ----------
Long-term debt and leases......................... $ 3,049 $341 $ 3,390
========== ========== ==========
F-13
6. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Certificate of Incorporation authorized the issuance of up to
8,000,000 shares of Convertible Preferred Stock with par value of $0.0001 per
share. Each share was convertible at the option of the stockholder into two
shares of common stock, subject to certain anti-dilution adjustments. The
Convertible Preferred Stockholders were entitled to the number of votes equal
to the number of shares of common stock into which each share of Convertible
Preferred Stock could be converted on the record date. In March 2000, a
warrant to purchase 21,008 shares of Series B convertible Preferred Stock at
$4.76 per share was exercised. Upon closing of the Company's initial public
offering, all outstanding shares of the Company's Redeemable Convertible
Preferred Stock were converted into an aggregate of 13,884,190 shares of the
Company's common stock.
As of January 1, 2000, Redeemable Convertible Preferred Stock was as follows
(in thousands except per share data):
Shares
Par Shares Issued and Liquidation
Value Authorized outstanding Preference
---------- --------------- ---------------- ---------------
Series
Undesignated........... $.0001 998 -- $ --
A...................... $.0001 5,391 5,345 5,250
B...................... $.0001 1,611 1,576 7,500
--------------- ---------------- ---------------
8,000 6,921 $12,750
=============== ================ ===============
COMMON STOCK
The Company had 48,117,437 shares of common stock outstanding as of December
30, 2000. Of these shares, 3,113,327 shares were unvested and are subject to
rights of repurchase that lapse according to a time based vesting schedule.
On November 3, 1999, the Company effected a two-for-one stock split through
a stock dividend of common stock. All references to common stock share and per
share amounts including options to purchase common stock have been retroactively
restated to reflect the stock split as if such split had taken place at the
inception of the Company. Also, the conversion ratio of the redeemable
convertible preferred stock was adjusted from one-for-one to one-for-two.
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Board of Directors on January 5, 2000. Eligible employees may purchase a limited
number of shares of the Company's common stock at 85% of the market value at
semi-annual intervals. A total of 400,000 shares the Company's common stock was
initially reserved under the Purchase Plan. In fiscal 2000, there were 29,341
shares issued under the Purchase Plan.
STOCK OPTION/STOCK ISSUANCE PLANS
In fiscal 2000, the Company's Board of Directors and Stockholders approved
the 2000 Stock Incentive Plan (the 2000 Plan). The 2000 Plan contains programs
for (i) the discretionary granting of stock options to employees, non-employee
board members and consultants for the purchase of shares of the Company's common
stock, (ii) the discretionary issuance of common stock directly to employees
(direct issuance shares), (iii) the granting of special below-market stock
options to executive officers and other highly compensated employees of the
Company for which the exercise price can be paid using earnings deductions and
(iv) the automatic issuance of stock options to non-employee board members. Upon
the Company's initial public offering, the 2000 Plan incorporated all stock
options and direct issuance shares outstanding under the 1997 Stock Option/Stock
Issuance Plan (the 1997 Plan). Under the 1997 Plan, employees, members of the
Board of Directors and independent advisors were granted stock options or were
issued direct issuance shares as a direct purchase or as a bonus for services
rendered to the Company. In connection with the acquisition of Krypton Isolation
Inc., the Company assumed outstanding options for 90,449 shares of the Company's
common stock.
F-14
6. STOCKHOLDERS' EQUITY (CONTINUED)
The 2000 Plan and the 1997 Plan contain similar terms. The direct issuance
shares and the stock options contain vesting provisions ranging from four to
eight years. If permitted by the Company, stock options can be exercised
immediately and, similar to the direct issuance shares, are subject to
repurchase rights which generally lapse in accordance with the vesting schedule.
The repurchase rights provide that upon certain defined events, the Company can
repurchase unvested shares at the price paid per share. The term of each stock
option is no more than ten years from the date of grant. At December 30, 2000,
10,561,808 shares were authorized for issuance under the 2000 Plan. No further
options or direct issuances may be granted under the 1997 Plan.
The Company recorded deferred stock compensation expense of $9,492,000,
$15,899,000 and $414,000 in connection with stock options granted or assumed for
297,697 shares, 2,464,200 shares and 355,500 shares of common stock during
fiscal 2000, 1999 and, 1998 respectively. These amounts represent the difference
between the exercise price of the stock option and the market price or the
subsequently deemed fair value of the Company's common stock. The deferred stock
compensation is amortized over the vesting periods of the applicable options,
resulting in amortization expense of $3,761,000, $976,000 and $8,000 for fiscal
years 2000, 1999, and 1998, respectively.
During fiscal 1999 and 1998, the Company made full recourse loans to
employees of $1,267,500 and $147,500, respectively, in connection with the
employees' purchase of shares through exercises of options. These full recourse
notes are secured by the shares of stock, are interest bearing at rates ranging
from 4.8% to 6.7%, have terms of five years, and must be repaid upon the sale of
the underlying shares of stock. No loans were issued during fiscal 2000.
A summary of the Company's stock option and direct issuance activity and
related information follows:
Outstanding Weighted-
Shares Options Average
Available And Direct Exercise Exercise
For Grant Issuances Prices Price
-------------- -------------- ----------------- --------------
Balance at January 3, 1998.... 1,664,536 770,000 $0.05 $ 0.05
Additional shares reserved.... 1,067,272 -- -- --
Granted....................... (1,542,500) 1,542,500 0.05 - 1.25 0.35
Exercised..................... -- (938,168) 0.05 - 0.25 0.18
Cancelled..................... 61,832 (61,832) 0.05 0.05
-------------- -------------- ----------------- --------------
Balance at January 2, 1999.... 1,251,140 1,312,500 0.05 - 1.25 0.31
Additional shares reserved.... 2,200,000 -- -- --
Granted....................... (2,484,200) 2,484,200 1.25 - 16.00 3.08
Exercised..................... -- (1,411,474) 0.05 - 5.00 1.45
Cancelled..................... 5,000 (5,000) 0.25 - 1.75 0.77
Repurchase and cancellation
of unvested shares.......... 37,332 -- 0.25 0.25
-------------- -------------- ----------------- --------------
Balance at January 1, 2000.... 1,009,272 2,380,226 0.05 - 16.00 2.52
Additional shares reserved.... 2,090,449 -- -- --
Granted and assumed........... (2,413,331) 2,413,331 0.00 - 74.75 30.92
Exercised..................... -- (573,308) 0.00 - 31.00 2.98
Cancelled..................... 138,834 (138,834) 1.75 - 57.50 31.38
Repurchase and cancellation
of unvested shares.......... 25,000 -- 2.50 - 10.00 2.80
-------------- -------------- ----------------- --------------
Balance at December 30, 2000.. 850,224 4,081,415 $0.00 - $74.75 $18.26
============== ============== ================= ==============
F-15
6. STOCKHOLDERS' EQUITY (CONTINUED)
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 30, 2000.
Outstanding Exercisable
-------------------------------------------------- ------------------------
Weighted-
Average Weighted-
Remaining Weighted- Average
Range of Number of Contractual Average Number of Exercise
Exercise Prices Options Life in Years Exercise Price Options Price
- --------------------- ----------- --------------- ---------------- ----------- ---------
$ 0.00 to $ 0.25 685,500 5.45 $ 0.13 628,000 $ 0.14
0.28 to 1.75 733,202 8.31 1.47 733,202 1.47
2.00 to 10.00 693,183 8.83 5.72 693,183 5.72
11.63 to 28.13 506,865 6.50 16.06 24,915 16.76
31.00 to 31.00 752,200 9.23 31.00 817 31.00
35.40 to 55.38 531,965 9.64 50.50 1,965 35.40
57.50 to 74.75 178,500 9.48 62.11 -- --
- --------------------- ----------- --------------- ---------------- ----------- ---------
$ 0.00 to $74.75 4,081,415 8.09 $18.26 2,068,546 $ 3.00
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 6%, no
expected dividends, an expected life of one year, and no volatility for options
granted in fiscal 1998 and 1999; risk-free interest rate of 6.2%, no expected
dividends, an expected life of 5.61 years, and volatility of 88% for options
granted in fiscal 2000. The fair value of shares issued under the Company's
Purchase Plan was not significant for all periods presented.
The weighted-average fair value of options granted during fiscal 1998, 1999
and 2000 was $.61, $9.55, and $26.80, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share data):
Year Ended
--------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
---------------- ------------- -------------
Pro forma net income (loss).................... $9,120 $11,014 $(3,400)
Pro forma basic net income (loss) per share.... .24 .73 (.37)
Pro forma diluted net income (loss) per share.. .19 .25 (.37)
Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because changes in the subjective
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
F-16
7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
lease agreements that expire at various dates through 2007. Some of these
arrangements contain renewal options, and require the Company to pay taxes,
insurance and maintenance costs.
Rent expense under operating leases was $1,064,889, $373,983, and $144,784
for the years ended December 30, 2000, January 1, 2000, and, January 2, 1999,
respectively.
The minimum annual future rentals under the terms of these leases at
December 30, 2000 are as follows (in thousands):
FISCAL YEAR
2001........................................................ $ 1,827
2002........................................................ 1,744
2003........................................................ 1,795
2004........................................................ 1,834
2005........................................................ 1,863
Thereafter.................................................. 1,196
-----------
Total minimum lease payments................................ 10,259
Minimum Sublease Rental Income.............................. (478)
-----------
Total net minimum lease payments............................ $ 9,781
===========
On January 12, 2000, the Company filed a lawsuit against Analog Devices and
3Com asserting that Analog Devices and 3Com had infringed, and were continuing
to infringe on its patents. Analog Devices and 3Com denied infringing on the
Company's patents and asserted counterclaims. On December 20, 2000, the Company,
along with Analog Devices and 3Com announced that the settlement of the pending
lawsuits had been completed without admission of fault or liability by any of
the parties. Pursuant to the settlement agreement, the Company received a
one-time non-refundable payment from Analog Devices for $2.5 million that was
recorded as revenue in the quarter ended December 30, 2000.
The Company is involved in various legal proceedings that have arisen in the
normal course of business. While the ultimate results of these matters cannot be
predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position and results of operations.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components of
the Company's deferred taxes as of December 30, 2000 and January 1, 2000 are as
follows (in thousands):
December 30, January 1,
2000 2000
---------------- --------------
Deferred tax liabilities:
Depreciable assets.................................... $1,387 $ --
Prepaid expenses...................................... 324 46
---------------- --------------
1,711 46
---------------- --------------
Deferred tax assets:
Reserves and allowances............................... 906 568
Deferred revenue...................................... 1,003 381
Accrued liabilities & other........................... 251 175
---------------- --------------
2,160 1,124
---------------- --------------
Net deferred taxes $ 449 $1,078
================ ==============
F-17
8. INCOME TAXES (CONTINUED)
Upon the acquisition of Krypton Isolation, Inc. on August 9, 2000 and SNR
Semiconductor, Inc. on October 2, 2000, the company recorded a net deferred tax
liability of approximately $360,000 and $49,000, respectively, due to
differences between book and tax basis of acquired assets and assumed
liabilities.
Significant components of the provision for income taxes are as follows (in
thousands):
December 30, January 1, January 2,
2000 2000 1999
--------------- ------------- -------------
Current:
Federal..................................... $10,695 $ 4,009 $ --
State....................................... 917 393 --
--------------- ------------- -------------
Total Current............................... 11,612 4,402 --
Deferred:
Federal..................................... 202 (993) --
State....................................... 18 (85) --
--------------- ------------- -------------
Total Deferred.............................. 220 (1,078) --
--------------- ------------- -------------
$11,832 $ 3,324 $ --
=============== ============= =============
The Company's provision for income taxes differs from the expected tax
expense amount computed by applying the statutory federal income tax rate to
income (loss) before income taxes as a result of the following:
December 30, January 1, January 2,
2000 2000 1999
--------------- ------------- -------------
Pre-tax book income (loss) at statutory rate 35.0% 35.0% (34.0)%
State taxes, net of federal benefit........... 4.0 3.0 (3.0)
Non-deductible deferred compensation expense 5.1 2.6 --
Other permanent items......................... 2.5 0.1 0.3
Tax credits................................... (0.8) (2.4) --
Change in valuation allowance................. -- (15.2) 36.7
--------------- ------------- -------------
45.8% 23.1% 0.0%
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution or 401(k) Plan for the benefit
of substantially all employees. To be eligible for the 401(k) Plan, employees
must have reached the age of 21. Participants may elect to contribute up to 15%
of their compensation to the 401(k) Plan. The Company may make discretionary
matching contributions of up to 10% of a participant's compensation as well as
discretionary profit-sharing contributions to the 401(k) Plan. The Company's
contributions to the 401(k) Plan vest over four years at a rate of 25% per year.
The Company contributed $219,000 to the Plan during the year ended December 30,
2000. During the fiscal years ended January 1, 2000 and January 2, 1999 no
contributions were made.
F-18
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
All of the quarterly periods reported here had thirteen weeks. Quarterly
financial information for fiscal 2000 and 1999 (thousands of dollars except as
noted):
Fiscal 2000 Fiscal 1999
------------------------------------------------- ------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues.............. $29,703* $29,427 $24,286 $19,687 $18,474 $14,574 $ 7,543 $ 6,320
Cost of revenues...... 10,324 10,130 8,390 6,757 5,907 4,582 2,866 2,415
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit.......... 19,379 19,297 15,896 12,930 12,567 9,992 4,677 3,905
Operating expenses:
Research and
development....... 6,132 5,263 4,444 3,580 3,298 2,109 1,597 1,293
Selling, general
& administrative.. 4,947 5,128 4,355 3,218 2,470 2,105 1,500 1,132
Write-off of in-
process research
and development... -- 394 -- -- -- -- -- --
Goodwill
Amortization...... 2,067 1,240 -- -- -- -- -- --
Amortization of
deferred stock
compensation...... 1,311 884 787 779 573 254 116 33
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
Expenses.......... 14,457 12,909 9,586 7,577 6,341 4,468 3,213 2,458
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income...... 4,922 6,388 6,310 5,353 6,226 5,524 1,464 1,447
Interest income....... (1,284) (1,248) (1,258) (248) (166) (98) (75) (63)
Interest expense...... 204 339 342 277 222 217 140 120
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before tax
expense............. 6,002 7,297 7,226 5,324 6,170 5,405 1,399 1,390
Income tax expense.... 3,136 3,332 3,045 2,319 1,428 1,251 323 322
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 2,866 $ 3,965 $ 4,181 $ 3,005 $ 4,742 $ 4,154 $ 1,076 $ 1,068
========== ========== ========== ========== ========== ========== ========== ==========
Net income per
share:
Basic............... $ .06 $ .09 $ .10 $ .14 $ .27 $ .26 $ .07 $ .08
Diluted............. $ .06 $ .08 $ .08 $ .07 $ .11 $ .09 $ .02 $ .02
Weighted-average
common shares
outstanding:
Basic............... 44,820 43,917 43,279 21,221 17,340 15,902 14,374 12,881
Diluted............. 49,435 49,987 49,812 45,952 44,830 44,377 43,907 43,611
* Includes $2,500 one-time, non-refundable payment from Analog Devices, Inc.
pursuant to the patent infringement settlement.
AS OF A PERCENTAGE OF REVENUES
Fiscal 2000 Fiscal 1999
------------------------------------------------- ------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...... 34.8 34.4 34.5 34.3 32.0 31.4 38.0 38.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.......... 65.2 65.6 65.5 65.7 68.0 68.6 62.0 61.8
Operating expenses:
Research and
development....... 20.6 17.9 18.3 18.2 17.9 14.5 21.2 20.5
Selling, general
& administrative.. 16.7 17.4 17.9 16.3 13.4 14.5 19.9 17.9
Write-off of in-
process research
and development... -- 1.3 -- -- -- -- -- --
Goodwill
Amortization...... 7.0 4.2 -- -- -- -- -- --
Amortization of
deferred stock
compensation...... 4.4 3.0 3.2 4.0 3.0 1.7 1.5 .5
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
Expenses......... 48.7 43.9 39.5 38.5 34.3 30.7 42.6 38.9
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income...... 16.5 21.7 26.0 27.2 33.7 37.9 19.4 22.9
Interest income....... (4.3) (4.2) (5.2) (1.3) (.9) (.7) (1.0) (1.0)
Interest expense...... 0.6 1.2 1.4 1.4 1.2 1.5 1.9 1.9
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before tax
expense............. 20.2 24.8 29.8 27.0 33.4 37.1 18.5 22.0
Income tax expense.... 10.5 11.3 12.5 11.8 7.7 8.6 4.2 5.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............ 9.7% 13.5% 17.2% 15.3% 25.7% 28.5% 14.3% 16.9%
========== ========== ========== ========== ========== ========== ========== ==========