www.silabs.com
2003 Annual Report
Look inside. Look ahead. Look beyond.
©2004 Silicon Laboratories Inc.
ISOmodem, ProSLIC, SiPHY, Aero, Silicon Laboratories Inc. and the Silicon Laboratories logo are trademarks of Silicon Laboratories Inc.
All other products or brand names mentioned herein may be trademarks of their respective holders.
Silicon Laboratories Inc.
4635 Boston Lane
Austin, Texas 78735
512-416-8500
Silicon Laboratories Inc. is a global leader in the innovation of mixed-signal integrated circuit (IC) technology. The company applies its
renowned design expertise to develop proprietary analog-intensive, mixed-signal IC solutions that are implemented in CMOS. These products
offer significant advantages in performance, size, cost and power consumption over traditional solutions. Silicon Laboratories’ product portfolio
includes solutions targeted at a broad range of markets including communications, computing, industrial, consumer and automotive. The
company, founded in 1996, has over 300 patents issued or pending. Based in Austin, Texas, Silicon Laboratories’ common stock is traded
on the NASDAQ® under the ticker symbol “SLAB.”
Corporate Directory
Directors
Nav Sooch
Chairman,
Silicon Laboratories
Dan Artusi
President and CEO,
Silicon Laboratories
Dave Welland
Vice President,
Silicon Laboratories
William Bock
CenterPoint Ventures,
General Partner
H. Berry Cash
InterWest Partners,
General Partner
R. Ted Enloe, III
Optisoft Inc.,
President and CEO
Laurence G. Walker
Individual Investor
William Wood
Silverton Partners,
General Partner
Executive Officers
Corporate Information
Dan Artusi
President and CEO
John McGovern
Chief Financial Officer
Dave Bresemann
Vice President
Brad Fluke
Vice President
Gary Gay
Vice President
Ed Healy
Vice President
Jon Ivester
Vice President
Jeff Scott
Vice President
Dave Welland
Vice President
Russ Brennan
Chief Financial Officer
(on leave)
Stock listing: Common stock
traded on NASDAQ®
Symbol: SLAB
Options: The Company’s
options are traded on the
Chicago Board Option Exchange
and the American Stock Exchange.
Legal Counsel
Andrews Kurth LLP
111 Congress Avenue, Suite 1700
Austin, Texas 78701
Independent Auditors
Ernst & Young LLP
700 Lavaca Street, Suite 1400
Austin, Texas 78701
Transfer Agent
and Registrar
American Stock Transfer
& Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800-937-5449
Fiscal Year Ended
January 3, 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended
December 28, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$30.27
32.56
53.01
58.88
$18.89
24.22
26.10
39.61
High Low
$39.65
37.54
29.09
30.40
$21.56
21.39
16.40
17.10
Annual Meeting
Stock Data
As of February 24, 2004, there
were 363 holders of record of
our Company’s Common Stock.
The following tables set forth
for the periods indicted, the
record of high and low per-
share prices of the Company’s
Common Stock as reported by
the NASDAQ.
The Silicon Laboratories Inc.
annual meeting will be held on
Thursday, April 29, 2004,
at 9:30 a.m. at the Lady Bird
Johnson Wildflower Center,
4801 La Crosse Avenue,
Austin, Texas.
Investor Relations
For more information about
Silicon Laboratories, or copies
of our Annual Report on Form
10-K, please visit our website at
www.silabs.com, or contact:
Investor Relations
Silicon Laboratories Inc.
4635 Boston Lane
Austin, Texas 78735
512-464-9254
investor.relations@silabs.com
Design: Cartis Group, Austin, Texas
It’s been a great year.
And the best is yet to come.
Financial Highlights (in millions, except per share data)
Year
Revenues
2003
2002
2001
2000
1999
$325
$182
$74
$103 $47
Research and development
Operating income (loss)
48
65
32
29
31 (51)
21 (46)
19 8
23 15
14 11
Net income (loss)
Earnings (loss) per share – diluted 0.86 0.41 (0.99) 0.29 0.25
45
Non-GAAP financial measures:*
Adjusted operating income (loss)
87
30 16
62 26 (1.2) 21 12
Adjusted net income (loss)
Adjusted earnings (loss) per share – diluted 1.18 0.51 (0.03) 0.44 0.28
36 (7)
Revenues (in millions)
Adjusted Net Income (in millions)*
$109.6
$82.9
$69.1
$63.8
100
80
60
40
20
$60.2
$51.8
$41.2
$28.8
$23.8
$15.1
$12.1
$10.6
25
20
15
10
5
$11.1
$9.2
$4.0
$1.7
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2003
2002
2003
2002
* Excluding charges relating to amortization of goodwill, deferred stock compensation, write-off of in-process research and development, impairment of goodwill and other intangible
assets and the settlement of a patent infringement lawsuit. See Reconciliation Table of GAAP to Non-GAAP Financial Measures provided in Appendix I.
1
Building the finest
semiconductor company
in the world.
Letter to the Shareholders
Silicon Laboratories’ success is driven by
our commitment to excellence in every
facet of our business. The strong growth
and record revenues delivered throughout
2003 are proof that we remain dedicat-
ed to this commitment. We ended the year
with our eleventh consecutive quarter of
revenue growth and our highest cash
balance in the company’s history.
In 2003, we continued to focus on
three main areas to maximize our share-
holders’ investment: Profitability, Innovation
and Diversification.
Profitability
Operating profit is taken very seriously
throughout the company as we work to
achieve industry-leading top line growth as
well as world-class bottom line performance.
By delivering on this goal and several
others, we can continue to invest in the
company, driving long-term sustainable
growth. Our very liquid balance sheet is a
great example; at year end, we had a
record cash and short-term investments
balance of $190 million.
the
With explosive growth comes
challenge of scaling efficiently. Since we
became a public company in 2000, we
have grown from $47 million to $325 million
in annual revenues, from tens to thousands
of customers and from 148 employees to
486. In 2003, we implemented an inte-
grated planning system that complements our
business-to-business strategy and more
closely links Silicon Laboratories to our
suppliers, distributors and customers. As our
product portfolio broadens, these efficiencies
allow us to leverage resources and improve
our working capital management.
Operational strength is a key underlying
driver of profitability. New product ramps in
2003 gave us an opportunity to exercise
our third-party manufacturing strategy. We
continue to see the benefits of our fabless
model as we strengthen our relationships
with world-class partners. Seventy percent
of our products are tested and shipped
through third parties, improving cycle times
and reducing costs. The efficiency of our
supply chain allowed us to ramp our ship-
ments to millions of units per week in 2003
with minimal capital investment.
Innovation
Our customers are the key to our success.
Innovative products that meet customer needs
create a lasting growth engine, and the
silicon DAA is a perfect example. It was
the company’s first product in 1998 and
continues to be the PC industry’s choice
for soft modems. Five years into volume
production, we believe the DAA is still in the
prime of its life cycle with year-over-year rev-
enue growth of over 40 percent in 2003.
This success demonstrates the value of our
strategic new product planning process,
which identifies product development oppor-
tunities that offer customers a unique value
proposition, create a significant IP advantage
and target large potential markets.
The Aero™ RF transceiver family is another
case in point. The Aero transceiver is
the industry’s most integrated solution for
mobile handsets and is the only CMOS RF
transceiver in production today. In only
24 months, the Aero transceiver has captured
over 20 percent of the GSM/GPRS mobile
handset market. In 2003, we introduced
the latest generation of the Aero transceiv-
er: Aero I and Aero I+, single package RF
transceivers that implement a triple-band
radio in only 1.2 square centimeters.
Diversification
We expect our future growth to be driven by
two factors: increased dollar content in our
current markets and penetration of applica-
tions in new markets.
The latest generation of our ISOmodem®
embedded modems has opened up a
variety of new opportunities. The very small
size and minimal bill-of-materials make the
new ISOmodem embedded modems ideal
for basic connectivity in applications like
personal video recorders, where customers
like TiVo™ are taking advantage of modem
connectivity to download program guide
information. Our advances into the local
loop have also been successful, and we
expect the ProSLIC® and DSL AFE will benefit
from the increasing presence of broadband
networks. Our optical portfolio, including
high-speed transceivers and precision clock
products, is poised for growth as the telecom
market recovers.
In the fourth quarter of 2003, we
expanded our wireless portfolio to capitalize
on our success in the satellite radio market
with the introduction of a complete satellite
radio tuner. Both retailers and car manufac-
turers have embraced satellite radio, which
makes this market a volume opportunity over
time, and offers us a foothold in the automo-
tive market.
Finally, we took a major step towards
our diversification objective through the
acquisition of Cygnal Integrated Products
in December 2003. A private company
based in Austin, Cygnal developed a
complete family of analog intensive, mixed-
signal 8-bit microcontrollers. The portfolio
of over 50 general-purpose products will
add breadth and diversity to our existing
product line of high-performance, applica-
tion specific mixed-signal ICs.
In 2003, we again had the oppor-
tunity to validate Silicon Laboratories’ strategy,
operations and financial model. As we look to
2004, we expect our business to grow solidly
as we continue to execute on our profitability,
innovation and diversification strategies.
I believe we have proven that Silicon
Laboratories is capable of competing with
established semiconductor leaders and remains
on course to realize our goal of building the
finest semiconductor company in the world.
Dan Artusi
President and CEO
3
Aero I transceiver
Aero I transceiver
Aero I transceiver
Aero I transceiver
Silicon Laboratories’ family of Aero™ RF transceivers in CMOS lead the industry
in integration and ease of use for mobile handsets and smart phones.
It began with an idea.
The idea became an opportunity.
Opportunity is everywhere.
In 2003, we found further evidence that
the opportunity for mixed-signal devices is
everywhere. Both existing and new products
contributed to an increasingly diverse reve-
nue and customer base. Today we describe
our business with two categories, both of
which contributed approximately one-half
of our 2003 revenues: broad-based mixed-
signal products and mobile handset
products. This is the latest step in the evolu-
tion of our business from a single product, to
several product lines, to a growing portfolio of
solutions that address a broad set of markets.
We have many examples in our product
portfolio that demonstrate how a good idea
that is well executed creates significant
opportunity. For instance, a clever idea to
improve the radio frequency (RF) front end of
the cellular handset by designing a CMOS
transceiver has, through hard work and
innovative design, led to a vibrant RF IC busi-
ness. We expanded our Aero RF transceiver
volume customers from 11 to 34 during 2003.
While Aero has taken off, the RF synthesizer,
our entry into the mobile handset market, has
proven its longevity as a general-purpose
part for a variety of applications. Already
in a large percentage of satellite radios, the
RF synthesizer is also part of our new satel-
lite tuner introduced in 2003. Implemented
in CMOS, the new tuner reduces board
space by 60 percent, component count by
70 percent and doubles Silicon Laboratories’
content in the satellite radio bill-of-materials.
Clearly, innovation breeds opportunity.
5
Change is constant.
New markets emerge.
The possibilities are endless.
The evolution of legacy communications
networks to voice over Internet Protocol (IP) and
broadband networks offers endless possibili-
ties for a company like Silicon Laboratories
with experience creating highly reliable, cost
effective and innovative telephony products.
Our broad-based mixed-signal solutions
hit record revenue highs in 2003. We intro-
duced the latest generation of the ISOmodem
family in 2003, which incorporates our third
generation DAA. The market for analog
connectivity shows no signs of waning as
more and more devices are attached to
communications networks through low-cost,
reliable, analog connections. The ISOmodem
embedded modems are ideal for this
expanding range of applications from point-
of-sale terminals to gaming consoles that
leverage its very small size and low bill-of-
materials to enable information exchange at
speeds from 2400 bps to 56 kbps.
The beauty of mixed-signal design is
that while it is incredibly difficult to master,
innovations in mixed-signal have long life
cycles and create endless possibilities across
many markets. Our voice DAA, a derivative
of the successful silicon DAA family, is
gaining acceptance in voice applications
like PBXs and VoIP hardware. The voice
DAA and ProSLIC subscriber line interface
offer a very compelling combined solution
for voice over broadband customer premises
equipment. We expect voice over IP in the
local loop to ramp in 2004, and our solution
is well suited for this new category of voice
hardware. Our DSL modem analog front end
began shipping in volume in the third quarter
of 2003, which is a significant milestone that
validates our strategy to focus on the difficult
analog component of the DSL chip design.
We also secured our first design win for a
soft DSL implementation that is similar to the
soft modem designs that revolutionized the
analog modem market, again opening up
exciting possibilities.
DAA mobile daughter card
Silicon Laboratories’ third generation silicon DAAs are
unmatched in size, feature set and global compatibility.
7
It’s good to be at the intersection of
billion dollar markets.
Silicon Laboratories’ expertise in analog-
intensive mixed-signal CMOS design allows
us to target the intersection between the
high-performance analog and digital circuit
markets. The need for increased mixed-
signal integration uniquely positions us to
capitalize on this enormous opportunity,
which includes very large markets such
as communications, computing, consumer,
industrial and automotive electronics.
According to industr y sources, these
electronics markets will represent over
$100 billion in semiconductor revenues in
2004 and present vast opportunities for
innovative mixed-signal IC solutions.
Our expansion strategy is based on
a fundamental core competency: the
innovative design of high-performance,
analog-intensive, mixed-signal ICs. Every
product we develop reflects our unique
CMOS design expertise, including the
microcontroller products we now offer
as a result of our acquisition of Cygnal
Integrated Products in December 2003.
These products provide a system on a chip
that incorporates high-performance analog
within an 8-bit, 8051 MCU architecture,
which is well aligned with our mixed-
signal concentration.
Our unwavering commitment to develop
the world’s leading mixed-signal technology,
driven by clear management direction
and the dedication of our employees, is
allowing us to build a more diversified
product portfolio that targets a fast growing
market opportunity. We believe our bold
vision for the future and our continued
commitment to the company’s key goals of
profitability, innovation and diversification will
sustain Silicon Laboratories’ position as the
leader in analog-intensive mixed-signal
IC technology.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
(cid:59) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
January 3, 2004
Or
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
Commission file number:
to
SILICON LABORATORIES INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
74-2793174
(I.R.S. Employer Identification No.)
4635 Boston Lane, Austin, Texas
(Address of principal executive offices)
78735
(Zip Code)
(512) 416-8500
(Registrant’s telephone number, including area code)
(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. (cid:59) Yes (cid:133) 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. (cid:133)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). (cid:59) Yes (cid:133) No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold as of the last business day of the registrant's most recently completed second
fiscal quarter (June 27, 2003) was $812,751,192 (assuming, for this purpose, that only directors and officers are deemed
affiliates).
There were 51,243,786 shares of the registrant's common stock issued and outstanding as of January 19, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into
Part II and Part III of this Form 10-K.
Explanatory Note
This Amendment No. 1 to the Annual Report on Form 10-K of Silicon Laboratories
Inc. for the fiscal year ended January 3, 2004 is being filed solely for the purpose
of correcting a typographical error that appears on page 8 of Item 1 of our Annual
Report on Form 10-K filed on January 27, 2004 (the “Original Report”). For the year
ended January 3, 2004, sales through independent sales representatives and
distributors accounted for 77% of our sales, rather than 27% as reported in our
Original Report. All other information in our Original Report remains unchanged.
References herein to the Form 10-K refer to our Original Report, as amended by this
Amendment No.1.
SILICON LABORATORIES INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I.
ITEM 1. Business and Factors Affecting Our Future Operating Results 3
ITEM 2. Properties 25
ITEM 3. Legal Proceedings 25
ITEM 4. Submission of Matters to a Vote of Security Holders 26
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters 26
ITEM 6. Selected Consolidated Financial Data 27
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 37
ITEM 8. Financial Statements and Supplementary Data 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 38
ITEM 9A. Controls and Procedures 38
PART III.
ITEM 10. Directors and Executive Officers of the Registrant 38
ITEM 11. Executive Compensation 38
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 38
ITEM 13. Certain Relationships and Related Transactions 38
ITEM 14. Principal Accountant Fees and Services 38
PART IV.
ITEM 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 39
CAUTIONARY STATEMENT
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT ON FORM 10-K (AS WELL AS DOCUMENTS INCORPORATED HEREIN BY
REFERENCE) MAY BE CONSIDERED “FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF SILICON
LABORATORIES AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS “EXPECTS,”
“ANTICIPATES,” “INTENDS,” “BELIEVES” OR SIMILAR LANGUAGE. YOU ARE CAUTIONED THAT
ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER “FACTORS AFFECTING
OUR FUTURE OPERATING RESULTS” AND ELSEWHERE IN THIS REPORT. SILICON LABORATORIES
DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
2
PART I
Item 1. Business and Factors Affecting Our Future Operating Results
GENERAL
Silicon Laboratories Inc. designs and develops proprietary, analog-intensive,
mixed-signal integrated circuits (ICs) for a broad range of applications. 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 in numerous applications,
including mobile handsets, cable and satellite set-top boxes, personal computer
modems, Voice over Internet Protocol on data networks, voice over digital subscriber
line (DSL) modems, personal video recorders, telephone equipment and optical
networking equipment. With our acquisition of Cygnal Integrated Products, we now
sell 8-bit microcontrollers (MCUs), which are incorporated in a broad range of
applications in a variety of industries, including automotive, communications,
consumer, industrial, medical and power management. Our world-class, mixed-signal
design engineers use standard complementary metal oxide semiconductor, or CMOS,
technology to create innovative ICs that can improve the performance and
dramatically reduce the cost, size and system power requirements of devices that our
customers sell to their end-user customers. Our expertise in analog-intensive,
mixed-signal IC design in CMOS 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 their end customer demand.
INDUSTRY BACKGROUND
In a January 2004 report, market research firm In-Stat projected that the analog
IC market will grow by 29 percent to $36.4 billion in 2004. Recent growth in the
market for ICs has been 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 electronic devices. For example, in mobile handset markets,
the demand for wireless phones and other wireless devices, such as personal digital
assistants, has grown steadily as digital wireless services have become increasingly
popular and affordable. In other markets, demand has increased for a wide range of
electronic products, including personal computers (PCs), cable and satellite set-top
boxes, fax machines, credit card verification machines, automated teller machines,
satellite radios and personal video recorders. Consumers increasingly demand higher
capacity connections at their residences using cable modems or high speed DSL. Voice
over Internet Protocol technology, which enables voice traffic over data networks is
emerging as a viable alternative to traditional telephone networks. 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. In the 8-bit MCU and high performance analog
market there is an increasing need for fully functional, analog intensive
applications which are used in automotive, communications, consumer, industrial,
medical and power management products.
Numerous devices require analog-intensive, mixed-signal circuits that provide
analog-to-digital functionality. Traditional designs for electronic 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, cost, power
consumption and performance are increasingly important product differentiators. In
order to improve their competitive position, electronic 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
electronic standards without altering the fundamental design of a product.
Manufacturers of electronic 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
3
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 electronic 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 at a reduced cost and shorter time-to-
market.
PRODUCTS
We provide analog-intensive, mixed-signal ICs for use in a variety of electronic
products in a broad range of applications including mobile handsets, PC modems,
satellite set top boxes, automotive controls and sensors, personal video recorders,
central office telephone equipment and optical networking equipment. Our products
integrate complex mixed-signal functions that are frequently performed by numerous
discrete components in competitive products into single chips or chipsets. By doing
so, we are able to create products that, compared to many competitive products:
- Require less board space;
- Reduce the use of external components;
- Can offer superior performance;
- Provide increased reliability;
- Reduce system power requirements; and
- Reduce costs.
We now group our products into two categories: mobile handset products or broad-
based mixed-signal products. The mobile handset category includes the Aero™
Transceivers and, to the extent incorporated into handsets, the RF Synthesizers. The
broad-based mixed-signal category includes our silicon DAA, ISOmodem®, ProSLIC®, DSL
analog front end, clock chips, SiPHYTM, optical transceivers and clock & data recovery
ICs (CDRs), general purpose RF Synthesizers for non-handset applications, as well as
the Cygnal MCU products. The following table summarizes the diverse product areas
and applications for the various ICs that we have introduced to customers:
PRODUCT AREAS and DESCRIPTION
APPLICATIONS
MOBILE HANDSET PRODUCTS
RF Synthesizer for GSM
A radio frequency, or RF, synthesizer generates high
frequency signals that are used in wireless
communications systems to select a particular radio
channel. We provide RF Synthesizers for the Global
System for Mobile Communications (GSM)/General
Packet Radio Services (GPRS) markets. GPRS brings
wireless Internet access to GSM users through data
transfer and signaling over GSM radio networks. Our
synthesizers are well-suited to meet the increasing
requirement for highly-integrated electronics that
reduce component count and consume less power.
Customers for our synthesizer products for mobile
handsets are typically migrating to our Aero
Transceiver family of products to utilize the higher
levels of integration.
- GSM/GPRS wireless phones
- GSM/GPRS data communications
devices
4
Aero Transceiver
The Aero Transceiver family provides highly
integrated transmit and receive radio functionality
that is found between the antennae electronics and
the digital baseband section of a GSM/GPRS mobile
handset or wireless data communication device. The
latest generation of the Aero Transceiver family,
Aero I/I+ addresses dual, triple or quad band
requirements, requires a smaller footprint than
competing solutions in this form-factor sensitive
market and supports wireless data transmission.
The Aero Transceivers are designed using 100%
standard CMOS process technology which enables an
aggressive roadmap for cost reduction and
integration.
BROAD-BASED MIXED-SIGNAL PRODUCTS
Silicon Direct Access Arrangement (DAA)
Our DAA provides the functionality of both a direct
access arrangement and a codec. A direct access
arrangement provides electrical isolation between a
wireline device, such as a modem, and the telephone
line to guard against power surges in the telephone
line, while the codec provides analog-to-digital and
digital-to-analog conversion. Traditional direct
access arrangement implementations contain numerous
discrete components to provide functionality
comparable to that which we provide in a single
chipset. This family of products includes offerings
to support different computer interface standards.
Some versions of this chipset are programmable for
differing international telephone standards, which
enables manufacturers to distribute their products
globally without costly country-specific design
modifications.
ISOmodem Embedded Modems
- GSM/GPRS wireless phones
- GSM/GPRS data communications
devices
- Personal digital assistants
- PCI desktop modems
- Audio Modem Riser Cards
- Mobile Daughter Cards
- Notebook modems
- Communication and Network
Riser (CNR) Cards
- Modem on motherboard
- Mini PCI cards
- Fax machines
- Handheld organizers
- Set-top boxes
- Video conferencing systems
- PBXs
- Voice recognition systems
- Web telephony products
- Multi-function printer cards
The ISOmodem combines an analog modem with a silicon
DAA, resulting in a complete modem implemented in a
very small form factor. The ISOmodem products are
designed for embedded modem applications, which are
typically found outside of the personal computer
area. The ISOmodem contains a programmable line
interface that meets global telephone line
requirements, allowing manufacturers to implement a
single modem design world-wide. The ISOmodem family
includes embedded modem solutions for speeds ranging
from 2400 bps to 56Kbps, suitable for a wide range of
applications.
- Set-top boxes
- Digital cable boxes
- Credit card verification
- Industrial monitoring
- Postage meters
- Security systems
- Remote medical monitoring
- Gaming consoles
- Personal video recorders
- Point of sale (POS)
terminals
General Purpose RF Synthesizer
A radio frequency, or RF, synthesizer generates high
frequency signals that are used in wireless
communications systems to select a particular radio
channel. We provide general purpose RF Synthesizers
for a variety of wireless communications devices,
other than mobile handsets, including the industrial,
science and medical (ISM) band applications. Our
synthesizers are well-suited to meet the increasing
requirement for highly-integrated electronics that
reduce component count and consume less power.
ProSLIC Subscriber Line Interface Circuits
The ProSLIC provides the analog telephone interface
on the source end of the telephone which generates
dial tone, busy tone, caller ID and ring signal.
Telephone source end electronics have historically
been at the telephone company central office, but
recently have been migrating to the customer premises
for voice over broadband systems. Our ProSLIC product
family has offerings for short-haul applications
suitable for the customer premises as well as long-
haul applications suitable for the traditional
telephone company central office. This family
includes a dual ProSLIC that provides for higher port
density and lower cost per phone line. The dual
ProSLIC is in the early stages of customer adoption
and is not yet being produced in volume.
- Wireless local area
networks
- Cordless phones
- Wireless headsets
- Wireless LAN (802.11b)
modems
- Telephone switchboard systems
- Cable telephony
- Wireless local loop providing
remote access for a wireline
system
- Voice over cable or digital
subscriber lines
- Digital broadband to analog
telephone adapters
- Wired long loop and central
office systems
5
- Personal computer modems
- External modems
- Residential gateways
- Network interface devices
- Optical port cards for
SONET/SDH optical networking
equipment
- Optical test equipment
- High speed serial back plane
interfaces
- Optical port cards for
SONET/SDH optical networking
equipment
- Optical test equipment
DSL Analog Front End
The DSL Analog Front End, or AFE, is designed to
provide the connectivity functions for business or
residential asymmetric digital subscriber line, or
ADSL, connection at the user end in customer premises
equipment. Such a connection addresses the business
and residential demand for DSL broadband higher
capacity connectivity as compared to traditional
standard dial-up analog phone line transmission
speeds. The DSL AFE supports several ADSL
communication standards enabling various upload and
download data rates. When combined with our DAA
products for analog phone line connectivity, our
combined product offering provides a single modem
design to address both the prevalent analog modem and
the emerging ADSL services. The ability to dial up
the analog phone line in order to provision the ADSL
connection or run remote diagnostics can assist in
the implementation and maintenance of this ADSL
broadband connection.
SiPHY TM Optical Physical Layer Transceivers
We offer a family of high-speed physical layer ICs
that meet the high-speed fiber Synchronous Optical
Network (SONET) and Synchronous Digital Hierarchy
(SDH) specifications. As part of this family we
offer transceivers that operate at a rate of 2.5
Gbps (giga bits per second), a transmission speed
commonly referred to as OC-48. The transceiver IC
provides both the receive path deserialization and
transmit path serialization as required by the
SONET/SDH physical layer. We also offer a family of
clock and data recovery chips to provide specific
functions at multiple speeds up to the OC-48 rate.
All of our physical layer products utilize our
proprietary digital signal processing technology to
reduce the device’s sensitivity to board-level noise
and improve performance. This product is still in
the early stages of customer adoption and has
produced small amounts of revenue in certain product
configurations.
Precision Clock Integrated Circuits
This precision clock product family includes various
products ranging from general purpose clock
multiplier products up to high performance multi-
port, redundant, multiple frequency range clock
multipliers and regenerators. SONET/SDH optical
network systems require very high precision, low
jitter, clock sources. Our knowledge gained in
developing the physical layer transceiver
subsections provided us the technology to offer
these high performance clock products.
Traditionally, these clock sources have been
implemented using expensive, bulky modules,
complicated discrete circuitry requiring numerous
components, or hybrid IC/discrete solutions that
offer limited functionality. The frequency agility,
performance, and integration offered by these
devices are key design features for our customer
base, especially as optical networking equipment
transitions from OC-48 to higher speed OC-192
(10Gbpps). This product is still in the early
stages of customer adoption and has produced modest
amounts of revenue in certain product
configurations.
6
Satellite Radio Products
The Satellite Radio Tuner combines our RF
Synthesizer with a highly integrated tuner for a
complete satellite radio tuner chipset. By
leveraging CMOS technology, our satellite radio
tuner minimizes the use of external components such
as external voltage-controlled oscillators (VCOs),
varactor diodes, and loop filters. The tuner
provides strong system performance, meets stringent
quality standards and fits into a very small
footprint.
- Consumer and automotive satellite
radios
Microcontroller Products
On December 10, 2003, we completed the acquisition
of Cygnal, allowing us to offer a portfolio of
mixed-signal, 8-bit microcontroller products. Our
C8051F family of microcontrollers integrate
intelligent data capture in the form of high-
resolution data converters, a traditional MCU
computing function, Flash memory and a highly
programmable set of communication interfaces in a
single system on a chip. The combination of
configurable high-performance analog, up to 100 MIPS
8051 core and in-system field programmability
provides the user with design flexibility, improved
time-to-market, superior system performance and
greater end product differentiation. These products
are designed for use in a large variety of end-
markets, including the automotive, communications,
consumer, industrial, medical and power management
markets.
- Industrial automation and
control
- Automotive sensors and
controls
- Medical instrumentation
- Electronic test and
measurement equipment
- Power management
- Weigh scales
- Optical line cards
- Digital cameras
- Computer peripherals
- Wireless headsets
- Magstripe readers
- Gaming consoles
- Electronic toys
During fiscal year 2003, sales of our broad-based mixed-signal products and
mobile handset products each accounted for approximately 50% of our revenues.
During fiscal year 2002, sales of our broad-based mixed-signal products and mobile
handset products accounted for 63% and 37% of our revenues, respectively. During
fiscal year 2001, sales of our broad-based mixed-signal products and mobile handset
products accounted for 81% and 19% of our revenues, respectively.
CUSTOMERS, SALES AND MARKETING
We market our products to original equipment manufacturers (OEM) and other
providers of applications in various markets through our direct sales staff, a
network of independent sales representatives, and electronics distributors. Direct
and distributor customers buy on an individual purchase order basis, rather than
pursuant to long-term agreements.
We consider our customer to be the end customer purchasing either directly from a
distributor, a contract manufacturer or us. An end customer purchasing through a
contract manufacturer typically instructs such contract manufacturer to obtain our
products and incorporate such products with other components for sale by such
contract manufacturer to the end customer. Although we actually sell the products
to, and are paid by, the distributors and contract manufacturers, we refer to such
end customer as our customer.
One of our distributors, Edom Technology, selling to multiple end customers in
Asia, represented 12.9% of our fiscal 2003 revenues. Distributors are not
considered end customers, but rather serve as a sales channel to our end customers.
No other distributor accounted for 10% or more of revenues for fiscal 2003.
7
During fiscal 2003, our ten largest end customers accounted for 64% of our
revenues. We had one end customer, Samsung, which represented 21% of our revenues.
No other single end customer accounted for more than 10% of our revenues. The
following is a list of our largest end customers that purchased our products in
fiscal 2003 for inclusion in products or devices offered to their customers:
- Agere Systems
- Broadcom
- Conexant/PC-Tel - Sagem
- Echostar
- Hughes
- Texas Instruments
- Samsung
- Thomson
- Sendo
- Smart Link - Wavecom
We maintain five sales offices in North America. We provide European sales
support through our subsidiaries in the United Kingdom and France. The Asia Pacific
area is supported through our subsidiaries in Japan and Hong Kong, as well as sales
offices in Korea, Taiwan and China. 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. We
maintain a dedicated website for our field sales organization, which includes
technical documentation, backlog information, order status, product availability and
new product introduction information to support our communications with that
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 on their
understanding of the mixed-signal IC marketplace and their ability to provide
effective field sales applications support for our products. For the year ended
January 3, 2004, sales through these representatives and distributors accounted for
77% of our sales.
Our marketing efforts are targeted at both identified industry leaders and
emerging market participants. Direct marketing activities are supplemented by a
focused marketing communications effort that seeks to raise awareness of the company
and our products. Our public relations efforts are focused on leading trade and
business publications. Our external website is used to deliver corporate information
and product information. We also pursue targeted advertising in key trade
publications and we have a cooperative marketing program that allows our
distributors and representatives to promote our products to their local markets in
conjunction with their own advertising activities. Finally we maintain a presence
at strategic trade shows and industry events. These activities, in combination with
direct sales activities, help drive demand for our products.
Due to the complex and innovative nature of our ICs, we employ experienced
applications engineers who work closely with customers 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 is typically 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 process, coupled with our intellectual property protection, promotes
relatively longer product life cycles for our ICs and high barriers to entry for
competitive products, even if such competing products are offered at lower prices.
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 experienced 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
8
techniques for integration in new applications where similar benefits can be
realized. We believe that reliable and precise analog and mixed-signal ICs can only
be developed by teams of engineers that coordinate their efforts under the direction
of senior engineers who have significant analog experience and 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 January 3, 2004, we had 188 employees involved in research and
development.
Research and development expenses were $48.3 million, $32.0 million and $29.0
million in fiscal 2003, 2002, and 2001, respectively.
TECHNOLOGY
Our product development process facilitates the design of highly-innovative,
analog-intensive, mixed-signal ICs. Our senior engineers start the product
development process by forming an understanding of our customers' products and then
design alternatives with increased functionality and with decreasing power, size and
cost requirements. Our engineers' deep knowledge of existing and emerging standards
and performance requirements help us to assess the technical feasibility of a
particular IC. We target areas where we 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 refined
features.
In providing mixed-signal ICs for our customers, we believe our key competitive
advantages are:
- analog CMOS design expertise;
- digital signal processing design expertise;
- microcontroller design expertise; and
- our broad understanding of systems technology and trends.
To fully capitalize on these advantages, we have 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 allows us to integrate more digital
functionality into our mixed-signal ICs.
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 voltage controlled 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
9
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 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
or a small, complementary high voltage chip, thereby enabling us to fulfill the
remaining core functions with a single CMOS chip. As a further example, our SiPHY
Optical Physical Layer Transceivers utilize 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.
MICROCONTROLLER DESIGN EXPERTISE
As a result of the acquisition of Cygnal Integrated Products, we now have the
required engineering talent and circuit integration methodologies to combine
precision analog, high-speed digital, Flash memory and in-system programmability
into a single, monolithic CMOS integrated circuit. A microcontroller product is
designed to capture an external analog signal, convert it to a digital signal,
compute digital functions on the stream of data and then communicate the results
through a standard digital interface. The ability to develop standard products with
the broadest possible customer application base while being cost efficient with the
silicon area of the monolithic CMOS integrated circuit requires a keen sense of
customer value and engineering capabilities. Additionally, to manage the wide
variety of signals on a monolithic piece of silicon including electrical noise,
harmonics and other electronic distortions requires a fundamental knowledge of
devices physics and accumulated design expertise.
UNDERSTANDING OF SYSTEMS TECHNOLOGY AND TRENDS
Our focused expertise in mixed-signal ICs is the result of the breadth of
engineering talent we have assembled with experience working in analog-intensive
CMOS design for a wide variety of applications. This expertise, which we consider a
competitive advantage, is the foundation of our in-depth understanding of the
technology and trends that impact electronic systems and markets. Our expertise
includes single line plain old telephone service (POTS), packet-based network
interfaces and high speed SONET-based optical networks. We have also expanded our
knowledge base into wireless technologies. Our microcontroller applications broaden
our knowledge base as we participate in these diverse markets. Our understanding of
the role of analog/digital interfaces within electronic 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
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 capacity over our products' life cycles. We
10
currently rely principally on Taiwan Semiconductor Manufacturing Co. (TSMC) to
manufacture substantially all of our semiconductor wafers. We believe that our
fabless manufacturing model significantly reduces our capital requirements and
allows us to focus our resources on design, development and marketing of our ICs.
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, either to our facilities in Austin, Texas or to our third-party test
subcontractors, prior to shipping to our customers. We have increasingly utilized
offshore third-party test subcontractors, typically in Asia where the parts are
assembled and where the products are frequently delivered to our customers. During
the fourth quarter of 2003, more than two-thirds of our units produced in volume
were tested by offshore third-party test subcontractors. We expect this trend
toward utilization of offshore third-party test subcontractors to continue in fiscal
2004.
BACKLOG
As of January 3, 2004, our backlog was approximately $86.1 million, compared to
approximately $46.0 million as of December 28, 2002. We include in backlog accepted
product purchase orders from customers and worldwide distributor stocking orders. We
only include orders with an expected shipping date from us within six months.
Product orders in our backlog are subject to changes in delivery schedules or
cancellation at the option of the purchaser typically without penalty. Our backlog
may fluctuate significantly depending upon customer order patterns which may, in
turn, vary considerably based on rapidly changing business circumstances. Backlog
from distributors are not recognized as our revenues until the products are sold by
the distributors. Additionally, our arrangements with distributors typically provide
for price protection and stock rotation activities. Accordingly, we do not believe
that our backlog at any time is necessarily representative of actual sales for any
succeeding period.
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:
- Product size;
- Level of integration;
- Product capabilities;
- Reliability;
- Price;
- Performance;
- Intellectual property;
- Customer support;
- Reputation; and
- Ability to rapidly introduce
new 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.
However, disadvantages we face include our relatively short operating history in
certain of our markets 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 markets and applications, we face competition from a
relatively large number of competitors. Across our product offerings, we compete
with Agere Systems, Atmel, AMCC, Analog Devices, Broadcom, Conexant, Cypress, ESS,
Fujitsu, Hitachi, Infineon Technologies, Legerity, Maxim Integrated Products,
Microchip, Motorola, National Semiconductor, Philips, RF Micro Devices, Semtech,
Skyworks Solutions, Texas Instruments, Vitesse Semiconductor, 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. Our competitors may also offer bundled chipset kit arrangements offering
a more complete product, which may negatively impact our competitive position
despite the technical merits or advantages of our products. In addition, our
customers could develop products or technologies internally that would replace their
need for our products and would become a source of competition. As the markets for
electronic products grow, we also may face competition from traditional electronic
11
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, complementary
product offerings, 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 our 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 January 3, 2004, we
had more than 300 issued or pending United States patents in the IC field. We also
frequently file for patent protection in a variety of international jurisdictions
with respect to the proprietary technology covered by our U.S. patents and patent
applications. There can be no assurance that patents will ever be issued with
respect to 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. The patents and patent
applications described above will expire at various times in the distant future.
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, of 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 and a variety of other product and product family names as
trademarks in the United States and selected foreign jurisdictions. 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 customary 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 electronics 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. For further information regarding
patent litigation, please see “Part I, Item 3. Legal Proceedings.”
Our licenses include industry standard licenses with our vendors, such as wafer
fabrication tool libraries, third party core libraries, computer-aided design
applications and business software applications.
EMPLOYEES
As of January 3, 2004, we employed 486 people, including 115 in manufacturing,
188 in research and development, 102 in marketing, 48 in sales and 33 in
administration. Our success depends on the continued service of our key technical
12
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.
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. Our compliance with these laws and regulations has not had
a material impact on our financial position or results of operations.
FACTORS AFFECTING OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH AND MAY EXPERIENCE SIGNIFICANT
PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS, WHICH MAY
RESULT IN VOLATILITY IN OUR STOCK PRICE
Although we have experienced revenue growth in our eleven most recent quarterly
periods, we may not be able to sustain this growth. We may also experience
significant period-to-period fluctuations in our revenues 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 revenues or
operating results will be below the expectations of 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 revenues and operating
results, including:
- the timing and volume of orders received 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 time lag between “design wins” and production orders;
- 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;
- the average selling prices for our products could drop suddenly due to
competitive offerings or competitive predatory pricing;
- impairment charges related to inventory, equipment or other long-lived assets;
- significant legal costs to defend our intellectual property rights or respond
to claims against us; 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.
The markets for mobile handsets, personal computers, satellite television set-top
boxes and voice over DSL applications are characterized by rapid fluctuations in
demand and seasonality that result in corresponding fluctuations in the demand for
our products that are incorporated in such devices. 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. Once a new IC achieves market
13
acceptance, demand for the new IC can quickly accelerate to a point and then level
off such that rapid historical growth in sales of a product should not be viewed as
indicative of continued future growth. In addition, demand can quickly decline for
a product when a new IC product is introduced and receives market acceptance. For
example, transceivers that provide some of the functionality provided by our RF
Synthesizers have been introduced to market by us and our competitors. The
introduction of these competing transceivers, including our Aero Transceiver, has
resulted in a rapid decline in our sales of RF Synthesizers. Due to the various
factors mentioned above, the results of any prior quarterly or annual periods should
not be relied upon as an indication of our future operating performance.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY
CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES
The loss of any of our key customers, or a significant reduction in sales to any
one of them, would significantly reduce our revenues and adversely affect our
business. During the fiscal year ended January 3, 2004, our ten largest customers
accounted for 64% of our revenues. We had one customer, Samsung, which represented
21% of our revenues. No other single customer accounted for more than 10% of our
revenues during the fiscal year ended January 3, 2004. Most of the markets for our
products are dominated by a small number of potential customers. Therefore, our
operating results in the foreseeable future will continue to depend on our ability
to sell to these dominant customers, as well as the ability of these customers to
sell products that incorporate our 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;
- some of our customers may have efforts underway to actively diversify their
vendor base which could reduce purchases of our ICs; and
- some of our customers have developed or acquired products that compete directly
with products these customers purchase from us, which could affect our
customers’ purchasing decisions in the future.
While we have been the sole supplier of the direct access arrangement, or DAA,
ICs used in many of our customers’ soft modem DAA products and have also been a
substantial supplier of synthesizers and transceivers to Samsung and other major GSM
handset manufacturers, our customers regularly evaluate alternative sources of
supply in order to diversify their supplier base, which would increase their
negotiating leverage with us and protect their ability to secure these components.
We believe that any expansion of our customers’ supplier bases could have an adverse
effect on the prices we are able to charge and volume of product that we are able to
supply to our customers, which would negatively affect our revenues and operating
results.
WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF REVENUE
DIVERSIFICATION
We derive a substantial portion of our revenues from a limited number of
products, and we expect these products to continue to account for a large percentage
of our revenues in the near term. Continued market acceptance of these products, is
therefore, critical to our future success. In addition, substantially all of our
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. Our business, operating results, financial
condition and cash flows could therefore be adversely affected by:
- a decline in demand for any of our more significant products, including our
Aero Transceiver, RF Synthesizer, DAA, ISOmodem or ProSLIC;
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- failure of our products to achieve continued market acceptance;
- an improved version of our products being offered by a competitor;
- technological change that we are unable to address with our products; and
- a failure to release new products or enhanced versions of our existing products
on a timely basis and/or the failure of these products to achieve market
acceptance.
We are particularly dependent on sales of our mobile handset products, which
constituted 50% of our total revenues in fiscal 2003 and 37% of our total revenues
in fiscal 2002. In particular, one mobile handset product, our Aero Transceiver,
represented approximately 40% of our total revenues in fiscal 2003. If the market
for the Aero Transceiver or the market for GSM mobile handsets in which these
products are incorporated deteriorates, our operating results would be materially
and adversely affected.
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 a few
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;
- 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, assembly and test capacity;
- achievement of high manufacturing yields;
- quality, price, performance, power use and size of our products;
- 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;
- changes in technology, industry standards or end-user preferences; and
- cooperation of software partners and semiconductor partners to support our
chips within a system.
We cannot provide any assurance that products which we recently have developed or
may develop in the future will achieve market acceptance. We have introduced to
market or are in development of many ICs. If our ICs fail to achieve market
acceptance, or if we fail to develop new products that achieve market acceptance,
our growth prospects, operating results and competitive position could be adversely
affected.
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
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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 electronic devices in various 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. Research and development expense for the
fiscal year ended January 3, 2004 was $48.3 million, or 14.8% of revenues. A number
of large companies 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 we
would. 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. For example, we have introduced to market the Aero
Transceiver product for use in wireless phones operating on the GSM standard. We
cannot be certain that this standard will not change, thereby making our products
unsuitable or impractical. Our MCU products are based on an 8-bit processor
architecture. Should customers decide they need a higher performance 16-bit
processor, then our products would be unsuitable and we would not realize sales from
that opportunity.
OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
In recent periods, we have significantly increased the scope of our operations
and expanded our workforce from 279 employees at the end of fiscal 2001 to 486
employees at the end of fiscal 2003. In December 2003, we added 60 employees with
the acquisition of Cygnal. 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, information technology
infrastructure, procedures and controls, including the improvement of our accounting
and other internal management systems to manage this growth and comply with
regulatory guidelines. 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, and we anticipate that we will require additional
management personnel and internal processes to manage these efforts and to plan for
the succession from time to time of certain persons who have been key management and
technical personnel. If we are unable to effectively manage our expanding global
operations, our business could be materially and adversely affected.
WE RELY ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS AND THE
FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
SUBCONTRACTORS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS
We do not have our own wafer fab manufacturing facilities. Therefore, we rely
principally on one third-party vendor, Taiwan Semiconductor Manufacturing Co.
(TSMC), to manufacture the ICs we design. We also currently rely principally on two
offshore third-party assembly subcontractors, Advanced Semiconductor Engineering
(ASE) and Amkor Technology, to assemble and package the silicon chips provided by
the wafers for use in final products. Additionally, we rely on these offshore
subcontractors for a significant portion of the testing requirements of our products
prior to shipping. Although we also maintain testing facilities in Austin, Texas,
we have increasingly utilized offshore third-party test subcontractors, typically in
Asia, where the parts are assembled and where the products are more frequently
delivered to our customers. We expect this trend toward utilization of offshore
third-party test subcontractors to continue.
There are significant risks associated with relying on these third-party
foundries and subcontractors, including:
- failure by us, our customers or their end customers to qualify a selected
supplier;
- capacity shortages during periods of high demand;
16
- potential insolvency of the third-party subcontractors;
- reduced control over delivery schedules and quality;
- limited warranties on wafers or products supplied to us;
- potential increases in prices;
- increased need for international-based supply, logistics and financial
management;
- their inability to supply or support new or changing packaging technologies;
and
- low test yields.
We have supply contracts with our third-party vendors which obligate the vendor
to perform services and supply products to us for a specific period, in specific
quantities, and at specific prices. We are not obligated to any fixed fee or
minimum purchase obligations. In the event that these vendors failed to meet our
demand for whatever reason, we believe that other semiconductor foundries or
assembly or test subcontractors could adequately address our needs. However, we
expect that it would take up to twelve 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 our foundry approximately three months
prior to the anticipated delivery date, with order volumes based on our forecasts of
demand from our customers. Accordingly, if we do not accurately forecast demand for
our products, we may be unable to obtain adequate foundry or assembly capacity from
our third-party foundry and assembly subcontractors 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. Beyond our
current forecast, our third-party foundry or assembly or test subcontractors
typically do not provide guarantees to us that adequate capacity will be available
to us within the time required to meet additional demand for our products.
Since our inception, substantially all of the silicon wafers for the products
that we have shipped were manufactured either by TSMC or its affiliates. Our
customers typically complete their own qualification process. If we fail to
properly balance customer demand across the existing semiconductor fabrication
facilities that we utilize or are required by our foundry partners to increase, or
otherwise change the number of fab lines that we utilize for our production, we
might not be able to fulfill demand for our products and may need to divert our
engineering resources away from new product development initiatives to support the
fab line transition, which would adversely affect our operating results.
Additionally, a resulting write-off of unusable or excess inventories would
contribute to a decline in earnings.
WE HAVE INCREASED OUR INTERNATIONAL ACTIVITIES SIGNIFICANTLY AND PLAN TO CONTINUE
SUCH EFFORTS, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED
LOGISTICAL AND FINANCIAL COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS
We recently established additional international subsidiaries and have opened
additional offices in international markets to expand our international activities
in Europe and the Pacific Rim region. The percentage of our revenues to customers
located outside of the United States was 80% in fiscal 2003, 79% in fiscal 2002 and
66% in fiscal 2001. 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;
17
- greater difficulty in accounts receivable collection and longer collection
periods;
- high levels of distributor inventory subject to rights of return to us;
- political and economic instability; and
- greater difficulty in hiring qualified technical sales and applications
engineers.
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 our products less competitive.
MOST OF OUR CURRENT MANUFACTURERS, ASSEMBLERS, TEST SERVICE PROVIDERS, AND CUSTOMERS
ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION, WHICH INCREASES THE RISK THAT A
NATURAL DISASTER, EPIDEMIC, LABOR STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR
OPERATIONS OR SALES
Most of our current semiconductor wafer manufacturer’s foundries and one of our
assembly and test subcontractor’s sites are primarily located in the same region
within Taiwan and our other assembly and test subcontractors are located in the
Pacific Rim region. In addition, many of our customers, particularly mobile handset
manufacturers, 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, lack of water or other natural disasters in Taiwan or the Pacific Rim
region, or an epidemic, political unrest, war, labor strikes or work stoppages in
countries where our semiconductor manufacturer, assemblers and test subcontractors
are located, likely would result in the disruption of our foundry, assembly or test
capacity. There can be no assurance that such alternate capacity could be obtained
on favorable terms, if at all.
A natural disaster, epidemic, labor strike, war or political unrest where our
customers’ facilities are located would likely reduce our sales to such customers.
For example, Samsung, our largest customer, is based in South Korea and represented
21% of our revenues in fiscal 2003. North Korea’s recent decision to withdraw from
the nuclear Non-Proliferation Treaty and related geopolitical maneuverings have
created unrest. Such unrest could create economic uncertainty or instability, could
escalate to war or otherwise adversely affect South Korea and our South Korean
customers and reduce our sales to such customers, which would materially and
adversely affect our operating results. In addition, a significant portion of the
assembly and testing of our mobile handset products occurs in South Korea. Any
disruption resulting from these events could also cause significant delays in
shipments of our products until we are able to shift our manufacturing, assembling
or testing from the affected subcontractor to another third-party vendor.
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 SATISFY DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER
The manufacture of our products is a highly complex and technologically demanding
process. This is particularly the case when multiple chips are packaged in a multi-
chip module, such as the Aero I/I+ Transceiver. 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 deliver fabricated silicon wafers of satisfactory quality in a timely
manner, we will be unable to meet our customers' demand for our products in a timely
manner, which would adversely affect our operating results and damage our customer
relationships.
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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 REVENUES
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 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.
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, sales and marketing
personnel. We believe that our future success will be dependent on retaining the
services of our key personnel, developing their successors and certain internal
processes to reduce our reliance on specific individuals, and on properly managing
the transition of key roles when they occur. For example, at the beginning of
fiscal 2004, Navdeep Sooch, our co-founder and chairman of the board, transitioned
out of his role as CEO and Daniel Artusi, our Chief Operating Officer and President,
assumed the role of CEO. There is currently a shortage of qualified personnel with
significant experience in the design, development, manufacturing, marketing and
sales of analog and mixed-signal 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 primary source
for 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 both in the United States and internationally,
including engineers and sales and marketing personnel, could delay the development
and introduction of, and negatively impact our ability to sell, our products.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION
On December 10, 2003, we acquired Cygnal. As part of our growth and product
diversification strategy, we will continue to evaluate opportunities to acquire
other businesses, intellectual property or technologies that would complement our
current offerings, expand the breadth of our markets or enhance our technical
capabilities. The Cygnal acquisition and other acquisitions that we may potentially
make in the future 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;
- need for financial resources above our planned investment levels;
- difficulties in retaining business relationships with suppliers and customers
of the acquired company;
- risks associated with entering markets in which we lack prior experience;
- potential loss of key employees of the acquired company; and
- potential impairment of related goodwill and intangible assets.
In connection with the Cygnal acquisition, we are obligated to issue up to
1,290,963 shares of our common stock based upon the achievement of Cygnal product
revenue milestones, which could distract our management and employees and lead to
disputes with former Cygnal stockholders. Future acquisitions also could cause us
19
to incur debt or contingent liabilities or cause us to issue equity securities that
could negatively impact the ownership percentages of existing shareholders.
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,
intellectual property providers 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,
trademarks or misappropriation of trade secrets or from customers requesting
indemnification for claims brought against them by third parties. 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.
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. For
example, in April 2003, we paid $17 million to settle patent infringement claims
brought against us by TDK Semiconductor Corporation. In January 2004, Digcom
commenced a lawsuit against us and several other major companies in the GSM/GPRS
wireless market for alleged past infringement of one of their expired patents. In
the future, we may become involved in additional litigation to defend allegations of
infringement asserted by others, both directly and indirectly as a result of certain
industry-standard indemnities we may offer to our customers. 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. Most 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 a right to a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;
- redesign those products that use infringing intellectual property; or
- pursue legal remedies with third parties to enforce our
indemnification rights, which may not adequately protect our interests.
FAILURE TO MANAGE OUR DISTRIBUTION CHANNEL RELATIONSHIPS COULD IMPEDE OUR FUTURE
GROWTH
The future growth of our business will depend in part on our ability to manage
our relationships with current and future distributors and sales representatives,
develop additional channels for the distribution and sale of our products and manage
20
these relationships. As we execute our indirect sales strategy, we will need to
manage the potential conflicts that may arise with our direct sales efforts. For
example, conflicts with a distributor may arise when a customer begins purchasing
directly from us rather than through the distributor. The inability to successfully
execute or manage a multi-channel sales strategy could impede our future growth.
WE COULD SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
EQUITY OR DEBT SECURITIES, BUT ADDITIONAL CAPITAL MAY NOT BE AVAILABLE ON TERMS
A
CCEPTABLE TO US, OR AT ALL
We believe that our existing cash, cash equivalents and investments will be
sufficient to meet our working capital needs, capital expenditures, investment
requirements and commitments for at least the next 12 months. However, it is
possible that we may need to raise additional funds to finance our activities or to
facilitate acquisitions of other businesses, products or technologies. We believe
we could raise these funds, if needed, by selling equity or debt securities to the
public or to selected investors. In addition, even though we may not need
additional funds, we may still elect to sell additional equity or debt securities or
obtain credit facilities for other reasons. However, we may not be able to obtain
additional funds on favorable terms, or at all. If we decide to raise additional
funds by issuing equity or convertible debt securities, the ownership percentages of
existing shareholders would be reduced.
OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE QUALIFICATION
PROCESS WITHOUT ANY ASSURANCE OF 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 ensure 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 DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS, AND SOME OF OUR CUSTOMERS OFFER
COMPETING PRODUCTS
Our products are currently used by our customers to produce modems, telephony
equipment, mobile handsets, optical networking equipment and a broad range of other
devices. We rely on our customers to provide hardware, software, intellectual
property indemnification and other technical support for the products supplied by
our customers. If our customers do not provide the required functionality or if our
customers do not provide satisfactory support for their products, the demand for
these devices that incorporate our products may diminish or we may otherwise be
materially adversely affected. Any reduction in the demand for these devices would
significantly reduce our revenues.
In certain products such as the DAA, some of our customers (including Conexant
and Smart Link) offer their own competitive products. These customers may find it
advantageous to support their own offerings in the marketplace in lieu of promoting
our products.
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 ensure 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
21
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. These inventory risks are
exacerbated when our customers purchase indirectly through contract manufacturers
because this causes us to have less visibility regarding the accumulated levels of
inventory for such customers.
WE ARE SUBJECT TO CREDIT RISKS RELATED TO OUR ACCOUNTS RECEIVABLE, ESPECIALLY WHEN
OVERSEAS CUSTOMERS PURCHASE OUR PRODUCTS
We do not generally obtain letters of credit or other security for payment from
customers, distributors or contract manufacturers. Accordingly, we are not
protected against accounts receivable default or bankruptcy by these entities. If
we are unable to collect our accounts receivable, our operating results could be
materially harmed. We continue to monitor the credit worthiness and payment
practice of each of our customers, distributors and contract manufacturers, and to
date have not had any significant write-offs of receivable balances from them.
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. These and other competitive pressures may
prevent us from competing successfully against current or future competitors, and
may materially harm our business. Competition could decrease our prices, reduce our
sales, lower our gross profits or decrease our market share.
OUR STOCK PRICE MAY BE VOLATILE
The market price of our common stock has been volatile in the past and may be
volatile in the future. The market price of our common stock may be significantly
affected by the following factors:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts or our failure to perform
in line with such estimates;
- changes in market valuations of other technology companies, particularly
semiconductor companies;
- announcements by us or our competitors of significant technical innovations,
acquisitions, strategic partnerships, joint ventures or capital commitments;
- introduction of technologies or product enhancements that reduce the need for
our products;
- the loss of one or more key original equipment manufacturers (OEM) customers;
- dilution from the issuance of our stock in connection with acquisitions; and
- departures of key personnel.
The stock market has experienced extreme volatility that often has been unrelated
to the performance of particular companies. These market fluctuations may cause our
stock price to fall regardless of our performance.
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR IMPEDE
A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws could have the effect
of discouraging, delaying or preventing a merger or acquisition that a stockholder
may consider favorable. For example, our certificate of incorporation and bylaws
provide for:
- the division of our board of directors into three classes to be elected on a
staggered basis, one class each year;
- the ability of our board of directors to issue shares of our preferred stock in
one or more series without further authorization of our stockholders;
- a prohibition on stockholder action by written consent;
- elimination of the right of stockholders to call a special meeting of
stockholders;
- a requirement that stockholders provide advance notice of any stockholder
nominations of directors or any proposal of new business to be considered at
any meeting of stockholders; and
- a requirement that a supermajority vote be obtained to amend or repeal certain
provisions of our certificate of incorporation.
We also are subject to the anti-takeover laws of Delaware which may discourage,
delay or prevent someone from acquiring or merging with us, which may adversely
affect the market price of our common stock.
THE PERFORMANCE OF OUR DSL ANALOG FRONT END (AFE) AND MODEM RELATED 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
REVENUES
Although our DSL AFE and modem related 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. 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.
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, we
face competition from a relatively large number of competitors. Across all of our
product areas, we compete with Agere Systems, Atmel, AMCC, Analog Devices, Broadcom,
Conexant, Cypress, ESS, Fujitsu, Hitachi, Infineon Technologies, Legerity, Maxim
Integrated Products, Microchip, Motorola, National Semiconductor, Philips, RF Micro
Devices, Semtech, Skyworks Solutions Inc., Texas Instruments, Vitesse Semiconductor
and others. We expect to face competition in the future from our current
competitors, other manufacturers and designers of semiconductors, and start-up
semiconductor design companies. Some of our customers, such as Agere Systems,
Broadcom, Intel, Motorola, Samsung 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
23
introducing their own ICs or by entering into strategic relationships with or
acquiring other existing providers of semiconductor products.
In addition, large companies may restructure their operations to create separate
companies or may acquire new businesses that are focused on providing the types of
products we produce or acquire our customers. For example, in May 2003, Conexant
acquired PC-Tel’s modem business. In the future, Conexant may seek to supplant our
silicon DAA products that have historically been incorporated in PC-Tel’s products
with Conexant’s own competing DAA product. As an additional example, in October
2003, Motorola announced it would separate its semiconductor operations into a
publicly traded company focused on communications and integrated electronic systems.
Also, in November 2003, Conexant and GlobespanVirata announced a plan to merge that
will focus the combined company on all broadband applications.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR REVENUES AND GROSS PROFITS
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.
The highly competitive GSM handset market is extremely cost sensitive due to the
potentially very high volumes and stringent expectations placed on consumer
electronics component suppliers for aggressive and sustained price reductions which
do result in declining average selling prices. We expect that these factors will
create downward pressure on our average selling prices and gross profit percentages.
If we are unable to offset any such reductions in our average selling prices by
increasing our sales volumes and corresponding production cost reductions, our gross
profits and revenues will suffer. To maintain our gross profit percentage, we will
need to develop and introduce new products and product enhancements on a timely
basis and continually reduce our costs. Our failure to do so would cause our
revenues and gross profit percentage to decline.
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY, WHICH HAS BEEN
SUBJECT TO SIGNIFICANT DOWNTURNS
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. Specific areas of the communications markets have contributed to
the overall decline and volatility of the semiconductor industry in the recent past.
For example, in fiscal 2001, the semiconductor industry suffered a downturn due to
reductions in the actual unit sales of personal computers and wireless phones as
compared to previous robust forecasts. Additionally, changing and competing
technical standards in airwave interfaces such as GSM and Code Division Multiple
Access (CDMA) for mobile handsets, migration to higher speed communication protocols
in the optical space and the return to prominence of the traditional regional Bell
operating companies compared to the competitive local exchange companies all
contributed to the volatility in the communications area of the semiconductor
industry. This downturn resulted in a material adverse effect on our business and
operating results in fiscal 2001.
Due to the cyclical nature of the semiconductor industry, an upturn in business
could result in increased competition for access to third-party foundry, assembly
and test capacity. We are dependent on the availability of such capacity to
manufacture, assemble and test our ICs. None of our third-party foundry, assembly
or test subcontractors 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 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
24
devices to support prevailing industry standards. Many of these companies are
significantly larger and more influential in affecting 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. For example, GSM mobile handsets now commonly use the GPRS
specification for enabling data communications. Certain suppliers are now offering
mobile handsets utilizing the Enhanced Data Rates for Global Evolution (EDGE)
protocol to support higher data communication rates on GSM networks. 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 in
developing new products or product enhancements that achieve market acceptance. Our
pursuit of necessary technological advances may require substantial time and
expense.
AVAILABLE INFORMATION
Our Internet website address is http://www.silabs.com. Our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through the investor relations page of
our internet website as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission (SEC).
Our Internet website and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on Form 10-K.
Item 2. Properties
Our primary facilities, housing test operations, sales and marketing, research
and development, and administration, are located in Austin, Texas. These facilities
consist of approximately 124,000 square feet of leased floor space with lease terms
expiring at various dates through December 2007. In addition to these properties, we
lease approximately 5,600 square feet in Nashua, New Hampshire for engineering
activities and various other smaller locations throughout the United States,
England, France, Japan, Malaysia, Korea, Taiwan and China for sales, marketing,
design and manufacturing support activities.
We believe that these facilities are suitable and adequate to meet our current
operating needs.
Item 3. Legal Proceedings
Patent Infringement Litigation
On January 14, 2004, Digcom, Inc., commenced a lawsuit in the United States
District Court for the Southern District of California against us and other major
companies in the GSM/GPRS wireless market for alleged infringement of Digcom’s U.S.
Patent No. 4,567,602, which was issued on January 28, 1986 and expired on June 13,
2003. Digcom’s complaint asserts that we and the other major companies have
infringed their ‘602 patent by manufacturing, using and selling products and
equipment for operation in GSM/GPRS wireless networks, including our Aero/Aero+ GSM
Transceiver Chipsets as a whole and the Si4200 and Si4201 Chips individually. We do
not believe that an injunction can be sought since the alleged patent has expired.
Accordingly, we do not expect any impact on the sale of our products as a result of
this lawsuit. We are currently investigating Digcom’s allegations, and intend to
respond with appropriate defenses. Due to the early stage of this litigation, we
cannot estimate the outcome of this matter or the resulting financial impact to us,
if any.
25
Securities Litigation
On December 6, 2001, a class action complaint for violations of U.S. federal
securities laws was filed in the United States District Court for the Southern
District of New York against us, four officers individually and the three investment
banking firms who served as representatives of the underwriters in connection with
our initial public offering of common stock which became effective on March 23,
2000. On April 19, 2002, a Consolidated Amended Complaint, which is now the
operative complaint, was filed in the same court. The complaint alleges that the
registration statement and prospectus for our initial public offering did not
disclose that (1) the underwriters solicited and received additional, excessive and
undisclosed commissions from certain investors, and (2) the underwriters had agreed
to allocate shares of the offering in exchange for a commitment from the customers
to purchase additional shares in the aftermarket at pre-determined higher prices.
The action seeks damages in an unspecified amount and is being coordinated with
approximately 300 other nearly identical actions filed against other companies. On
July 15, 2002, we moved to dismiss all claims against us and the individual
defendants. A court order dated October 9, 2002 dismissed without prejudice
numerous individual defendants, including the four officers of our company who had
been named individually. On February 19, 2003, the Court denied the motion to
dismiss the complaint against us. We have approved a Memorandum of Understanding
("MOU") and related agreements which set forth the terms of a proposed settlement
between the plaintiff class and us and the vast majority of the other approximately
300 issuer defendants. It is anticipated that any potential financial obligation of
us to plaintiffs due pursuant to the terms of the MOU and related agreements would
be covered by existing insurance. Therefore, we do not expect that the proposed
settlement would involve any payment by us. The MOU and related agreements are
subject to a number of contingencies, including the negotiation of a settlement
agreement and approval by the Court. We cannot be certain as to whether or when a
settlement will occur or be finalized and are unable at this time to determine
whether the outcome of the litigation will have a material impact on our results of
operations or financial condition in any future period.
We are not currently involved in any other 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 23, 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 January 3, 2004, the
end of our 2003 fiscal year, there were 424 holders of record of our common stock.
Fiscal Year Ended December 28, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended January 3, 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
LOW
$39.65
37.54
29.09
30.40
$30.27
32.56
53.01
58.88
$21.56
21.39
16.40
17.10
$18.89
24.22
26.10
39.61
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 expansion of our business.
On December 10, 2003, we issued 1,190,034 shares of our common stock in exchange
for the outstanding capital stock of Cygnal Integrated Products, Inc. The issuance
of our common stock in connection with the acquisition of Cygnal was deemed exempt
26
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.
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 shares 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 $1.6 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 equipment loans provided by Imperial Bank. We used another $1.0
million of the proceeds as part of the consideration paid in the acquisition of SNR
Semiconductor Incorporated (SNR) on October 2, 2000. In December 2002, we prepaid
$2.4 million in satisfaction of our remaining debt and lease obligations to three
equipment financing institutions. In December 2003, we paid $0.9 million in direct
acquisition costs for professional and legal fees related to the acquisition of
Cygnal. As of January 3, 2004, the remaining proceeds were invested in short-term,
investment-grade, interest bearing instruments.
The information under the caption “Equity Compensation Plan Information”
appearing in the Proxy Statement, is incorporated herein by reference.
Item 6. Selected Consolidated Financial Data
The selected consolidated balance sheet data as of fiscal year ended 2003 and
2002 and the selected consolidated statements of operations data for fiscal 2003,
2002 and 2001 have been derived from audited consolidated financial statements
included in this Form 10-K. The selected consolidated balance sheet data as of
fiscal year ended 2001, 2000 and 1999 and the selected consolidated statements of
operations data for fiscal 2000 and 1999 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.
27
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Fiscal Year
2003
2002
2001
2000
1999
(in thousands, except per share data)
Revenues
Cost of revenues
$325,305
162,173
$182,016
79,939
$ 74,065
31,930
$103,103
35,601
$46,911
15,770
Gross profit
Operating expenses:
Research and development
Selling, general and
administrative
Write off of in-process
research & development
Goodwill amortization
Impairment of goodwill and
other intangible assets
Amortization of deferred
stock compensation
Operating expenses
Operating income (loss)
Other income (expenses):
Interest income
Interest expense
Other income (expense)
Income (loss) before income
taxes
Provision (benefit) for income
taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted-average common shares
outstanding:
Basic
Diluted
163,132
102,077
42,135
67,502
31,141
48,296
32,001
28,978
19,419
8,297
42,836
33,877
20,056
17,648
7,207
1,600
--
--
--
--
4,187
394
3,307
--
--
--
37
34,885
--
--
4,986
97,718
65,414
1,368
(49)
(537)
5,173
71,088
30,989
1,582
(617)
(647)
5,276
93,382
(51,247)
3,624
(751)
(2)
3,761
44,529
22,973
3,964
(1,162)
74
976
16,480
14,661
402
(699)
--
66,196
31,307
(48,376)
25,849
14,364
21,480
$44,716
10,590
$20,717
(2,803)
$(45,573)
11,832
$ 14,017
3,324
$11,040
$ .92
$ .86
$ .44
$ .41
$ (.99)
$ (.99)
$ .37
$ .29
$ .73
$ .25
48,850
52,288
47,419
50,811
45,914
45,914
38,326
48,788
15,152
43,657
CONSOLIDATED BALANCE SHEET DATA:
January 3,
2004
December 28,
2002
December 29,
2001
December 30,
2000
January 1,
2000
Cash, cash equivalents and
short-term investments
Working capital
Total assets
Long-term obligations
Redeemable convertible
preferred stock
Total stockholders' equity
$190,313
202,712
378,095
9,962
--
287,205
$115,166
122,354
197,065
949
--
155,722
$101,248
106,556
145,021
3,817
--
125,407
$ 96,438
103,347
184,840
5,125
--
162,951
$14,706
14,281
41,958
6,223
12,750
8,003
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT ON FORM 10-K. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. PLEASE SEE THE “CAUTIONARY
STATEMENT” ABOVE AND “FACTORS AFFECTING OUR FUTURE OPERATING RESULTS” UNDER ITEM 1
FOR A DISCUSSION OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE
STATEMENTS. OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52- OR 53- WEEK
YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. FISCAL 2003 HAD 53 WEEKS WITH
THE EXTRA WEEK OCCURRING IN THE FOURTH QUARTER OF THE YEAR AND ENDED ON JANUARY 3,
2004. FISCAL 2002 HAD 52 WEEKS AND ENDED ON DECEMBER 28, 2002. FISCAL 2001 HAD 52
WEEKS AND ENDED ON DECEMBER 29, 2001.
OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal integrated
circuits (ICs) for a broad range of applications. Our innovative ICs can
dramatically reduce the cost, size and system power requirements of the products
that our customers sell to consumers. We currently offer ICs that can be
incorporated into communications devices, such as wireless phones and modems, as
28
well as cable and satellite set-top boxes, residential communication gateways for
cable or digital subscriber line (DSL), satellite radios and optical network
equipment. With our recent acquisition of Cygnal Integrated Products, Inc. we offer
a family of 8-bit MCUs for use in a broad array of applications such as industrial
automation and control, automotive sensors and controls, medical instrumentation,
and electronic test and measurement equipment. Our customers during fiscal 2003
included Agere Systems, Broadcom, Conexant/PC-TEL, Echostar, Hughes Network Systems,
Sagem, Samsung, Sendo, Smart Link, Texas Instruments, Thomson and Wavecom.
Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 486 at the end
of fiscal 2003, from 364 employees at the end of fiscal 2002 and 279 employees at
the end of fiscal 2001. As a "fabless" semiconductor company, we rely on third-
party semiconductor fabricators in Asia, and to a lesser extent the United States,
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-parties in Asia to assemble, package, and, in the majority of cases, test
these die and ship these units to our customers. We plan to increase the amount of
testing performed by such third parties, which we anticipate will facilitate faster
delivery of products to our customers (particularly those located in Asia), shorter
production cycle times, lower inventory requirements, lower costs and increased
flexibility of test capacity. We have implemented supply chain management software
which we believe will improve our ability to scale our operations, reduce our
inventory requirements and improve the quality of our shipment scheduling
commitments with our customers through improved efficiency.
Our product set has expanded to a broad portfolio targeting the mobile handset
and broad-based mixed-signal applications. Our expertise in analog-intensive, high-
performance, mixed signal ICs enables us to develop highly differentiated solutions
that address large markets. For example, our silicon DAA product family is
optimized for the PC modem market; our ISOmodem family of embedded modems has been
widely adopted by satellite set-top box manufacturers; and our Aero™ Global System
for Mobile Communications (GSM)/General Packet Radio Services (GPRS) transceiver
family is being shipped in mobile handsets worldwide. We continue to introduce next
generation ICs with added functionality and further integration. In fiscal 2003, we
expanded our Aero Transceiver family with the launch of Aero I/I+, a single package
GSM/GPRS transceiver, and we introduced a new ISOmodem product family that
integrates our third generation silicon DAA. Through our recently acquired MCU
business and our internal development efforts, we further diversified our product
portfolio. We plan to continue to diversify our product portfolio by introducing
products that increase the amount of content we provide for existing applications
and by introducing ICs for markets we do not currently address, thereby expanding
our total available market opportunity.
During fiscal 2003 and 2002, one customer, Samsung, represented 21% and 16% of
our revenues, respectively. No other single end customer accounted for more than
10% of our revenues in either of these years. In addition to direct sales to
customers, some of our end customers purchase products indirectly from us through
distributors and contract manufacturers. An end customer purchasing through a
contract manufacturer typically instructs such contract manufacturer to obtain our
products and incorporate such products with other components for sale by such
contract manufacturer to the end customer. Although we actually sell the products
to, and are paid by, the distributors and contract manufacturers, we refer to such
end customer as our customer. There was one distributor, Edom Technology, which
accounted for 13% of our total revenues during fiscal 2003. Two of our
distributors, Uniquest and Edom Technology, represented 20% and 16% of our fiscal
2002 revenues, respectively. No other distributor accounted for more than 10% of
our revenues in fiscal years 2003 or 2002.
The percentage of our revenues derived from customers located outside of the
United States was 80% in fiscal 2003, 79% in fiscal 2002 and 66% in fiscal 2001.
This percentage increase in the two most recent years reflects our product and
customer diversification, as many of our mobile handset, and increasingly, broad-
based mixed signal customers manufacture and design their products in the Pacific
Rim region. All of our revenues to date have been denominated in U.S. dollars. We
believe that a majority of our revenues will continue to be derived from customers
outside of the United States as our products receive acceptance in international
markets.
29
The sales cycle for the test and evaluation of our ICs can range from one month
to 12 months or more. An additional three to six 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.
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.
Moreover, the amount of time between initial research and development and
commercialization of a product, if ever, can be substantially longer than the sales
cycle for the product. Accordingly, if we incur substantial research and
development costs without developing a commercially successful product, our
operating results, as well as our growth prospects, could be adversely affected.
Rapid changes in our markets and across our product areas make it difficult for
us to estimate the impact of seasonal factors on our business. Because many of our
ICs are designed for use in consumer products such as personal computers (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 now group our products into two categories, mobile handset products or broad-
based mixed-signal products. Mobile handset products include the Aero Transceivers
and, to the extent incorporated into handsets, the RF Synthesizers. Broad-based
mixed-signal products include our silicon DAA, ISOmodem, ProSLIC, satellite tuner,
DSL analog front end, clock chips, optical transceivers and CDRs, general purpose RF
Synthesizers for non-handset applications, as well as the Cygnal MCU products.
Comparison of prior year financial results also have been revised to reflect this
change in product grouping.
The following describes the line items set forth in our consolidated statements
of operations:
REVENUES. Revenues are generated principally by sales of our ICs. We recognize
revenue when all of the following criteria are met: 1) there is persuasive evidence
that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is
fixed or determinable, and 4) collectibility is reasonably assured. Generally, we
recognize revenue from product sales direct to customers and contract manufacturers
upon shipment. Certain of our sales are made to distributors under agreements
allowing certain rights of return and price protection on products unsold by
distributors. Accordingly, We defer the revenue and gross profit on such sales until
the distributors sell the product to the end customer. Our products typically carry
a one-year replacement warranty. Replacements have been insignificant to date. 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 negotiated 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, to provide profit margin to our
distributors who resell our products or in response to competition. In addition, as
a product matures, we expect that the average selling price for such product will
decline due to the greater availability of competing products. 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 those products in response to
such demand, as well as our ability to develop or acquire new products and
subsequently achieve 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; costs of software
royalties and amortization of purchased software, other intellectual property
license costs, and certain acquired intangible assets; an allocated portion of our
occupancy costs; allocable depreciation of testing equipment and leasehold
improvements; impairment charges related to certain manufacturing equipment held for
sale or abandoned; and a portion of the settlement costs associated with the TDK
Semiconductor Corporation (TDK) patent infringement lawsuit. Generally, we
depreciate equipment over four years on a straight line basis and leasehold
improvements over the shorter of the estimated useful life or the applicable lease
30
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 yields improve and
our semiconductor fabricators, assemblers and test operations achieve greater
economies of scale for that product. Additionally, the cost of wafer procurement
and assembly and test services, which are significant components of cost of goods
sold, vary cyclically with overall demand for semiconductors and our suppliers’
available capacity of such products and services.
RESEARCH AND DEVELOPMENT. Research and development expense consists primarily of
compensation and related costs of employees engaged in research and development
activities, new product mask, wafer and packaging costs, external consulting and
services costs, amortization of purchased software, equipment tooling, amortization
of acquired intangible assets, as well as an allocated portion of our occupancy
costs for such operations. We generally depreciate our research and development
equipment over four years and amortize our purchased software from computer-aided
design tool vendors over three to four years. Development activities include the
design of new products, refinement of existing products and design of test
methodologies to ensure compliance with required specifications.
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, patent litigation
legal fees, other promotional and marketing expenses, and reserves for bad debt.
Write-offs of uncollectible accounts 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
which we acquired in connection with our acquisition of Cygnal Integrated Products,
Inc. (Cygnal) in fiscal 2003 and Krypton Isolation, Inc. (Krypton) in fiscal 2000.
GOODWILL AMORTIZATION. We adopted Statement of Financial Accounting Standards
(SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, at the beginning of fiscal
2002 and accordingly ceased amortization of goodwill. Goodwill amortization through
December 2001 includes the amortization of goodwill purchased in connection with our
acquisitions of Krypton in August 2000 and SNR in October 2000. Goodwill was
amortized over four to five years using the straight line method.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. Impairment of goodwill and
other intangible assets reflects the charge to write-down that portion of the
carrying value of goodwill and other intangible assets that was in excess of its
fair market value.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of
stock options and direct issuances of stock to our employees, we record deferred
stock compensation, representing, for accounting purposes, the difference between
the exercise price of option grants, or the issuance price of direct issuances of
stock, as the case may be, and the fair value of our common stock at the time of
such grants or issuances. The deferred stock compensation is amortized over the
vesting period of the applicable options or shares, generally five to eight years.
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. We may from time to time elect to invest in
tax-advantaged short-term investments yielding lower nominal interest proceeds.
INTEREST EXPENSE. Interest expense consists of interest on our long-term debt,
capital leases and other long-term obligations.
OTHER INCOME (EXPENSE). Other income (expense) reflects our share of income and
losses related to our equity investment in ASIC Design Services, Inc. (ADS) and the
gain on the disposal of fixed assets.
PROVISION FOR INCOME TAXES. We accrue a provision for federal and state income
tax at the applicable statutory rates adjusted for non-deductible expenses, research
and development tax credits and interest income from tax-advantaged short-term
investments.
31
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 2003 TO FISCAL 2002
REVENUES. Revenues in fiscal 2003 were $325.3 million, an increase of $143.3
million, or 78.7%, from revenues of $182.0 million in fiscal 2002. The increase was
primarily attributable to significant growth in the volume of sales for our Aero
Transceiver used in GSM mobile handsets and ISOmodem products used in satellite set
top boxes, primarily reflecting gains in market share and an increase in the overall
market size. We also continued to see significant growth in the sales of our DAA
products, primarily reflecting an increase in the overall market demand for these
products and strength in mobile notebook computer modems. During fiscal 2003, we
experienced normal decreases in the average selling prices for certain products.
However, these price decreases were offset by the significant increases in sales
volumes for our products and the introduction of higher priced next generation
products and product extensions. As a product becomes more mature, we expect it to
experience additional decreases in average selling prices in the future. Our
revenue will be dependent on our ability to increase sales volumes and introduce
higher priced next generation products and product extensions.
GROSS PROFIT. Gross profit in fiscal 2003 was $163.1 million, or 50.1% of
revenues, an increase of $61.0 million, or 59.8%, as compared with gross profit of
$102.1 million, or 56.1% of revenues, in fiscal 2002. The increase in gross profit
dollars was primarily due to the substantial increase in sales volume. The decrease
in gross margin percentage was primarily due to (1) a $15.3 million charge
associated with a patent litigation settlement in fiscal 2003; (2) a greater portion
of our sales being comprised of our lower margin mobile handset products; and (3) a
$0.8 million impairment charge associated with test equipment held for sale. We
expect to experience continued declines in the average selling prices of our mobile
handset products. This downward pressure on gross profit as a percentage of
revenues may be offset to the extent we are able to introduce higher margin new
products and continue to gain market share with our broad-based mixed-signal ICs.
RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2003 was
$48.3 million, or 14.8% of revenues, which reflected an increase of $16.3 million,
or 50.9%, as compared with research and development expense of $32.0 million, or
17.6% of revenues, in fiscal 2002. The increase in the dollar amount of research and
development expense was principally due to increased staffing and associated costs
to pursue new product development opportunities, and continue to develop new testing
methodologies for newly introduced and existing products. As a percentage of
revenues, research and development expense decreased due to the substantial increase
in revenues in fiscal 2003. We expect that research and development expense will
increase in absolute dollars in future periods as we continue to increase our
staffing and associated costs to pursue additional new product development
opportunities, and may fluctuate as a percentage of revenues due to changes in sales
volume and the timing of certain expensive items related to new product development
initiatives, such as engineering mask and wafer costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense
in fiscal 2003 was $42.8 million, or 13.2% of revenues, which reflected an increase
of $8.9 million, or 26.4%, as compared to selling, general and administrative
expense of $33.9 million or 18.6% of revenues, in fiscal 2002. The increase in the
dollar amount of selling, general and administrative expense was principally
attributable to increased staffing and associated costs, sales commissions
associated with our higher revenues and the conversion of our largest customer
account, Samsung, from a non-commission bearing distributor account to a commission
bearing direct account, and employee bonuses resulting from increased earnings. This
increase was partially offset by lower patent litigation-related legal costs
following settlement of the TDK litigation. We expect that selling, general and
administrative expense will increase in absolute dollars in future periods as we
expand our sales channels, marketing efforts and administrative infrastructure. In
addition, we expect selling, general and administrative expense to fluctuate as a
percentage of revenues because of (1) potential significant variability in our
future sales volumes; (2) the likelihood that indirect sales distribution channels,
which typically 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; (3) fluctuating usage of advertising to promote our products
and, in particular, our newly introduced products; and (4) fluctuating legal costs
related to litigation and intellectual property matters.
32
WRITE OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. We wrote off $1.6 million of
in-process research and development in fiscal 2003 related to our acquisition of
Cygnal. We did not have any write-offs in fiscal 2002.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. We did not recognize any
impairment of goodwill and other intangible assets during fiscal 2003. During fiscal
2002, we wrote off $37 thousand, which represented the remaining goodwill related to
the fiscal 2000 acquisition of Krypton.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation for the difference between the exercise price of option grants or the
issuance price of direct issuances of stock, as the case may be, 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 issuances, which
resulted in amortization expense of $5.0 million in fiscal 2003, as compared to $5.2
million in fiscal 2002. In fiscal 2004, we expect our amortization expense to
remain at approximately this same level.
INTEREST INCOME. Interest income in fiscal 2003 was $1.4 million, as compared to
$1.6 million in fiscal 2002. The decrease was generally due to lower interest rates
on cash and short-term investments balances during the current year and our
transition to tax-exempt investments which bear even lower interest rates.
INTEREST EXPENSE. Interest expense in fiscal 2003 was $49 thousand as compared
to $0.6 million in fiscal 2002. The decrease in interest expense was primarily due
to lower debt, lease and other long-term payable balances during the recent period.
We expect our interest expense to remain at a modest level in fiscal 2004.
OTHER INCOME (EXPENSE). Other expense in fiscal 2003 was $0.5 million as
compared to $0.6 million in fiscal 2002, which primarily reflects our share of the
losses in our investment in ADS.
PROVISION (BENEFIT) FOR INCOME TAXES. Our tax provision rate, excluding the
impact of the amortization of deferred stock compensation, the write off of in-
process research and development and impairment of goodwill and other intangibles,
was 30% in fiscal 2003 as compared to the 29% rate in fiscal 2002. This increase was
due in part to the fact that our tax-advantaged interest income as a percentage of
pre-tax income was lower in fiscal 2003 than it was in fiscal 2002. For fiscal 2003,
our tax provision reflects a deduction for the amount of employee income
attributable to employee stock-based awards that relates to the amortization of
deferred stock compensation. In prior years such deductions were recorded as an
increase to additional paid-in capital. The impact of not reflecting these
deductions in the tax provision (benefit) in prior years is not material. The tax
provision rate differs from the statutory rate due to the impact of research and
development tax credits, state taxes, tax-advantaged interest income and other
permanent items.
COMPARISON OF FISCAL 2002 TO FISCAL 2001
REVENUES. Revenues in fiscal 2002 were $182.0 million, an increase of $107.9
million, or 146%, from revenues of $74.1 million in fiscal 2001. The increase was
primarily attributable to significant growth in the volume of sales for our mobile
handset products, reflecting a growing number of customers adopting these products
into their offerings. We also continued to see significant growth in the sales of
our broad-based mixed-signal ICs, particularly the ISOmodem and DAA, reflecting
increasing demand by existing customers for these products. During fiscal 2002, we
experienced normal decreases in the average selling prices for certain products.
However, these price decreases were offset by the significant increases in sales
volumes for our products and the introduction of higher priced next generation
products and product extensions.
GROSS PROFIT. Gross profit in fiscal 2002 was $102.1 million, or 56.1% of
revenues, an increase of $59.9 million, or 142%, as compared with gross profit of
$42.1 million, or 56.8% of revenues, in fiscal 2001. The increase in gross profit
dollars was primarily due to the substantial increase in sales volume. The decrease
in gross margin percentage was primarily due to a greater portion of our sales being
comprised of our lower margin mobile handset products which have lower average
selling prices and higher material costs than our other products. The gross margin
33
percentage in fiscal year 2002 was also negatively impacted by start up costs
associated with the rapid production ramp of our Aero Transceiver product.
RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2002 was
$32.0 million, or 17.6% of revenues, which reflected an increase of $3.0 million, or
10.4%, as compared with research and development expense of $29.0 million, or 39.1%
of revenues, in fiscal 2001. The increase in the dollar amount of research and
development expense was principally due to increased staffing and associated costs
to pursue new product development opportunities, and continue to develop new testing
methodologies for newly introduced and existing products. As a percentage of
revenues, research and development expense decreased significantly due to the
substantial increase in revenues in fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense
in fiscal 2002 was $33.9 million, or 18.6% of revenues, which reflected an increase
of $13.8 million, or 68.9%, as compared to selling, general and administrative
expense of $20.0 million or 27.0% of revenues, in fiscal 2001. The increase in the
dollar amount of selling, general and administrative expense was principally
attributable to increased staffing and associated costs, legal fees incurred during
patent litigation, sales commissions associated with our higher revenues and
employee bonuses resulting from increased earnings.
GOODWILL AMORTIZATION. We did not incur goodwill amortization in fiscal 2002 due
to the adoption of SFAS No. 142. Goodwill amortization in fiscal 2001 was $4.2
million. In fiscal 2001, we wrote off the majority of our goodwill balances after
determining that they were permanently impaired.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. During fiscal 2001, we
performed an assessment of the carrying value of our long-lived assets recorded in
connection with our acquisitions of Krypton and SNR. As a result of this assessment,
we concluded that the value of these assets had become permanently impaired and
recorded charges of $33.3 million to write off related goodwill and $1.6 million to
reduce the carrying value of related intangible assets to their fair value. During
fiscal 2002, we determined that the remaining goodwill of $37,000 related to Krypton
was impaired and wrote off the balance. There were no other impairments of goodwill
and other intangible assets in fiscal 2002.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation for the difference between the exercise price of option grants or the
issuance price of direct issuances of stock, as the case may be, 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 issuances, which
resulted in amortization expense of $5.2 million in fiscal 2002, as compared to $5.3
million in fiscal 2001.
INTEREST INCOME. Interest income in fiscal 2002 was $1.6 million, as compared to
$3.6 million in fiscal 2001. The decrease was generally due to lower interest rates
on cash and short-term investments balances during the current year and our
transition to tax-exempt investments which bear even lower interest rates.
INTEREST EXPENSE. Interest expense in fiscal 2002 was $0.6 million as compared
to $0.8 million in fiscal 2001. The decrease in interest expense was primarily due
to lower debt and lease payable balances during the recent period. In December 2002.
we prepaid $2.4 million in satisfaction of our remaining debt and lease obligations
to three equipment financing institutions.
OTHER INCOME (EXPENSE). Other expense in fiscal 2002 was $0.6 million, which
primarily reflects our share of the losses in our investment in ADS. We did not
have any equity investments, and therefore no corresponding losses, in fiscal 2001.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax provision rate,
excluding the impact of goodwill amortization, impairment of goodwill and other
intangible assets, and deferred stock compensation amortization, was 29.0% in fiscal
2002, as compared to our effective tax benefit rate of 69.6% in fiscal 2001. Such
fiscal 2002 effective tax provision rate reflects our tax benefits from our
estimated research and development tax credit, tax-exempt interest income, and other
deductions. The effective tax benefit in fiscal 2001 was attributable to our pre-tax
loss as well as tax benefits from our estimated research and development tax credit,
tax-exempt interest income and other deductions.
34
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of January 3, 2004 consisted of $190.3
million in cash, cash equivalents and short-term investments. Our short-term
investments consist primarily of obligations of municipalities and agencies of the
U.S. government that have initial maturities of less than one year.
In August 2003, we terminated our bank credit facility for a revolving line of
credit for borrowings and letters of credit. At January 3, 2004, a letter of credit
for $0.4 million related to a building lease was outstanding under a letter of
credit agreement with our bank.
Net cash provided by operating activities was $71.9 million during the fiscal
year ended January 3, 2004, compared to $39.0 million during the fiscal year ended
December 28, 2002. The increase was principally due to revenues generated by a
higher volume of sales over a relatively fixed cost structure. This increase was
partially offset by a $15.3 million cash payment relating to the settlement of
patent litigation with TDK. Operating cash flows during the fiscal year ended
January 3, 2004 reflect our net income of $44.7 million, as adjusted for non-cash
adjustments (depreciation, amortization, write-off of in-process research and
development, equity investment losses, and tax benefits associated with the exercise
of stock options) of $34.5 million, and a net decrease in the components of our
working capital of $7.3 million.
Net cash used in investing activities was $11.2 million during the fiscal year
ended January 3, 2004, compared to net cash used of $46.3 million during the fiscal
year ended December 28, 2002. The decrease was principally due to an increase in
net maturities of short-term investments of $2.0 million, net cash acquired of $5.4
million related to the purchase of Cygnal, and a decrease of $18.6 million in
purchases of fixed assets and other assets.
We anticipate capital expenditures of approximately $20.0 million for fiscal
2004. Additionally, as part of our growth strategy, we expect to evaluate
opportunities to invest in or acquire other businesses, intellectual property or
technologies that would complement or expand our current offerings, expand the
breadth of our markets or enhance our technical capabilities.
Net cash provided by financing activities was $16.7 million during the fiscal
year ended January 3, 2004, compared to net cash used of $1.1 million during the
fiscal year ended December 28, 2002. The increase in cash flows from financing
activities during the fiscal year ended January 3, 2004 was principally due to
proceeds from the exercise of employee stock options and purchases under our
employee stock purchase plan.
In our day-to-day business activities, we incur certain commitments to make
future payments under contracts such as purchase orders, leases and other long-term
contracts. Maturities under these contracts are set forth in the following table as
of January 3, 2004, in thousands:
Payments due by period
Operating lease
obligations
Purchase
obligations
Other long-term
obligations
2004
2005
2006
2007
2008
Thereafter
$ 2,544
$2,719
$2,384
$1,451
$316
$393
83,477
--
--
--
--
--
--
6,644
1,945
1,229
144
--
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 our existing cash and investment balances 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.
35
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and accompanying notes in conformity with
accounting principles generally accepted in the United States requires that we make
estimates and assumptions that affect the amounts reported. Changes in facts and
circumstances could have a significant impact on the resulting estimated amounts
included in the financial statements. We believe the following critical accounting
policies affect our more complex judgments and estimates. We also have other
policies that we consider to be key accounting policies, such as our policies for
revenue recognition, including the deferral of revenues and gross profit on sales to
distributors; however, these policies do not meet the definition of critical
accounting estimates because they do not generally require us to make estimates or
judgments that are difficult or subjective.
Allowance for doubtful accounts – We evaluate the collectibility of our accounts
receivable based on a combination of factors. In circumstances where we are aware
of a specific customer’s inability to meet its financial obligations to us, we
record a specific allowance to reduce the net receivable to the amount we reasonably
believe will be collected. For all other customers, we recognize allowances for
doubtful accounts based on a variety of factors including the length of time the
receivables are past their contractual due date, the current business environment,
and our historical experience. If the financial condition of our customers were to
deteriorate or if economic conditions worsened, additional allowances may be
required in the future. Accounts receivable write-offs to date have been minimal.
Inventory Valuation - We assess the recoverability of inventories through an on-
going review of inventory levels in relation to sales history, backlog and
forecasts, product marketing plans and product life cycles. To address the
difficult, subjective and complex area of judgment in determining appropriate
inventory valuation in a consistent manner, we apply a set of methods, assumptions
and estimates to arrive at the net inventory amount by completing the following:
First, we identify any inventory that has been previously reserved in prior periods.
This inventory remains reserved until sold, destroyed or otherwise disposed of.
Second, we examine the inventory line items that may have some form of obsolescence
due to non-conformance with electrical and mechanical standards as identified by our
quality assurance personnel and provide reserves. Third, the remaining inventory
not otherwise identified to be reserved is compared to an assessment of product
history and forecasted demand, typically over the last six months and next six
months, or actual firm backlog on hand. However, microcontroller product history
and forecasted demand is typically measured over the last twelve months and next
twelve months, respectively, due to the breadth of customers and markets served and
longer product life cycles. Finally, the result of this methodology is compared
against the product life cycle and competitive situations in the marketplace driving
the outlook for the consumption of the inventory and the appropriateness of the
resulting inventory levels. Demand for our products may fluctuate significantly
over time, and actual demand and market conditions may be more or less favorable
than those that we project. In the event that actual demand is lower or market
conditions are worse than originally projected, additional inventory write-downs may
be required.
Impairment of long-lived assets – We review long-lived assets which are held and
used, including fixed assets and purchased intangible assets, for impairment
whenever changes in circumstances indicate that the carrying amount of the assets
may not be recoverable and record an impairment charge if necessary. Such
evaluations compare the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset and are significantly impacted by
estimates of future prices and volumes for our products, capital needs, economic
trends and other factors which are inherently difficult to forecast. Occasionally,
we may hold certain assets for sale. In those cases, the assets are reclassified on
our balance sheet from long-term to current, and the carrying value of such assets
are reviewed and adjusted each period thereafter to the fair value less expected
cost to sell.
We also review the carrying values of goodwill and other intangible assets with
indefinite lives annually for possible impairment. The goodwill impairment test is a
two-step process. The first step of the impairment analysis compares our fair value
for such assets to our net book value. In determining fair value, the accounting
guidance allows for the use of several valuation methodologies, although it states
quoted market prices are the best evidence of fair value. The second step of the
36
analysis compares the implied fair value of our goodwill to its carrying amount. If
the carrying amount of goodwill exceeds its implied fair value, we recognize an
impairment loss equal to that excess amount. We test our goodwill for impairment
annually as of the first day of our fourth fiscal quarter and in interim periods if
certain events occur indicating that the carrying value of goodwill may be impaired.
Income Taxes – We are required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves estimating the actual
current tax liability together with assessing temporary differences in recognition
of income (loss) for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our consolidated balance
sheet. We must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income (loss) and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance against the deferred
tax asset. Further, we operate within multiple taxing jurisdictions and are subject
to audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve and could result in additional
assessments of income tax. In our opinion, adequate provisions for income taxes
have been made for all periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51, which
addresses consolidation by business enterprises of variable interest entities (VIEs)
either: (1) that do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial support,
or (2) in which the equity investors lack an essential characteristic of a
controlling financial interest. In December 2003, the FASB completed deliberations
of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE. VIEs
created after January 31, 2003, but prior to January 1, 2004, may be accounted for
either based on the original interpretation or the Revised Interpretations. However,
the Revised Interpretations must be applied no later than the first quarter of
fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the
Revised Interpretations. There has been no material impact to our financial
statements from potential VIEs entered into after January 31, 2003 and we do not
expect there to be a material impact to our financial statements from the adoption
of the deferred provisions in the first quarter of fiscal year 2004.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions of
SFAS 150 are effective for financial instruments entered into or modified after May
31, 2003 and to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. The adoption of
SFAS 150 did not have a material impact on our results of operations or financial
position.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, REVENUE
RECOGNITION (SAB No. 104), which codifies, revises and rescinds certain sections of
SAB No. 101, REVENUE RECOGNITION, in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC rules
and regulations. The changes noted in SAB No. 104 did not have a material effect on
our consolidated results of operations, consolidated financial position or
consolidated cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
All of our investments are entered into for other than trading purposes. 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.
Based on our investment holdings as of January 3, 2004, an immediate 1 percentage
point decline in the yield for such instruments would decrease our annual interest
income by $1.9 million. We believe that our investment policy is conservative, both
in terms of the average maturity of our investments and the credit quality of the
investments we hold.
37
Item 8. Financial Statements and Supplementary Data
The Financial Statements and supplementary data required by this item are
included in Part IV, Item 15 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.
Item 9A. Controls and Procedures
We have performed an evaluation under the supervision and with the participation
of our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of our disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act). Based on that evaluation, our management, including our CEO and CFO,
concluded that our disclosure controls and procedures were effective as of January
3, 2004 to ensure that information required to be disclosed by us in the reports
filed or submitted by us under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms. There
have been no significant changes in our internal controls or other factors that
could significantly affect our internal controls subsequent to January 3, 2004.
PART III
Certain information required by Part III is omitted from this report because we
intend to 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Ownership of Securities" and “Equity
Compensation Plan Information” appearing in the Proxy Statement, is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions," appearing in
the Proxy Statement, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information related to audit fees and services appearing in the Proxy
Statement, is incorporated herein by reference.
38
PART IV
Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
SILICON LABORATORIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated balance sheets at January 3, 2004 and December 28,
2002
Consolidated statements of operations for the fiscal years ended
January 3, 2004, December 28, 2002, and December 29, 2001
Consolidated statements of changes in stockholders' equity for the
fiscal years ended January 3, 2004, December 28, 2002, and
December 29, 2001
Consolidated statements of cash flows for the fiscal years ended
January 3, 2004, December 28, 2002, and December 29, 2001
Notes to consolidated financial statements
PAGE
F-1
F-2
F-3
F-4
F-5
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.
During the fourth quarter of fiscal 2003, we filed the following Current
Reports on Form 8-K:
We filed a Form 8-K/A on October 3, 2003 (Item 2 and 7)
providing the Agreement and Plan of Reorganization, dated September 25,
2003, by and among Silicon Laboratories Inc., Homestead Enterprises,
Inc., and Cygnal Integrated Products, Inc.
We filed a Form 8-K on October 20, 2003 (Item 7 and 12) providing
the press release describing our results of operations for
the fiscal quarter ended September 27, 2003.
We filed a Form 8-K/A on November 14, 2003 (Item 2 and 7)
providing the financial statements and pro forma financial
information of Cygnal Integrated Products, Inc., which was required due
to our plan to acquire all of Cygnal’s outstanding capital stock.
We filed a Form 8-K on December 11, 2003 (Item 5) announcing
the completion of the acquisition of Cygnal Integrated Products, Inc.,
pursuant to the Agreement and Plan of Reorganization dated September 25,
2003.
39
(c) Exhibits
Exhibit
Number
2.1* Agreement and Plan of Reorganization, dated September 25, 2003, by
and among Silicon Laboratories Inc., Homestead Enterprises, Inc.,
and Cygnal Integrated Products, Inc. (filed as Exhibit 2.1 to the
Form 8-K filed October 3, 2003).
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 (Securities and Exchange
Commission File No. 333-94853 (the “IPO Registration Statement”)).
3.2* Second Amended and Restated Bylaws of Silicon Laboratories Inc.
(filed as Exhibit 3.2 to the Registrant’s Annual Report on Form
10-K for the year ended January 3, 2004).
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 99.1 to the Registrant’s Registration Statement on Form
S-8 (Securities and Exchange Commission File No. 333-60794) filed
on May 11, 2001).
10.3* Silicon Laboratories Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.3 to the IPO Registration Statement).
10.4* 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).
10.5* 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).
10.6* 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).
10.7* Silicon Laboratories Inc. 2004 Bonus Plan (filed as Exhibit 10.7 to
the Registrant’s Annual Report on Form 10-K for the year ended
January 3, 2004).
21* Subsidiaries of the Registrant (filed as Exhibit 21 to the
Registrant’s Annual Report on Form 10-K for the year ended
January 3, 2004).
23.1
Consent of Ernst & Young LLP, Independent Auditors.
31.1
by Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Executive Officer, as required
31.2
by Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Accounting Officer, as required
32.1 Certification as required by Section 906 of the Sarbanes-Oxley Act
of 2002.
* Incorporated herein by reference to the indicated filing.
40
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 28,
2004.
SILICON LABORATORIES INC.
By: /s/ Daniel A. Artusi
Daniel A. Artusi
CHIEF EXECUTIVE
OFFICER AND PRESIDENT
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
/s/ Navdeep S. Sooch
Navdeep S. Sooch
Chairman of the Board
January 28, 2004
/s/ Daniel A. Artusi
Daniel A. Artusi
President and Director
(principal executive officer)
January 28, 2004
Chief Executive Officer,
/s/ John W. McGovern
John W. McGovern
/s/ David R. Welland
David R. Welland
Vice President and Chief
Financial Officer
(principal financial and
accounting officer)
January 28, 2004
Vice President and Director
January 28, 2004
/s/ William G. Bock
William G. Bock
Director
/s/ H. Berry Cash
H. Berry Cash
Director
/s/ Robert Ted Enloe, III Director
Robert Ted Enloe, III
/s/ Laurence G. Walker
Laurence G. Walker
Director
/s/ William P. Wood
William P. Wood
Director
January 28, 2004
January 28, 2004
January 28, 2004
January 28, 2004
January 28, 2004
41
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 January 3, 2004 and December 28, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended January 3, 2004. 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 January 3, 2004 and December 28, 2002, and the consolidated
results of its operations and its cash flows for each of the three fiscal years in
the period ended January 3, 2004, in conformity with accounting principles generally
accepted in the United States.
Austin, Texas
January 22, 2004
/s/ ERNST & YOUNG LLP
F-1
Silicon Laboratories Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
JANUARY 3,
2004
DECEMBER 28,
2002
Current assets:
ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for
doubtful accounts of $1,079 at January 3,
2004 and $945 at December 28, 2002
Inventories
Deferred income taxes
Prepaid expenses and other
Total current assets
Property, equipment and software, net
Goodwill
Other intangible assets, net
Other assets, net
$151,359
38,954
$ 73,950
41,216
47,879
34,064
5,784
5,600
283,640
34,376
38,613
14,744
6,722
27,501
13,319
4,921
1,841
162,748
29,781
98
352
4,086
Total assets
$378,095
$197,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
$ 45,488
Accounts payable
Accrued expenses
11,251
Deferred income on shipments to distributors 11,526
12,663
Income taxes payable
$ 13,272
8,505
10,147
8,470
40,394
949
41,343
80,928
9,962
90,890
Total current liabilities
Long-term obligations
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock--$.0001 par value; 250,000
shares authorized; 51,237 and 48,904
shares issued and outstanding at
January 3, 2004 and December 28, 2002,
respectively
Additional paid-in capital
Stockholder notes receivable
Deferred stock compensation
Retained earnings (deficit)
Total stockholders' equity
5
256,792
--
(9,257)
39,665
5
174,088
(228)
(13,092)
(5,051)
287,205
155,722
Total liabilities and stockholders' equity
$378,095
$197,065
The accompanying notes are an integral part of these consolidated financial statements.
F-2
(in thousands, except per share data)
Silicon Laboratories Inc.
Consolidated Statements of Operations
Revenues
Cost of revenues
Gross profit
Operating expenses:
YEAR ENDED
JANUARY 3,
2004
DECEMBER 28,
2002
DECEMBER 29,
2001
$325,305
162,173
$182,016
79,939
$ 74,065
31,930
163,132
102,077
42,135
Research and development
48,296
Selling, general and administrative 42,836
Write off of in-process research &
development
Goodwill amortization
Impairment of goodwill and other
intangible assets
Amortization of deferred stock
compensation
Operating expenses
1,600
--
--
4,986
97,718
32,001
33,877
28,978
20,056
--
--
--
4,187
37
34,885
5,173
5,276
71,088
93,382
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Other income (expense), net
65,414
30,989
(51,247)
1,368
(49)
(537)
1,582
(617)
(647)
3,624
(751)
(2)
Income (loss) before income taxes
66,196
Provision (benefit) for income taxes 21,480
31,307
10,590
(48,376)
(2,803)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted-average common shares
outstanding:
Basic
Diluted
$ 44,716
$ 20,717
$(45,573)
$ 0.92
$ 0.86
$ 0.44
$ 0.41
$(0.99)
$(0.99)
48,850
52,288
47,419
50,811
45,914
45,914
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
Number
Of
Shares
48,117
Par
Value
$5
Additional
Paid-In
Capital
$165,404
Stockholder
Notes
Receivable
$(1,202)
Deferred
Stock
Compensation
$(21,061)
Retained
Earnings
(Deficit)
$19,805
Total
Stockholders’
Equity
$162,951
Balance as of December 30, 2000
Exercises of stock options and
warrants
Income tax benefit from
employee stock-based awards
Repurchase and cancellation of
unvested shares
Repayment of stockholder notes
receivable
Employee Stock Purchase Plan
Deferred stock compensation
Amortization of deferred stock
compensation
Net loss
469
--
(14)
--
68
--
--
--
Balance as of December 29, 2001
48,640
Exercises of stock options
Income tax benefit from
employee stock-based awards
Repurchase and cancellation of
unvested shares
Repayment of stockholder notes
receivable
Employee Stock Purchase Plan
Deferred stock compensation
Amortization of deferred stock
compensation
Net income
238
--
(51)
--
77
--
--
--
Balance as of December 28, 2002
48,904
Exercises of stock options
Income tax benefit from
employee stock-based awards
Repurchase and cancellation of
unvested shares
Repayment of stockholder notes
receivable
Employee Stock Purchase Plan
Deferred stock compensation
Amortization of deferred stock
compensation
Purchase acquisition
Net income
1,063
--
(5)
--
85
--
--
1,190
--
--
--
--
--
--
--
--
--
5
--
--
--
--
--
--
--
--
5
--
--
--
--
--
--
--
--
587
662
--
--
--
587
--
--
--
662
(24)
24
--
--
--
--
1,120
2,818
--
--
384
--
--
--
--
--
--
(2,818)
5,276
--
--
--
--
--
(45,573)
384
1,120
--
5,276
(45,573)
170,567
(794)
(18,603)
(25,768)
125,407
1,483
--
--
--
1,483
1,170
--
--
--
1,170
(98)
--
--
--
(98)
--
1,304
(338)
--
--
566
--
--
--
--
--
--
338
5,173
--
--
--
--
--
20,717
566
1,304
--
5,173
20,717
174,088
(228)
(13,092)
(5,051)
155,722
14,739
--
--
--
14,739
6,969
(21)
--
1,793
1,151
--
58,073
--
--
--
228
--
--
--
--
--
--
--
--
(1,151)
4,986
--
--
--
--
--
--
--
44,716
6,969
(21)
228
1,793
--
4,986
58,073
44,716
Balance as of January 3, 2004
51,237
$5
$256,792
$--
$(9,257)
$39,665
$287,205
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Silicon Laboratories Inc.
Consolidated Statements of Cash Flows
(in thousands)
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of property, equipment
and software
Impairment of property, equipment and software
Write off of in-process research & development
Amortization of goodwill, other intangible assets and
other assets
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Amortization of note/lease end-of-term interest
payments
Equity investment loss
Income tax benefit from employee stock-based awards
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other
Income tax receivable
Other assets
Accounts payable
Accrued expenses
Deferred income on shipments to distributors
Deferred income taxes
Income taxes payable
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of short-term investments
Maturities of short-term investments
Purchases of property, equipment and software
Purchases of other assets
Net cash acquired in connection with acquisition of
business
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES
Payments on long-term debt
Payments on capital leases
Proceeds from repayment of stockholder notes
Proceeds from Employee Stock Purchase Plan
Repurchase and cancellation of common stock
Net proceeds from exercises of stock options
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
Income taxes paid (received), net
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Accrued software licenses and maintenance
Stock issued for acquisition of business
YEAR ENDED
JANUARY 3,
2004
DECEMBER 28,
2002
DECEMBER 29,
2001
$ 44,716
$ 20,717
$(45,573)
15,427
1,087
1,600
11,755
--
--
7,968
--
--
3,742
--
4,986
445
37
5,173
4,608
34,885
5,276
--
663
6,969
214
662
1,170
322
--
662
(19,543)
(19,201)
(1,030)
--
(18)
24,681
1,916
1,188
505
4,194
(16,958)
(8,098)
(1,099)
2,086
20
6,273
4,501
7,285
(3,614)
8,470
3,072
1,998
839
(2,086)
71
(979)
1,491
222
(152)
(912)
71,882
39,039
11,712
(80,871)
82,854
(11,438)
(7,124)
(77,062)
54,993
(21,498)
(2,719)
(59,210)
84,138
(5,400)
(821)
5,367
--
--
(11,212)
(46,286)
18,707
--
--
228
1,793
(21)
14,739
16,739
77,409
73,950
$151,359
(3,940)
(464)
566
1,304
(98)
1,483
(1,149)
(8,396)
82,346
$73,950
(1,535)
(531)
384
1,120
--
587
25
30,444
51,902
$82,346
$ 49
$10,326
$ 319
$ 3,248 $(1,104)
$ 424
$ 9,514
$58,074
$ --
$ --
$ --
$ --
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
January 3, 2004
1. ORGANIZATION
Silicon Laboratories Inc. (the Company), a Delaware corporation, develops and
markets mixed-signal analog intensive integrated circuits (ICs) for a broad range of
applications for global markets. Within the semiconductor industry, the Company is
known as a "fabless" company meaning that the ICs are manufactured by third-party
semiconductor companies.
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 2003 ended January 3, 2004, fiscal year
2002 ended on December 28 and fiscal year 2001 ended on December 29. Fiscal year
2003 had 53 weeks and fiscal years 2002 and 2001 each had 52 weeks. The extra week
in fiscal 2003 occurred in the fourth quarter of the year.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. The functional currency of the Company's
foreign subsidiaries 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 (loss).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash deposits and investments with a
maturity of ninety days 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 Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (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 due to their short-term nature. Short-term
investments at January 3, 2004 and December 28, 2002 consist of the following (in
thousands):
Municipal Securities
Auction Rate Securities
Carrying Value
January 3,
2004
December 28,
2002
$38,954 $33,237
--
$38,954 $41,216
7,979
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, receivables and accounts payable. The Company
believes all of these financial instruments are recorded at amounts that approximate
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):
Work in progress
Finished goods
January 3,
2004
December 28,
2002
$17,702
16,362
$34,064
$ 7,291
6,028
$13,319
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 three to five
years). Leasehold improvements are depreciated over the contractual lease period or
their useful life, whichever is shorter. Property, equipment and software consist of
the following (in thousands):
Equipment
Computers and purchased software
Furniture and fixtures
Leasehold improvements
Accumulated depreciation
LONG-LIVED ASSETS
January 3,
2004
December 28,
2002
$33,261 $38,970
23,855 10,249
1,551 1,079
3,837 3,032
62,504 53,330
(28,128) (23,549)
$34,376 $29,781
The Company evaluates its long-lived assets in accordance with FASB SFAS No. 144,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets “held and
used” by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that their net book value may not be recoverable. When such
factors and circumstances exist, the Company compares the projected undiscounted
future cash flows associated with the related asset or group of assets over their
estimated useful lives, against their respective carrying amounts. Impairment, if
any, is based on the excess of the carrying amount over the fair value of those
assets and is recorded in the period in which the determination was made. Long-
lived assets held for sale by the Company are adjusted to fair value less cost to
sell in the period the “held for sale” criteria are met and reclassified to a
current asset. The fair value less cost to sell amount is evaluated each period to
determine if it has changed. Changes are recognized as gains or losses in the
period in which they occur.
During fiscal 2003, the Company was in final negotiations to sell certain test
equipment capitalized in fixed assets with a net book value of approximately $2.4
million. As a result of this negotiation, the Company determined that the equipment
was impaired and recorded a $0.8 million charge to cost of goods sold to write the
assets down to their expected sales price. These assets were reclassified to
prepaid expenses and other. The Company expects the sale of such assets to be
completed by the end of their first fiscal quarter of 2004.
Carrying values of goodwill and other intangible assets with indefinite lives are
reviewed annually by the Company for possible impairment in accordance with SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was adopted on December 30,2001.
The goodwill impairment test is a two-step process. The first step of the impairment
analysis compares our fair value to our net book value. In determining fair value,
SFAS No. 142 allows for the use of several valuation methodologies, although it
states quoted market prices are the best evidence of fair value. Step two of the
analysis compares the implied fair value of goodwill to its carrying amount. If the
F-7
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount of goodwill exceeds its implied fair value, an impairment loss is
recognized equal to that excess. The Company tests goodwill for impairment annually
as of the first day of our fourth fiscal quarter and in interim periods if certain
events occur indicating that the carrying value of goodwill may be impaired.
EQUITY METHOD INVESTMENTS
Where the Company has investments in affiliated companies in which it has the
ability to exercise significant influence over operating and financial policies, but
not control, these investments are accounted for using the equity method. When
special conditions warrant, for example when the Company is the sole funding source
for an affiliated company and the affiliated company has not generated sufficient
cash flows to sustain its operations, the Company determines equity income
measurement by using the Hypothetical Liquidation at Book Value (HLBV) method. The
HLBV method is a balance-sheet oriented approach to equity method accounting and is
calculated as the amount that the Company would receive if the affiliated company
were to liquidate all of its assets at recorded amounts and distribute the cash to
creditors and investors in accordance with their respective liquidation preferences.
The Company records investment income (loss) under the caption other income
(expense) in its consolidated statement of operations.
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. Among the significant estimates affecting the
financial statements are those related to inventories, accounts receivables, long-
lived assets, goodwill and income taxes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.
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. 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 December 30, 2000
Additions (reductions) charged to costs and expenses
Write-off of uncollectible accounts
Balance at December 29, 2001
Additions charged to costs and expenses
Write-off of uncollectible accounts
Balance at December 28, 2002
Balance acquired from Cygnal Integrated Products, Inc. purchase
Additions charged to costs and expenses
Write-off of uncollectible accounts
Balance at January 3, 2004
$ 758
(229)
(39)
490
455
--
945
39
117
(22)
$1,079
A significant portion of the Company's products is fabricated by Taiwan
Semiconductor Manufacturing Co. (TSMC). The inability of TSMC to deliver wafers to
the company on a timely basis 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.
F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During fiscal 2003, one of our distributors, Edom Technology, accounted for 12.9%
of our revenues. During fiscal 2002, two of our distributors, Uniquest and Edom
Technology, represented 20% and 16% of our revenues, respectively. During fiscal
2001, no distributor accounted for more than 10% of our total revenues.
In addition to direct sales to customers, some of our end customers purchase
products indirectly from us through distributors and contract manufacturers. An end
customer purchasing through a contract manufacturer typically instructs such
contract manufacturer to obtain our products and incorporate such products with
other components for sale by such contract manufacturer to the end customer.
Although we actually sell the products to, and are paid by, the distributors and
contract manufacturers, we refer to such end customer as our customer. The
following is a detail of the Company’s end customers that accounted for greater than
10% of revenue in the respective fiscal years:
January 3,
2004
21%
*
*
Year Ended
December 28,
2002
December 29,
2001
16%
*
*
12%
15
13
Samsung
PC-Tel
Agere Systems
* Revenue % is less than 10%.
REVENUE RECOGNITION
The Company recognizes revenue when all of the following criteria are met: 1)
there is persuasive evidence that an arrangement exists, 2) delivery of goods has
occurred, 3) the sales price is fixed or determinable, and 4) collectibility is
reasonably assured. Revenue from product sales direct to customers and contract
manufacturers is generally recognized 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 distributors sell the product to
the end customer.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were $0.8
million, $0.5 million and $0.5 million in the fiscal years ended January 3, 2004,
December 28, 2002 and December 29, 2001, respectively.
STOCK-BASED COMPENSATION
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 using the intrinsic value method
in accordance with Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES. The Company’s basis for electing accounting treatment
under APB Opinion No. 25 is principally due to the satisfactory incorporation of the
dilutive effect of these shares in the reported earnings per share calculation and
the presence of pro forma supplemental disclosure of the estimated fair value
methodology prescribed by SFAS No. 123 and SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION – TRANSITION AND DISCLOSURE.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the effect on net income (loss) and earnings per
share if the Company had applied the fair value recognition provisions of SFAS No.
123 (in thousands, except per share data):
Net income (loss) - as reported
Total stock-based compensation cost, net
of related tax effects included in the
determination of net income as
reported
The stock-based employee compensation
cost, net of related tax effects, that
would have been included in the
determination of net income if the fair
value based method had been applied to
all awards
Pro forma net income (loss)
Earnings per share
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
OTHER COMPREHENSIVE INCOME (LOSS)
Year Ended
January 3,
2004
December 28,
December 29,
2002
2001
$ 44,716
$ 20,717
$(45,573)
3,345
5,173
5,276
(23,027)
$ 25,034
(25,137)
$ 753
(18,482)
$(58,779)
$0.92
$0.51
$0.44
$0.02
$(0.99)
$(1.28)
$0.86
$0.49
$0.41
$0.02
$(0.99)
$(1.28)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME 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.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. This statement requires the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between financial reporting and the tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
SEGMENT REPORTING
The Company has one operating segment, mixed-signal analog intensive integrated
circuits (ICs), consisting of eleven product lines. The Company’s chief operating
decision maker is considered to be the Chief Executive Officer and President. The
chief operating decision maker allocates resources and assesses performance of the
business and other activities at the operating segment level.
Approximately $260.2 million, $144.7 million and $48.7 million of the Company's
revenues were from export sales for the fiscal years ended January 3, 2004, December
28, 2002 and December 29, 2001, respectively. The operations and assets of the
Company’s wholly owned foreign subsidiaries were immaterial in all periods
p
resented.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements to
conform with current year presentation.
F-10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share data):
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Net income (loss)
Basic:
$44,716
$20,717
$(45,573)
Weighted-average shares of common stock
outstanding
Weighted-average shares of common stock
subject to repurchase
Shares used in computing basic net
income (loss) per share
49,484
48,780
48,431
(634)
(1,361) (2,517)
48,850
47,419
45,914
Effect of dilutive securities:
Weighted-average shares of common stock
subject to repurchase
Stock options
Shares used in computing diluted net
income (loss) per share
511
2,927
1,130
--
2,262
--
52,288
50,811
45,914
Basic net income (loss) per share
Diluted net income (loss) per share
$0.92
$0.86
$0.44
$(0.99)
$0.41
$(0.99)
Approximately 971,000, 2,156,000 and 4,199,000 weighted-average dilutive
potential shares of common stock have been excluded from the diluted net income
(loss) per share calculation for the years ended January 3, 2004, December 28, 2002
and December 29, 2001, respectively, as the exercise price of the underlying stock
options exceeded the average market price of the stock during the respective
periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51, which
addresses consolidation by business enterprises of variable interest entities (VIEs)
either: (1) that do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial support,
or (2) in which the equity investors lack an essential characteristic of a
controlling financial interest. In December 2003, the FASB completed deliberations
of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE. VIEs
created after January 31, 2003, but prior to January 1, 2004, may be accounted for
either based on the original interpretation or the Revised Interpretations. However,
the Revised Interpretations must be applied no later than the first quarter of
fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the
Revised Interpretations. There has been no material impact to the Company’s
financial statements from potential VIEs entered into after January 31, 2003 and
there is no expected impact from the adoption of the deferred provisions in the
first quarter of fiscal year 2004.
In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. SFAS 150 establishes standards on the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other instruments
that exist as of the beginning of the first interim financial reporting period
F-11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company’s results of operations or financial position.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, REVENUE
RECOGNITION (SAB No. 104), which codifies, revises and rescinds certain sections of
SAB No. 101, REVENUE RECOGNITION, in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC rules
and regulations. The changes noted in SAB No. 104 did not have a material effect on
the Company's consolidated results of operations, consolidated financial position or
consolidated cash flows.
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC.
On December 10, 2003, the Company completed its acquisition of Cygnal Integrated
Products, Inc., a Delaware corporation (Cygnal) pursuant to the Agreement and Plan
of Reorganization whereby the Company acquired all of the outstanding capital stock
of Cygnal for initial consideration of $59.2 million, consisting of 1,190,034 shares
of Silicon Laboratories’ common stock valued at $58.1 million, and direct
acquisition costs estimated at $1.1 million. The direct acquisition costs consist
primarily of legal, investment banking, accounting, and appraisal fees to be
incurred by the two companies that are directly related to the merger. In addition,
Silicon Laboratories is obligated to potentially issue up to an additional 1,290,963
shares of common stock to shareholders of Cygnal based on the achievement of certain
revenue milestones during the twelve-month earn out period commencing on April 4,
2004 and ending on April 2, 2005. The additional shares will become issuable as
follows: (1) up to 297,915 shares on a pro rata basis for every dollar of Cygnal
product revenues during the earn out period in excess of $10.0 million up to $15.0
million; plus (2) up to 496,524 shares on a pro rata basis for every dollar of
Cygnal product revenues during the earn out period in excess of $15.0 million up to
$20.0 million; plus (3) up to 496,524 shares on a pro rata basis for every dollar of
Cygnal product revenues during the earn out period in excess of $20.0 million up to
$24.0 million. The distribution of the additional shares may occur at either or
both an interim date occurring six months after the beginning of the earn out period
and/or upon completion of the earn out period. The number of additional shares
issuable at the interim date would be equal to 40% of the shares that would be
issuable at the end of the earn out period if the revenues for the full earn out
period were equal to twice the revenues through the interim date.
In accordance with Emerging Issues Task Force Issue No. 99-12 DETERMINATION OF
THE MEASUREMENT DATE FOR THE MARKET PRICE OF ACQUIRER SECURITIES ISSUED IN A
PURCHASE BUSINESS COMBINATION, the Company has used $48.80 per share (representing
the average of the closing prices of Silicon Laboratories common stock for the three
days before and after the merger agreement date of September 25, 2003) to value the
initial consideration to be paid to Cygnal shareholders. The value of any
additional consideration to be issued upon achievement of the revenue milestones
will be determined based on the then current value of the stock issued, and will be
recorded as additional purchase price which will change the amount of the purchase
price allocable to goodwill.
F-12
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC. (CONTINUED)
The acquisition of Cygnal was accounted for as a purchase business combination.
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):
Intangibles:
Amortization
Period
Core and developed product technology
$ 9,250
9 years
Internal use software
Non-compete agreements
Customer relationships
Goodwill
Net fair value of tangible assets
acquired and liabilities assumed
Net deferred tax liabilities assumed
Liability for facility exit costs
In-process research and development
Total purchase price
1,300
4 - 7 years
305
1 - 4 years
2,100
6 years
38,515
51,470
9,029
(2,245)
(643)
1,600
$ 59,211
Since the acquisition was accounted for using the purchase method, the results of
operations of Cygnal have been included with those of the Company subsequent to the
acquisition date, December 10, 2003.
The following presents the unaudited pro forma combined results of operations of
the Company with Cygnal, after giving effect to certain pro forma adjustments
(amortization of acquired intangibles and deferred stock compensation, accrued
retention bonuses and income tax benefit), as if Cygnal had been acquired as of the
beginning of the respective fiscal years. The unaudited pro forma financial
information for the fiscal year ended January 3, 2004 gives effect to the merger as
if it had occurred at the beginning of the period presented, and combines the
audited historical statements of operations of the Company for the fiscal year ended
January 3, 2004 and the unaudited historical statement of operations of Cygnal for
the year ended December 31, 2003. The unaudited pro forma financial information for
the fiscal year ended December 28, 2002 gives effect to the merger as if it had
occurred at the beginning of the period presented, and combines the audited
historical statements of operations of the Company for the fiscal year ended
December 28, 2002 and the audited historical statement of operations of Cygnal for
the year ended December 31, 2002 (in thousands, except per share data):
Revenues
Net Income
Diluted net income per share
Fiscal Year Ended
January 3, 2004
$331,997
39,098
$0.73
Fiscal Year Ended
December 28, 2002
$187,214
14,483
$0.28
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 and the acquisition had been consummated as of the dates
indicated, nor is it necessarily indicative of future operating results or financial
position.
Approximately $1.6 million of the Cygnal purchase price was allocated to in-
process research and development based upon an independent third-party appraisal and
expensed upon the closing of the transaction. The pro forma results do not include
the impact of this write-off as it does not have a continuing impact on the
operations of the Company. Further, the unaudited pro forma combined financial
information does not include the realization of potential cost savings from
operating efficiencies, synergies or other restructurings that may result from the
merger.
None of the goodwill is deductible for tax purposes.
F-13
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following information details the gross carrying amount and accumulated
amortization of other intangible assets (in thousands):
January 3, 2004
December 28, 2002
Amortization
Period
Gross Accumulated
Amount Amortization
Gross Accumulated
Amount Amortization
Amortized intangible assets:
Core & developed technology
Customer relationships
Internal use software
Patents
Non-compete agreements
9 years
6 years
4-7 years
4-7 years
1-4 years
$9,250
($56) $ --
2,100
1,300
2,310
305
(19) --
(13) --
(427) 470
(5) --
$--
--
--
(118)
--
$15,265
($521) $470
($118)
Unamortized intangible assets:
Goodwill
$38,613
$0 $ 98
$0
During fiscal 2001, the Company performed an assessment of the carrying value of
the Company’s long-lived assets recorded in connection with the Company’s
acquisitions of Krypton and SNR. This assessment was performed pursuant to Statement
of FASB SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. The Company performed this assessment because
it became aware of the following factors and circumstances:
-
-
-
The revenue streams associated with those assets had decreased significantly
since their acquisition and the Company did not expect to have any significant or
identifiable future cash flows related to those assets;
The Company determined that further development or alternative uses of the
acquired technologies were remote; and
The Krypton office was closed in August of 2001 and the related workforce had
since either ceased to work for the Company or been reassigned to new projects
which were unrelated to the projects on which they previously worked.
The Company compared the carrying value for those assets that had separately
identifiable cash flows to the projected undiscounted future cash flows to be
derived from those assets over their remaining estimated useful lives. The Company
placed no value on those assets that did not have separately identifiable cash flows
as the factors normally judged to constitute future value, such as the expectation
of future business, revenues and/or cash flows, the expectation of ongoing
development of new products, the good name and reputation of the acquired company,
etc. appeared to be absent.
As a result of this assessment, the Company concluded that the value of those
assets had become permanently impaired and recorded charges for $33.3 million and
$37,000 to write-down related goodwill in fiscal 2001 and 2002, respectively, and
$1.6 million to reduce the carrying value of related intangible assets to their fair
value in fiscal 2001.
Amortization expense related to other intangible assets for fiscal years 2003,
2002, and 2001 was $0.4 million, $0.1 million, and $4.6 million, respectively. The
following table details the estimated aggregate amortization expense for other
intangible assets for each of the 5 succeeding fiscal years (in thousands):
For fiscal year 2004
For fiscal year 2005
For fiscal year 2006
For fiscal year 2007
For fiscal year 2008
F-14
$2,069
2,063
2,010
1,941
1,799
5. STOCKHOLDERS’ EQUITY
COMMON STOCK
The Company had 51,237,410 shares of common stock outstanding as of January 3,
2004. Of these shares, 473,637 shares were unvested and subject to rights of
repurchase that lapse according to a time based vesting schedule.
As of January 3, 2004, the Company had reserved shares of common stock for future
issuance as follows:
13,230,564
Employee Stock Option Plans
Employee Stock Purchase Plan
1,117,863
Contingent consideration (Note 3) 1,290,963
15,639,390
Total shares reserved
The shares issuable under the 2000 Stock Incentive Plan and Employee Stock
Purchase Plan automatically increase on the first stock market trading day of each
calendar year. During fiscal 2003, the shares increased as follows:
January 2, 2003
January 2, 2004
Number of shares
2000 Stock
Incentive Plan
Employee Stock
Purchase Plan
2,445,187
2,561,870
5,007,057
244,519
250,000
494,519
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Company’s
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. As of January 3, 2004, a total of 1,378,306 shares of the
Company’s common stock were authorized for issuance under the Purchase Plan. There
were 85,661 and 77,460 shares issued under the Purchase Plan in fiscal 2003 and
fiscal 2002, respectively.
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 payroll 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 Company’s 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 in fiscal 2000, the Company assumed
outstanding options for 90,449 shares of the Company’s common stock.
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 January 3, 2004, 20,463,217 shares were authorized for
issuance under the 2000 Plan. No further options or direct issuances may be granted
under the 1997 Plan.
F-15
5. STOCKHOLDERS’ EQUITY (CONTINUED)
The following table summarizes information about deferred stock compensation and
amortization of deferred stock compensation:
January 3,
2004
Year Ended
December 28,
2002
December 29,
2001
Stock options or direct
issuance shares
Deferred stock compensation
Recorded
Amortization of deferred
stock compensation
40,000
--
160,000
$1,752,000
--
$3,294,000
$4,986,000
$5,173,000
$5,276,000
The deferred stock compensation represents the difference between the exercise
price of the options or the purchase price of the direct issuance shares, and the
market price on the date of grant. The deferred stock compensation is amortized
over the vesting periods of the related options or shares using the straight-line
method.
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 were secured by the
shares of stock, were interest bearing at rates ranging from 1.8% to 5.9%, had terms
of five years, and were to be repaid upon the sale of the underlying shares of
stock. The Company has collected principal payments on these notes for $228,000,
$566,000, and $384,000 in fiscal years 2003, 2002 and 2001, respectively. The
remaining balance of shareholder notes as of January 3, 2004 is zero. No loans were
issued during fiscal 2003, 2002 or 2001.
A summary of the Company's stock option and direct issuance activity and related
information follows:
Outstanding
Options
Shares
Available
And Direct
Issuances
For Grant
4,081,415
Balance at December 30, 2000 850,224
2,462,349
Additional shares reserved
--
(3,110,300) 3,110,300
Granted
--
Exercised
Cancelled
175,599
Repurchase and cancellation
of unvested shares
--
13,667
(370,641)
(175,599)
Exercise
Prices
Weighted-
Average
Exercise
Price
$0.00 - $74.75 $18.26
--
--
16.46
0.00 – 34.97
1.58
0.00 – 15.44
21.51
0.28 – 66.00
0.05 – 2.00
1.76
6,645,475
Balance at December 29, 2001 391,539
2,432,003
Additional shares reserved
--
(2,136,850) 2,136,850
Granted
0
Exercised
Cancelled
194,224
Repurchase and cancellation
of unvested shares
--
50,041
(237,567)
(194,224)
0.00 - 74.75
--
18.33 – 37.90
0.00 - 31.00
2.00 - 66.00
18.26
--
24.11
6.28
26.46
1.25 - 5.00
1.90
8,350,534
Balance at December 28, 2002 930,957
5,007,057
Additional shares reserved
--
(2,090,550) 2,090,550
Granted
0
Exercised
387,452
Cancelled
Repurchase and cancellation
of unvested shares
--
5,234
(1,063,218)
(387,452)
0.00 - 74.75
--
0.00 – 52.18
0.00 – 38.50
0.00 – 62.50
19.91
--
35.46
13.87
30.92
0.00 - 10.00
4.08
Balance at January 3, 2004
4,240,150
8,990,414
$0.00 – $74.75 $23.77
F-16
5. STOCKHOLDERS’ EQUITY (CONTINUED)
In addition, the following table summarizes information about stock options
that
were outstanding and exercisable at January 3, 2004.
Range of
Number of
Options
Exercise Prices
$ 0.00 - $15.00 1,499,822
15.10 - 15.44 1,654,982
16.00 - 24.04 1,426,923
24.06 - 26.63 1,353,337
26.76 - 38.50 2,023,750
43.81 - 66.00 1,029,600
74.75 - 74.75 2,000
$ 0.00 - $74.75 8,990,414
Outstanding
Weighted-
Average
Remaining
Contractual
Life in Years
5.41
7.55
8.20
8.60
8.30
8.25
6.27
7.70
Exercisable
Number of
Options
1,351,636
682,356
293,755
54,900
431,657
289,307
1,500
3,105,111
Weighted-
Average
Exercise
Price
$3.04
15.22
20.69
25.52
31.50
53.94
74.75
$16.74
Weighted-
Average
Exercise Price
$ 3.93
15.21
20.89
24.84
33.56
49.63
74.75
$23.77
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 stock-based awards
to employees under the fair value method of that Statement. The fair value of
these stock-based awards was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
January 3,
2004
December 28,
December 29,
2002
2001
Year Ended
Employee Stock Option Plans:
Expected stock price volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
70%
2.9%
85%
3.9%
85%
4.6%
5.2
4.9 5.1
--
--
--
Employee Stock Purchase Plan:
Expected stock price volatility
Risk-free interest rate
Expected life (in months)
Dividend yield
77%
1.1%
16
--
85%
3.2%
16
--
85%
3.5%
14
--
The weighted-average exercise price and fair value for options granted and direct
issuance shares during fiscal 2003 is as follows:
Number of
Options/Shares
Weighted-
Average
Exercise Price
Weighted-
Average Fair
Value
Exercise price equal to price
of stock on date of grant
Exercise price less than price
of stock on date of grant
2,050,550
$36.15
$22.19
40,000
$ --
$43.81
The weighted-average fair value for purchase rights granted under the Purchase
Plan for fiscal 2003 was $13.21.
For purposes of pro forma disclosure, the estimated fair value of the Company’s
stock-based awards to employees is amortized to expense over the vesting period of
the underlying instruments. The Company's pro forma information is as follows (in
thousands, except per share data):
Pro forma net income (loss)
Pro forma basic net income (loss)
per share
Pro forma diluted net income (loss)
per share
Year Ended
January 3,
2004
$25,034
December 28,
December 29,
2002
$753
2001
$(58,779)
$0.51
$0.02
$(1.28)
$0.49
$0.02
$(1.28)
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 stock-based awards to employees.
F-17
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities 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 $2,528,000, $2,002,000 and $1,724,000 for
fiscal 2003, 2002 and 2001, respectively.
The minimum annual future rentals under the terms of these leases at
January 3, 2004 are as follows (in thousands):
FISCAL YEAR
2004
2005
2006
2007
2008
Thereafter
Total minimum lease payments
Minimum Sublease Rental Income
Total net minimum lease payments
$2,558
2,719
2,384
1,451
316
393
9,821
(14)
9,807
On December 6, 2001, a class action complaint for violations of U.S. federal
securities laws was filed in the United States District Court for the Southern
District of New York against the Company, four officers individually and the three
investment banking firms who served as representatives of the underwriters in
connection with the Company’s initial public offering of common stock which became
effective on March 23, 2000. On April 19, 2002, a Consolidated Amended Complaint,
which is now the operative complaint, was filed in the same court. The complaint
alleges that the registration statement and prospectus for the Company’s initial
public offering did not disclose that (1) the underwriters solicited and received
additional, excessive and undisclosed commissions from certain investors, and (2)
the underwriters had agreed to allocate shares of the offering in exchange for a
commitment from the customers to purchase additional shares in the aftermarket at
pre-determined higher prices. The action seeks damages in an unspecified amount and
is being coordinated with approximately 300 other nearly identical actions filed
against other companies. On July 15, 2002, the Company moved to dismiss all claims
against the Company and the individual defendants. A court order dated October 9,
2002 dismissed without prejudice numerous individual defendants, including the four
officers of our company who had been named individually. On February 19, 2003, the
Court denied the motion to dismiss the complaint against the Company. The Company
has approved a Memorandum of Understanding ("MOU") and related agreements which set
forth the terms of a proposed settlement between the plaintiff class and the Company
and the vast majority of the other approximately 300 issuer defendants. It is
anticipated that any potential financial obligation of the Company to plaintiffs due
pursuant to the terms of the MOU and related agreements would be covered by existing
insurance. Therefore, the Company does not expect that the proposed settlement
would involve any payment by the Company. The MOU and related agreements are
subject to a number of contingencies, including the negotiation of a settlement
agreement and approval by the Court. The Company cannot be certain as to whether or
when a settlement will occur or be finalized and is unable at this time to determine
whether the outcome of the litigation will have a material impact on its results of
operations or financial condition in any future period.
On January 14, 2004, Digcom, Inc., commenced a lawsuit in the United States
District Court for the Southern District of California against the Company and other
major companies in the GSM/GPRS wireless market, for alleged infringement of
Digcom’s U.S. Patent No. 4,567,602, which was issued on January 28, 1986 and expired
on June 13, 2003. Digcom’s complaint asserts that the Company and the other major
companies have infringed their ‘602 patent by manufacturing, using and selling
products and equipment for operation in GSM/GPRS wireless networks, including the
Company’s Aero/Aero+ GSM Transceiver Chipsets as a whole and the Si4200 and Si4201
Chips individually. The Company does not believe that an injunction can be sought
since the alleged patent has expired. Accordingly, the Company does not expect any
impact on the sale of its products as a result of this lawsuit.
F-18
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently investigating Digcom’s allegations, and will respond with
appropriate defenses. Due to the early stage of this litigation, the Company cannot
estimate the outcome of this matter or resulting financial impact, if any.
The Company is involved in various other 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 or results of operations.
7. INCOME TAXES
As of January 3, 2004, the Company had federal net operating loss and research and
development credit of approximately $25,867,000 and $532,000 respectively, as a result of
the Cygnal acquisition. These carryforwards expire in fiscal years 2019 through 2023.
The Company also had state research and development credit carryforwards of approximately
$1,634,000 which do not expire.
The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net
operating losses and tax credit carryforwards in the event of an "ownership change" of a
corporation. Federal net operating loss carryforwards of approximately $26,054,000 and
tax credit carryforwards of $532,000 at December 10, 2003 were incurred by Cygnal prior
to being acquired by us and will be subject to an annual utilization limit of $3.3
million. The annual limit may result in the expiration of net operating losses and tax
credits before utilization.
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. Upon the acquisition of Cygnal on December 10, 2003, the
company recorded a net deferred tax liability of approximately $2,245,000 due to
differences between book and tax basis of acquired assets and assumed liabilities.
Significant components of the Company's deferred taxes as of January 3, 2004 and December
28, 2002 are as follows (in thousands):
Deferred tax liabilities:
Acquired intangibles
Depreciable assets
Prepaid expenses
January 3,
2004
December 28,
2002
$ 4,625
3,752
927
9,304
$ --
1,597
486
2,083
Deferred tax assets:
Net operating loss carryforward 9,561
Research and development tax
credit carryforward
Reserves and allowances
Deferred income on shipments
to distributors
4,008
1,620
Accrued liabilities & other
18,930
Less: Valuation allowance
2,166
1,575
Net deferred taxes
(8,062)
10,868
$ 1,564
--
671
1,164
3,653
808
6,296
--
6,296
$4,213
The Company has established a valuation allowance due to uncertainties regarding
the realization of deferred tax assets related to net operating loss carryforwards
acquired in connection with the Cygnal purchase. The subsequent recognition of these
acquired deferred tax asset items will reduce goodwill.
F-19
7. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes attributable to
continuing operations are as follows (in thousands):
January 3,
2004
December 28,
December 29,
2002
2001
Current:
$19,255
Federal
State
550
Total Current 19,805
Deferred:
Federal
1,629
46
State
Total Deferred 1,675
$21,480
$13,811
396
14,207
$(1,436)
(215)
(1,651)
(3,517)
(100)
(3,617)
$10,590
(1,031)
(121)
(1,152)
$(2,803)
The Company's provision (benefit) for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax rate to
income (loss) before income taxes as a result of the following:
Pre-tax book income (loss) at statutory rate
State taxes, net of federal benefit
Research and development tax credits
Non-deductible intangible amortization and
impairment charges
Other
December 28,
December 29,
January 3,
2004
35.0%
1.0
(3.6)
2002
35.0%
1.1
(3.6)
--
--
32.4%
--
1.3
33.8%
2001
(35.0)%
(0.2)
(1.0)
27.1
3.3
(5.8)%
Employee-based stock awards granted under the 2000 Plan may result in
compensation which is includable in the taxable income of the employee and
deductible by the Company for federal and state income tax purposes. Such
compensation results from increases in the fair market value of the Company’s common
stock subsequent to the date of grant and from stock awards granted at prices below
market value. In accordance with APB No. 25, such compensation is not recognized as
an expense for financial accounting purposes. Prior to fiscal 2003, the related tax
benefits were recorded as an increase to additional paid-in capital. In fiscal 2003,
the employee income from stock-based awards that relates to the amortization of
deferred stock compensation was recorded as a reduction to the tax provision, with
the remaining amount recorded as an increase in additional paid in capital. The
impact of not reflecting the deductions in the tax provision (benefit) in prior
years is not material.
Substantially all of the Company's operating income was generated from domestic
operations during fiscal 2002 and 2003. Undistributed earnings of the Company's foreign
subsidiaries are considered to be permanently reinvested and, accordingly, no provision
for U.S. federal and/or state income taxes has been provided thereon.
The U.S. Internal Revenue Service has selected the Company's 1999, 2000, and 2001
federal income tax returns for examination. Management believes that the results of the
examination will not materially affect the financial position or results of operations of
the Company.
8. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution or 401(k) Plan for its qualified
U.S. employees. Participants may contribute a percentage of their compensation on a
pre-tax basis, subject to a maximum annual contribution imposed by the Internal
Revenue Code. The Company may make discretionary matching contributions 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 $424,000, $320,000 and $269,000 to the 401(k) Plan during fiscal
2003, 2002 and 2001, respectively.
F-20
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The fourth quarter of fiscal 2003 had fourteen weeks. All other quarterly periods
reported here had thirteen weeks. Quarterly financial information for fiscal 2003 and
2002 (in thousands of dollars except per share amounts):
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and
development
Selling, general
& administrative
Write off of in-
process research
and
development
Impairment of
goodwill and
other intangible
assets
Amortization of
deferred stock
compensation
Operating expenses
Operating income
(loss)
Other income
(expense):
Interest income
Interest expense
Other income
(expense)
Income (loss) before
income taxes
Provision for income
taxes
Fiscal 2003
Fourth
Quarter
$109,559
50,267
59,292
Third
Quarter
$82,907
38,061
44,846
Second
Quarter
$69,086
30,267
38,819
First
Quarter
$63,753
43,578*
20,175
Fourth
Quarter
$60,196
25,794
34,402
Fiscal 2002
Third
Quarter
$51,786
22,747
29,039
Second
Quarter
$41,185
19,304
21,881
First
Quarter
$28,849
12,094
16,755
14,864
12,267
11,635
9,530
8,364
7,379
8,211
8,047
12,611
10,688
9,539
9,998
10,249
8,653
8,299
6,676
1,600
--
--
--
--
--
--
--
--
--
--
--
37
--
--
--
1,301
30,376
1,196
24,151
1,223
22,397
1,266
20,794
1,267
19,917
1,293
17,325
1,308
17,818
1,305
16,028
28,916
20,695
16,422
(619)
14,485
11,714
4,063
727
435
(49)
281
--
308
--
344
--
406
(168)
351
(150)
367
(148)
458
(151)
170
75
(119)
(663)
(352)
(286)
(9)
--
29,472
21,051
16,611
(938)
14,371
11,629
4,273
1,034
8,549
7,119
5,707
105
4,547
3,747
1,618
678
Net income (loss)
$ 20,923
$13,932
$10,904
$(1,043)
$9,824
$7,882
$2,655
$ 356
Net income (loss)
per share:
Basic
Diluted
Weighted-average
common shares
outstanding:
Basic
Diluted
$ .42
$ .39
$ .28
$ .26
$ .22
$ .21
$ (.02)
$ (.02)
$ .20
$ .19
$ .17
$ .16
$ .06
$ .05
$ .01
$ .01
49,711
53,969
48,939
52,816
48,480
51,392
48,215
48,215
47,956
50,542
47,703
50,519
47,482
50,901
47,129
51,283
* Includes a $15.3 million charge for patent infringement litigation settlement
AS OF A PERCENTAGE OF REVENUES
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and
development
Selling, general
& administrative
Write off of in-
process
research and
development
Impairment of
goodwill and
other intangible
assets
Amortization of
deferred stock
compensation
Operating expenses
Operating income
(loss)
Other income
(expense):
Interest income
Interest expense
Other income
(expense)
Income (loss) before
income taxes
Provision for income
taxes
Fiscal 2003
Fiscal 2002
Fourth
Quarter
100.0%
45.9
54.1
Third
Quarter
100.0%
45.9
54.1
13.6
14.8
11.5
12.9
Second
Quarter
100.0%
43.8
56.2
16.8
13.8
First
Quarter
100.0%
68.4
31.6
14.9
15.7
Fourth
Quarter
100.0%
42.9
57.1
13.9
17.0
Third
Quarter
100.0%
43.9
56.1
14.2
16.7
Second
Quarter
100.0%
46.9
53.1
19.9
20.2
First
Quarter
100.0%
41.9
58.1
27.9
23.1
1.5
--
--
--
--
--
--
--
--
--
--
--
0.1
--
--
--
1.2
27.8
1.4
29.1
1.8
32.4
2.0
32.6
2.1
33.1
26.3
25.0
23.8
(1.0)
24.0
2.5
33.4
22.7
0.4
--
0.3
--
0.5
--
0.6
--
0.7
(0.3)
0.7
(0.3)
0.2
0.1
(0.2)
(1.0)
(0.5)
(0.7)
26.9
25.4
7.8
8.6
24.1
8.3
(1.4)
23.9
0.2
7.6
22.4
7.2
3.2
43.3
9.8
0.9
(0.4)
--
10.3
3.9
4.5
55.5
2.6
1.5
(0.5)
--
3.6
2.4
Net income (loss)
19.1%
16.8%
15.8%
(1.6)%
16.3%
15.2%
6.4%
1.2%
Supplementary Financial Information
to the Annual Report
Appendix I. Reconciliation of GAAP to Non-GAAP
Financial Measures
Appendix I: SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The non-GAAP financial measurements are not intended to replace the presentation of Silicon
Laboratories’ GAAP financial results. These measurements merely provide supplemental
information to assist investors in analyzing Silicon Laboratories’ financial position and results of
operations; however, these measures are not an alternative to GAAP and may be different from
non-GAAP measures used by other companies. We are providing this information because it
may enable investors to perform meaningful comparisons of operating results, and more clearly
highlight the results of core ongoing operations.
Reconciliation of GAAP to Non-GAAP Financial Measures (in thousands, except per share data)
Revenues
Operating income (loss)
Adjustments:
Settlement of patent infringement lawsuit
Write off of in-process research & development
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Adjustments
Adjusted operating income
Adjusted operating margin
Net income (loss)
Tax-effected adjustments:
Fiscal 2003
Fourth
Quarter
$109,559
Third
Quarter
$82,907
Second
Quarter
$69,086
First
Quarter
$63,753
Fiscal 2002
Fourth
Quarter
$60,196
Third
Quarter
$51,786
Second
Quarter
$41,185
First
Quarter
$28,849
$28,916
$20,695
$16,422
($619)
$14,485
$11,714
$4,063
$727
--
1,600
--
1,301
2,901
--
--
--
1,196
1,196
--
--
--
1,223
1,223
15,260
--
--
1,266
16,526
--
--
37
1,267
1,304
--
--
--
1,293
1,293
--
--
--
1,308
1,308
--
--
--
1,305
1,305
$31,817
29.0%
$21,891
26.4%
$17,645
25.5%
$15,907
25.0%
$15,789
26.2%
$13,007
25.1%
$5,371
13.0%
$2,032
7.0%
$20,923
$13,932
$10,904
($1,043)
$9,824
$7,882
$2,655
$356
Settlement of patent infringement lawsuit
Write off of in-process research & development
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Tax-effected adjustments
Adjusted net income
--
1,600
--
1,301
2,901
--
--
--
1,196
1,196
--
--
--
1,223
1,223
10,377
--
--
1,266
11,643
--
--
37
1,267
1,304
--
--
--
1,293
1,293
--
--
--
1,308
1,308
--
--
--
1,305
1,305
$23,824
$15,128
$12,127
$10,600
$11,128
$9,175
$3,963
$1,661
Operating income (loss)
Adjustments:
Settlement of patent infringement lawsuit
Write off of in-process research & development
Goodwill amortization
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Adjustments
2003
2002
2001
2000
1999
Fiscal Year
$65,414
$30,989
($51,247)
$22,973
$14,661
15,260
1,600
--
--
4,986
21,846
--
--
--
37
5,173
5,210
--
--
4,187
34,885
5,276
44,348
--
394
3,307
--
3,761
7,462
--
--
--
--
976
976
Adjusted operating income (loss)
$87,260
$36,199
($6,899)
$30,435
$15,637
Net income (loss)
Tax-effected adjustments:
Settlement of patent infringement lawsuit
Write off of in-process research & development
Goodwill amortization
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Tax-effected adjustments
Adjusted net income (loss)
$44,716
$20,717
($45,573)
$14,017
$11,040
10,377
1,600
--
--
4,986
16,963
--
--
--
37
5,173
5,210
--
--
4,187
34,885
5,276
44,348
--
394
3,307
--
3,761
7,462
--
--
--
--
976
976
$61,679
$25,927
($1,225)
$21,479
$12,016
Shares used in computing adjusted earnings (loss) per share
52,288
50,811
45,914
48,788
43,657
Adjusted earnings (loss) per share
$1.18
$0.51
($0.03)
$0.44
$0.28
Silicon Laboratories Inc. is a global leader in the innovation of mixed-signal integrated circuit (IC) technology. The company applies its
renowned design expertise to develop proprietary analog-intensive, mixed-signal IC solutions that are implemented in CMOS. These products
offer significant advantages in performance, size, cost and power consumption over traditional solutions. Silicon Laboratories’ product portfolio
includes solutions targeted at a broad range of markets including communications, computing, industrial, consumer and automotive. The
company, founded in 1996, has over 300 patents issued or pending. Based in Austin, Texas, Silicon Laboratories’ common stock is traded
on the NASDAQ® under the ticker symbol “SLAB.”
Corporate Directory
Directors
Nav Sooch
Chairman,
Silicon Laboratories
Dan Artusi
President and CEO,
Silicon Laboratories
Dave Welland
Vice President,
Silicon Laboratories
William Bock
CenterPoint Ventures,
General Partner
H. Berry Cash
InterWest Partners,
General Partner
R. Ted Enloe, III
Optisoft Inc.,
President and CEO
Laurence G. Walker
Individual Investor
William Wood
Silverton Partners,
General Partner
Executive Officers
Corporate Information
Dan Artusi
President and CEO
John McGovern
Chief Financial Officer
Dave Bresemann
Vice President
Brad Fluke
Vice President
Gary Gay
Vice President
Ed Healy
Vice President
Jon Ivester
Vice President
Jeff Scott
Vice President
Dave Welland
Vice President
Russ Brennan
Chief Financial Officer
(on leave)
Stock listing: Common stock
traded on NASDAQ®
Symbol: SLAB
Options: The Company’s
options are traded on the
Chicago Board Option Exchange
and the American Stock Exchange.
Legal Counsel
Andrews Kurth LLP
111 Congress Avenue, Suite 1700
Austin, Texas 78701
Independent Auditors
Ernst & Young LLP
700 Lavaca Street, Suite 1400
Austin, Texas 78701
Transfer Agent
and Registrar
American Stock Transfer
& Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800-937-5449
Fiscal Year Ended
January 3, 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended
December 28, 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Low
$30.27
32.56
53.01
58.88
$18.89
24.22
26.10
39.61
High Low
$39.65
37.54
29.09
30.40
$21.56
21.39
16.40
17.10
Annual Meeting
Stock Data
As of February 24, 2004, there
were 363 holders of record of
our Company’s Common Stock.
The following tables set forth
for the periods indicted, the
record of high and low per-
share prices of the Company’s
Common Stock as reported by
the NASDAQ.
The Silicon Laboratories Inc.
annual meeting will be held on
Thursday, April 29, 2004,
at 9:30 a.m. at the Lady Bird
Johnson Wildflower Center,
4801 La Crosse Avenue,
Austin, Texas.
Investor Relations
For more information about
Silicon Laboratories, or copies
of our Annual Report on Form
10-K, please visit our website at
www.silabs.com, or contact:
Investor Relations
Silicon Laboratories Inc.
4635 Boston Lane
Austin, Texas 78735
512-464-9254
investor.relations@silabs.com
Design: Cartis Group, Austin, Texas
www.silabs.com
2003 Annual Report
Look inside. Look ahead. Look beyond.
©2004 Silicon Laboratories Inc.
ISOmodem, ProSLIC, SiPHY, Aero, Silicon Laboratories Inc. and the Silicon Laboratories logo are trademarks of Silicon Laboratories Inc.
All other products or brand names mentioned herein may be trademarks of their respective holders.
Silicon Laboratories Inc.
4635 Boston Lane
Austin, Texas 78735
512-416-8500