MIXED-SIGNAL IS EVERYWHERE
2004 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
Revenues (percentage growth by year)
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 ICs that are implemented in CMOS. These products offer
significant advantages in performance, size, cost and power consumption over traditional
solutions. Silicon Laboratories sells its products to over 3,000 customers on a global basis.
The company’s product portfolio targets a broad range of markets including communications,
computing, industrial, consumer and automotive. The company, founded in 1996, has over
450 patents issued or pending. Based in Austin, Texas, Silicon Laboratories’ common stock is
traded on the NASDAQ® under the ticker symbol “SLAB.”
2001
146%
2002
79%
2003
40%
2004
Financial Highlights (in millions, except per share data)
YEAR
Revenues
Research and Development
Operating income (loss)
Net income (loss)
Earnings (loss) per share — diluted
Non-GAAP financial measures *
Adjusted operating income (loss)
Adjusted net income (loss)
Adjusted earnings (loss) per share — diluted
2001
$ 74
29
(51)
(46)
(0.99)
(7)
(1)
(0.03)
2002
$ 182
32
31
21
0.41
36
26
0.51
2003
$ 325
48
65
45
0.86
87
62
1.18
2004
$ 456
75
106
77
1.39
111
81
1.47
* 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.
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LETTER TO OUR SHAREHOLDERS
LETTER TO OUR SHAREHOLDERS
A MILESTONE YEAR
A MILESTONE YEAR
FOR SILICON LABORATORIES
FOR SILICON LABORATORIES
2004 was a milestone year. It marked the realization of our goal to progress
2004 was a milestone year. It marked the realization of our goal to progress
from a rapidly emerging industry player in mixed-signal ICs to a diversifying
from a rapidly emerging industry player in mixed-signal ICs to a diversifying
market leader.
market leader.
management of the company and the benefits of a
tripled when compared to 2003. Serving a very diverse
nimble operational infrastructure. Our fabless business
market with thousands of potential customers and
model is a powerful enabler for a variable cost structure
an extensive distribution channel, the mixed-signal
that supports strong operating and gross margin
MCU products accelerate our diversification into
profiles. Our solid balance sheet gives shareholders
general-purpose products.
better visibility into the business and enables us to base
Our new product pipeline
decision-making on long-term strategic objectives.
is also rich in its variety of
PICKING THE RIGHT PRODUCTS
markets and target applications,
offering more potential than at
We have developed technology that has led to truly
any other time in the company’s
revolutionary products. In numerous cases, products
history. This pipeline leverages
we have developed have had a very disruptive effect
the company’s vast IP portfolio
on traditional solutions. As the market leader in
to create solutions that add
GSM/GPRS transceivers for cellular phones, Silicon
value in our existing markets
Laboratories changed the landscape by introducing the
and expand our presence into
During the year, we added to our world-class team,
in a number of industrial applications, consumer devices
first GSM/GPRS Radio Frequency (RF) transceiver in
new, large markets that are ripe
opened multiple new sales, support and design locations
and recently, automotive electronics.
CMOS (which is still the only transceiver in CMOS
for mixed-signal innovation.
around the globe and expanded our product portfolio.
We are continuously optimizing our operations,
in production three years later). The Aero transceiver’s
We successfully integrated an acquisition, extended our
creating a solid foundation for future growth. I believe
ease of use enabled a number of new entrants to quickly
The success of Silicon Laboratories is about more
distribution network, made a larger contribution to our
that operational planning and development can be the
deliver products to the handset market. This year, we
than one person or one product. It is the culmination
community and formalized our powerful commitment
difference between short-term and sustained success.
further distanced ourselves from the competition by
of the extraordinary effort by employees and partners
to ethics and corporate governance. We also furthered
To this end, we have automated where appropriate,
delivering a single-chip transceiver to the market,
to pursue excellence in all that we do. We create
our track record of growth driven by execution across
added systems to enable the business to rapidly scale and
Aero II, which is also the basis of our EDGE solution.
customer loyalty through superior products and support;
the organization.
we have partnered with wafer manufacturing, assembly
Introduced in 2004, our new power amplifier (PA) is the
we create shareholder value by delivering healthy
and test leaders to reduce our capital investment. This
first single-chip, dual-band power amplifier for GSM/
margins, top line growth, and strong bottom line
EVOLUTION OF THE COMPANY
attention to streamlining the infrastructure of the
GPRS handsets and the only PA in CMOS. It renders
performance; we attract the best and brightest
Since our inception, we have focused on diversification
organization allows us to stay focused on our core
solutions in exotic semiconductor process technology
employees by offering a stimulating work environment
of products, customers and markets. This effort pervades
competency — mixed-signal IC design.
less competitive by providing a smaller, lower cost, easier
with challenging projects; and we give back to our
every aspect of our strategic planning and is changing
to use solution for cellular phones.
community by donating time and money to improve
the profile of our business. Our customer base increased
STRONG BUSINESS FUNDAMENTALS
In our efforts to
identify the best product
the quality of life. There is no place I would rather be
to over 3,000 during 2004.
At Silicon Laboratories, we value execution and results.
opportunities that meet our product life cycle, margin
in 2005 than Silicon Laboratories.
The company’s portfolio of mixed-signal products
When compared to the prior year, 2004 revenues
and revenue criteria, we acquired Cygnal Integrated
has expanded to serve major electronics markets
increased by 40 percent, GAAP earnings per share
Products in December of 2003. This acquisition
including mobile handsets, set-top boxes, digital video
increased by over 60 percent and our cash and short-
opened the door to the multi-billion dollar 8-bit micro-
recorders, VoIP equipment, networking equipment and
term investments increased by over 45 percent. This
controller (MCU) market. A tremendous success story
Daniel Artusi
optical hardware. Our products are also finding homes
performance was a testament to the sound financial
in 2004, the MCU products’ pro forma revenue almost
President and CEO
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COMPLETE GSM /GPRS RADIO
(ACTUAL SIZE)
MAKING MIXED-SIGNAL EASY
FOR OUR CUSTOMERS
For decades, mixed-signal problems have required equal parts science
and art. Equipment makers designing with sensitive analog components
endlessly tune and tweak, often falling victim to low yields and high costs.
Silicon Laboratories’ philosophy is to simplify mixed-
development tools, talented applications and field sales
signal for the customer to reduce the uncertainty and
engineers and a highly technical sales and distribution
risks in their designs. This prevents customers from
network. Our MCU development kits are designed
having to develop expensive and hard-to-find mixed-
to be “application engineers in a box.” These tools
signal expertise. It saves them time and precious board
are low cost, complete design resources that allow our
space while improving their yields.
customers to get up and running on our products in a
We help our customers simplify their mixed-signal
matter of minutes.
designs by focusing on three things. First, we take a
Third, and most important, we listen to our
circuit approach to innovation rather than relying
customers. We avoid innovating for innovation’s sake
on physics alone. We invent from the fundamental
by developing an understanding of our customers’
transistor level. This allows us to innovate using
applications, road maps and business drivers. We then
standard CMOS, increasing our integration potential
leverage our IP portfolio to develop products that solve
with digital chips and decreasing the size and complexity
customers’ mixed-signal problems in a simple, direct
of our ICs when compared to competing solutions.
way. We eliminate the need for expensive, bulky discrete
We have a demonstrated ability to design the most
components; we lower power consumption and improve
difficult analog circuits using
standard CMOS
performance; and we make end of line adjustments
technologies to create highly integrated solutions.
unnecessary. We do the hard work up front, taking
Second, we provide true applications support to our
the guesswork out of a customer’s mixed-signal designs.
customers. This includes complete documentation and
We make mixed-signal easy.
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5
A BROAD VIEW OF
THE MARKET
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Silicon Laboratories’ broad-based mixed-signal ICs
phone, enabling a single product to address multiple
represent about half of our business and include a diverse
new markets. With about 25,000 development platforms
set of products. These products or their derivatives
shipped to date, we are seeding thousands of new
typically meet several key criteria: they address large
potential customers.
market opportunities; they have high margin profiles
Another example is our ProSLIC® family of subscriber
above our corporate average of mid-fifty percent;
line interface circuit ICs. The ProSLIC devices are an
and
they have characteristics associated with
instrumental component of VoIP deployments, acting
general-purpose products, namely broad distribution
as the analog telephony interface to the traditional
channels to reach thousands of customers.
phone line. This product family, which grew almost
Our MCU product
line, which has
rapidly
150 percent in 2004, is designed for residential gateways,
expanded our total available market, is a good example.
terminal adapters, integrated access devices, PBXs and
Our 8-bit mixed-signal MCU family, which includes
central office equipment spanning VoIP deployments
more than 70 different products, captures, computes
across Ethernet, DSL, cable and fiber networks.
and communicates signals in a single system-on-a-chip.
When combined with the vertical market focus of
This is unique in the marketplace, and it provides our
our mobile handset business, the diversifying, horizontal
customers with design flexibility, improved time-to-
nature of our broad-based mixed-signal business further
market and superior system performance. In addition,
strengthens our business model.
the same MCU part can be used in a toy or a cellular
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MIXED-SIGNAL CONNECTS
THE ANALOG WORLD WE LIVE IN WITH THE
RAPIDLY PROLIFERATING DIGITAL WORLD.
The analog and digital worlds continue to merge as technology pervades every
aspect of our lives. Cellular phones are becoming digital command centers
for entertainment and communications. Our homes are rapidly becoming
networked, enabling real-time monitoring and control.
Computing is completely mobile, and connectivity is becoming universal. These global trends are accelerating.
The result will be an exponential increase in demand for mixed-signal ICs that enable the analog world we live in
to interconnect to the sprawling digital world.
Silicon Laboratories is well positioned to benefit from this trend. We believe our mixed-signal expertise is
unmatched and creates a long-term competitive advantage. We have established a deep well of new products to feed
a growing number of applications and markets. We invested 16 percent of revenue in R&D in 2004, and we intend
to keep investing aggressively in future products. We believe in our R&D pipeline and see it as a critical bellwether
of the company’s health and future growth potential.
THERE WILL BE AN EXPONENTIAL INCREASE
IN DEMAND FOR MIXED-SIGNAL ICs
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9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:58) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2005
Or
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-29823
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)
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:58) 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:134)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). (cid:58) Yes (cid:134)
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 (July 2, 2004) was $1,742,469,341 (assuming, for this purpose, that only directors and officers are
deemed affiliates).
There were 52,646,075 shares of the registrant’s common stock issued and outstanding as of February 4, 2005.
Portions of the Proxy Statement for the registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
SILICON LABORATORIES INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
ITEM 1. Business and Factors Affecting Our Future Operating Results
ITEM 2.
ITEM 3.
ITEM 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Consolidated Financial Data
ITEM 6.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III.
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Principal Accountant Fees and Services
PART IV.
ITEM 15. Exhibits and Financial Statement Schedules
CAUTIONARY STATEMENT
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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 INC. 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
(Cygnal) in December 2003, we now sell mixed-signal 8-bit microcontrollers (MCUs), which are incorporated in a broad
range of applications in a variety of markets, 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 our 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 that are highly integrated, which simplifies our
customers’ designs and improves their time-to-market.
INDUSTRY BACKGROUND
According to market research firm Gartner, personal computers (PCs) and mobile handsets are expected to remain the
most significant market drivers for semiconductor consumption through 2008. In wired communications, increased enterprise
equipment spending and capital expenditures by service providers combined with broadband and Voice over Packet
technology continue to represent growth areas in the communications IC market which Gartner expects to top $80 billion by
2008.
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 PCs, cable and satellite set-top boxes, fax machines, credit card verification machines, automated teller machines,
satellite radios and personal video recorders (PVRs). 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 networking systems that route this traffic.
Numerous devices require analog-intensive, mixed-signal circuits. Traditional designs for electronic devices have used
mixed-signal solutions 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.
3
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
manufacturers increasingly are turning to third parties, like us, 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 value 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,
industrial monitoring and control, 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;
• Are easier for customers to use; and
• Reduce costs.
We group our products into two categories: mobile handset products and broad-based mixed-signal products. The
mobile handset category includes the Aero® Transceivers, to the extent incorporated into handsets, the RF Synthesizers and
the Power Amplifier (PA). The broad-based mixed-signal category includes our silicon DAA, ISOmodem®, ProSLIC®, DSL
analog front end, clock chips, SiPHY®, optical transceivers and clock & data recovery ICs (CDRs), general purpose RF
Synthesizers for non-handset applications, and 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
• GSM/GPRS wireless phones
• GSM/GPRS data communications devices
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
which integrates the RF synthesizer with the transceiver.
4
• GSM/GPRS/EDGE wireless phones
• GSM/GPRS/EDGE data communications devices
• Personal digital assistants
• Dual band GSM/GPRS handsets
• 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
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/Enhanced Data Rates for Global Evolution (EDGE)
mobile handset or wireless data communication device. The
latest generation of the Aero Transceiver family, Aero II, is the
only single chip GSM/GPRS transceiver available in CMOS.
This solution requires a smaller footprint than competing
solutions in this form-factor sensitive market and can be paired
with virtually any baseband. The Aero Transceivers are designed
using 100% standard CMOS process technology which
facilitates cost reduction and integration.
Power Amplifier
Our Power Amplifier for dual-band cellular handsets is the first
functionally complete, monolithic GSM PA solution, and the
first to be implemented in CMOS, creating high levels of
integration and performance without sacrificing quality or
reliability. Our PA integrates power control circuits, innovative
temperature and overvoltage protection circuits, input and output
matching networks and harmonic filters. Our PA provides
customers with flexibility to meet key specifications and a
system that is easy to design into new or existing handset
platforms. This product is still in the early stages of customer
adoption and is not yet being produced in volume.
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.
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ISOmodem Embedded Modems
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, outside of the personal
computer area such as set-top boxes and PVRs. 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
• PVRs
• Point of sale (POS) terminals
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. 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.
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 million instructions per second
(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.
• IP telephony
• Wireless local loop providing remote access for a
wireline system
• Voice over broadband modems and terminal
adapters
• VoIP residential gateways
• PBXs
• Wired long loop and central office systems
• 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
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 high-speed connectivity.
The DSL AFE supports several ADSL communication
standards enabling various upload and download data rates.
• Personal computer modems
• External modems
• Residential gateways
• Network interface devices
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SiPHY 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 rates up
to 2.7 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.
Precision Clock Integrated Circuits
Our 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. 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,
numerous crystal sources, 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.
Satellite Radio Tuner
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.
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, medical (ISM) band applications and satellite radio
applications. Our synthesizers are well-suited to meet the
increasing requirement for highly-integrated electronics that
reduce component count and consume less power.
• 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
• Networking test equipment
• Short and long haul networking equipment
• Consumer and automotive satellite radios
• Satellite radio
• Wireless local area networks
• Cordless phones
• Wireless headsets
• Wireless LAN (802.11b) modems
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During fiscal year 2004 and fiscal year 2003, sales of our mobile handset products and broad-based mixed-signal
products each accounted for approximately 50% of our revenues. During fiscal year 2002, sales of our mobile handset
products and broad-based mixed-signal products accounted for 37% and 63% 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 force, 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.
Two of our distributors, Edom Technology and Uniquest, each selling products to customers in Asia, represented 20%
and 12% of our fiscal 2004 revenues, respectively. 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 2004.
During fiscal 2004, our ten largest end customers accounted for 51% of our revenues. We had one end customer,
Samsung, which represented 17% 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 during fiscal 2004:
• Agere Systems
• Conexant
• Hughes Network Systems
• Intel
• LG Electronics
• Sagem
• Samsung
• Sendo
• Smart Link
• Thomson
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We maintain five sales offices in North America. We provide European sales support through our subsidiaries in the
United Kingdom, France and Germany. Our Asia Pacific sales are supported through our subsidiaries in Japan and Hong
Kong, as well as sales offices in Korea, Taiwan and China. Revenue is attributed to a geographic area based on the end
customer’s shipped-to location. The percentage of our revenues to customers located outside of the United States was 89% in
fiscal 2004, 80% in fiscal 2003 and 79% in fiscal 2002. In fiscal 2004, South Korea, Taiwan and China accounted for 28%,
16% and 10% of revenues, respectively.
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.
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 our company and
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. Not all design wins
ultimately result in revenue. However, once a completed design architecture has been implemented and produced in high
volumes, our customers are reluctant to significantly alter their designs due to this extensive design-win process. 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.
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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 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.
Research and development expenses were $74.9 million, $48.3 million and $32.0 million in fiscal 2004, 2003, and 2002,
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 needs
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.
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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 and intermediate frequency surface
acoustic wave filters are replaced by our integrated CMOS frequency synthesizer and AERO transceiver products. Our design
expertise in the technically challenging optical networking market has allowed us to reduce the number of supplemental
components used in our customers’ products while providing lower levels of noise in the circuit operation. This is a key
technical consideration in high speed optical networks.
DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE
We consider the partitioning of a circuit’s functionality to be a proprietary and creative design technique. Our digital
signal processing design expertise maximizes the price/performance characteristics of both the analog and digital functions
and allows our ICs to work in an optimized manner to accomplish particular tasks. Generally, we surround core analog
circuitry with 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. Our microcontroller products are 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:
•
•
isolation, which is critical for existing and emerging telecom networks;
frequency synthesis, which is core technology for wireless and clocking applications; and
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•
signal processing and precision analog, which forms the heart of consumer, industrial, medical and automotive
electronics applications.
Our understanding of the role of analog/digital interfaces within electronic systems, standards evolution, and end market
drivers enables us to identify product development opportunities and capitalize on market trends.
MANUFACTURING
As a fabless IC manufacturer, we conduct IC design and development in our facilities 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 increasing the likelihood that
manufacturing capacity will be available throughout our products’ life cycles. We currently partner principally with 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 third-party test subcontractors or our facilities in Austin,
Texas, 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 2004, more than 90% of our units produced were tested by offshore third-party test subcontractors. We expect that
our utilization of offshore third-party test subcontractors will remain at this level during fiscal 2005.
BACKLOG
As of January 1, 2005, our backlog was approximately $69.9 million, compared to approximately $86.1 million as of
January 3, 2004. 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 is not recognized as revenue 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;
• Ability to rapidly introduce new products to market; and
• Power requirements.
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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.
For example, the mobile handset markets may increasingly require compliance with Wideband Code Division Multiple
Access (WCDMA) or EDGE standards, in addition to the GSM/GPRS standard. Our GSM/GPRS mobile handset products
have accounted for substantially all of our mobile handset revenue to date. If we are not able to develop EDGE and/or
WCDMA compliant products that gain similar acceptance, our mobile handset revenue and overall operating results would
be adversely affected. 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, Freescale, Fujitsu, Infineon Technologies, Legerity,
Maxim Integrated Products, Microchip, National Semiconductor, Philips, Renesas, 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 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 1, 2005, we had
more than 450 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.
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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 1, 2005, we employed 588 people. Our success depends on the continued service of our key technical and
senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-
signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our
employees are represented by a labor organization. We consider our employee relations to be good.
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 generally experienced revenue growth in our recent history, 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. For example, our revenues in the third and fourth quarters of fiscal 2004 fell below
analyst expectations and resulted in significant declines in our stock price.
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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 timeliness of our new product introductions;
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 and realization rate 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 or reductions 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, especially with respect to our mobile handset products;
changes in market standards;
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 VOIP 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 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, mobile handset 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.
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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 fiscal 2004, our ten largest customers accounted for 51% of our
revenues. We had one customer, Samsung, which represented 17% of our revenues. No other single customer accounted for
more than 10% of our revenues during fiscal 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 material long-term purchase contracts with our customers;
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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 a significant 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 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 sell 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:
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a decline in demand for any of our more significant products, including our Aero Transceiver, DAA, ISOmodem or
ProSLIC;
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.
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We are particularly dependent on sales of our mobile handset products, which constituted 50% of our total revenues in
fiscal 2004 and fiscal 2003. In particular, our Aero Transceiver mobile handset product and its subsequent derivatives
represented approximately 50% of our total revenues in fiscal 2004 and approximately 40% of our total revenues in fiscal
2003. If the market for the Aero Transceiver or the market for GSM/GPRS 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 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:
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changing requirements of customers;
accurate prediction of market and technical requirements, such as any shift of GSM/GPRS to EDGE and WCDMA;
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 on a timely basis that achieve market acceptance, our growth
prospects, operating results and competitive position could be adversely affected.
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OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW
TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO ACHIEVE
MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION
Our ICs are used as components in 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 year ended January 1, 2005
was $74.9 million, or 16.4% 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/GPRS
standard. We believe this market is now in the early stages of adopting the EDGE and/or WCDMA standards, which allow
for enhanced data generation and transmission using mobile handsets. Forecasters expect the EDGE and WCDMA markets
to develop and expand in 2005 and 2006. In July 2004, we extended our Aero family to meet the EDGE standard with the
Aero EDGE Radio. However, we cannot be certain that the use of this technology will not change in the future and thereby
make our products unsuitable. Furthermore, we cannot be certain that any product we develop for these standards will
achieve market acceptance.
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. This has included the establishment of a
headquarters in Singapore for non-U.S. operations. The percentage of our revenues to customers located outside of the
United States was 89% in fiscal 2004, 80% in fiscal 2003 and 79% in fiscal 2002. 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:
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increased complexity and costs of managing international operations, including our headquarters for non-U.S.
operations in Singapore;
protectionist laws and business practices that favor local competition in some countries;
• multiple, conflicting and changing laws, regulations and tax schemes;
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longer sales cycles;
greater difficulty in accounts receivable collection and longer collection periods;
high levels of distributor inventory subject to price protection and rights of return to us;
political and economic instability;
greater difficulty in hiring qualified technical sales and applications engineers and administrative personnel; and
the need to have business and operations systems that can meet the need of our international business and structure.
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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.
FAILURE TO MANAGE OUR DISTRIBUTION CHANNEL RELATIONSHIPS COULD IMPEDE OUR FUTURE
GROWTH
The future growth of our business will depend in large 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 these relationships. As we execute our indirect sales strategy, we must 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. In addition, relationships with our distributors often involve the use of price protection and
inventory return rights. This often requires a significant amount of sales management’s time and system resources to manage
properly.
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 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, increased obsolescence and increased operating costs. These inventory risks are exacerbated when our customers
purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate
because this causes us to have less visibility regarding the accumulated levels of inventory for such customers. A resulting
write-off of unusable or excess inventories would adversely affect our operating results.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN ERRORS WHICH COULD LEAD TO PRODUCT
LIABILITY, AN INCREASE IN OUR COSTS AND/OR A REDUCTION IN OUR REVENUES
Our products are complex and may contain errors, particularly 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. Any defects could require product replacement or recall or we could be obligated to accept product returns. Any
of the foregoing could impose substantial costs and harm our business.
Product liability claims may be asserted with respect to our products. Our products are typically sold at prices that are
significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product
could cause failure in our customer’s end-product, so we could face claims for damages that are disproportionately higher
than the revenues and profits we receive from the products involved. Furthermore, product liability risks are particularly
significant with respect to medical and automotive applications because of the risk of serious harm to users of these products.
There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims.
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An increasing number of our new product developments are being designed in even more complex processes. For
example, our Aero II was designed in a .13 micron CMOS process, which adds cost, complexity and elements of
experimentation and development, particularly in the area of advanced mixed-signal design.
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. We are experiencing this lengthy introduction to volume production cycle time with
our CMOS Power Amplifier, which was introduced in the early part of fiscal 2004 and is not expected to contribute to our
revenues prior to the second half of fiscal 2005. 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 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 substantial 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 frequently delivered to our customers. We expect
utilization of offshore third-party test subcontractors to continue in the future.
The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors.
On occasion, we have been unable to adequately respond to unexpected increases in customer demand due to capacity
constraints and, therefore, were unable to benefit from this incremental demand. We may be unable to obtain adequate
foundry, assembly or test capacity from our third-party subcontractors to meet our customers’ delivery requirements even if
we adequately forecast customer demand.
There are significant risks associated with relying on these third-party foundries and subcontractors, including:
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failure by us, our customers or their end customers to qualify a selected supplier;
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;
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their inability to supply or support new or changing packaging technologies; and
low test yields.
We typically do not have long-term 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. Our third-party foundry,
assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time
required to meet demand for our products. In the event that these vendors fail to meet our demand for whatever reason, we
expect that it would take up to twelve months to transition performance of these services to new providers. Such a transition
may also require qualification of the new providers by our customers or their end customers.
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.
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
486 employees at the end of fiscal 2003 to 588 employees at the end of fiscal 2004. 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 sales, operational and financial enterprise-wide
systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and
other internal management systems to manage this growth and maintain compliance with regulatory guidelines, including
Sarbanes-Oxley Act requirements. While we believe that we are in compliance with all Sarbanes-Oxley Act requirements
today, as our business grows our internal management systems and processes will need to improve to ensure that we remain
in compliance. 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.
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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
As part of our growth and product diversification strategy, we 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:
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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;
risks associated with the transfer of licenses of intellectual property;
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 potentially issue up to a maximum of 1,290,963 additional
shares of our common stock based upon the achievement of product revenue milestones (of which approximately 369,000
shares have been issued thus far), which could distract our management and employees and lead to disputes with former
Cygnal stockholders. Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity
securities that could negatively impact the ownership percentages of existing shareholders.
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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:
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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, or decrease in sales to, one or more key customers;
a large sale of stock by a significant shareholder;
dilution from the issuance of our stock in connection with acquisitions;
departures of key personnel; and
the required expensing of stock options under Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) 123 (revised 2004), SHARE-BASED PAYMENT.
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.
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
17% of our revenues in fiscal 2004. North Korea’s 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.
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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.
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. 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.
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,
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 Agere Systems, 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.
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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 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 (TDK). In February
2004, we filed a lawsuit against a former employee and Axiom Microdevices alleging theft of trade secrets. In September
2004, we added claims for patent infringement to such suit. 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:
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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.
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 ACCEPTABLE 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,
intellectual property 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.
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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.
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.
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.
26
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
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY, WHICH HAS BEEN
SUBJECT TO SIGNIFICANT FLUCTUATIONS
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 fluctuations, often connected with, or in anticipation of, maturing
product cycles and new product introductions of both semiconductor companies’ and their customers’ products and
fluctuations in general economic conditions.
Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and
accelerated erosion of average selling prices. 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.
This downturn resulted in a material adverse effect on our business and operating results in fiscal 2001.
Upturns have been characterized by increased product demand and production capacity constraints created by 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.
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, particularly for mobile handset products. We have reduced the average unit price of our products in
anticipation of or in response to competitive pricing pressures, new product introductions by us or our competitors and other
factors. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes and
reducing production costs, 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.
27
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, Freescale, Fujitsu, Infineon Technologies, Legerity, Maxim Integrated Products, Microchip,
National Semiconductor, Philips, Renesas, 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
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. In 2004,
Motorola separated its semiconductor operations into Freescale Semiconductor, a publicly traded company focused on
communications and integrated electronic systems. As an additional example, in February 2004, Conexant and
GlobespanVirata merged to form a company focused on communication semiconductors. This combined entity will focus on
all broadband applications and may compete with our DAA, ISOmodem and asymmetric digital subscriber line (ADSL)
product lines.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS AND TECHNOLOGY 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
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.
28
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 handset devices utilizing the WCDMA protocol to support higher data communication rates on
WCDMA networks. We do not currently have a WCDMA mobile handset product. Other suppliers, including us, are now
offering mobile handset devices utilizing the 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.
Our pursuit of necessary technological advances may require substantial time and expense. We may not be successful in
developing or using new technologies or in developing new products or product enhancements that achieve market
acceptance. If our ICs fail to achieve market acceptance, our growth prospects, operating results and competitive position
could be adversely affected.
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 200,000 square feet of leased floor space with lease terms
expiring at various dates through April 2010. In addition to these properties, we lease facilities in New Hampshire for
engineering activities and various other smaller locations throughout the United States, England, France, Germany, Japan,
Singapore, Hong Kong, Malaysia, Korea, Taiwan and China for sales, marketing, administrative, design and manufacturing
support activities.
We believe that these facilities are suitable and adequate to meet our current operating needs.
29
Item 3. Legal Proceedings
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 of our 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. The Consolidated Amended 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. A court order dated October 9, 2002 dismissed without prejudice our four officers who had been
named individually. On February 19, 2003, the Court denied the motion to dismiss the complaint against us. On October 13,
2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is
intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet
moved to certify a class in the Silicon Laboratories case. We have approved a settlement agreement and related agreements
which set forth the terms of a settlement between us, the plaintiff class and the vast majority of the other approximately 300
issuer defendants. Among other provisions, the settlement provides for a release of us and the individual defendants for the
conduct alleged in the action to be wrongful. We would agree to undertake certain responsibilities, including agreeing to
assign away, not assert, or release certain potential claims we may have against our underwriters. The settlement agreement
also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers.
To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under
the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. We anticipate that our potential financial obligation to plaintiffs pursuant to the terms of
the settlement agreement and related agreements will be covered by existing insurance. We are not aware of any material
limitations on the expected recovery of any potential financial obligation to plaintiffs from our insurance carriers. Our
carriers appear to be solvent, and we are not aware of any uncertainties as to the legal sufficiency of an insurance claim with
respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement would involve any material payment by
us. Furthermore, even if our insurance were unavailable due to insurer insolvency or otherwise, we expect that our maximum
financial obligation to plaintiffs pursuant to the settlement agreement would be less than $3.4 million. The settlement
agreement has been submitted to the Court for approval. Approval by the Court cannot be assured. We are unable to
determine whether or when a settlement will occur or be finalized. As approval by the Court cannot be assured, we are
unable at this time to determine whether the outcome of the litigation would have a material impact on our results of
operations or financial condition.
Trade Secret and Patent Infringement Litigation
On February 17, 2004, we filed a lawsuit against a former employee and Axiom Microdevices Inc., a California
corporation, in the United States District Court for the Western District of Texas, Austin Division, alleging theft of trade
secrets by the individual and Axiom. The lawsuit also alleges that the employee breached his ethical, contractual and
fiduciary obligations to us by disclosing trade secrets and confidential information to Axiom and that Axiom tortiously
interfered with the employee’s contractual obligations to us. On September 14, 2004, we added claims for infringement of
United States Patents 6,549,071 and 6,788,141 to the pending suit. The patents relate to our proprietary technology for
CMOS RF power amplifiers. At this time, we cannot estimate the outcome of this matter or resulting financial impact to us,
if any.
30
Other Litigation
We are 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, we do not expect them to have a material adverse effect on the
consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 1, 2005, the end of our 2004 fiscal year, there
were 343 holders of record of our common stock.
Fiscal Year Ended January 3, 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended January 1, 2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
HIGH
LOW
30.27 $
32.56
53.01
58.88
59.92 $
59.45
43.95
37.50
18.89
24.22
26.10
39.61
44.00
42.88
29.02
26.89
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.
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 1, 2005, the remaining proceeds were invested in short-term, investment-grade interest-bearing
instruments.
No securities were repurchased during the fourth quarter of fiscal 2004.
31
Item 6. Selected Consolidated Financial Data
The selected consolidated balance sheet data as of fiscal year ended 2004 and 2003 and the selected consolidated
statements of operations data for fiscal 2004, 2003 and 2002 have been derived from the audited consolidated financial
statements included in this Form 10-K. The selected consolidated balance sheet data as of fiscal year ended 2002, 2001 and
2000 and the selected consolidated statements of operations data for fiscal 2001 and 2000 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.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Revenues
Cost of revenues
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 (expense):
Interest income
Interest expense
Other income (expense), net
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
CONSOLIDATED BALANCE SHEET DATA:
$
$
$
2004
2003
Fiscal Year
2002
(in thousands, except per share data)
2001
2000
$
456,225 $
206,230
325,305 $
162,173
182,016 $
79,939
74,065 $
31,930
103,103
35,601
249,995
163,132
102,077
42,135
74,917
64,156
—
—
—
4,237
143,310
106,685
3,054
(311)
2,148
111,576
34,883
76,693
$
48,296
42,836
1,600
—
—
4,986
97,718
65,414
1,368
(49 )
(537 )
66,196
21,480
44,716
$
32,001
33,877
—
—
37
5,173
71,088
30,989
1,582
(617 )
(647 )
31,307
10,590
20,717 $
28,978
20,056
—
4,187
34,885
5,276
93,382
(51,247 )
3,624
(751 )
(2 )
(48,376 )
(2,803 )
(45,573 ) $
1.49 $
1.39 $
0.92 $
0.86 $
0.44 $
0.41 $
(0.99 ) $
(0.99 ) $
51,471
54,983
48,850
52,288
47,419
50,811
45,914
45,914
67,502
19,419
17,648
394
3,307
—
3,761
44,529
22,973
3,964
(1,162 )
74
25,849
11,832
14,017
0.37
0.29
38,326
48,788
Cash, cash equivalents and short-term investments
Working capital
Total assets
Long-term obligations and other liabilities
Total stockholders’ equity
$
January 1,
2005
January 3,
2004
December 28,
2002
(in thousands)
December 29,
2001
December 30,
2000
277,106 $
294,557
484,402
2,570
399,484
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
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 2004 HAD 52 WEEKS AND ENDED ON
JANUARY 1, 2005. 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.
32
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 well as cable and satellite set-top boxes, residential communication gateways for cable or
digital subscriber line (DSL), satellite radios and networking equipment. We also offer a family of 8-bit microcontrollers
(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 major customers include Agere Systems,
Conexant, Hughes Network Systems, Intel, LG Electronics, Sagem, Samsung, Sendo, Smart Link and Thomson.
Our company was founded in 1996. Our business has grown rapidly since our inception, as reflected by our employee
headcount, which increased to 588 at the end of fiscal 2004, from 486 employees at the end of fiscal 2003 and 364 employees
at the end of fiscal 2002. 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 substantial majority of cases, test these die and ship these units to our customers. We have increased the
amount of testing performed by such third parties, which facilitates 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 implemented supply chain management software during fiscal 2003 which improved our ability to scale
our operations, reduced our inventory requirements and improved the quality of our shipment scheduling commitments with
our customers through improved efficiency.
Our product set has expanded to a broad portfolio targeting 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 multiple markets. For example, our silicon direct access arrangement (DAA) product family is optimized for the
personal computer (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 February 2004, we introduced a power amplifier product
for GSM/GPRS mobile handsets that is in the sampling stage to wireless customers. In June 2004, we introduced the Aero II
transceiver that provides increased performance and integration over our prior offerings. In July 2004, we introduced and are
now sampling the Aero EDGE Radio, which addresses the Enhanced Data Rates for Global Evolution (EDGE) standard for
mobile handsets. 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
content we provide for existing applications and by introducing ICs for markets we do not currently address, thereby
expanding our total available market opportunity.
We group our products into two categories, mobile handset products and broad-based mixed-signal products. Mobile
handset products include the Aero Transceivers, to the extent incorporated into handsets, the RF Synthesizers and the Power
Amplifier. Broad-based mixed-signal products include our silicon DAA, ISOmodem, ProSLIC, satellite tuner, DSL analog
front end, clock chips, optical transceivers and clock & data recovery ICs (CDRs), general purpose RF Synthesizers for non-
handset applications, as well as the microcontroller products.
33
During fiscal 2004, 2003 and 2002, one customer, Samsung, represented 17%, 21% and 16% of our revenues,
respectively. No other single end customer accounted for more than 10% of our revenues in any 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. Two of our distributors, Edom Technology and Uniquest, each selling products to
customers in Asia, represented 20% and 12% of our fiscal 2004 revenues, respectively. 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. There were no other distributors or contract
manufacturers that accounted for more than 10% of our revenues in fiscal years 2004, 2003 or 2002.
The percentage of our revenues derived from customers located outside of the United States was 89% in fiscal 2004,
80% in fiscal 2003 and 79% in fiscal 2002. This percentage increase in the two most recent years reflects our product and
customer diversification and increased market penetration for our products, as many of our mobile handset, and increasingly,
broad-based mixed-signal customers manufacture and design their products in Asia. 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.
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 are usually required before a customer ships a significant volume of devices that incorporate our
ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring expenses for research and
development and selling, general and administrative efforts, and the generation of corresponding sales. 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.
Because many of our ICs are designed for use in consumer products such as personal computers (PCs), personal video
recorders, set-top boxes and mobile handsets, we expect that the demand for our products will be typically subject to some
degree of seasonal demand resulting in increased sales in the third and fourth quarters of each year when customers place
orders to meet holiday demand. However, rapid changes in our markets and across our product areas make it difficult for us
to accurately estimate the impact of seasonal factors on our business.
34
The following describes the line items set forth in our consolidated statements of income:
REVENUES. Revenues are generated almost exclusively by sales of our ICs. We recognize revenue on sales 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 cost of revenue 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: 1) to establish a relationship with a new
customer, 2) as an incentive for customers to purchase products in larger volumes, and 3) 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, for prior periods, a portion of the settlement costs
associated with a 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 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, packaging and test
costs, external consulting and services costs, amortization of purchased software, equipment tooling, equipment depreciation,
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. Research and 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 in fiscal 2003 and Krypton Isolation, Inc. (Krypton) in fiscal 2000.
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.
35
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 generally invest in tax-exempt short-term investments which yield lower nominal interest proceeds.
INTEREST EXPENSE. Interest expense consists of interest on our short and long-term obligations.
OTHER INCOME (EXPENSE), NET. Other income (expense), net primarily reflects our share of income and losses
related to our equity investments and the gain on the disposal of fixed assets.
PROVISION FOR INCOME TAXES. We accrue a provision for federal, state and foreign income tax at the applicable
statutory rates adjusted for non-deductible expenses, research and development tax credits and interest income from tax-
exempt short-term investments.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of income data as a percentage of revenues for the periods
indicated:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Write-off of in-process research & development
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Operating expenses
Operating income
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
COMPARISON OF FISCAL 2004 TO FISCAL 2003
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
100.0%
45.2
54.8
100.0%
49.9
50.1
100.0%
43.9
56.1
16.4
14.1
—
—
0.9
31.4
23.4
0.7
(0.1)
0.4
24.4
7.6
16.8%
14.8
13.2
0.5
—
1.5
30.0
20.1
0.4
(0.0)
(0.2)
20.3
6.6
13.7%
17.6
18.6
—
0.0
2.8
39.0
17.1
0.9
(0.4)
(0.4)
17.2
5.8
11.4%
REVENUES
(in millions)
Revenues
Year Ended
January 1,
2005
January 3,
2004
Change
%
Change
$
456.2 $
325.3 $
130.9
40.2%
The year over year increase in revenues during fiscal 2004 was primarily attributable to significant growth in both our
mobile handset and broad-based mixed-signal product groups.
36
Mobile Handsets: Mobile handset revenues were $228.8 million or 50.1% of total revenues in fiscal 2004. Compared to the
prior year, revenues increased $65.8 million or 40.4%. Growth in the sales of our mobile handset products were driven by
increased unit sales of our Aero Transceiver family of products reflecting the increased demand and market share gains
driven largely by Asian mobile handset customers. Unit sales of our mobile handset products increased year over year by
38.3%. In addition, average selling prices in this area increased year over year by 1.5%.
Broad-Based Mixed-Signal: Broad-based mixed-signal revenues were $227.3 million or 49.8% of total revenues in fiscal
2004. Compared to the prior year, revenues increased $65.2 million or 40.2%. Growth in the sales of our broad-based
mixed-signal products were primarily driven by increased unit sales of our: (1) ISOmodems reflecting growth in demand and
market share gains primarily in the set-top box and personal video recorder market segments; (2) microcontrollers, a new
business that we acquired in the fourth quarter of fiscal 2003 which contributed revenues of $19.4 million in fiscal 2004; (3)
ProSLICs reflecting growth in demand and market share gains in the voice-over-internet protocol (VOIP) market segment;
and (4) DAAs reflecting growth in demand in voice applications, such as VOIP, and modems for personal computers. Unit
sales of broad-based mixed-signal products increased year over year by 18.1%. In addition, average selling prices in this area
increased year over year by 18.7% reflecting the change in mix in this area towards higher priced items.
As our products become more mature, we expect to experience decreases in average selling prices in the future. Our
revenues will be dependent on our ability to increase sales volumes and introduce higher priced, next generation products and
product extensions.
GROSS PROFIT
(in millions)
Gross Profit
Percent of revenue
Year Ended
January 1,
2005
January 3,
2004
$
250.0 $
54.8%
163.1 $
50.1%
Change
%
Change
86.9
53.2%
The year over year increase in gross profit dollars for fiscal 2004 was primarily due to the substantial increase in sales
volumes in both our mobile handset and broad-based mixed-signal product groups. The increase in gross profit percentage in
fiscal 2004 was primarily due to the absence of any significant one-time charges such as the $15.3 million charge associated
with a patent litigation settlement recorded during the first fiscal quarter of 2003.
We expect to experience declines in the average selling prices of our mobile handset products and certain of our broad-
based mixed-signal products. This downward pressure on gross profit as a percentage of revenues may be offset to the extent
we are able to: 1) introduce higher margin new products and continue to gain market share with our broad-based mixed-
signal ICs; and 2) achieve lower production costs from our wafer foundries and third-party assembly and test sub-contractors.
RESEARCH AND DEVELOPMENT
(in millions)
Research and development
Percent of revenue
Year Ended
January 1,
2005
January 3,
2004
$
74.9 $
16.4%
48.3 $
14.8%
Change
%
Change
26.6
55.1%
The year over year increase in research and development expense for fiscal 2004 was principally due to increased
staffing, including personnel related to our acquisition of Cygnal, and associated occupancy and other costs to pursue new
product development opportunities, and to continue to develop new testing methodologies for newly introduced and existing
products. Some of our more significant development projects in the mobile-handset product area included a power amplifier,
a single chip transceiver, and an EDGE compliant radio. Significant development projects in the broad-based mixed-signal
product area included the F350 and F064 microcontrollers integrating analog-to-digital converters targeting precision
measurement applications. All of these development projects have either been completed or are scheduled to be completed
37
over the next twelve months. Additionally, many of these new products are being sampled by certain of our customers and
are in the design-in phase. We don’t expect the products derived from these projects to begin to contribute to revenues in a
meaningful way until fiscal years 2005 or 2006. Additionally, 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
(in millions)
Year Ended
January 1,
2005
January 3,
2004
Change
%
Change
Selling, general and administrative
Percent of revenue
$
64.2 $
14.1%
42.8 $
13.2%
21.4
49.8%
The increase in the dollar amount of selling, general and administrative expense was principally attributable to: (1) an
increase of approximately $3.2 million for sales commissions and bonuses associated with our increased revenue levels; (2)
an increase of approximately $3.1 million for personnel associated with our acquisition of Cygnal; (3) an increase of
approximately $2.9 million for increased staffing and associated costs related to the expansion of our internal information
technology and services support organization; (4) an increase of approximately $2.6 million for increased staffing and
associated costs associated with the geographical expansion of our sales support organization in Asia and Europe; (5) an
increase of approximately $2.4 million in legal, consulting and auditing fees which were primarily driven by activities related
to the establishment of a headquarters for non-U.S. operations in Singapore and compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act; and (6) an increase of approximately $2.0 million for increased staffing and
associated costs related to product marketing and marketing applications activities associated with our mobile handset
products. We expect that selling, general and administrative expense will increase in absolute dollars in future periods as we
continue to 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 revenues; (2) fluctuating usage of advertising to promote our products and, in particular, our newly introduced
products; and (3) fluctuating legal costs related to litigation and intellectual property matters.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT
(in millions)
Write off of in-process research & development $
Year Ended
January 1,
2005
January 3,
2004
Change
— $
1.6 $
(1.6 )
We wrote off in-process research and development in fiscal 2003 related to our acquisition of Cygnal. We did not have
any such write-offs in fiscal 2004.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
(in millions)
Amortization of deferred stock compensation
Year Ended
January 1,
2005
January 3,
2004
Change
$
4.2 $
5.0 $
(0.8 )
The decrease in the dollar amounts of amortization of deferred stock compensation is primarily related to the expiration
of amortization on certain grants in which the deferred stock compensation has become fully amortized because the grants
have become fully vested.
38
INTEREST INCOME
(in millions)
Interest income
Year Ended
January 1,
2005
January 3,
2004
Change
$
3.1 $
1.4 $
1.7
The increase in the dollar amount of interest income was due to a greater amount of cash and short-term investments
balances during the year ended January 1, 2005 and due to an increase in the interest rates of the underlying instruments
during fiscal 2004.
INTEREST EXPENSE
(in millions)
Interest expense
Year Ended
January 1,
2005
January 3,
2004
Change
$
(0.3) $
(0.0) $
(0.3)
The increase in the dollar amount of interest expense during the most recent period was due to accrued interest
associated with software license agreements.
OTHER INCOME (EXPENSE), NET
(in millions)
Other income (expense), net
Year Ended
January 1,
2005
January 3,
2004
Change
$
2.1 $
(0.5) $
2.6
The increase in the dollar amount of other income for the most recent period was primarily due to gains on the sale of
test equipment.
PROVISION FOR INCOME TAXES
(in millions)
Provision for income taxes
Effective tax rate
Year Ended
January 1,
2005
January 3,
2004
$
34.9 $
31.3%
21.5 $
32.4%
Change
13.4
The effective tax rates differ from the federal statutory rate of 35% due to the impact of research and development tax
credits, state taxes, tax-advantaged interest income and other permanent items.
We anticipate the effective tax rate for fiscal 2005 to be approximately 20% due to our recent completion of an
alignment of our financial structure with our international operational structure. However, due to the variability of business
conditions, the relative mix in earnings between the U.S. and international operations, and other risks, this effective tax rate
may not be realized. Our U.S. earnings are typically taxed at a higher rate than our international earnings.
39
COMPARISON OF FISCAL 2003 TO FISCAL 2002
REVENUES
(in millions)
Revenues
Year Ended
January 3,
2004
December 28,
2002
Change
%
Change
$
325.3 $
182.0 $
143.3
78.7%
The increase in revenues from fiscal 2002 to fiscal 2003 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 saw 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.
GROSS PROFIT
(in millions)
Gross profit
Percent of revenue
Year Ended
January 3,
2004
December 28,
2002
$
163.1 $
50.1%
102.1 $
56.1%
Change
%
Change
61.0
59.8%
The increase in gross profit dollars from fiscal 2002 to fiscal 2003 was primarily due to the substantial increase in sales
volume. The decrease in gross margin percentage from fiscal 2002 to fiscal 2003 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.
RESEARCH AND DEVELOPMENT
(in millions)
Research and development
Percent of revenue
Year Ended
January 3,
2004
December 28,
2002
$
48.3 $
14.8%
32.0 $
17.6%
Change
%
Change
16.3
50.9%
The increase in the dollar amount of research and development expense from fiscal 2002 to fiscal 2003 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.
SELLING, GENERAL AND ADMINISTRATIVE
(in millions)
Selling, general and administrative
Percent of revenue
Year Ended
January 3,
2004
December 28,
2002
$
42.8 $
13.2%
33.9 $
18.6%
Change
%
Change
8.9
26.4%
The increase in the dollar amount of selling, general and administrative expense from fiscal 2002 to fiscal 2003 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.
40
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT
(in millions)
Write off of in-process research & development
Year Ended
January 3,
2004
December 28,
2002
Change
$
1.6 $
— $
1.6
We wrote off 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
(in millions)
Amortization of deferred stock compensation
Year Ended
January 3,
2004
December 28,
2002
Change
$
5.0 $
5.2 $
(0.2)
The decrease in the dollar amounts of amortization of deferred stock compensation in fiscal 2003 was primarily related
to the expiration of amortization on certain grants in which the deferred stock compensation has become fully amortized
because the grants have become fully vested.
INTEREST INCOME
(in millions)
Interest income
Year Ended
January 3,
2004
December 28,
2002
Change
$
1.4 $
1.6 $
(0.2)
The decrease in the dollar amount of interest income in fiscal 2003 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
(in millions)
Interest expense
Year Ended
January 3,
2004
December 28,
2002
Change
$
(0.0) $
(0.6 ) $
0.6
The decrease in interest expense was primarily due to lower debt, lease and other long-term payable balances during
fiscal 2003.
OTHER INCOME (EXPENSE), NET
(in millions)
Other income (expense), net
Year Ended
January 3,
2004
December 28,
2002
Change
$
(0.5) $
(0.6 ) $
0.1
Other expense primarily reflects our share of the losses in our investment in ASIC Design Services, Inc.
41
PROVISION FOR INCOME TAXES
(in millions)
Provision for income taxes
Effective tax rate
Year Ended
January 3,
2004
December 28,
2002
$
21.5 $
32.4%
10.6 $
33.8%
Change
10.9
PROVISION FOR INCOME TAXES. The effective tax rates differ from the federal statutory rate of 35% due to the
impact of research and development tax credits, state taxes, tax-advantaged interest income and other permanent items.
BUSINESS OUTLOOK
We expect revenues in the first quarter of fiscal 2005 to be in the range of $101 million to $105 million. Furthermore,
we expect our diluted net income per share to be in the range of $0.25 to $0.28.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of January 1, 2005 consisted of $277.1 million in cash, cash equivalents and short-
term investments. Our short-term investments consist primarily of municipal and corporate debt securities that have initial
maturities of less than one year.
Net cash provided by operating activities was $96.3 million during fiscal 2004, compared to net cash provided of $71.9
million during fiscal 2003. The increase was principally due the higher sales volumes and net income during fiscal 2004 and
the absence of any significant one-time payments in fiscal 2004 such as the $15.3 million payment associated with a patent
litigation settlement made during fiscal 2003. Operating cash flows during fiscal 2004 reflect our net income of $76.7
million, adjustments for non-cash items (depreciation, amortization, gain on disposal of property, equipment and software
and tax benefits associated with the exercise of stock options) of $28.3 million, and a net increase in the components of our
working capital of $8.7 million.
Net cash used in investing activities was $58.1 million during fiscal 2004, compared to net cash used of $11.2 million
during fiscal 2003. The increase was principally due to an increase of $37.6 million in net purchases of short-term
investments, a $5.5 million decrease in the net cash acquired from acquisition of business activity and a $3.8 million increase
in net purchases of property, equipment and software and other assets.
We anticipate capital expenditures of approximately $25 million for fiscal 2005. 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 $13.0 million during fiscal 2004, compared to net cash provided of $16.7
million during fiscal 2003. The decrease in cash flows from financing activities during fiscal 2004 was principally due to
lower proceeds from the exercise of employee stock options.
42
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 1, 2005, (in thousands):
Operating lease obligations (1)
Purchase obligations (2)
Other long-term obligations
$
3,503 $
25,153
—
3,365 $
403
993
2,124 $
—
—
1,172 $
—
—
1,329 $
—
—
581
—
—
2005
2006
Payments due by period
2007
2008
2009
Thereafter
(1) Operating lease obligations include amounts for leased facilities.
(2) Purchase obligations include contractual arrangements in the form of purchase orders with suppliers where there is a
fixed non-cancelable payment schedule or minimum payments due with a reduced delivery schedule.
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, potential acquisitions of companies or technologies
and the expansion of our sales and marketing activities. We believe our existing cash and short-term 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting
principles 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 cost of revenues 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.
43
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 written down in prior periods. This inventory remains written down until
sold, destroyed or otherwise disposed of. Second, we write down 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. Third, the remaining inventory not otherwise identified to be written down 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 goodwill and other 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. Such evaluations compare the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset over its expected useful life 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. If the asset is considered to be impaired, we record an impairment charge equal to the amount
by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value
determined by utilizing a discounted cash flow technique. 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 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. 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, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices
are the best evidence of fair value. If the fair value is less than the net book value, the second step of the 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.
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 then assess the likelihood that the deferred tax assets will be recovered from future
taxable income and, to the extent we believe that recovery is not likely, we 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. We believe adequate provisions for income taxes have been made for all periods.
44
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 (SFAS 151). SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation
of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the
adoption of SFAS 151 will have a material impact on our results of operations or financial position.
In December 2004, the FASB issued SFAS 123 (revised 2004), SHARE-BASED PAYMENT, (SFAS 123R). SFAS
123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under
the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic
method in accordance with Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Instead, companies will be required to account for such transactions using a fair-value method and recognize
the expense in the consolidated statement of income. SFAS 123R will be effective for periods beginning after June 15, 2005
and allows, but does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-
based payments under SFAS 123R. We have not yet determined which fair-value method and transitional provision we will
follow. However, we expect that the adoption of SFAS 123R will have a significant impact on our results of operations. We
do not expect the adoption of SFAS 123R will impact our overall financial position. See STOCK-BASED
COMPENSATION in Note 2 for the pro forma impact on net income and net income per share from calculating stock-based
compensation costs under the fair value alternative of SFAS 123. However, the calculation of compensation cost for share-
based payment transactions after the effective date of SFAS 123R may be different from the calculation of compensation cost
under SFAS 123, but such differences have not yet been quantified.
In December 2004, the FASB issued SFAS 153, EXCHANGES OF NONMONETARY ASSETS, AN AMENDMENT
OF APB OPINION NO. 29 (SFAS 153). The guidance in APB Opinion No. 29, ACCOUNTING FOR NONMONETARY
TRANSACTIONS, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle.
SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15,
2005. We do not believe that the adoption of SFAS 153 will have a material impact on our results of operations or financial
position.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our financial instruments include cash, cash equivalents and short-term investments. Our main investment objectives
are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest
income is sensitive to changes in the general level of U.S. interest rates. Based on our cash, cash equivalents and short-term
investments holdings as of January 1, 2005, an immediate one-percentage point decline in the yield for such instruments
would decrease our annual interest income by approximately $2.8 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.
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.
45
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 1, 2005 to provide reasonable assurance 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.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our
internal control system was designed to provide reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of January 1, 2005. In
making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of January 1,
2005, our internal control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm, Ernst & Young LLP, issued an attestation report on our assessment
of our internal control over financial reporting. This report appears on page F-1.
Item 9B. Other Information
None.
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”, “Compliance with Section 16(a) of the Securities
Exchange Act of 1934.” and “Code of Ethics.”
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.
46
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.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1. Financial Statements
SILICON LABORATORIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of independent registered public accounting firm on internal control over financial reporting
Report of independent registered public accounting firm on financial reporting
Consolidated balance sheets at January 1, 2005 and January 3, 2004
Consolidated statements of income for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002
Consolidated statements of changes in stockholders’ equity for the fiscal years ended January 1, 2005,
January 3, 2004 and December 28, 2002
Consolidated statements of cash flows for the fiscal years ended January 1, 2005, January 3, 2004 and
December 28, 2002
Notes to consolidated financial statements
2. Schedules
PAGE
F-1
F-2
F-3
F-4
F-5
F-6
F-7
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)
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 fiscal year ended January 3, 2004).
47
Exhibit
Number
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
Form of Stock Option Agreement and Notice of Grant of Stock Option under Registrant’s 2000 Stock
Incentive Plan.
10. 4
Form of Addendum to Stock Option Agreement under Registrant’s 2000 Stock Incentive Plan.
10. 5
Form of Stock Issuance Agreement under Registrant’s 2000 Stock Incentive Plan.
10. 6
Form of Addendum to Stock Issuance Agreement under Registrant’s 2000 Stock Incentive Plan.
10. 7*
Silicon Laboratories Inc. Employee Stock Purchase Plan (filed as Exhibit 10.3 to the IPO Registration
Statement).
10. 8*
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. 9*
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. 10*
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. 11*
Silicon Laboratories Inc. 2005 Bonus Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on January 25, 2005).
21
Subsidiaries of the Registrant.
23. 1
Consent of Independent Registered Public Accounting Firm.
24
Power of Attorney (included on signature page to this Form 10-K).
31. 1
Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of
2002.
31. 2
Certification of the Principal Accounting Officer, as required by Section 302 of the Sarbanes-Oxley Act
of 2002.
32. 1
Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated herein by reference to the indicated filing.
48
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 February 14,
2005.
SIGNATURES
SILICON LABORATORIES INC.
(Registrant)
By:
/s/ Daniel A. Artusi
Daniel A. Artusi
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Daniel A. Artusi and Russell J. Brennan, and each of them, acting individually, as his or her attorney-in-fact, each
with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this annual report on Form 10-K and other documents in connection herewith
and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents,
or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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
Chairman of the Board
February 14, 2005
Chief Executive Officer,
President and Director
(principal executive officer)
Vice President and Chief
Financial Officer
(principal financial and accounting officer)
February 14, 2005
February 14, 2005
Vice President and Director
February 14, 2005
/s/ Navdeep S. Sooch
Navdeep S. Sooch
/s/ Daniel A. Artusi
Daniel A. Artusi
/s/ Russell J. Brennan
Russell J. Brennan
/s/ David R. Welland
David R. Welland
/s/ William G. Bock
William G. Bock
/s/ Harvey B. Cash
Harvey B. Cash
Director
Director
February 14, 2005
February 14, 2005
February 14, 2005
February 14, 2005
February 14, 2005
/s/ Robert Ted Enloe, III
Robert Ted Enloe, III
Director
/s/ Laurence G. Walker
Laurence G. Walker
Director
/s/ William P. Wood
William P. Wood
Director
49
Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of Silicon Laboratories Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting that Silicon Laboratories Inc. maintained effective internal control over financial reporting as of
January 1, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Silicon Laboratories Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that Silicon Laboratories Inc. maintained effective internal control over
financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Silicon Laboratories Inc. maintained, in all material respects, effective internal control over financial reporting as of
January 1, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Silicon Laboratories Inc. as of January 1, 2005 and January 3, 2004, and the
related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three fiscal years
in the period ended January 1, 2005 of Silicon Laboratories Inc. and our report dated February 9, 2005 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Austin, Texas
February 9, 2005
F-1
Report of Independent Registered Public Accounting Firm on Financial Reporting
The Board of Directors and Shareholders of Silicon Laboratories Inc.
We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. as of January 1, 2005 and
January 3, 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each
of the three fiscal years in the period ended January 1, 2005. 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 the standards of the Public Company Accounting Oversight Board (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 1, 2005 and January 3, 2004, and the consolidated results of its operations and
its cash flows for each of the three fiscal years in the period ended January 1, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Silicon Laboratories Inc.’s internal control over financial reporting as of January 1, 2005, based
on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 9, 2005 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Austin, Texas
February 9, 2005
F-2
Silicon Laboratories Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of
$1,088 at January 1, 2005 and $1,079 at January 3, 2004
Inventories
Deferred income taxes
Prepaid expenses and other
Total current assets
Property, equipment and software, net
Goodwill
Other intangible assets, net
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred income on shipments to distributors
Income taxes payable
Total current liabilities
Long-term obligations and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock—$.0001 par value; 10,000 shares
authorized; no shares issued and outstanding
Common stock—$.0001 par value; 250,000 shares authorized;
52,508 and 51,237 shares issued and outstanding at
January 1, 2005 and January 3, 2004, respectively
Additional paid-in capital
Deferred stock compensation
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
January 1,
2005
January 3,
2004
$
$
$
202,521 $
74,585
46,272
38,405
9,878
5,244
376,905
34,559
46,766
15,384
10,788
484,402 $
37,001 $
11,913
25,227
8,207
82,348
2,570
84,918
151,359
38,954
47,879
34,064
5,784
5,600
283,640
34,376
38,613
14,744
6,722
378,095
45,488
11,251
11,526
12,663
80,928
9,962
90,890
—
—
5
287,908
(4,787)
116,358
399,484
484,402 $
5
256,792
(9,257)
39,665
287,205
378,095
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Silicon Laboratories Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Write off of in-process research & development
Impairment of goodwill and other intangible assets
Amortization of deferred stock compensation
Operating expenses
Operating income
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
$
456,225 $
206,230
249,995
325,305 $
162,173
163,132
182,016
79,939
102,077
74,917
64,156
—
—
4,237
143,310
106,685
3,054
(311)
2,148
111,576
34,883
48,296
42,836
1,600
—
4,986
97,718
65,414
1,368
(49)
(537)
66,196
21,480
32,001
33,877
—
37
5,173
71,088
30,989
1,582
(617)
(647)
31,307
10,590
$
$
$
76,693 $
44,716 $
20,717
1.49 $
1.39 $
0.92 $
0.86 $
51,471
54,983
48,850
52,288
0.44
0.41
47,419
50,811
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Silicon Laboratories Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
Balance as of December 29, 2001
48,640 $
5 $
170,567 $
(794 ) $
Common Stock
Number
Of
Shares
Par
Value
Additional
Paid-In
Capital
Stockholder
Notes
Receivable
Deferred
Stock
Compensatio
n
(18,603) $
Retained
Earnings
(Deficit)
Total
Stockholders’
Equity
(25,768) $
125,407
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
—
—
—
—
—
—
—
—
—
—
—
1,483
1,170
(98)
—
1,304
(338)
—
—
—
—
—
566
—
—
—
—
—
—
1,483
—
—
—
—
338
5,173
—
—
—
—
—
—
—
20,717
1,170
(98 )
566
1,304
—
5,173
20,717
Balance as of December 28, 2002
48,904
5
174,088
(228 )
(13,092 )
(5,051)
155,722
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
—
—
—
—
—
—
—
—
—
—
14,739
6,969
(21)
—
1,793
1,151
—
58,073
—
Balance as of January 3, 2004
51,237
5
256,792
Exercises of stock options
Income tax benefit from employee stock-based
awards
Repurchase and cancellation of unvested shares
Employee Stock Purchase Plan
Deferred stock compensation
Amortization of deferred stock compensation
Purchase acquisition
Net income
798
—
(5 )
109
—
—
369
—
—
—
—
—
—
—
—
—
10,268
6,766
—
2,746
(233)
—
11,569
—
—
—
—
228
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,739
—
—
—
—
(1,151 )
4,986
—
—
—
—
—
—
—
—
—
44,716
6,969
(21 )
228
1,793
—
4,986
58,073
44,716
(9,257 )
39,665
287,205
—
—
10,268
—
—
—
233
4,237
—
—
—
—
—
—
—
—
76,693
6,766
—
2,746
—
4,237
11,569
76,693
Balance as of January 1, 2005
52,508 $
5 $
287,908 $
— $
(4,787) $ 116,358 $
399,484
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Silicon Laboratories Inc.
Consolidated Statements of Cash Flows
(in thousands)
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of property, equipment and software
Loss (gain) on disposal of property, equipment and software
Write off of in-process research & development
Amortization of 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
Proceeds from sale of property, equipment and software
Purchases of other assets
Net cash acquired (used) in connection with acquisition of business
Net cash 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
$
76,693 $
44,716 $
16,191
(2,174 )
—
3,315
—
4,237
—
—
6,766
1,607
(4,341 )
(1,244 )
—
(358 )
(10,689 )
662
13,701
(3,645 )
(4,456 )
96,265
(95,677 )
60,046
(20,508 )
4,464
(6,328 )
(114 )
(58,117 )
—
—
—
2,746
—
10,268
13,014
15,427
1,087
1,600
3,742
—
4,986
—
663
6,969
(19,543)
(19,201)
(1,030)
—
(18)
24,681
1,916
1,188
505
4,194
71,882
(80,871)
82,854
(11,438)
—
(7,124)
5,367
(11,212)
—
—
228
1,793
(21)
14,739
16,739
51,162
151,359
202,521 $
77,409
73,950
151,359 $
254 $
36,350 $
49 $
10,326 $
2,902 $
11,569 $
9,514 $
58,074 $
$
$
$
$
$
20,717
11,755
—
—
445
37
5,173
214
662
1,170
(16,958 )
(8,098 )
(1,099 )
2,086
20
6,273
4,501
7,285
(3,614 )
8,470
39,039
(77,062 )
54,993
(21,498 )
—
(2,719 )
—
(46,286 )
(3,940 )
(464 )
566
1,304
(98 )
1,483
(1,149 )
(8,396 )
82,346
73,950
319
3,248
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
January 1, 2005
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 foundry 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 2004 ended January 1, 2005, fiscal year 2003 ended January 3, 2004 and fiscal year 2002 ended on December 28,
2002. Fiscal year 2004 had 52 weeks, fiscal year 2003 had 53 weeks and fiscal year 2002 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.
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 as of the
date of purchase 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 1, 2005 and January 3, 2004
consist of the following (in thousands):
Municipal Debt Securities
Corporate Debt Securities
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying Value
January 1,
2005
January 3,
2004
$
$
59,585 $
15,000
74,585 $
38,954
—
38,954
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-7
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Shipping and
handling costs are classified as a component of cost of revenue in the consolidated statements of income. Inventories consist
of the following (in thousands):
Work in progress
Finished goods
January 1,
2005
January 3,
2004
$
$
23,149 $
15,256
38,405 $
17,702
16,362
34,064
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 1,
2005
January 3,
2004
$
$
26,920 $
28,008
1,770
5,513
62,211
(27,652)
34,559 $
33,261
23,855
1,551
3,837
62,504
(28,128)
34,376
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.
F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually by the
Company for possible impairment in accordance with FASB 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 the fair value of the company or reporting unit to the net book value of the company or
reporting unit. 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 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 its fourth fiscal
quarter and in interim periods if events occur that would indicate 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), net in its consolidated
statement of income.
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 periodic 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 29, 2001
Additions charged to costs and expenses
Write-off of uncollectible accounts
Balance at December 28, 2002
Balance acquired from the Cygnal Integrated Products, Inc. purchase
Additions charged to costs and expenses
Write-off of uncollectible accounts
Balance at January 3, 2004
Additions charged to costs and expenses
Write-off of uncollectible accounts
Balance at January 1, 2005
F-9
$
490
455
—
945
39
117
(22)
1,079
38
(29)
$
1,088
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A significant portion of the Company’s products are 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.
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:
Samsung
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
17%
21%
16%
During fiscal 2004, two of our distributors, Edom Technology and Uniquest, represented 20% and 12% of our revenues,
respectively. During fiscal 2003, one of our distributors, Edom Technology, accounted for 13% of our revenues. During
fiscal 2002, two of our distributors, Uniquest and Edom Technology, represented 20% and 16% of our revenues, respectively.
We are particularly dependent on sales of our Aero Transceiver mobile handset product and its subsequent derivatives,
which represented approximately 50% of our total revenues in fiscal 2004 and approximately 40% of our total revenues in
fiscal 2003.
REVENUE RECOGNITION
Revenues are generated almost exclusively by sales of our ICs. 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 $1.5 million, $0.8 million and $0.5 million in the
fiscal years ended January 1, 2005, January 3, 2004 and December 28, 2002, 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-10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the effect on net income and net income per share if the Company had applied the fair
value recognition provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (in thousands,
except per share data):
Net income - as reported
Total stock-based compensation cost, net of related tax effects included
$
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
76,693 $
44,716 $
20,717
in the determination of net income as reported
2,354
3,345
5,173
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
Net income per share
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
$
$
$
$
$
(29,998)
49,049 $
(23,027)
25,034 $
(25,137)
753
1.49 $
0.95 $
1.39 $
0.90 $
0.92 $
0.51 $
0.86 $
0.49 $
0.44
0.02
0.41
0.02
In December 2004, the FASB issued SFAS 123 (revised 2004), SHARE-BASED PAYMENT, (SFAS 123R). See
RECENT ACCOUNTING PRONOUNCEMENTS in Note 2 for additional information.
OTHER COMPREHENSIVE INCOME
FASB 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 significant differences between net
income and comprehensive income during any of the periods presented.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. This statement requires the use of the asset and 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
numerous product areas. 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.
Revenue is attributed to a geographic area based on the end customer’s shipped-to location. Approximately $404.6
million, $260.2 million and $144.7 million of the Company’s revenues were from export sales for the fiscal years ended
January 1, 2005, January 3, 2004 and December 28, 2002, respectively. In fiscal 2004, South Korea, Taiwan and China
accounted for $129.2 million, $70.8 million and $46.6 million of revenues, respectively. During fiscal year 2004, sales of our
mobile handset products and broad-based mixed-signal products each accounted for approximately 50% of our revenues.
The long-lived assets of the Company’s wholly owned foreign subsidiaries were immaterial in all periods presented.
F-11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share
data):
Net income
Basic:
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
$
76,693 $
44,716 $
20,717
Weighted-average shares of common stock outstanding
Weighted-average shares of common stock subject to
repurchase
Shares used in computing basic net income per share
51,811
49,484
48,780
(340)
51,471
(634)
48,850
(1,361)
47,419
Effect of dilutive securities:
Weighted-average shares of common stock subject to
repurchase
Contingent shares, acquisition
Stock options
Shares used in computing diluted net income per share
274
139
3,099
54,983
511
—
2,927
52,288
Basic net income per share
Diluted net income per share
$
$
1.49 $
1.39 $
0.92 $
0.86 $
1,130
—
2,262
50,811
0.44
0.41
Approximately 1,568,000, 971,000 and 2,156,000 weighted-average dilutive potential shares of common stock have
been excluded from the diluted net income per share calculation for the years ended January 1, 2005, January 3, 2004 and
December 28, 2002, respectively, as the exercise price of the underlying stock options exceeded the average market price of
the stock during the respective periods. The Company has issued 1,270,701 shares of common stock during the fiscal year
ended January 1, 2005, net of repurchases.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, AN AMENDMENT OF ARB NO. 43,
CHAPTER 4 (SFAS 151). SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation
of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not
believe that the adoption of SFAS 151 will have a material impact on its results of operations or financial position.
F-12
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2004, the FASB issued SFAS 123 (revised 2004), SHARE-BASED PAYMENT, (SFAS 123R). SFAS
123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under
the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic
method in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Instead,
companies will be required to account for such transactions using a fair-value method and recognize the expense in the
consolidated statement of income. SFAS 123R will be effective for periods beginning after June 15, 2005 and allows, but
does not require, companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments
under SFAS 123R. The Company has not yet determined which fair-value method and transitional provision it will follow.
However, the Company expects that the adoption of SFAS 123R will have a significant impact on its results of operations.
The Company does not expect the adoption of SFAS 123R will impact its overall financial position. See STOCK-BASED
COMPENSATION in Note 2 for the pro forma impact on net income and net income per share from calculating stock-based
compensation costs under the fair value alternative of SFAS 123. However, the calculation of compensation cost for share-
based payment transactions after the effective date of SFAS 123R may be different from the calculation of compensation cost
under SFAS 123, but such differences have not yet been quantified.
In December 2004, the FASB issued SFAS 153, EXCHANGES OF NONMONETARY ASSETS, AN AMENDMENT
OF APB OPINION NO. 29 (SFAS 153). The guidance in APB Opinion No. 29, ACCOUNTING FOR NONMONETARY
TRANSACTIONS, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle.
SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15,
2005. The Company does not believe that the adoption of SFAS 153 will have a material impact on its results of operations
or financial position.
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC.
On December 10, 2003, the Company completed its acquisition of Cygnal Integrated Products, Inc. (Cygnal), an
innovator in analog-intensive, highly integrated 8-bit microcontrollers (MCUs). As a result of the acquisition, Cygnal’s
portfolio of over 50 general-purpose products further diversifies the Company’s existing product line, and will allow it to
address the broad-based, high margin, 8-bit MCU and high-performance analog markets. These factors contributed to a
purchase price that was in excess of the fair value of the Cygnal net tangible and intangible assets acquired and, as a result,
the Company recorded goodwill in connection with this transaction.
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.
F-13
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC. (CONTINUED)
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
Fiscal Year Ended
December 28, 2002
$
331,997 $
39,098
0.73
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 purchase price related to the fair-value of in-process research and development
(IPR&D) and was charged to operations during the fourth quarter of fiscal year 2003. The IPR&D was made up of two
micro-controller projects which were estimated to be 75% complete as of the date of the acquisition. Additionally, the
targeted completion dates were expected to be between December 2003 and March 2004, and the estimated cost to complete
these projects was expected to be approximately $0.3 million in the aggregate. The significant risks associated with the
successful completion of these projects included the Company’s potential inability to finish the complex designs, produce
sample versions of the integrated circuits which operated at the required technical specifications and gain customer
acceptance of the parts. Failure to complete these projects in a timely manner could have resulted in lost revenues. The fair
value of the IPR&D was determined using the income approach. Under the income approach, the fair value reflected the
present value of the projected cash flows that were expected to be generated by the products incorporating the IPR&D, if
successful. The projected cash flows were discounted to approximate fair value. The discount rate applicable to the cash
flows of each project reflected the stage of completion and other risks inherent in each project. The weighted average
discount rate used in the valuation of IPR&D was approximately 15 percent. As of January 1, 2005, the Company had
completed both of these projects. The Company estimates that it spent an aggregate of $0.9 million to complete these
projects. Additionally, the Company expects the products derived from these projects to begin contributing to revenues in a
meaningful way in fiscal 2005.
F-14
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC. (CONTINUED)
The Company is obligated to potentially issue up to a maximum of 1,290,963 additional shares of common stock to
shareholders of Cygnal (of which 369,330 shares have already been issued) 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 be earned 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. During the six month interim earn out period which ended on October 2, 2004,
microcontroller product revenues were $10.5 million. As a result, the Company issued 369,330 additional shares during the
fourth quarter of fiscal 2004. These shares represented 40% of the shares that would be issuable at the end of the earn out
period, assuming, for purposes of this calculation, that the revenues for the full earn out period (i.e., the full twelve-month
period) were equal to twice the revenues through the six-month interim measurement period. The Company anticipates that a
substantial portion or all of the remaining shares eligible for issuance (921,633 shares) will be issued at the end of the earn
out period in fiscal 2005. Such remaining shares have not been, and will not be, reflected in the accompanying financial
statements until the contingency is resolved and the shares are issuable.
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 $31.34 per share (representing the average of the closing prices of Silicon
Laboratories common stock for the three days before and after the date of the interim distribution which occurred on
November 16, 2004) to value the interim earn-out shares issued to former Cygnal shareholders. The value of any additional
consideration to be issued at the completion of the earn-out period 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.
To date, 1,559,364 shares have been issued related to this acquisition, consisting of the initial consideration and interim
additional consideration. Of this amount, 205,603 shares are being held in escrow to satisfy potential liabilities, if any,
resulting from claims for breaches of representations and warranties under the Agreement and Plan of Reorganization. These
shares will be released at the end of the earn out period in fiscal 2005, if no claims are made.
F-15
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following information details the gross carrying amount and accumulated amortization of other intangible assets (in
thousands):
Amortized intangible assets:
Core & developed technology
Customer relationships
Internal use software
Patents (1)
Non-compete agreements
Unamortized intangible assets:
Goodwill (2)
Amortization
Period
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
January 1, 2005
January 3, 2004
9 years
6 years
4-7 years
4-7 years
1-4 years
$
$
9,250 $
2,100
1,300
5,168
305
18,123
$
(1,084) $
(369)
(251)
(938)
(97)
(2,739) $
9,250 $
2,100
1,300
2,310
305
15,265 $
(56)
(19)
(13)
(427)
(5)
(520)
$
46,766 $
— $
38,613 $
—
(1) During fiscal 2004, the Company acquired various patents from a third-party for $2.9 million.
(2) During fiscal 2004, goodwill associated with the acquisition of Cygnal increased by $8.2 million.
Amortization expense related to other intangible assets for fiscal years 2004, 2003, and 2002 was $2.2 million,
$0.4 million, and $0.1 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 2005
For fiscal year 2006
For fiscal year 2007
For fiscal year 2008
For fiscal year 2009
2,467
2,417
2,355
2,213
2,107
5. STOCKHOLDERS’ EQUITY
COMMON STOCK
The Company had 52,508,111 shares of common stock outstanding as of January 1, 2005. Of these shares, 212,329
shares were unvested and subject to rights of repurchase that lapse according to a time based vesting schedule.
As of January 1, 2005, the Company had reserved shares of common stock for future issuance as follows:
Employee Stock Option Plans
Employee Stock Purchase Plan
Contingent consideration (Note 3)
Total shares reserved
12,438,461
1,008,595
921,633
14,368,689
F-16
5. STOCKHOLDERS’ EQUITY (CONTINUED)
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. Because the first trading day of calendar year 2004 occurred in fiscal
2003, two automatic increases to the reserves were included in fiscal 2003 and there were no increases to the reserves during
fiscal 2004.
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 1, 2005, a total of 1,378,306 shares of the Company’s common stock were
authorized for issuance under the Purchase Plan. There were 109,268 and 85,661 shares issued under the Purchase Plan in
fiscal 2004 and fiscal 2003, 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. The direct issuance
shares and the stock options contain vesting provisions generally 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 1, 2005, 20,463,217 shares were authorized for issuance under the 2000
Plan.
The following table summarizes information about deferred stock compensation and amortization of deferred stock
compensation:
Stock options or direct issuance shares
Deferred stock compensation recorded
Amortization of deferred stock compensation
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
—
40,000
—
—
— $ 1,752,000
$ 4,237,000 $ 4,986,000 $ 5,173,000
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.
F-17
5. STOCKHOLDERS’ EQUITY (CONTINUED)
A summary of the Company’s stock option and direct issuance activity and related information follows:
Balance at December 29, 2001
Additional shares reserved
Granted
Exercised
Cancelled
Repurchase and cancellation of unvested shares
Balance at December 28, 2002
Additional shares reserved
Granted
Exercised
Cancelled
Repurchase and cancellation of unvested shares
Balance at January 3, 2004
Additional shares reserved
Granted
Exercised
Cancelled
Repurchase and cancellation of unvested shares
Shares
Available
For Grant
Outstanding
Options
And Direct
Issuances
391,539
2,432,003
(2,136,850)
—
194,224
50,041
930,957
5,007,057
(2,090,550)
—
387,452
5,234
4,240,150
—
(1,949,300)
—
161,469
5,000
6,645,475
—
2,136,850
(237,567)
(194,224)
—
8,350,534
—
2,090,550
(1,063,218)
(387,452)
—
8,990,414
—
1,949,300
(797,103)
(161,469)
—
$
Exercise
Prices
$0.00 - $74.75
—
18.33 - 37.90
0.00 - 31.00
2.00 - 66.00
1.25 -5.00
0.00 - 74.75
—
0.00 - 52.18
0.00 - 38.50
0.00 - 62.50
0.00 - 10.00
0.00 - 74.75
—
30.12 - 58.83
0.00 - 55.38
2.00 - 55.38
0.00 -0.00
Balance at January 1, 2005
2,457,319
9,981,142
$0.00 - $74.75 $
Weighted-
Average
Exercise
Price
18.26
—
24.11
6.28
26.46
1.90
19.91
—
35.46
13.87
30.92
4.08
23.77
—
39.50
12.90
33.95
0.00
27.54
In addition, the following table summarizes information about stock options that were outstanding and exercisable at
January 1, 2005.
Range of
Exercise Prices
Number of
Options
$0.00 - $15.10
15.44 - 22.63
22.80 - 26.50
26.63 - 33.17
33.54 - 43.81
44.44 - 66.00
74.75 - 74.75
$0.00 - $74.75
2,155,102
1,531,847
1,444,720
1,986,847
1,525,787
1,334,839
2,000
9,981,142
Outstanding
Weighted-
Average
Remaining
Contractual
Life in Years
5.52
6.87
7.60
7.90
8.88
7.77
5.27
7.32
$
$
Exercisable
Weighted-
Average
Exercise Price
Number of
Options
Weighted-
Average
Exercise
Price
9.32
19.09
24.58
31.26
39.01
51.16
74.75
27.54
1,635,579 $
683,836
200,778
612,909
293,516
468,819
1,900
3,897,337 $
7.63
18.51
24.94
30.47
39.19
53.01
74.75
21.89
Pro forma information regarding net income (loss) is required by FASB 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:
Employee Stock Option Plans:
Expected stock price volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
Employee Stock Purchase Plan:
Expected stock price volatility
Risk-free interest rate
Expected life (in months)
Dividend yield
January 1,
2005
Year Ended
January 3,
2004
December 28,
2002
60%
3.5%
5.7
—
73%
1.4%
17
—
70%
2.9%
5.2
—
77%
1.1%
16
—
85 %
3.9 %
4.9
—
85 %
3.2 %
16
—
F-18
5. STOCKHOLDERS’ EQUITY (CONTINUED)
The weighted-average exercise price and fair value for options granted and direct issuance shares during fiscal 2004 is as
follows:
Exercise price equal to price of stock on date of grant
Exercise price less than price of stock on date of grant
Number of
Options/Shares
Weighted-
Average
Exercise Price
Weighted-
Average Fair
Value
1,949,300
$
—
39.50 $
—
22.41
—
The weighted-average fair value for purchase rights granted under the Purchase Plan for fiscal 2004 was $14.51.
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
Pro forma basic net income per share
Pro forma diluted net income per share
January 1,
2005
$
$
$
49,049 $
0.95
$
0.90 $
Year Ended
January 3,
2004
December 28,
2002
25,034 $
0.51 $
0.49 $
753
0.02
0.02
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.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating lease agreements that expire at various dates through 2010. Some of
these arrangements contain renewal options, and require the Company to pay taxes, insurance and maintenance costs.
Rent expense under operating leases was $3.0 million, $2.5 million and $2.0 million for fiscal 2004, 2003 and 2002,
respectively.
The minimum annual future rentals under the terms of these leases at January 1, 2005 are as follows (in thousands):
FISCAL YEAR
2005
2006
2007
2008
2009
Thereafter
Total minimum lease payments
Minimum sublease rental income
Total net minimum lease payments
Securities Litigation
$
$
3,694
3,572
2,345
1,326
1,329
581
12,847
(773)
12,074
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. The Consolidated Amended 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
F-19
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
prices. The action seeks damages in an unspecified amount and is being coordinated with approximately 300 other nearly
identical actions filed against other companies. A court order dated October 9, 2002 dismissed without prejudice the four
officers of the Company who had been named individually. On February 19, 2003, the Court denied the motion to dismiss
the complaint against the Company. On October 13, 2004, the Court certified a class in six of the approximately 300 other
nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class
certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Silicon Laboratories case. The
Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the
Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other
provisions, the settlement provides for a release of the Company and the individual defendants for the conduct alleged in the
action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away,
not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also
provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the
extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the
issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are
required to make up the difference. The Company anticipates that its potential financial obligation to plaintiffs pursuant to
the terms of the settlement agreement and related agreements will be covered by existing insurance. The Company is not
aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers appear to be solvent, and the Company is not aware of any uncertainties as to the legal
sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, the Company does not expect that the
settlement would involve any material payment by it. Furthermore, even if the Company’s insurance were unavailable due to
insurer insolvency or otherwise, the Company expects that its maximum financial obligation to plaintiffs pursuant to the
settlement agreement would be less than $3.4 million. The settlement agreement has been submitted to the Court for
approval. Approval by the Court cannot be assured. The Company is unable to determine whether or when a settlement will
occur or be finalized. As approval by the Court cannot be assured, the Company is unable at this time to determine whether
the outcome of the litigation would have a material impact on its results of operations or financial condition.
Trade Secret and Patent Infringement Litigation
On February 17, 2004, the Company filed a lawsuit against a former employee and Axiom Microdevices Inc., a
California corporation, in the United States District Court for the Western District of Texas, Austin Division, alleging theft of
trade secrets by the individual and Axiom. The lawsuit also alleges that the employee breached his ethical, contractual and
fiduciary obligations to the Company by disclosing trade secrets and confidential information to Axiom and that Axiom
tortiously interfered with the employee’s contractual obligations to the Company. On September 14, 2004, the Company
added claims for infringement of United States Patents 6,549,071 and 6,788,141 to the pending suit. The patents relate to the
Company’s proprietary technology for CMOS RF power amplifiers. At this time, the Company cannot estimate the outcome
of this matter or resulting financial impact to it, if any.
Other Litigation
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, the Company does not expect them to have a material
adverse effect on the consolidated financial position or results of operations.
F-20
7.
INCOME TAXES
As of January 1, 2005, the Company had a federal net operating loss and a research and development credit
carryforwards of approximately $20,664,000 and $559,000 respectively, as a result of the Cygnal acquisition on December
10, 2003. These carryforwards expire in fiscal years 2019 through 2023. Recognition of these loss and credit carryforwards
is subject to an annual limit, which may cause them to expire before they are used. Recognition of the benefits will reduce
goodwill. The Company has established a valuation allowance against a portion of the deferred tax asset related to these
benefits to reflect its judgment about their realizability.
The Company also had state research and development credit carryforwards of approximately $1,607,000 which expire
in fiscal years 2019 through 2023.
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 bases of acquired assets and assumed liabilities.
Significant components of the Company’s deferred taxes as of January 1, 2005 and January 3, 2004 are as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforward
Research and development tax credit carryforwards
Reserves and allowances
Deferred income on shipments to distributors
Accrued liabilities & other
$
Less: Valuation allowance
Deferred tax liabilities:
Acquired intangibles
Depreciable assets
Prepaid expenses & other
January 1,
2005
January 3,
2004
8,020 $
1,607
1,490
6,912
2,316
20,345
(3,629)
16,716
3,904
3,382
773
8,059
9,561
2,166
1,575
4,008
1,620
18,930
(8,062)
10,868
4,625
3,752
927
9,304
Net deferred tax assets
$
8,657 $
1,564
F-21
7.
INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes attributable to continuing operations are as follows (in
thousands):
Current:
Federal
State
International
Total Current
Deferred:
Federal
State
International
Total Deferred
January 1,
2005
January 3,
2004
December 28,
2002
$
$
37,755 $
1,170
917
39,842
(4,335 )
(114 )
(510 )
(4,959 )
34,883 $
19,255 $
550
—
19,805
1,629
46
—
1,675
21,480 $
13,811
396
—
14,207
(3,517)
(100)
—
(3,617)
10,590
The Company’s provision for income taxes differs from the expected tax expense amount computed by applying the
statutory federal income tax rate to income before income taxes as a result of the following:
Federal statutory rate
State taxes, net of federal benefit
Research and development tax credits
Other
January 1,
2005
January 3,
2004
December
28,
2002
35.0 %
1.0
(3.0 )
(1.7 )
31.3 %
35.0%
1.0
(3.6)
—
32.4%
35.0%
1.1
(3.6)
1.3
33.8%
Substantially all of the Company’s operating income was generated from domestic operations during fiscal 2003 and
2004. At the end of fiscal 2004, undistributed earnings of the Company’s foreign subsidiaries of approximately $666,000 are
considered permanently reinvested. Accordingly, no provision for U.S. federal and state income taxes has been provided.
Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.
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 $655,000, $424,000 and $320,000 to the 401(k) Plan during fiscal 2004, 2003 and 2002,
respectively.
F-22
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 2004 and 2003 is as follows (in thousands of dollars except per share amounts):
Revenues
Cost of revenues
Gross profit
Operating expenses:
Fiscal 2004
Fiscal 2003
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
95,462 $
43,108
52,354
121,010 $
53,712
67,298
126,130 $
57,544
68,586
113,623 $
51,866
61,757
109,559 $
50,267
59,292
82,907 $
38,061
44,846
69,086 $
30,267
38,819
63,753
43,578 *
20,175
Research and development
Selling, general &
administrative
Write off of in- process research
and development
Amortization of deferred stock
compensation
Operating expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Provision for income taxes
20,052
18,856
17,867
18,142
14,864
12,267
11,635
9,530
15,244
17,058
16,650
15,204
12,611
10,688
9,539
9,998
—
—
—
—
1,600
—
—
—
854
36,150
16,204
1,194
(68 )
169
17,499
4,570
983
36,897
30,401
790
(78 )
(29 )
31,084
10,041
1,163
35,680
32,906
591
(115)
193
33,575
10,769
1,237
34,583
27,174
479
(50 )
1,815
29,418
9,503
1,301
30,376
28,916
435
(49)
170
29,472
8,549
1,196
24,151
20,695
281
—
75
21,051
7,119
1,223
22,397
16,422
308
—
(119 )
16,611
5,707
1,266
20,794
(619 )
344
—
(663 )
(938 )
105
Net income (loss)
$
12,929 $
21,043 $
22,806 $
19,915 $
20,923 $
13,932 $
10,904 $
(1,043)
Net income (loss) per share:
Basic
Diluted
Weighted-average common shares
outstanding:
Basic
Diluted
$
$
0.25 $
$
0.24
0.41 $
0.39 $
0.44 $
0.41 $
0.39 $
$
0.36
0.42 $
0.39
$
0.28 $
0.26 $
0.22 $
0.21 $
(0.02)
(0.02)
52,008
54,632
51,389
54,547
51,328
55,294
50,992
55,290
49,711
53,969
48,939
52,816
48,480
51,392
48,215
48,215
*
Includes a $15.3 million charge for patent infringement litigation settlement.
AS 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
Amortization of deferred stock
compensation
Operating expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Provision for income taxes
Fiscal 2004
Fiscal 2003
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
100.0 %
45.2
54.8
100.0%
44.4
55.6
100.0%
45.6
54.4
100.0%
45.6
54.4
100.0%
45.9
54.1
100.0 %
45.9
54.1
100.0 %
43.8
56.2
100.0%
68.4*
31.6
21.0
16.0
—
0.9
37.9
16.9
1.3
(0.1 )
0.2
18.3
4.8
15.6
14.1
—
0.8
30.5
25.1
0.7
(0.1)
0.0
25.7
8.3
14.2
13.2
—
0.9
28.3
26.1
0.5
(0.1)
0.1
26.6
8.5
16.0
13.4
—
1.1
30.5
23.9
0.4
0.0
1.6
25.9
8.4
13.6
11.5
1.5
1.2
27.8
26.3
0.4
—
0.2
26.9
7.8
14.8
12.9
—
1.4
29.1
25.0
0.3
—
0.1
25.4
8.6
16.8
14.9
13.8
15.7
—
1.8
32.4
23.8
0.5
—
(0.2 )
24.1
8.3
—
2.0
32.6
)
(1.0
0.6
—
(1.0)
(1.4)
0.2
Net income (loss)
13.5 %
17.4%
18.1%
17.5%
19.1%
16.8 %
15.8 %
(1.6) %
•
Includes a charge equal to 23.9% of revenues for a patent infringement litigation settlement.
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)
2001
2002
2003
2004
Fiscal
Operating income (loss)
($51,247)
$30,989
$65,414
$106,685
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
--
--
4,187
34,885
5,276
44,348
--
--
--
37
5,173
5,210
15,260
1,600
--
--
4,986
21,846
--
--
--
--
4,237
4,237
Adjusted operating income (loss)
($6,899)
$36,199
$87,260
$110,922
Net income (loss)
Adjustments:
($45,573)
$20,717
$44,716
$76,693
Settlement of patent infringement lawsuit, net of tax
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)
--
--
4,187
34,885
5,276
44,348
--
--
--
37
5,173
5,210
10,377
1,600
--
--
4,986
16,963
--
--
--
--
4,237
4,237
($1,225)
$25,927
$61,679
$80,930
Shares used in computing adjusted earnings (loss) per share
45,914
50,811
52,288
54,983
Adjusted earnings (loss) per share
($0.03)
$0.51
$1.18
$1.47
(This Page Intentionally Left Blank)
EXECUTIVE OFFICERS
CORPORATE INFORMATION
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
DLA Piper Rudnick
Gray Cary US LLP
1221 South MoPac Expressway,
Suite 400
Austin, TX 78746-6875
INDEPENDENT AUDITORS
Ernst & Young LLP
700 Lavaca Street, Suite 1400
Austin, TX 78701
TRANSFER AGENT
AND REGISTRAR
American Stock Transfer
& Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
(800) 937-5449
Daniel Artusi
President
and Chief Executive Officer
Russell Brennan
Chief Financial Officer
David Bresemann
Vice President
Derrell Coker
Vice President
Bradley Fluke
Vice President
Gary Gay
Vice President
Edmund Healy
Vice President
Jonathan Ivester
Vice President
David Welland
Vice President
SILICON LABORATORIES
ENGINEERING FELLOWS
Donald Kerth
Fellow
Jeffrey Scott
Fellow
David Welland
Vice President
and Fellow
FISCAL YEAR ENDED
JANUARY 1, 2005
Q1 04
Q2 04
Q3 04
Q4 04
HIGH
LOW
$59.92
$44.00
59.45
43.95
37.50
42.88
29.02
26.89
CORPORATE DIRECTORY
DIRECTORS
Navdeep Sooch
Chairman,
Silicon Laboratories
Daniel Artusi
President
and Chief Executive Officer,
Silicon Laboratories
David Welland
Vice President
and Fellow,
Silicon Laboratories
William Bock
CenterPoint Ventures,
Partner
Harvey B. Cash
InterWest Partners,
General Partner
Robert Ted Enloe, III
Optisoft, Inc.,
President and CEO
Laurence G. Walker, PhD
William Wood
Silverton Partners,
General Partner
ANNUAL MEETING
STOCK DATA
As of February 21, 2005,
there were 291 holders of
record of the Company’s
Common Stock.
The table to the right sets
forth for the periods indicated,
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 21, 2005,
at 9:30am Central Standard
Time at the Lady Bird Johnson
Wildflower Center,
4801 La Crosse Avenue,
Austin, Texas.
INVESTOR RELATIONS
For more information
about Silicon Laboratories,
please visit our website at
www.silabs.com, or contact:
Investor Relations
Silicon Laboratories Inc.
4635 Boston Lane
Austin, TX 78735
(512) 464-9254
investor.relations@silabs.com
This annual report is printed on acid-free paper and contains 20% post-consumer fiber.
Silicon Laboratories Inc.
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