AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 2000 REGISTRATION NO. 333--94853 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ SILICON LABORATORIES INC. (Exact name of registrant as specified in its charter) DELAWARE 3674 74-2793174 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 4635 BOSTON LANE AUSTIN, TX 78735 TELEPHONE: (512) 416-8500 FACSIMILE: (512) 464-9404 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) NAVDEEP S. SOOCH CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD 4635 BOSTON LANE AUSTIN, TX 78735 TELEPHONE: (512) 416-8500 FACSIMILE: (512) 464-9404 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: S. MICHAEL DUNN, P.C. ALAN DEAN THOMAS R. NELSON DAVIS POLK & WARDWELL PHILIP W. RUSSELL 450 LEXINGTON AVENUE BROBECK, PHLEGER & HARRISON LLP NEW YORK, NEW YORK 10017 301 CONGRESS AVENUE, SUITE 1200 TELEPHONE: (212) 450-4000 AUSTIN, TEXAS 78701 FACSIMILE: (212) 450-4800 TELEPHONE: (512) 477-5495 FACSIMILE: (512) 477-5813 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE Common Stock, $0.0001 par value....... 3,680,000(a) $23.00 $84,640,000 $22,345(b) (a) Includes 480,000 shares as to which the Registrant has granted the Underwriters an option to cover over-allotments. (b) $26,400 was previously paid on January 18, 2000. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION) ISSUED MARCH 7, 2000 3,200,000 SHARES [LOGO] COMMON STOCK -------------- SILICON LABORATORIES INC. IS OFFERING 2,720,000 SHARES OF ITS COMMON STOCK AND THE SELLING STOCKHOLDERS ARE SELLING 480,000 SHARES OF COMMON STOCK. SILICON LABORATORIES WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $21.00 AND $23.00 PER SHARE. ------------------- OUR COMMON STOCK HAS BEEN APPROVED FOR TRADING AND QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "SLAB." ------------------- INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------------- PRICE $ A SHARE ------------------- UNDERWRITING PROCEEDS TO PROCEEDS TO PRICE TO DISCOUNTS AND SILICON SELLING PUBLIC COMMISSIONS LABORATORIES STOCKHOLDERS ---------------- ---------------- ---------------- ---------------- PER SHARE...................... $ $ $ $ TOTAL.......................... $ $ $ $ SILICON LABORATORIES INC. HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 480,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES OF COMMON STOCK TO PURCHASERS ON , 2000. ------------------- MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS SALOMON SMITH BARNEY , 2000
[The graphics background is a silicon chip wafer with the heading Silicon Laboratories and its logo. The phrase "Mixed-Signal Innovation for the Communications Industry" is under the logo and company name. The rest of the page consists of two columns, the left column titled "Silicon Laboratories Products" and the right column titled "Typical Applications". Under the Silicon Laboratories Products column, there are four graphics of the Company's chips. Under the Typical Applications column, there are four graphics of applications that the various chips are used in with text descriptions of each graphic consisting, from top to bottom, of "Personal Computer Modems and Fax Machines" and "Cellular Phones, Pagers, Wireless Data Communications, Personal Digital Assistants" and "Set-Top Boxes, Point of Sale Terminals, Automated Teller Machines, Security Systems" and "Telephone Switchboards, Voice Communications Over the Internet, Cable Telephony." In between the left and right columns is text describing the Company's products consisting, from top to bottom, of "Silicon DAA Products, Globally-Programmable Silicon Direct Access Arrangement Products--Provides electrical isolation between the wireline device and the telephone line to insure safety and to prevent harm to the telephone network from electrical surges" and "RF Synthesizer Products, Integrated Radio Frequency Synthesizers--Generates high frequency signals used in wireless communication devices to select a particular radio channel" and "ISOmodem-TM- Products, Low-Speed Embedded Modems--Functions as a miniaturized modem designed for quick network access for devices with limited data transmission requirements" and "ProSLIC Products-TM-, Integrated Subscriber Line Interface Circuits and Codec Integrated Circuits--Serves as the interface providing dial tone, busy tone, caller ID and ring signal functions at the source end of the telephone."]
TABLE OF CONTENTS PAGE -------- Prospectus Summary..................... 3 Risk Factors........................... 6 Special Note Regarding Forward-Looking Statements........................... 18 Use of Proceeds........................ 19 Dividend Policy........................ 19 Capitalization......................... 20 Dilution............................... 21 Selected Consolidated Financial Information.......................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 23 PAGE -------- Business............................... 33 Management............................. 45 Certain Transactions................... 54 Principal and Selling Stockholders..... 55 Description of Capital Stock........... 57 Shares Eligible for Future Sale........ 61 Underwriters........................... 63 Legal Matters.......................... 65 Experts................................ 65 Where You Can Find Additional Information About Silicon Laboratories......................... 65 Index to Consolidated Financial Statements........................... F-1 ------------------------ You should rely only on the information contained in this prospectus. We and the selling stockholders have not authorized anyone to provide you with information that is different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2000, all dealers that buy, sell or trade shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SILICON LABORATORIES We design and develop proprietary, analog-intensive, mixed-signal integrated circuits, or ICs, for the rapidly growing communications industry. 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. Mixed-signal ICs are critical components of numerous communications products, including cellular telephones, cable and satellite set-top boxes, modems and fax machines. Our ICs can dramatically reduce the cost, size and system power requirements of these communications products. To develop our business rapidly, we initially focused our efforts on developing ICs for the personal computer modem market. We are now applying our mixed-signal and communications expertise to the development of innovative ICs for other communications markets with high growth potential, such as cellular telephones and network access applications. Our five largest customers in 1999 were Intel, Motorola, PC-Tel, SmartLink and 3Com. We have no long-term purchase commitments from any of our customers. In addition, PC-Tel is qualifying a second source for the ICs that we currently sell to it and we are currently in litigation with 3Com, which could result in decreased sales of our products to either or both of these customers. Sales to PC-Tel and 3Com represented over 70% of our total sales in fiscal 1999. Within the semiconductor industry, we are known as a "fabless" company, meaning that we do not fabricate the semiconductors that we design and develop, but instead rely on third parties to manufacture our products. We design our ICs to be manufactured using standard complementary metal oxide semiconductor, or CMOS, technology, which involves less cost and complexity in the manufacturing process than competing technologies. As a result, our ICs can be reliably manufactured at a reduced cost and in high volume at semiconductor foundries around the world. Demand for communications services has increased at a rapid rate in recent years due to a number of factors, including the growth of Internet usage, development of new communications technologies, availability of improved communications services at lower costs and remote access requirements for corporate networks. This demand has fueled tremendous growth in the number of wireline and wireless communications devices used to access these services. Digital communications devices typically require mixed-signal circuits to access the communications networks to which they are connected. In order to improve their competitive position, communications device manufacturers need advanced mixed-signal ICs to create smaller products with improved price/performance characteristics. Manufacturers of communications devices must rapidly introduce new and advanced products and must adapt to evolving industry standards and new technologies to remain competitive. Because analog-intensive, mixed-signal IC design expertise is difficult to find, these manufacturers increasingly are turning to third parties, such as Silicon Laboratories with its world-class design talent, to provide advanced mixed-signal ICs. This expertise is even more important when designing within the limitations of standard CMOS manufacturing processes rather than alternative semiconductor processes, which are typically more expensive and not as widely available. Our mixed-signal ICs provide our customers with the following benefits: - DRAMATICALLY IMPROVED SIZE AND PRICE/PERFORMANCE CHARACTERISTICS. By significantly reducing the number of discrete components used in communications devices, our ICs enable our customers to offer products with smaller sizes, lower costs, reduced power consumption and with increased performance and reliability. - REDUCED TIME REQUIRED TO BRING A PRODUCT TO MARKET. We design our mixed-signal ICs to be integrated with the products of multiple manufacturers and conduct extensive research and development to ensure that they conform to our customers' evolving technical standards. As a result, our customers are able to rapidly integrate our ICs into their designs and reduce the time it takes to begin marketing their products. - ATTRACTIVE NEW PRODUCT OPPORTUNITIES. Our space-saving and cost-efficient ICs allow our customers to create smaller and more cost-effective products for use in many evolving markets for communications devices. 3
THE OFFERING Common stock offered by: Silicon Laboratories..................................... 2,720,000 shares Selling stockholders..................................... 480,000 shares Total.................................................. 3,200,000 shares Common stock to be outstanding after this offering......... 46,578,118 shares Use of proceeds............................................ For working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... SLAB ------------------------ The number of shares of common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of January 1, 2000 and reflects the conversion of all shares of our outstanding convertible preferred stock into common stock. This information excludes: - 2,380,226 shares subject to outstanding options with a weighted average exercise price of $2.52 per share; and - 143,182 shares subject to outstanding warrants with a weighted average exercise price of $1.17 per share. In addition, the underwriters have a 30-day option to purchase up to 480,000 additional shares from us to cover over-allotments. Some of the disclosures in this prospectus would be different if the underwriters exercise the over-allotment option. Unless we tell you otherwise, the information in this prospectus: - assumes that the underwriters will not exercise the over-allotment option; - reflects a 2-for-1 split of our common stock effected as of November 3, 1999; and - reflects the conversion of each share of our outstanding convertible preferred stock into two shares of common stock upon the closing of this offering. You should note that our fiscal year ends on the Saturday closest to December 31st. A reference to "fiscal 1997" is to our fiscal year ended January 3, 1998; a reference to "fiscal 1998" is to our fiscal year ended January 2, 1999; and a reference to "fiscal 1999" is to our fiscal year ended January 1, 2000. ------------------------ Our principal executive offices are located at 4635 Boston Lane, Austin, Texas 78735. Our telephone number is (512) 416-8500. Our Web site address is WWW.SILABS.COM. THE INFORMATION CONTAINED ON OUR WEB SITE IS NOT INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. 4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION PERIOD FROM INCEPTION (AUGUST 19, 1996) FISCAL YEAR THROUGH ------------------------------ DECEMBER 31, 1996 1997 1998 1999 ------------------ -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Sales............................................ $ -- $ -- $ 5,609 $46,911 Cost of goods sold............................... -- -- 2,371 15,770 ------- ------- ------- ------- Gross profit..................................... -- -- 3,238 31,141 Operating expenses............................... 20 1,991 6,690 16,480 ------- ------- ------- ------- Operating income (loss).......................... (20) (1,991) (3,452) 14,661 ------- ------- ------- ------- Net income (loss)................................ $ (20) $(1,835) $(3,397) $11,040 ======= ======= ======= ======= Basic net income (loss) per share................ $ -- $ (1.04) $ (.37) $ .73 Diluted net income (loss) per share.............. $ -- $ (1.04) $ (.37) $ .25 Shares used in calculating basic net income (loss) per share............................... -- 1,760 9,129 15,152 Shares used in calculating diluted net income (loss) per share............................... -- 1,760 9,129 43,657 Pro forma basic net income per share............. $ .30 Pro forma diluted net income per share........... $ .25 Shares used in calculating pro forma basic net income per share............................... 36,461 Shares used in calculating pro forma diluted net income (loss) per share........................ 43,657 The following table contains a summary of our balance sheet: - on an actual basis at January 1, 2000; - on a pro forma basis to reflect the conversion of all outstanding shares of convertible preferred stock into 13,842,174 shares of common stock; and - on a pro forma as adjusted basis to additionally reflect the sale of 2,720,000 shares of common stock by us in this offering at an assumed initial public offering price of $22.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. AS OF JANUARY 1, 2000 -------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $14,706 $14,706 $69,357 Working capital............................................. 14,281 14,281 68,933 Total assets................................................ 41,958 41,958 96,609 Long-term obligations, net of current maturities............ 6,223 6,223 6,223 Redeemable convertible preferred stock...................... 12,750 -- -- Total stockholders' equity.................................. 8,003 20,753 75,404 5
RISK FACTORS THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. RISKS RELATED TO OUR BUSINESS WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF OUR SALES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR SALES In fiscal 1999, our four largest customers, in the aggregate, accounted for approximately 92% of our sales. Of these customers, PC-Tel accounted for 62%, SmartLink for 12%, 3Com for 10% and Motorola for 8% of our fiscal 1999 sales. Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that use our integrated circuit, or IC, products. In the future, these customers may decide not to purchase our ICs at all, purchase fewer ICs than they did in the past or alter their purchasing patterns, particularly because: - we do not have any material long-term purchase arrangements or contracts with these or any of our other customers; - substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty; and - some of our customers have sought or are seeking relationships with current or potential competitors which may affect our customers' purchasing decisions. For example, PC-Tel recently announced that, while Silicon Laboratories is currently the sole supplier of the direct access arrangement, or DAA, IC used in PC-Tel's products, PC-Tel is in the process of qualifying a second source for its DAA IC requirements. We believe PC-Tel is seeking a second source in order to diversify its supplier base which would increase its negotiating leverage with us and protect its ability to secure DAA components. With minor modifications to PC-Tel's products, our competitors' DAA products could be incorporated in PC-Tel's products. We have a volume purchase agreement with PC-Tel, but the agreement does not require PC-Tel to purchase any minimum number of units from us during fiscal 2000. If PC-Tel qualifies a second source, we believe that this could have an adverse effect on the prices we are able to charge PC-Tel and the volume of DAA ICs that we sell to PC-Tel, which would negatively affect our sales and operating results. On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com claiming that Analog Devices has infringed, and is continuing to infringe, our issued U.S. patent with respect to our DAA technology and that Analog Devices and 3Com have misappropriated our confidential information, know-how and trade secrets. On February 24, 2000, 3Com filed an answer denying it has misappropriated our confidential information, know how and trade secrets and, without specifying, asserted we have acted with unclean hands. Although 3Com, which is one of our key customers, may decide to cease purchasing direct access arrangement ICs from Analog Devices as a result of this suit, it is possible that 3Com may respond by ceasing its purchase of our DAA products. The loss of sales to 3Com could have a material adverse effect on our sales and operating results. The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our sales and adversely affect our business. 6
WE HAVE DEPENDED ON OUR DIRECT ACCESS ARRANGEMENT, OR DAA, FAMILY OF PRODUCTS FOR SUBSTANTIALLY ALL OF OUR SALES TO DATE, AND SIGNIFICANT REDUCTIONS IN ORDERS FOR DAA PRODUCTS WOULD SIGNIFICANTLY REDUCE OUR SALES Substantially all of our sales to date have been derived from sales of our DAA family of ICs. Until we are able to diversify our sales through the introduction of new products, we will continue to rely on sales of our DAA products. Reduced market acceptance of our DAA products or the introduction of products with superior price/performance characteristics by our competitors could significantly reduce our sales. In addition, substantially all of our DAA products that we have sold include technology related to our issued U.S. patent. If this patent is found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our sales. WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS Our DAA products are currently used by our customers to produce modems for the personal computer market. We rely on our customers to provide software and other technical support for the modems that use our DAA products. If our customers' software does not provide the required functionality or if our customers do not provide satisfactory support for their modem products, the demand for modems that incorporate our DAA products may diminish. Any reduction in the demand for modems would significantly reduce our sales. IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION COULD BE HARMED We currently sell only our DAA products in commercial quantities. Our future success will depend on our ability to reduce our dependence on our DAA products by developing new ICs and product enhancements that achieve market acceptance in a timely and cost-effective manner. The development of mixed-signal ICs is highly complex, and we occasionally have experienced delays in completing the development and introduction of new products and product enhancements. Successful product development and market acceptance of our products depend on a number of factors, including: - changing requirements of customers within the wireline and wireless communications markets; - accurate prediction of market requirements; - timely completion and introduction of new designs; - timely qualification and certification of our ICs for use in our customers' products; - commercial acceptance and volume production of the products into which our ICs will be incorporated; - availability of foundry and assembly capacity; - achievement of high manufacturing yields; - quality, price, performance, power use and size of our products; - availability, quality, price and performance of competing products and technologies; - our customer service and support capabilities and responsiveness; - successful development of our relationships with existing and potential customers; and - changes in technology, industry standards or end-user preferences. We cannot provide any assurance that new products which we recently have developed or may develop in the future will achieve market acceptance. We have recently introduced to market three new ICs: - an RF synthesizer, which is used to generate high frequency signals that are used in wireless communications systems to select a particular radio channel; - an ISOmodem, which is a miniaturized modem that can be embedded in electronic devices with low transmission requirements, such as credit card verification devices, to provide quick network access; and 7
- a ProSLIC product, which provides dial tone, busy tone, caller ID and ring signal functions at the source end of the telephone. We also are actively developing other ICs. If our recently introduced or other ICs fail to achieve market acceptance, our operating results and competitive position could be adversely affected. DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY BOTH IN ACCURATELY PREDICTING OUR FUTURE SALES AND APPROPRIATELY BUDGETING FOR OUR EXPENSES We were incorporated in 1996 and did not begin generating sales until the second quarter of 1998. As a result, we have only a short history from which to predict future sales. This limited operating experience combined with the rapidly evolving nature of the markets in which we sell our products, as well as other factors which are beyond our control, reduce our ability to accurately forecast quarterly or annual sales. Additionally, because most of our expenses are fixed in the short term or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales. We are currently expanding our staffing and increasing our expense levels in anticipation of future sales growth. If our sales do not increase as anticipated, significant losses could result due to our higher expense levels. WE RELY ON THIRD PARTIES TO MANUFACTURE AND ASSEMBLE OUR PRODUCTS AND THE FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND ASSEMBLERS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS We do not have our own manufacturing facilities. Therefore, we must rely on third-party vendors to manufacture the ICs we design. We also currently rely on two third-party assembly contractors, Advanced Semiconductor Engineering and Amkor, to assemble and package the silicon chips extracted from the wafers for use in final products. Additionally, we rely on third-party vendors for a portion of the testing requirements of our products prior to shipping. There are significant risks associated with relying on these third-party contractors, including: - failure by us, our customers or their end customers to qualify a selected supplier; - capacity shortages during periods of high demand; - reduced control over delivery schedules and quality; - limited warranties on wafers or products supplied to us; and - potential increases in prices. We currently do not have long-term supply contracts with any of our third-party vendors, and therefore, they are not obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. Although we believe that other semiconductor foundries or assembly contractors can adequately address our needs, we expect that it would take approximately two to six months to transition performance of these services from our current providers to new providers. Such a transition may also require a qualification process by our customers or their end customers. We generally place orders for products with some of our suppliers approximately four months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate foundry or assembly capacity from our third-party contractors to meet our customers' delivery requirements, or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders, and therefore, were unable to benefit from this incremental demand. None of our third-party foundry or assembly contractors have provided assurances to us that adequate capacity will be available to us within the time required to meet additional demand for our products. 8
WE CURRENTLY ARE IN THE PROCESS OF QUALIFYING VANGUARD INTERNATIONAL SEMICONDUCTOR AS A SECOND MANUFACTURER OF OUR PRODUCTS, BUT IF FULL QUALIFICATION BY ALL OF OUR CUSTOMERS DOES NOT OCCUR, WE MAY NOT BE ABLE TO SELL ALL OF THE PRODUCTS THAT WE ARE CURRENTLY PAYING VANGUARD TO PRODUCE From our inception through fiscal 1999, all of the silicon wafers for the products that we have shipped were manufactured by Taiwan Semiconductor Manufacturing Co. To address capacity considerations, we are in the process of qualifying Vanguard International Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing Co., as an additional semiconductor fabricator, but such qualification is not complete. Qualification would not occur if there is a defect in Vanguard's manufacturing process or if our customers do not elect to spend the time and expense necessary to put Vanguard through their qualification processes. In anticipation of successfully qualifying Vanguard, Vanguard is currently producing on our behalf a majority of our current work in progress. If Vanguard's full qualification does not occur, we may not be able to sell all of the materials produced by Vanguard and we might not be able to fulfill demand for our products, which would adversely affect our operating results. Additionally, the resulting write-off of unusable inventories would contribute to a decline in earnings. THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS WHICH COULD RESULT IN OUR INABILITY TO TIMELY SATISFY DEMAND FOR OUR PRODUCTS The manufacture of silicon wafers for our products is a highly complex and technologically demanding process. Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries from time to time have experienced lower than anticipated manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies. If our foundries fail to timely deliver fabricated silicon wafers of satisfactory quality, we will be unable to timely meet our customers' demand for our products, which would adversely affect our operating results and damage our customer relationships. OUR CURRENT MANUFACTURERS AND ASSEMBLERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR OPERATIONS Our current semiconductor manufacturers are located in the same region within Taiwan and our assembly contractors are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area. In September 1999, our current semiconductor manufacturers' principal facilities were affected by a significant earthquake in Taiwan. As a consequence of this earthquake, these manufacturers suffered power outages and disruption that impaired their production capacity. We have filed an insurance claim for $1.2 million under our contingent business interruption insurance policy for the business disruption that we sustained as a result of this earthquake. However, we do not know whether this claim will be paid in full or at all in order to compensate us for this disruption. Earthquakes, fire, flooding or other natural disasters in Taiwan or the Pacific Rim region, or political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturers' and assemblers' facilities are located, likely would result in the disruption of our foundry or assembly capacity. Any disruption resulting from these events could cause significant delays in shipments of our products until we are able to shift our manufacturing or assembling from the affected contractor to another third-party vendor. There can be no assurance that such alternate capacity could be obtained on favorable terms, if at all. WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE ORDERS FOR THE PRODUCTS In order to assure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not 9
materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs and increased obsolescence and may increase our operating costs. WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATE Although we have experienced sales and earnings growth in our recent quarterly and annual periods, we may not be able to sustain these growth rates. In particular, we may gain significant market share in a relatively short period of time following the introduction of a new product, resulting in sales growth. However, incremental gains in market share for these newly introduced products may not occur. Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance. WE MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR SALES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICE We may experience significant period-to-period fluctuations in our sales and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate. It is likely that in some future period our operating results will be below the expectations of public market analysts or investors. If this occurs, our stock price may drop, perhaps significantly. A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our sales and operating results, including: - the timing and volume of orders from our customers; - the rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the products manufactured by such customers, which we refer to as "design wins"; - the demand for and life cycles of the products incorporating our ICs; - the rate of adoption of mixed-signal ICs in the markets we target; - deferrals of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of ICs; - changes in product mix; and - the rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets. For example, the personal computer modem market is characterized by rapid fluctuations in demand which results in corresponding fluctuations in the demand for our DAA products that are incorporated in personal computer modems. Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance. However, once a new IC achieves market acceptance, demand for the new IC quickly accelerates and demand quickly declines for the product that the new IC replaces. 10
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND INCREASE MARKET SHARE Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours. In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products. Our competitors may also offer bundled chipset kit arrangements offering a more complete product despite the technical merits or advantages of our products. These competitors may elect not to support our products which could complicate our sales efforts. In addition, our largest competitors may restructure their operations to create separate companies that are more focused on providing the types of products we produce. For example, Rockwell's restructuring led to the creation of Conexant which is a significant competitor. Increased competition could decrease our prices, reduce our sales, lower our margins or decrease our market share. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR PRODUCTS COULD BE HARMED We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. Specifically, due to the relatively early stage of our company's business, we believe that our future success is highly dependent on Navdeep Sooch, our co-founder, Chief Executive Officer and Chairman of the Board, Jeffrey Scott, our co-founder and Vice President of Engineering, and David Welland, our co-founder and Vice President of Technology. We do not have employment contracts with these or any other key personnel. There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signal communications ICs. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense. Our key technical personnel represent a significant asset and serve as the source of our technological and product innovations. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. The loss of any of our key employees or the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products. OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION Our ICs are used as components in communications devices in the wireline and wireless markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. In fiscal 1999, our research and development expense was $8.3 million, which represented 17.7% of our sales. A number of large companies in the wireline and wireless communications industries are actively involved in the development of these new technologies and standards. Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and 11
standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than would we. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate. We recently introduced a RF synthesizer product for use in cellular phones operating on the Global System for Mobile Communications, or GSM, standard. The RF synthesizer is also compatible with General Packet Radio Service, which is the emerging data communications protocol for GSM based cellular phones. We cannot be certain whether manufacturers of cellular phones using these standards will incorporate our RF synthesizer or that these standards will not change, thereby making our products unsuitable or impractical. OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES Our products are complex and may contain errors when first introduced or as new versions are released. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors prior to delivery of our products to our customers. Because our products are manufactured by third parties, should problems occur in the operation or performance of our ICs, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers. These errors also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems. THE PERFORMANCE OF OUR DIRECT ACCESS ARRANGEMENT PRODUCTS MAY BE ADVERSELY AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES Although our direct access arrangement products are compliant with published specifications, these established specifications might not adequately address all conditions that must be satisfied in order to operate in harsh environments. This includes environments where there are wide variations in electrical quality, telephone line quality, static electricity and operating temperatures or that may be affected by lightning or improper handling by customers and end users. Our products have had a limited period of time in the field under operation, and these environmental factors may result in unanticipated returns of our products. Any necessary modifications could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems. A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS In 1999, approximately 74% of our final product test operations were performed in-house. The balance of the final testing of our products is provided by our contract manufacturers or other third parties. While we believe performing this testing in-house provides us with advantages in terms of quality control and shortens the time required to bring a product to market, we may encounter difficulties and delays in maintaining or expanding our internal test capabilities. In addition, final testing of complex semiconductors requires substantial resources to acquire state-of-the-art testing equipment and hiring additional qualified personnel, which has increased our fixed costs. If demand for our products does not support the effective utilization of these employees and additional equipment, we may not realize any benefit from replacing our outside vendors with internal final testing. Any decrease in the demand for our products could result in the underutilization of our testing equipment and personnel. If our internal test operations are underused or mismanaged, we may incur significant costs that could adversely affect our operating results. 12
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS We intend to open sales offices in international markets to expand our international sales activities in Europe and the Pacific Rim region. Our planned international sales growth will be limited if we are unable to hire additional personnel and develop relationships with international distributors. We may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including: - increased complexity and costs of managing international operations; - protectionist laws and business practices that favor local competition in some countries; - multiple, conflicting and changing laws, regulations and tax schemes; - longer sales cycles; - greater difficulty in accounts receivable collection and longer collection periods; and - political and economic instability. To date, all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering them less competitive. OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS During the past year, we have significantly increased the scope of our operations and expanded our workforce from 42 employees at January 2, 1999 to 148 employees at January 1, 2000. This growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources. We anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort. If we are unable to effectively manage our expanding operations, our business could be materially and adversely affected. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products. Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or effective competing technologies on their own. 13
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. From time to time, we receive letters from various industry participants alleging infringement of patents or trade secrets. The exploratory nature of these inquiries has become relatively common in the semiconductor industry. We typically respond when appropriate and as advised by legal counsel. We may become involved in litigation to protect our intellectual property rights or to defend allegations of infringement asserted by others. Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, would likely be time consuming and expensive to resolve and would divert our management's time and attention. Any intellectual property litigation also could force us to take specific actions, including: - cease selling products that use the challenged intellectual property; - obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or - redesign those products that use infringing intellectual property. On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com claiming that Analog Devices has infringed, and is continuing to infringe, our issued U.S. patent with respect to our DAA technology and that Analog Devices and 3Com have misappropriated our confidential information, know-how and trade secrets. On January 26, 2000, Analog Devices served an answer denying that it has misappropriated our confidential information, know-how and trade secrets and brought a counterclaim against us seeking a declaratory judgment that our issued U.S. patent is invalid and unenforceable and that Analog Devices has not infringed our issued U.S. patent. We filed a reply to Analog Devices' counterclaim asserting that our issued U.S. patent is valid and enforceable and that Analog Devices has infringed our issued U.S. patent. On February 24, 2000, 3Com served an answer denying it has misappropriated our confidential information, know-how and trade secrets and, without specifying, asserted we have acted with unclean hands. Our lawsuit will involve significant expense and divert our management's time and attention from other aspects of our business. The lawsuit may also damage our business relationship with 3Com which accounted for 10% of our sales in fiscal 1999 and 20% of our sales in fiscal 1998. Due to the inherent uncertainties of litigation, we cannot be certain of the outcome of this lawsuit. ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION As part of our growth strategy, we may consider opportunities to acquire other businesses or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. To date, we have not made any acquisitions and we are currently not subject to any agreement or letter of intent with respect to potential acquisitions. Acquisitions entail a number of risks that could materially and adversely affect our business and operating results, including: - problems integrating the acquired operations, technologies or products with our existing business and products; - diversion of management's time and attention from our core business; - difficulties in retaining business relationships with suppliers and customers of the acquired company; - risks associated with entering markets in which we lack prior experience; and - potential loss of key employees of the acquired company. 14
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH The future growth of our business will depend in part on our ability to expand our existing relationships with distributors and sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships. As part of our channel sales strategy, we intend to expand our relationships with distributors and sales representatives. As we develop our indirect sales capabilities, we will need to manage the potential conflicts that may arise with our direct sales efforts. The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth. RISKS RELATED TO OUR INDUSTRY COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE MARKET SHARE The markets for semiconductors in general, and for mixed-signal ICs in particular, are intensely competitive. We expect that the market for our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous markets and applications, including wireline, wireless and other communications markets, we face competition from a relatively large number of competitors. Across all of our product areas, we compete with Advanced Micro Devices, Analog Devices, Conexant, Delta Integration, Fujitsu, Infineon Technologies, Krypton Isolation, National Semiconductor, Philips and Texas Instruments, among others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and innovative start-up semiconductor design companies. Some of our customers, such as Intel, Lucent and Motorola, are also large, established semiconductor suppliers. Our sales to and support of these customers may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights. As the markets for communications products grow, we also may face competition from traditional communications device companies. These companies may enter the mixed-signal semiconductor market by introducing their own ICs or by entering into strategic relationships with or acquiring other existing providers of semiconductor products. THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY NEGATIVELY IMPACT OUR GROSS MARGINS AND SALES We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We have reduced the average unit price of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to do so again in the future. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes, our gross profits and sales will suffer. To maintain gross margins, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs. Our failure to do so would cause our sales and gross margins to decline. OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the customer's system as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the IC, changes in its manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial 15
resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer. WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. We are dependent on the availability of such capacity to manufacture and assemble our ICs. None of our third-party foundry or assembly contractors have provided assurances that adequate capacity will be available to us. OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY END USERS IN OUR MARKETS Generally, our products comprise only a part of a communications device. All components of such devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in effecting industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business. Products for communications applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. RISKS RELATED TO THIS OFFERING OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT OUR STOCKHOLDERS MAY NOT AGREE WITH AND IN WAYS THAT DO NOT INCREASE OUR PROFITS OR INCREASE OUR STOCK PRICE Our management will have considerable discretion in the application of the net proceeds received by us from this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the proceeds of this offering. The net proceeds may be used for corporate purposes that do not increase our profitability or increase our stock price. Pending application of the net proceeds of this offering, such proceeds may be placed in investments that fail to produce income or that could lose value. 16
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL Upon completion of this offering, our executive officers and directors, and their respective affiliates, will beneficially own, in the aggregate, approximately 74.3% of our outstanding common stock. As a result, these stockholders will be able to exert significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. 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. 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. Please see "Description of Capital Stock-Anti-Takeover Effects" for more information concerning these anti-takeover provisions. OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, the selling stockholders and us. This initial public offering price may vary from the market price of our common stock after the offering. If you purchase shares of common stock, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the following: - 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 those that design, manufacture and/or sell semiconductors; - announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments; - introduction of technologies or product enhancements that reduce the need for our products; - the loss of one or more key customers; - departures of key personnel; and - sales of our common stock in the future. 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. OF OUR TOTAL OUTSTANDING SHARES AFTER THIS OFFERING, 43,378,118, OR 93%, WILL BE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL After this offering, we will have outstanding 46,578,118 shares of common stock, based on the number of shares outstanding at January 1, 2000. This includes the 2,720,000 shares we are selling, and the 480,000 shares the stockholders are selling, in this offering, all of which shares may be resold in the public market 17
immediately. The remaining 43,378,118 shares will become available for resale in the public market as shown in the chart below: % OF TOTAL SHARES NUMBER OF SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET - --------------------- ----------------- ------------------------------------------------------------ 0 -- Immediately. 12,954,470 27.8% 120 days after the date of this prospectus due to a release of 30% of the shares, and shares underlying the options, held by each stockholder from lock-up agreements with the underwriters, if the last reported sale price of our common stock is at least two times the initial public offering price per share for each of the 20 consecutive trading days preceding the 120th day after the date of this prospectus and other conditions are met. 27,508,907 59.1% 181 days after the date of this prospectus upon the expiration of the lock-up agreements with the underwriters (plus any shares not already released from the lock-up agreements). 2,914,741 6.3% At various times after 181 days following the date of this prospectus, subject to compliance with federal securities laws and upon the lapse of any applicable vesting restrictions. The underwriters can waive the restrictions of the lock-up agreements at an earlier time without prior notice or announcement and allow stockholders to sell their shares. As restrictions on resale end, the market price of our stock could drop significantly if the holders of restricted shares sell them or are perceived by the market as intending to sell them. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. For more detailed information, see "Shares Eligible for Future Sale." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate" and "continue" and other similar words. You should read statements that contain these words carefully because they discuss our future expectations, make projections of our future results of operations or of our financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed in the sections captioned "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and elsewhere in this prospectus could have a material adverse effect on our business, operating results and financial condition. 18
USE OF PROCEEDS Assuming an initial public offering price of $22.00 per share, we will receive $54.7 million from our sale of 2,720,000 shares of common stock in this offering and the selling stockholders in this offering will receive $9.8 million from their sale of 480,000 shares of common stock, net of estimated offering expenses of approximately $1 million payable by us and estimated underwriting discounts and commissions. We will not receive any portion of the net proceeds received by the selling stockholders from the sale of their shares. If the underwriters exercise their over-allotment option in full, we will receive an additional $9.8 million in net proceeds. See "Principal and Selling Stockholders." The principal purposes of this offering are to increase our equity capital, create a public market for our common stock, facilitate future access by us to public capital markets and provide us with increased visibility in our markets. We intend to use the net proceeds for this offering for working capital and other general corporate purposes, including capital expenditures and research and development. Although we may use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to our current or future business and product lines, we currently have no specific acquisitions planned. Our management will have significant flexibility in applying the net proceeds of this offering. Pending such uses, we will invest the net proceeds of this offering in investment grade, interest-bearing securities. DIVIDEND POLICY 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. In addition, our credit agreements with our bank lender prohibit us from paying cash dividends on our capital stock without the prior consent of the lender. 19
CAPITALIZATION The following table sets forth our capitalization as of January 1, 2000: - On an actual basis; - On a pro forma basis to reflect the conversion of all shares of our outstanding convertible preferred stock into 13,842,174 shares of common stock; and - On a pro forma as adjusted basis to additionally reflect our sale of 2,720,000 shares of common stock in this offering at an assumed initial public offering price of $22.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. You should read the following table in conjunction with the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operation" of this prospectus and our consolidated financial statements and the notes to those statements included at the end of this prospectus. AS OF JANUARY 1, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Long-term obligations, net of current maturities........... 6,223 6,223 6,223 Redeemable convertible preferred stock: Series A convertible preferred stock, $0.0001 par value; 5,391,267 shares designated, 5,345,449 shares issued and outstanding actual; none designated, issued and outstanding pro forma and pro forma as adjusted........ 5,250 -- -- Series B convertible preferred stock, $0.0001 par value; 1,610,638 shares designated, 1,575,638 shares issued and outstanding actual; none designated, issued and outstanding pro forma and pro forma as adjusted........ 7,500 -- -- Stockholders' equity: Common stock, $0.0001 par value, 52,000,000 shares authorized, 30,015,944 shares issued and outstanding, actual; 250,000,000 shares authorized, 43,858,118 shares issued and outstanding, pro forma; 250,000,000 shares authorized, 46,578,118 shares issued and outstanding, pro forma as adjusted................... 3 4 5 Preferred stock, $0.0001 par value, 8,000,000 shares authorized, none issued and outstanding actual; 8,000,000 shares authorized, none issued and outstanding, pro forma; and 10,000,000 shares authorized, none issued and outstanding pro forma as adjusted............................................. -- -- -- Additional paid-in capital............................. 19,014 31,763 86,413 Notes receivable from stockholders..................... (1,472) (1,472) (1,472) Deferred stock compensation............................ (15,330) (15,330) (15,330) Retained earnings...................................... 5,788 5,788 5,788 ------- ------- ------- Total stockholders' equity........................... 8,003 20,753 75,404 ------- ------- ------- Total capitalization............................... $26,976 $26,976 $81,627 ======= ======= ======= The number of shares of common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of January 1, 2000. This information excludes: - 2,380,226 shares subject to outstanding options; and - 143,182 shares subject to outstanding warrants. 20
DILUTION Our pro forma net tangible book value as of January 1, 2000 was approximately $20.8 million, or $.47 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by 43,858,118 shares of common stock outstanding on a pro forma basis as of January 1, 2000. These pro forma numbers reflect the conversion of all shares of our outstanding convertible preferred stock into common stock. Dilution in pro forma net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of 2,720,000 shares of common stock in this offering at an assumed initial public offering price of $22.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of January 1, 2000 would have been $75.4 million, or $1.62 per share. This amount represents an immediate increase in pro forma net tangible book value to our existing stockholders of $1.15 per share and an immediate dilution to new investors of $20.38 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ 22.00 Pro forma net tangible book value per share at January 1, 2000.................................................... $ .47 Increase in pro forma net tangible book value per share attributable to new investors........................... 1.15 ------- Pro forma net tangible book value per share after this offering.................................................. 1.62 ------- Dilution per share to new investors......................... 20.38 ======= If the underwriters exercise their over-allotment option in full, our adjusted pro forma net tangible book value at January 1, 2000 would have been $85.2 million, or $1.81 per share, representing an immediate increase in pro forma net tangible book value to our existing stockholders of $1.34 per share and an immediate dilution to new investors of $20.19 per share. The following table summarizes, on a pro forma basis as of January 1, 2000, the differences between the number of shares of common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock in this offering. These pro forma numbers reflect the conversion of all of our outstanding convertible preferred stock into common stock. The calculation below is based on an assumed initial public offering price of $22.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us: SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- -------- ----------- -------- --------- Existing stockholders....................... 43,858,118 94.2% $15,096,695 20.1% $ .34 New investors............................... 2,720,000 5.8 59,840,000 79.9 22.00 ---------- ----- ----------- ----- Total............................... 46,578,118 100.0% $74,936,695 100.0% ========== ===== =========== ===== This discussion and table assume no exercise of any stock options or warrants outstanding as of January 1, 2000. As of January 1, 2000, there were options outstanding to purchase a total of 2,380,226 shares of common stock with a weighted average exercise price of $2.52 per share and warrants outstanding to purchase a total of 143,182 shares of common stock with a weighted average exercise price of $1.17 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to 3,200,000 shares, or 6.8% of the total number of shares of common stock outstanding after this offering. 21
SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated balance sheet data as of fiscal year end 1998 and 1999 and the selected consolidated statement of operations data for fiscal 1997, 1998 and 1999 have been derived from audited consolidated financial statements included in this prospectus. The selected consolidated balance sheet data as of December 31, 1996 and fiscal year end 1997 and the selected consolidated statement of operations data for the period from inception (August 19, 1996) to December 31, 1996 have been derived from audited consolidated financial statements not included in this prospectus. 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 prospectus. PERIOD FROM INCEPTION (AUGUST 19, 1996) THROUGH FISCAL YEAR DECEMBER 31, ------------------------------ 1996 1997 1998 1999 ------------ -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales....................................................... $ -- $ -- $ 5,609 $46,911 Cost of goods sold.......................................... -- -- 2,371 15,770 ------- ------- ------- ------- Gross profit................................................ -- -- 3,238 31,141 Operating expenses: Research and development.................................. 10 1,364 4,587 8,297 Selling, general and administrative....................... 10 627 2,095 7,207 Amortization of deferred stock compensation............... -- -- 8 976 ------- ------- ------- ------- Total operating expenses................................ (20) 1,991 6,690 16,480 ------- ------- ------- ------- Operating income (loss)..................................... (20) (1,991) (3,452) 14,661 Interest income............................................. -- (178) (261) (402) Interest expense............................................ -- 22 206 699 ------- ------- ------- ------- Income (loss) before tax expense............................ (20) (1,835) (3,397) 14,364 Income tax expense.......................................... -- -- -- 3,324 ------- ------- ------- ------- Net income (loss)........................................... $ (20) $(1,835) $(3,397) $11,040 ======= ======= ======= ======= Basic net income (loss) per share........................... $ -- $ (1.04) $ (.37) $ .73 Diluted net income (loss) per share......................... $ -- $ (1.04) $ (.37) $ .25 Shares used in computing basic net income (loss) per share..................................................... -- 1,760 9,129 15,152 Shares used in computing diluted net income (loss) per share..................................................... -- 1,760 9,129 43,657 Pro forma basic net income (loss) per share................. $ .30 Pro forma diluted net income per share...................... $ .25 Shares used in computing pro forma basic net income per share..................................................... 36,461 Shares used in computing pro forma diluted net income per share..................................................... 43,657 AS OF FISCAL YEAR END DECEMBER 31, ------------------------------ 1996 1997 1998 1999 ------------ -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $ 132 $ 3,778 $ 5,824 $14,706 Working capital........................................... (62) 2,045 5,209 14,281 Total assets.............................................. 181 6,023 14,014 41,958 Long-term obligations, net of current maturities.......... -- 747 2,153 6,223 Redeemable convertible preferred stock.................... -- 5,250 12,750 12,750 Total stockholders' equity (deficit)...................... (19) (1,776) (5,149) 8,003 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES WHICH APPEAR ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY UNDER THE HEADING "RISK FACTORS." PLEASE ALSO SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. FISCAL 1997 HAD 53 WEEKS AND ENDED ON JANUARY 3, 1998. FISCAL 1998 HAD 52 WEEKS AND ENDED ON JANUARY 2, 1999. FISCAL 1999 HAD 52 WEEKS AND ENDED ON JANUARY 1, 2000. ALL OF THE QUARTERLY PERIODS REPORTED IN THIS PROSPECTUS HAD THIRTEEN WEEKS. OVERVIEW We design and develop proprietary, analog-intensive, mixed-signal ICs for the rapidly growing communications industry. Our innovative ICs can dramatically reduce the cost, size and system power requirements of the products that our customers sell to their end-user customers. We currently offer ICs that can be incorporated into communications devices, such as modems and cellular phones, as well as cable and satellite set-top boxes, credit card verification machines, automated teller machines, network access equipment and remote gaming devices. Our five largest customers in fiscal 1999 were Intel, Motorola, PC-Tel, SmartLink and 3Com. Our company was founded in 1996. Our business has grown rapidly since our inception, as reflected by our employee headcount, which increased to 148 at the end of fiscal 1999, from 42 at the end of fiscal 1998 and 17 at the end of fiscal 1997. As a "fabless" semiconductor company, we rely on third-party semiconductor fabricators to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We also rely on third-party assemblers to assemble and package these die prior to final product testing and shipping. Our company is organized into two principal divisions, the Wireline Products Division and the Wireless Products Division. Our Wireline Products Division commenced research and development for our first IC product, the direct access arrangement, or DAA, in October 1996. We introduced our DAA product in the first quarter of fiscal 1998, and first received acceptance of this product for inclusion in a customer's device, which we refer to as a "design win", in March 1998. The first commercial shipment of our DAA product was made in April 1998. In September 1998, we introduced an international version of our first DAA product. Based on the success of our DAA products, we became profitable in the fourth quarter of fiscal 1998 and have been profitable in each succeeding quarter through the quarter ended January 1, 2000. Substantially all of our sales to date have been derived from sales of our various DAA products and we expect to remain dependent on continued sales of DAA products for a majority of our sales until we are able to diversify sales with new products. In fiscal 1999, our Wireline Products Division introduced two additional ICs, a voice codec product, which encodes analog signals within the voice frequency range into digital signals and decodes digital voice signals back into analog signals, and our ISO modem product. In addition, our Wireless Products Division introduced our RF synthesizer product in fiscal 1999. In January 2000, our Wireline Products Division introduced our ProSLIC product. We will be less dependent on our DAA products for future sales to the extent that these products, or other products that we may introduce, are incorporated into devices sold by our customers. For a further description of our products, please see "Business--Products." Since our inception, a few customers have accounted for a substantial portion of our sales. During fiscal 1999, our three largest customers accounted for 84% of our sales, including 62% for PC-Tel, 12% for SmartLink and 10% for 3Com. In fiscal 1998, PC-Tel accounted for 78% and 3Com accounted for 20% of our sales. No other customer accounted for more than 10% of our sales in either of these years. To date, substantially all of our sales have been generated through our direct sales force. In fiscal 1998, we began to 23
establish a network of independent sales representatives and distributors worldwide to support our sales and marketing activities. We anticipate that sales to these representatives and distributors will increase as a percentage of our sales in future periods. However, we expect to continue to experience significant customer concentration in direct sales to key customer accounts until we are able to diversify sales with new customers. The percentage of our sales to customers located outside of the United States was 7% in fiscal 1999 and insignificant in fiscal 1998. All of our sales to date have been denominated in U.S. dollars. We believe that a greater percentage of our sales will be made to customers outside of the United States as our products receive greater acceptance in international markets. The sales cycle for the test and evaluation of our ICs can range from 1 to 12 months or more. An additional 3 to 6 months or more may be required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we may experience a significant delay between incurring expenses for research and development and selling, general and administrative efforts, and the generation of corresponding sales, if any. We intend to continue to increase our investment in research and development, selling, general and administrative functions and inventory as we expand our operations in the future. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Our limited operating history and rapid growth makes it difficult for us to assess the impact of seasonal factors on our business. Because many of our ICs are designed for use in consumer products such as PCs and cellular telephones, we expect that the demand for our products will be subject to seasonal demand resulting in increased sales in the third and fourth quarters of each year when customers place orders to meet holiday demand. We expect to experience seasonal fluctuations in the demand for our products as customer demand increases in greater volume across our product offerings. The following describes the line items set forth in our consolidated statements of income: SALES. Sales consists of revenue generated principally by sales of our ICs. Generally, we recognize sales at the time of shipment to our customers. Sales are deferred on shipments to distributors until they are resold by such distributors. Our products typically carry a one-year warranty. Since our inception, product returns and warranty costs have been immaterial. Our sales 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 sales were conducted at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including to establish a relationship with a new customer, as an incentive for customers to purchase products in larger volumes or in response to competition. In addition, as a product matures, we expect that the average selling price for that product will decline. Therefore, our ability to increase sales in the future is dependent on increased demand for our established products and our ability to ship larger volumes of products in response to such demand, as well as customer acceptance of newly introduced products. COST OF GOODS SOLD. Cost of goods sold includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; an allocated portion of our occupancy costs; and allocable depreciation of testing equipment. Generally, we depreciate equipment over four years on a straight line basis. We also depreciate our leasehold improvements over the applicable lease term. Recently introduced products tend to have higher cost of goods sold per unit due to initially low production volumes required by our customers and higher costs associated with new package variations. Generally, as production volumes for a product increase, unit production costs tend to decrease as our semiconductor fabricators and assemblers achieve greater economies of scale for that product. Additionally, the cost of wafer procurement, which is a significant component of cost of goods sold, varies cyclically with overall demand for semiconductors. The 24
semiconductor industry has recently experienced a period of high demand, resulting in higher wafer procurement costs. RESEARCH AND DEVELOPMENT. Research and development expense consists primarily of compensation and related costs of employees engaged in research and development activities, as well as an allocated portion of our occupancy costs for such operations. We depreciate our research and development equipment over four years and amortize our purchased software from computer-aided design tool vendors over four years. Development activities include the creation of test methodologies to assure compliance with required specifications. We have granted stock options or directly issued stock to patent attorneys and outside technical consultants for services previously rendered. We recognize stock-based compensation expense for these non-employees based on the deemed fair value of the options or stock at the date of grant. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense consists primarily of personnel-related expenses, related allocable portion of our occupancy costs, sales commissions to independent sales representatives, professional fees, other promotional and marketing expenses and reserves for bad debt. Write-offs of bad debt have been insignificant to date. We awarded non-employee sales persons with stock in connection with a sales incentive program that ended on January 1, 2000. We recognize stock-based compensation expense based on the deemed fair value of the stock at the date of grant. AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of stock options and direct issuances of stock to our employees, we recorded deferred stock compensation of approximately $16.3 million, representing, for accounting purposes, the difference between the deemed fair value of the common stock and the respective exercise prices at the date of grant in the case of stock options and the fair market value of the stock at the date of grant in the case of direct issuances of stock. The difference is amortized over the vesting period of the applicable option or share, generally five to eight years, resulting in amortization expense of $976,000 and $8,000 for fiscal 1999 and 1998, respectively. The amortization of deferred stock compensation is recorded as an operating expense. INTEREST INCOME. Interest income reflects interest earned on average cash and cash equivalents and investment balances. INTEREST EXPENSE. Interest expense consists of interest on our long-term debt and capital lease obligations. INCOME TAX EXPENSE. We accrue a provision for federal and state income tax at the applicable statutory rates. 25
RESULTS OF OPERATIONS The following table sets forth our statement of income data as a percentage of sales for fiscal 1998 and 1999. We have not presented percentage data for fiscal 1997 since we had no sales in fiscal 1997. FISCAL FISCAL 1998 1999 -------- -------- Sales...................................................... 100.0 % 100.0% Cost of goods sold......................................... 42.3 33.6 ----- ----- Gross profit............................................... 57.7 66.4 Operating expenses: Research and development................................. 81.8 17.7 Selling, general and administrative...................... 37.4 15.4 Amortization of deferred stock compensation.............. .1 2.1 ----- ----- Total operating expenses............................... 119.3 35.2 ----- ----- Operating income (loss).................................... (61.5) 31.2 Interest income............................................ 4.7 .9 Interest expense........................................... 3.7 1.5 ----- ----- Income (loss) before tax expense........................... (60.6) 30.6 Income tax expense......................................... -- 7.1 ----- ----- Net income (loss).......................................... (60.6)% 23.5% ===== ===== COMPARISON OF FISCAL 1999 TO FISCAL 1998 SALES. Sales increased $41.3 million, or 736.4%, to $46.9 million in fiscal 1999 from $5.6 million in fiscal 1998. The increase was attributable to the strong acceptance of our DAA family of products, including our international DAA and MC-97 DAA products. This increase reflected an increase in the number of customers that purchased our IC products and an increase in the volume that those customers bought. GROSS PROFIT. Cost of goods sold increased $13.4 million, or 565.1%, to $15.8 million in fiscal 1999 from $2.4 million in fiscal 1998, and represented 33.6% of sales in fiscal 1999 and 42.3% of sales in fiscal 1998, respectively. Gross profit increased $27.9 million, or 861.7%, to $31.1 million in fiscal 1999 from $3.2 million in fiscal 1998. Gross margins improved to 66.4% in fiscal 1999 from 57.7% in fiscal 1998. The increase in gross profit was primarily due to the substantial increase in sales volume. The improvement in gross margin from fiscal 1998 to 1999 was due to volume discounts on wafer purchases that resulted from substantial increases in our production and attractive pricing conditions for silicon wafers due to the availability of capacity within the semiconductor manufacturing industry during the period. Our gross margins may decline due to the expected introduction of products competitive to our products and increased demand for silicon wafer capacity within the semiconductor industry generally. However, the impact of these factors on our gross margins may be offset by increased sales of newly introduced products, which we expect will have larger gross margins than products which have been in the market for longer periods of time and that face greater competition as a result. RESEARCH AND DEVELOPMENT. Research and development expense increased $3.7 million or 80.9%, to $8.3 million in fiscal 1999 from $4.6 million in fiscal 1998, and represented 17.7% of sales in fiscal 1999 and 81.8% of sales in fiscal 1998. The increased research and development expense was principally due to continued product development activities in the Wireline Division, as well as significant increases in product development activity in the Wireless Division. Both divisions increased spending to develop test methodologies for new products. The substantial decrease in research and development expense as a percentage of sales reflected our emergence from the development stage with modest fiscal 1998 sales 26
compared to substantial sales growth in fiscal 1999. We expect that research and development expense will increase in absolute dollars in future periods as we develop new ICs, and may fluctuate as a percentage of sales due to significant changes in our sales volume and new product development initiatives. During fiscal 1999, we recorded approximately $196,000 of stock-based compensation expense in connection with grants of stock options and direct issuances to outside patent attorneys and technical consultants. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased $5.1 million or 244.0%, to $7.2 million in fiscal 1999 from $2.1 million in fiscal 1998, and represented 15.4% of sales in fiscal 1999 and 37.4% of sales in fiscal 1998. The increase in the dollar amount of selling, general and administrative expense was principally attributable to increased staffing. The decrease in selling, general and administrative expense as a percentage of sales was due to substantially higher sales levels in fiscal 1999. We expect that selling, general and administrative expense will increase in absolute dollars in future periods as we expand our sales channels, marketing efforts and administrative infrastructure. We also expect our legal expenses to increase as a result of the infringement lawsuit we filed against Analog Devices and 3Com in January 2000. This lawsuit may also cause our sales to 3Com to decline. In addition, we expect selling, general and administrative expenses to fluctuate as a percentage of sales because of (1) the likelihood that indirect distribution channels, which entail the payment of commissions, will account for a larger portion of our sales in future periods and, therefore, increase our selling, general and administrative expense relative to a direct sales force performing at satisfactory levels of productivity; (2) fluctuating usage of advertising to promote our products and, in particular, our newly introduced products; and (3) potential significant variability in our future sales volume. During fiscal 1999, we recorded approximately $70,000 of stock-based compensation expense for awards of stock to non-employee sales persons in connection with a sales incentive program that ended January 1, 2000. AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred stock compensation for the difference between the exercise price of option grants, or the issuance price of direct issuances of stock, and the deemed fair value of our common stock at the time of such grants or issuances. We are amortizing this amount over the vesting periods of the applicable options or restricted stock, which resulted in amortization expense of $976,000 for fiscal 1999 and $8,000 for fiscal 1998. Our amortization expense increased in fiscal 1999 due to an increase in deferred stock compensation recorded in fiscal 1999 for options and restricted stock issued in fiscal 1999. INTEREST INCOME. Interest income was $402,000 in fiscal 1999 as compared to $261,000 in fiscal 1998. The increase in interest income was primarily due to higher cash balances invested in short-term investments. INTEREST EXPENSE. Interest expense was $699,000 in fiscal 1999 as compared to $206,000 in fiscal 1998. The increase in interest expense was primarily due to higher levels of debt and lease financing used to finance capital expenditures, particularly relating to the acquisition of IC testing equipment and leasehold improvements. INCOME TAX EXPENSE. Our effective tax rate was 23.1% for fiscal 1999. We had sufficient net operating loss tax carryforwards available from our development stage operations to offset any tax liability during fiscal 1998. For fiscal 1999, utilization of the remaining net operating loss carryforward and, to a lesser extent, full utilization of prior and current year research and development tax credits reduced our effective tax rates from full corporate rates. We expect to pay a full corporate income tax rate of approximately 38% during future periods. 27
COMPARISON OF FISCAL 1998 TO FISCAL 1997 SALES. Sales were $5.6 million in fiscal 1998. We did not have any sales in fiscal 1997. Sales in fiscal 1998 were attributable to the introduction of our first DAA product in March 1998. GROSS PROFIT. Cost of goods sold was $2.4 million in fiscal 1998 and gross profit was $3.2 million in 1998. Gross margins were 57.7% in fiscal 1998. RESEARCH AND DEVELOPMENT. Research and development expense increased $3.2 million, or 236.3%, to $4.6 million in fiscal 1998 from $1.4 million in fiscal 1997, and represented 81.8% of sales in fiscal 1998. The increase in the dollar amount of research and development expense was primarily due to increased engineering staffing from 10 to 20 people, in addition to product development expenses related to the release of our first product. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased $1.5 million, or 234.1%, to $2.1 million in fiscal 1998 from $627,000 in fiscal 1997, and represented 37.4% of sales in fiscal 1998. The increase in the dollar amount of selling, general and administrative expense was principally attributable to increased staffing, moving and relocation expenses and provisions for bad debt reserves on initial product shipments. AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock compensation expense was $8,000 in fiscal 1998. No deferred stock compensation expense was recorded in fiscal 1997. INTEREST INCOME. Interest income was $261,000 in fiscal 1998 as compared to $178,000 in fiscal 1997. The increase in interest income was primarily due to higher invested cash balances on average during the period. INTEREST EXPENSE. Interest expense was $206,000 in fiscal 1998, compared to $22,000 in fiscal 1997. The increase in interest expense was primarily due to higher levels of debt and lease financing related to the various financing lines. The proceeds of such lines were used to finance capital expenditures, consisting principally of acquisitions of IC testing equipment, computer-aided design software tools and leasehold improvements. INCOME TAX EXPENSE. We did not incur liabilities for income taxes in fiscal 1997 or fiscal 1998 due primarily to operating losses incurred in each of those years. 28
QUARTERLY RESULTS OF OPERATIONS The following tables set forth our unaudited statement of operations data for each of the eight quarters in the period ended January 1, 2000, as well as such data expressed as a percentage of our sales for the quarters presented. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and, in the opinion of our management, reflects all normal recurring adjustments that we consider necessary for a fair presentation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period. Because our sales during the first and second quarters of fiscal 1998 were immaterial, data regarding quarterly operations for such periods as a percentage of sales has been excluded from the table below. FISCAL 1998 FISCAL 1999 ----------------------------------------- ----------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS) DATA: Sales.............................. $ -- $ 161 $ 1,099 $4,349 $6,320 $7,543 $14,574 $18,474 Cost of goods sold................. -- 127 581 1,663 2,415 2,866 4,582 5,907 ------- ------- ------- ------ ------ ------ ------- ------- Gross profit....................... -- 34 518 2,686 3,905 4,677 9,992 12,567 Operating expenses: Research and development......... 788 1,270 1,276 1,253 1,293 1,597 2,109 3,298 Selling, general and administrative................. 286 490 551 768 1,132 1,500 2,105 2,470 Amortization of deferred stock compensation................... -- -- 1 7 33 116 254 573 ------- ------- ------- ------ ------ ------ ------- ------- Total operating expenses....... 1,074 1,760 1,828 2,028 2,458 3,213 4,468 6,341 ------- ------- ------- ------ ------ ------ ------- ------- Operating income (loss)............ (1,074) (1,726) (1,310) 658 1,447 1,464 5,524 6,226 Interest income.................... (41) (52) (93) (75) (63) (75) (98) (166) Interest expense................... 33 49 55 69 120 140 217 222 ------- ------- ------- ------ ------ ------ ------- ------- Income (loss) before tax expense... (1,066) (1,723) (1,272) 664 1,390 1,399 5,405 6,170 Income tax expense................. -- -- -- -- 322 323 1,251 1,428 ------- ------- ------- ------ ------ ------ ------- ------- Net income (loss).................. $(1,066) $(1,723) $(1,272) $ 664 $1,068 $1,076 $ 4,154 $ 4,742 ======= ======= ======= ====== ====== ====== ======= ======= FISCAL 1998 FISCAL 1999 ------------------- ----------------------------------------- THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER AS A PERCENTAGE OF SALES: -------- -------- -------- -------- -------- -------- Sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................................... 52.9 38.2 38.2 38.0 31.4 32.0 ------ ----- ----- ----- ----- ----- Gross profit......................................... 47.1 61.8 61.8 62.0 68.6 68.0 Operating expenses: Research and development........................... 116.1 28.8 20.5 21.2 14.5 17.9 Selling, general and administrative................ 50.1 17.7 17.9 19.9 14.5 13.4 Amortization of deferred stock compensation........ .1 .1 .5 1.5 1.7 3.0 ------ ----- ----- ----- ----- ----- Total operating expenses......................... 166.3 46.6 38.9 42.6 30.7 34.3 ------ ----- ----- ----- ----- ----- Operating income (loss).............................. (119.2) 15.2 22.9 19.4 37.9 33.7 Interest income...................................... 8.5 1.7 1.0 1.0 .7 .9 Interest expense..................................... 5.0 1.6 1.9 1.9 1.5 1.2 ------ ----- ----- ----- ----- ----- Income (loss) before tax expense..................... (115.7) 15.3 22.0 18.5 37.1 33.4 Income tax expense................................... -- -- 5.1 4.2 8.6 7.7 ------ ----- ----- ----- ----- ----- Net income (loss).................................... (115.7)% 15.3% 16.9% 14.3% 28.5% 25.7% ====== ===== ===== ===== ===== ===== 29
Our quarterly results of operations have varied from quarter-to-quarter in the past and we expect them to vary from quarter-to-quarter in future periods. These changes are principally due to (1) the timing and volume of orders from our customers, (2) the timing of volume production of the products into which our ICs are incorporated and (3) the capacity and cost environment in the semiconductor industry applicable to our procurement of services from third-party foundries and assembly contractors. We have experienced declining average selling prices for our products while the costs of third-party foundries and assembly contractors have increased or decreased based on relative market demand for capacity in the semiconductor manufacturing industry. Beginning in the fourth quarter of fiscal 1998, and continuing through the first and second quarter of fiscal 1999, our sales have increased due to greater market acceptance of our DAA ICs. In the third quarter of fiscal 1999, our sales increased significantly due to an increase in demand for our international DAA product. Additionally, personal computer manufacturers began to adopt the Modem Codec 97, or MC-97, standard developed by Intel for connecting modem interface circuitry to microprocessors during this time frame. We experienced rapid sales increase in our MC-97 modem product during the third quarter of fiscal 1999 due to the adoption of this emerging standard. Such market technical standards rarely are introduced with any quarter-to-quarter regularity and can contribute to significant changes in operating results. Research and development expenses increased by $1.2 million, or 56.4%, to $3.3 million in the fourth quarter of fiscal 1999 from $2.1 million in the third quarter of fiscal 1999. This increase was principally due to new product development activity in the Wireless Division, and, to a lesser extent, continued product development in the Wireline Division. The number of employees involved in research and development increased from 41 employees at the end of the third quarter of fiscal 1999 to 62 employees at the end of the fourth quarter, representing a 51.2% increase in staffing. An active recruiting effort was underway during the quarter to increase staffing for new product development activities. This increase in research and development spending also increased as a percent of sales to 17.9% in the fourth quarter of fiscal 1999 from 14.5% of sales in the third quarter of fiscal 1999. We believe that this rapid increase in research and development staffing may not be sustainable in future quarterly periods due to the limited availability of qualified mixed-signal circuit design engineers and test development engineers. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity as of January 1, 2000 consisted of $14.7 million in cash, cash equivalents and short-term investments, our bank credit facilities and equipment financing facilities with three institutional lenders. Our bank credit facilities include a revolving line of credit available for borrowings and letters of credit of up to the lesser of $3.0 million or 80% of eligible accounts receivable, a separate letter of credit facility for $454,000 related to a building lease, equipment loans which provided for initial equipment financing of up to $2.5 million and new loan facilities totaling $4.0 million for new equipment, leasehold improvements and computer-aided design software. At January 1, 2000, a letter of credit for $500,000 related to a building lease was outstanding under the revolving line of credit, with no other amounts outstanding thereunder, and $1.5 million was outstanding under the equipment loans. At January 31, 2000, $6.5 million was available under our credit facilities. Borrowings under the revolving line of credit bear interest at the bank's prime rate, which was 8.5% at January 1, 2000, and are payable at annual renewal of the line. Borrowings under the equipment loan agreement bear interest at the bank's prime rate, and are payable through January 2002. The new $4.0 million loan facilities have no amount outstanding as of January 1, 2000. We intend to use these facilities for financing principally during the first quarter of fiscal 2000. All bank facilities are secured by our accounts receivable, inventories, capital equipment and all other unsecured assets (excluding intellectual property). The line of credit, the separate letter of credit facility and equipment loans contain 30
provisions that prohibit the payment of cash dividends and require the maintenance of tangible net worth and compliance with financial ratios, which measure our immediate liquidity and our ongoing ability to pay back our outstanding obligations. Any default on one of the bank facilities will cause all of the bank facilities to be in default under these agreements. The bank has received warrants as consideration for providing portions of this financing. We also have entered into agreements with three institutional lenders for equipment financing. Under these agreements, we may borrow up to an aggregate of $8.5 million to purchase or lease equipment, leasehold improvements and software. At January 1, 2000, borrowings under these agreements were $8.2 million. This indebtedness bears effective interest rates (including end-of-term interest payments of $1.1 million) ranging from 12.5% to 14.6% per annum and is secured by a security interest in specific items, principally comprised of test equipment, and is repayable over approximately the next four years. See Note 4 of the notes to our consolidated financial statements. We have funded our operations to date primarily through sales of preferred stock which have resulted in gross aggregate proceeds to us of approximately $12.8 million, and debt financing under the credit and lease obligations described above and cash from operations. During fiscal 1999, cash provided by operating activities was $12.3 million reflecting the first year of profitable operations. This compares to cash used in operating activities of $4.5 million in fiscal 1998 and $219,000 in fiscal 1997 as our company incurred operating losses, primarily as a result of our product development activities. Capital expenditures were $9.9 million in fiscal 1999, $3.1 million in fiscal 1998 and $2.3 million in fiscal 1997. These expenditures were incurred to purchase semiconductor test equipment, design software and engineering tools, and other computer equipment and software to support our business expansion. In addition, we relocated our operations to a new facility in Austin, Texas in 1999 and incurred approximately $1.0 million in capital expenditures and leasehold improvement expenses in connection with the build-out of this new location. We anticipate further capital expenditures in fiscal 2000 of approximately $14.0 million to fund test floor operations and expanded engineering product development activities. We believe the net proceeds of this offering, together with our existing cash balances, credit facilities and cash generated by our operations, will be 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. Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects and the expansion of our sales and marketing activities. Although we are currently not a party to any agreement or letter of intent with respect to a potential acquisition or strategic arrangement, we may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing. There can be no assurances that additional equity or debt financing, if required, will be available to us on acceptable terms or at all. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income. We do not expect that the adoption of SFAS No. 133 will have a material impact on our financial statements because we do not currently hold any derivative instruments. In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The application of SAB No. 101 did not have a material impact on our financial statements. 31
On March 31, 1999, the FASB issued an exposure draft entitled "Accounting for Certain Transactions Involving Stock Compensation," which is a proposed interpretation of APB Opinion No. 25 which has an effective date for certain transactions of December 15, 1998. However, the exposure draft has not been finalized. Once finalized and issued, the current accounting practices for transactions involving stock compensation may need to change and such changes could affect our future earnings. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. 32
BUSINESS We design and develop proprietary, analog-intensive, mixed-signal integrated circuits, or ICs, for the rapidly growing global communications industry. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components of numerous communications products, including cellular phones, cable and satellite set-top boxes, modems and fax machines. To develop our business rapidly, we initially focused our efforts on developing ICs for the personal computer modem market. We are now applying our mixed-signal and communications expertise to the development of ICs for other high growth communications devices such as cellular telephones and network access applications. Our world-class, mixed-signal design engineers use standard complementary metal oxide semiconductor, or CMOS, technology to create innovative ICs that can dramatically reduce the cost, size and system power requirements of devices that our customers sell to their end-user customers. Our expertise in analog CMOS and mixed-signal IC design allows us to develop new and innovative products rapidly, which enables our customers to improve their time-to-market with end products that respond to consumer demand in the communications industry. Our five largest customers in fiscal 1999 were Intel, Motorola, PC-Tel, SmartLink and 3Com. INDUSTRY BACKGROUND According to Dataquest, the overall worldwide analog and mixed-signal IC market, which includes as a subset the mixed-signal communications IC markets that we target, surpassed $21.2 billion in 1998 and is expected to grow to more than $39.1 billion by 2003. This growth is being driven in part by the demand for communications services, which has increased at a rapid rate in recent years due to a number of factors, including the growth of Internet usage, development of new communications technologies, availability of improved communications services at lower costs and remote access requirements for corporate networks. This demand has fueled tremendous growth in the number of wireless and wireline communications devices used to access these services. For example, in wireless markets, the demand for cellular phones and other wireless devices, such as pagers and personal digital assistants, has grown rapidly as digital wireless services have become increasingly popular and affordable. In wireline markets, demand has increased for communications capabilities in a wide range of products, including personal computers, cable set-top boxes, fax machines, credit card verification machines, automated teller machines and remote gaming systems. Digital communications devices typically require mixed-signal circuits that provide analog-to-digital functionality to access the communications networks to which they are connected. Traditional designs for communications devices have used mixed-signal circuits built with numerous discrete analog and digital components. While these traditional designs provide the required functionality, they can be inefficient and inadequate for use in markets where size, price and performance are increasingly important product differentiators. In order to improve their competitive position, communications device manufacturers need advanced mixed-signal ICs that reduce the number of discrete components and required board space to create smaller products with improved price/performance characteristics. Additionally, these manufacturers require programmable ICs that can be reconfigured to comply with numerous and constantly evolving international communications standards without altering the fundamental design of a product. Manufacturers of communications devices face accelerating time-to-market demands and must adapt to evolving industry standards and new technologies. Because analog-intensive, mixed-signal IC design expertise is difficult to find, these manufacturers increasingly are turning to third parties to provide advanced mixed-signal ICs. Designing the analog component of a mixed-signal IC involves great complexity and difficulty, because the performance of an analog IC depends on the creative analog expertise of engineers to maximize speed, power, amplitude and resolution within the constraints of standard manufacturing processes. The development of analog design expertise typically requires years of 33
practical analog design experience under the guidance of a senior engineer, and engineers with the required level of skill and expertise are in short supply. Many third-party IC providers lack sufficient analog expertise to develop compelling mixed-signal ICs. As a result, manufacturers of communications devices are often faced with inadequate mixed-signal ICs and are challenged to find third-party providers that can supply them with mixed-signal ICs with greater functionality, smaller size and lower power requirements all at a reduced cost and time-to-market. THE SILICON LABORATORIES SOLUTION Our engineers apply their expertise in analog and mixed-signal IC design to create analog-intensive, mixed-signal ICs that communications device manufacturers use in numerous leading-edge applications. We combine this analog and mixed-signal expertise with standard CMOS manufacturing process technology to develop innovative mixed-signal ICs for our customers. We are a fabless semiconductor company and rely on leading semiconductor foundries to produce our ICs, which allows us to focus our resources on enhancing and extending our core design capabilities. Our ICs provide our customers with the following benefits: DRAMATICALLY IMPROVED SIZE AND PRICE/PERFORMANCE CHARACTERISTICS. Our products are highly integrated, typically replacing existing alternatives that use multiple costly discrete components, and use standard CMOS manufacturing process technology, which typically is less expensive than other competing technologies. As a result, we can offer competitively priced products that allow our customers to reduce the number of discrete components used in their products while offering increased reliability, lower power consumption and smaller sizes. Additionally, some of our ICs can be programmed to accommodate emerging and differing global standards. REDUCED TIME REQUIRED TO BRING A PRODUCT TO MARKET. We enable our customers to rapidly meet the demand for their end-user communications devices by providing them with outsourced mixed-signal ICs that incorporate our industry-leading designs. Because we design our ICs to be integrated into the products of multiple manufacturers and we conduct extensive research and development to ensure that our products conform to evolving technical standards, our customers are able to rapidly integrate our products into their designs. By reducing the number of discrete components, our customers can also reduce the number of outside suppliers required for their products. As a result, our customers can reduce the time required to bring a communication device to market. Furthermore, our ICs are tested prior to customer delivery to ensure their compliance with applicable specifications of the Federal Communications Commission, or FCC, and international regulators, minimizing complications and delays for our customers throughout their internal testing process. ATTRACTIVE NEW PRODUCT OPPORTUNITIES. Our space-saving and cost-efficient ICs allow our customers to create smaller and more cost-effective products for use in numerous emerging communications markets. Our ICs provide enhanced communication capabilities at lower costs and with smaller form factors for numerous evolving applications, including cellular communications, Internet telephony and remote monitoring systems. For example, due to the dramatically reduced size and cost of our silicon DAA products, our customers are able to cost-effectively incorporate modems into multiple new applications such as remote gaming systems, smart vending machines and set-top boxes. STRATEGY Our objective is to be a leading supplier of proprietary analog-intensive mixed-signal ICs for the communications industry. To achieve this goal, we are pursuing the following strategies: TARGET MULTIPLE HIGH-GROWTH COMMUNICATIONS MARKETS. We intend to continue to identify large and sustainable opportunities in emerging high-growth communications markets and develop mixed-signal ICs that address the needs of suppliers of communications devices in those markets. We strive to develop 34
creative ICs that require complex analog design in order to address opportunities with high revenue and profit potential and relatively long life-cycles. Our core technological capabilities were initially focused on the PC modem market and we are currently applying these capabilities to expand into other high growth communications markets such as cellular phones, set-top boxes, central office lines, interactive gaming systems and personal digital assistants. LEVERAGE OUR EXISTING DESIGNS TO OFFER COMPELLING PRODUCTS. We consider our ability to leverage our proprietary IC designs a competitive advantage. Many of our designs are reusable in the development of new mixed-signal ICs. By leveraging these designs and our extensive experience, we are able to rapidly introduce new analog-intensive, mixed-signal ICs that are smaller in size and require less power in the final device than traditional products. We enable our customers to reduce production costs, board space and the number of processes required for the manufacture of their devices while improving yields, performance and reliability. For example, our silicon direct access arrangement product was introduced in 1998, and has already been modified for use in our ISOmodems and adapted for use with our voice codec products. We intend to continue to use our existing IC designs and methodologies as building blocks for new ICs to rapidly address new and emerging market opportunities. ATTRACT AND RETAIN TOP MIXED-SIGNAL TECHNICAL TALENT. We are committed to recruiting and retaining technical personnel who possess the expertise necessary to identify compelling market opportunities for highly innovative mixed-signal ICs, and to design, develop and market these ICs to capitalize on those opportunities. We believe we have assembled a world-class team of engineers with the exceptional analog design expertise required to provide our customers with products that offer superior price/performance characteristics. We believe our senior engineer expertise, combined with our focus on leading-edge technology and innovative solutions to complex problems, enhances our attractive and highly stimulating collaborative work environment. We believe this appealing work environment provides us with a competitive advantage in recruiting. We intend to continue to promote this attractive work environment and to offer competitive compensation to attract and retain the best mixed-signal IC technical talent available. CAPITALIZE ON STANDARD MANUFACTURING PROCESSES AND FABLESS SEMICONDUCTOR MODEL. High volume CMOS manufacturing process technology is widely available at semiconductor foundries around the world. We intend to continue to utilize standard CMOS manufacturing process technology to develop advanced mixed-signal ICs that can be reliably manufactured in volume and decrease the time-to-market of our new products at a significant cost advantage. Our fabless model allows us to focus our resources on the development of proprietary and innovative mixed-signal designs, while minimizing capital and operating infrastructure requirements. EXTEND TECHNOLOGICAL LEADERSHIP. We believe that we have established a reputation as a technological leader in the design and development of analog-intensive, mixed-signal ICs. We are actively extending our intellectual property position by aggressively investing in research and development and utilizing our mixed-signal expertise to create innovative ICs. We currently hold one U.S. patent, with 55 U.S. patent applications pending, and we continue to actively pursue the filing of additional patent applications to cover our intellectual property advancements. We intend to leverage our talent pool of engineers, and continue to invest significant resources in recruiting and developing expertise in mixed-signal IC design to extend our proprietary intellectual property portfolio. EXPAND GLOBAL SALES EFFORTS. We plan to aggressively pursue a global multi-channel distribution strategy. We believe there are significant international opportunities for both our wireline and wireless ICs and we intend to continue to expand our global marketing and distribution efforts to address the range of markets and applications for our innovative mixed-signal ICs. While substantially all of our sales in fiscal 1999 were made to customers based in the United States, we intend to increase our international sales through our international direct sales office and our network of independent sales representatives and distributors. 35
PRODUCTS We provide mixed-signal ICs for use in both wireline and wireless communications devices and applications. Our products integrate the numerous discrete components required by most existing mixed-signal circuits for communications devices into single chips or chipsets. By doing so, we are able to create products that: - require less board space; - can offer superior performance; - provide increased reliability; - reduce system power requirements; and - reduce costs. WIRELINE PRODUCTS Many of our wireline products are designed for use in analog modems, which enable the transmission of digital data signals over wireline telephone networks and are used in the vast majority of Internet connections. Three fundamental components of the modem provide the requisite functionality: software algorithms; a direct access arrangement, or DAA; and an analog/digital converter, or codec. Complex software algorithms mitigate the impairments found in the telephone network, such as noise interference and echoes. Since telephone lines fundamentally transmit analog signals and computers use digital transmissions, modems require analog-to-digital and digital-to-analog converters, or coders/decoders, that are referred to as codecs. A modem transmits analog signals from a codec to the telephone line through a DAA. We offer a variety of modem products which include the DAA and codec functions and which are software programmable to meet international regulatory specifications. - DAA FUNCTIONS. Government regulation requires electrical isolation between the telephone line and the local electrical power system. Isolation is required for safety, sound quality, and to prevent harm to the telephone network from electrical surges. With the introduction of telecommunications deregulation, consumers were allowed to connect directly to the telephone network. However, they were required to use a device that met FCC part 68 specifications, which govern all electronic products sold in the United States intended for connection to the telephone network. Traditional DAA products met FCC requirements, but were designed inefficiently and contained a variety of discrete components. Our silicon DAA is the first to integrate the bulky transformer, relays, and opto-isolators traditionally found in a modem's isolation circuitry, and achieve FCC part 68 compliance. Our silicon DAA may be used with digital signal processors, or DSPs, currently used in traditional analog modems. We were able to design our product in CMOS, creating a silicon DAA with attractive process characteristics for our customers. Our DAA products are lower in cost, use substantially less board space than alternative products and are programmable to meet international standards. - CODEC FUNCTIONS. Traditionally, analog modems included specialized hardware chips known as a digital signal processor, or DSP, which contained the modem's software algorithms. The DSP is typically the most expensive hardware component in traditional analog modems. In an effort to reduce costs and as a result of capabilities offered by more powerful microprocessors introduced during the mid-1990's, a new generation of modems, known as soft modems, has evolved. When soft modems are used, the main microprocessor in a personal computer runs the software algorithms required to operate a modem, thus eliminating the need for a DSP chip. The software modem's digital interface between the codec and the personal computer in a soft modem can take one of two forms. The first and most popular is the PCI interface standard. Soft modems using a PCI interface typically require an additional chip to make the digital codec interface compatible with a PCI 36
interface. Alternatively, the MC-97, a new modem interface standard promoted by Intel, eliminates the need for this additional chip. With an MC-97 compliant codec, soft modem hardware can interface directly with a microprocessor, further reducing costs. Our DAA products, which include codecs, can be used with either the PCI or MC-97 interface standards. We also design innovative products for network access applications. In January 2000, we announced the ProSLIC, our first product targeting this market. - SUBSCRIBER LINE INTERFACE CIRCUIT, OR SLIC. Subscriber line interface circuits, or SLICs, provide the analog telephone interface on the source end of the telephone line. The primary functions of a SLIC are to ring and provide power and signaling (such as caller ID, dial tone and busy tone) to the telephone. Traditionally, SLICs have been produced with an expensive high voltage IC accompanied by a CMOS codec IC and requiring as many as five voltage sources. Our ProSLIC has been designed as one integrated CMOS chip, eliminating the need for a high voltage IC and requiring only two voltage sources. The result is a smaller, more reliable and less expensive product. The following table summarizes the ICs for the wireline market that we currently offer to customers: WIRELINE PRODUCTS (INTRODUCTION DATE) DESCRIPTION APPLICATIONS Direct Access Provides both the functionality of a DAA and - personal computer modems Arrangement (DAA) a codec. A DAA provides electrical isolation - fax machines between a wireline device, such as a modem, - host modems (First Quarter 1998) and the telephone line to guard against - handheld organizers power surges in the telephone line, while a - set-top boxes codec provides analog-to-digital and digital-to-analog conversion. Traditional DAA products contain as many as 35 discrete components to provide functionality comparable to that which we provide in a single chipset. International DAA Provides the same functionality as our DAA, - same as DAA but is programmable for differing (Third Quarter 1998) international telephone standards, which enables manufacturers to distribute their products globally without costly country-specific design modifications. MC-97 International Provides the same functionality as our - personal computer modems DAA International DAA, but features a MC-97 - embedded modems (Modem Codec 97) interface. (First Quarter 1999) Voice Codec Encodes analog signals within the voice - data/fax/voice modems frequency range into digital signals and - speaker phones (Second Quarter 1999) decodes digital voice signals back into - fax machines analog signals. When combined with the DAA - voice recognition systems chipset, the Voice Codec permits voice - Web telephony products communications to be digitized and carried - video conferencing systems simultaneously with data traffic. 37
WIRELINE PRODUCTS (INTRODUCTION DESCRIPTIONTE) APPLICATIONS ISOmodem The ISOmodem is a miniaturized modem that - credit card verification uses our DAA technology and operates at a systems (Third Quarter 1999) speed of up to 2400 bits per second. The - set-top boxes ISOmodem is designed to provide quick - smart vending machines network access for devices with limited data - pay-per-view systems transmission requirements. For such devices, - postage meters a low access transmission speed of 2400 bits - pay phones per second is generally sufficient to - industrial power meters sustain performance while also providing - security systems more rapid connect times. The ISOmodem contains a programmable line interface that meets global telephone line requirements. ProSLIC The ProSLIC provides the analog telephone - telephone switchboard systems interface on the source end of the telephone - cable telephony (1st Quarter which provides dial tone, busy tone, caller - wireless local loop providing 2000) ID and ring signal. It is programmable to remote access for a wireline meet international telephone standards, system which enables manufacturers to distribute - voice over Internet protocol their products globally without costly - digital broadband to analog country-specific design modifications. Our telephone adapters ProSLIC product is currently designed for - voice over digital subscriber short-haul applications. lines WIRELESS PRODUCTS A variety of cellular communications standards are employed around the world. The most popular standard used today is the Global System for Mobile Communications, or GSM, standard, which was first deployed in Europe and is now available in several countries throughout the world. Manufacturers continue to introduce new cellular phone models that offer smaller form factors and longer battery life at lower costs. These market dynamics drive a need for new, highly-integrated electronics that reduce component count and consume less power. Our products are designed to serve this need. 38
The following table summarizes the ICs for the wireless market that we currently offer to customers: WIRELESS PRODUCTS (INTRODUCTION DATE) DESCRIPTION APPLICATIONS RF Synthesizer for A frequency synthesizer generates high - wireless local area networking General Application frequency signals that are used in wireless - wireless modems communications systems to select a - wireless meter readers (Fourth Quarter 1998) particular radio channel. Existing frequency - handheld point-of-sale synthesizers contain discrete voltage terminals control modules and as many as 30 discrete electronic components to provide functionality comparable to what we provide in a monolithic IC. Our general purpose synthesizer can be programmed to address multiple wireless communications applications. RF Synthesizer for GSM Provides the same functionality as the RF - GSM cellular phones Synthesizer for General Application but has - GPRS data communications (Fourth Quarter 1999) been optimized for cellular phones operating devices on the GSM standard. This synthesizer is capable of providing dual-band synthesis to use one or both of the separate radio bands available to GSM phones. Additionally, this synthesizer has very fast settling times, allowing the phone to quickly lock to a desired channel. This RF synthesizer is compatible with General Packet Radio Service, or GPRS standard, which is the data communications protocol employed by the GSM standard. GPRS brings wireless Internet access to GSM users through data transfer and signaling over GSM radio networks. CUSTOMERS, SALES AND MARKETING We market our products to original equipment manufacturers and other providers of applications in both the wireline and wireless communications markets. The following is a list of customers that have purchased our products and incorporated them into products or devices offered to their customers: Ambient Motorola 3Com Intel PC-Tel Topic Lucent SmartLink Zyxel To date, we have sold substantially all of our ICs through our direct sales force. We maintain three sales offices in North America and conduct European direct sales through our United Kingdom subsidiary. Our direct sales force includes regional sales managers in the field and area business managers at our headquarters to further support customer communications. Many of these managers have engineering degrees. Our password-protected field sales organization Web site, which includes technical documentation, backlog information, order status, product availability and new product introduction information, supports communications with our field sales organization. Additionally, we provide direct communication to all field sales personnel as part of a structured sales communications program. 39
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 support for our products. To date, sales to these representatives and distributors have accounted for a small portion of our sales. Our marketing efforts are targeted at both identified industry leaders and emerging market participants. Marketing activities are supported by a focused communications effort that targets editorial coverage in leading trade and business publications. Our external Web site includes data sheets and supporting product information, press releases and a company overview. These activities, in conjunction with customer contacts, help prompt requests for evaluation boards and sample products, which are fulfilled through our corporate headquarters as an integrated part of our sales efforts. Due to the complex and innovative nature of our ICs, we employ experienced applications engineers who work closely with each customer to support the design-win process, and can significantly accelerate the customer's time required to bring a product to market. A design-win occurs when a customer has designed our ICs into its product architecture. A considerable amount of effort to assist the customer in incorporating our ICs into its products typically is required prior to any sale. In many cases, our innovative ICs require significantly different implementations than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design-win can vary substantially depending on a customer's development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Due to this extensive design-win process, once a completed design architecture has been implemented and produced in high volumes, our customers are reluctant to significantly alter their designs. We believe this promotes relatively long product life cycles for our ICs and high barriers to entry for competitive products, even at lower price levels for such competing products. Finally, our close collaboration with our customers provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions. RESEARCH AND DEVELOPMENT Through our research and development efforts, we apply our world-class analog and mixed-signal engineering talent and expertise to create new ICs that integrate functions typically performed inefficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced price/performance characteristics. We attempt to reuse successful techniques for integration in new applications where similar benefits can be realized. Reliable and precise analog and mixed-signal ICs can only be developed by teams of engineers under the direction of senior engineers with significant analog experience who are familiar with the intricacies of designing these ICs for commercial volume production. The development of test methodologies is a critical activity in releasing a new product for commercial success. We believe that we have attracted some of the best engineers in our industry. As of January 1, 2000, we had 62 employees involved in research and development. TECHNOLOGY Our product development process facilitates the design of highly innovative mixed-signal ICs . Our senior engineers start the product development process by forming an understanding of our customers' products and then design alternatives for decreasing power, size and cost requirements. Our engineers' deep knowledge of existing and emerging communications standards and performance requirements help us to assess the technical feasibility of a particular IC. We target areas where Silicon Laboratories can provide compelling product improvements. Once we have solved the primary challenges, our field engineers continue to work closely with our customers' design teams to maintain and develop an understanding of our customers' needs, allowing us to formulate derivative products and features. In providing mixed-signal ICs for our customers, we believe our key competitive advantages are: (1) analog CMOS design expertise; (2) digital signal processing design expertise; and (3) our broad understanding of communication systems technology and trends. To fully capitalize on these advantages, 40
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 lowers the cost of the digital circuitry in our products. 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 pioneering efforts in analog circuit design 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 expensive, discrete modem components, such as transformers, relays and opto-isolators, with highly integrated CMOS mixed-signal ICs. Similarly, expensive cellular phone components such as oscillators are replaced by our integrated CMOS frequency synthesizer products. DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE We consider the partitioning of a circuit's functionality to be a proprietary and creative design technique. Our digital signal processing design expertise maximizes the price/performance characteristics of both the analog and digital functions and allows our ICs to work in an optimized manner to accomplish particular tasks. Generally, we surround core analog circuitry with inexpensive digital CMOS transistors, which allows our ICs to perform the required analog functions with increased digital capabilities. For example, our ProSLIC product is designed to function more efficiently than traditional products for the source end of the telephone line which involve a two chip combination requiring more board space and numerous external components. The ProSLIC product is partitioned by combining a core analog design that provides analog-to-digital conversion and digital-to-analog conversion with optimized digital signal processing functions such as data compression, data expansion, filtering and tone generation. In this manner, we can isolate the higher voltage required to ring a telephone in low-cost, off-chip high voltage transistors, thereby enabling us to fulfill the remaining core functions with a single chip. UNDERSTANDING OF COMMUNICATION SYSTEMS TECHNOLOGY AND TRENDS Our focused expertise in communications ICs is rooted in our founders' previous experience at AT&T Bell Labs working in CMOS design for communications applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends that impact communications systems and markets. Therefore, we believe we have a unique ability to predict product evolution and design compelling ICs for communications manufacturers. Our understanding of the role of analog/digital interfaces within communications systems and the key domestic and international telecommunications standards that must be supported are particular areas of expertise. MANUFACTURING As a fabless IC manufacturer, we conduct IC design and development in our facilities in the United States and electronically transfer our proprietary IC designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs use industry-standard complementary metal oxide semiconductor, or CMOS, manufacturing process technology to achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs within a lower cost 41
framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus ensuring the availability of manufacturing capability over our products' life cycles. We currently rely solely on Taiwan Semiconductor Manufacturing Co. to manufacture all of our semiconductor wafers. We are in the process of qualifying Vanguard International Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing Co., as an additional semiconductor fabricator and such qualification is not complete. In anticipation of successfully qualifying Vanguard, Vanguard is currently producing a majority of our current work in progress. 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 at our facilities or through outsourced testing vendors, prior to shipping to our customers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on the design, development and marketing of our ICs. COMPETITION The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We believe the principal competitive factors in our industry are: - - level of integration; - intellectual property; - - product capabilities; - customer support; - - reliability; - reputation; and - - price; - ability to rapidly introduce new products to market. We believe that we are competitive with respect to these factors, particularly because our ICs typically are smaller in size, are highly integrated, achieve high performance specifications at lower price points than competitive products and are manufactured in standard CMOS which generally enables us to supply them on a relatively rapid basis to customers to meet their product introduction schedules. Our DAA product is an example of our competitive positioning. Traditional DAA isolation techniques rely on relays, optical isolators and transformers, transfer analog signals across the isolation barrier, and/or require numerous external components to achieve their functionality. Our silicon DAA reduces costs by eliminating the need for these bulky and/or numerous discrete components. Our DAA ICs also reduce board area and power consumption, while improving performance. However, disadvantages we face in our markets include our short operating history and the need for customers to redesign their products and modify their software to implement our ICs in their products. We anticipate that the market for our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous wireline and wireless communications markets and applications, we face competition from a relatively large number of competitors. Across our product offerings, we compete with Advanced Micro Devices, Analog Devices, Conexant, Delta Integration, Fujitsu, Infineon Technologies, Krypton Isolation, National Semiconductor, Philips and Texas Instruments, among others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and innovative start-up semiconductor design companies. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. As the markets for communications products grow, we also may face competition from traditional communications device companies. These companies may enter the mixed-signal semiconductor market by introducing their own products, including components within their products that would eliminate the need for our ICs, or by entering into strategic relationships with or acquiring other existing IC providers. Many of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with existing or 42
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, 2000, we had been granted one United States patent in the IC field, which is entitled "Analog Isolation System With Digital Communication Across A Capacitive Barrier" and expires in 2017. The patent covers a silicon DAA chipset which provides a digital, low-cost interface to telephone lines. We also have filed 55 additional U.S. patent applications. There can be no assurance that patents will ever be issued for these applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. In addition, we claim copyright protection for proprietary documentation used in our products. We register the visual image of each IC that we manufacture in commercial quantities with the United States Copyright Office. We have registered the "Silicon Laboratories" logo as a trademark in the United States. All other trademarks, service marks or trade names appearing in this prospectus are the property of their respective owners. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other security measures. We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new products in a timely manner will be an important factor in maintaining our competitive position. Many participants in the semiconductor and communications industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management's time. Any such litigation could materially adversely affect us. Other than industry standard licenses with our vendors, such as wafer fabrication tool libraries, computer-aided design applications and business software applications, we do not have material licenses. EMPLOYEES As of January 1, 2000, we employed 148 people, including 34 in manufacturing, 62 in engineering development, 30 in marketing, 12 in sales and 10 in administration. Our success depends on the continued service of our key technical and senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our employees are represented by a labor organization. We consider our employee relations to be good. FACILITIES Our main executive, administrative and technical offices occupy approximately 37,800 square feet in Austin, Texas under a lease that expires in April 2006, with one five year renewal option. We have an additional lease commitment in Austin, Texas for supplemental office space for approximately 34,000 square feet which we began to occupy in February 2000. This lease's term is for 76 months after initial occupancy with one five year renewal option. We believe that these facilities are sufficient to meet our needs through December 2000. We also lease sales offices in Atlanta, Georgia and San Jose, California. 43
LEGAL PROCEEDINGS On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com in the United States District Court for the Western District of Texas (Austin Division). The complaint asserts that Analog Devices has infringed, and is continuing to infringe, our U.S. Patent 5,870,046, entitled "Analog Isolation System With Digital Communication Across A Capacitive Barrier," by making, using, selling, offering to sell and/or importing silicon DAAs that embody or use inventions claimed by our patent. The complaint also asserts, among other things, that Analog Devices and 3Com have misappropriated our confidential information, know-how and trade secrets relating to our DAA technology, tortiously interfered with our business relations with our existing and prospective customers, and been unjustly enriched by this misappropriation. The suit seeks unspecified damages from Analog Devices, including damages for willful infringement of our patent, and an injunction prohibiting Analog Devices from infringing our patent. In addition, the suit seeks unspecified damages, including punitive damages and attorneys' fees arising, among other things, out of the misappropriation, tortious interference and unjust enrichment, and an injunction prohibiting Analog Devices and 3Com from designing, manufacturing, reproducing, using or selling any ICs, modems or other products the conception, design or development of which was based on our confidential information, know-how and trade secrets. On January 26, 2000, Analog Devices served an answer denying that it has misappropriated our confidential information, know-how and trade secrets and brought a counterclaim against us seeking a declaratory judgment that our issued U.S. patent is invalid and unenforceable and that Analog Devices has not infringed our issued U.S. patent. The counterclaim further alleges that we improperly failed to disclose a relevant pre-existing patent to the U.S. Patent and Trademark Office during the course of our patent application process, and that we therefore are unable to enforce our patent. We filed a reply to Analog Devices' counterclaim asserting that our issued U.S. patent is valid and enforceable and that Analog Devices has infringed our issued U.S. patent. We also denied that we improperly excluded any relevant information in the course of our patent application process. On February 24, 2000, 3Com served an answer denying it has misappropriated our confidential information, know-how and trade secrets and, without specifying, asserted we have acted with unclean hands. This litigation is in the early stages of discovery and no trial date has been set by the trial court. For a description of risks associated with this pending lawsuit, please see "Risk Factors--We depend on a limited number of customers for the vast majority of our sales, and the loss of, or a significant reduction in orders from, any key customer could significantly reduce our sales" and "--Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business." We are not currently involved in any other material legal proceedings. 44
MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Set forth below is information regarding the executive officers and directors of Silicon Laboratories as of January 1, 2000. NAME AGE POSITION - ---- -------- ------------------------------------------ Navdeep S. Sooch.......................... 37 Chief Executive Officer and Chairman of the Board Jeffrey W. Scott.......................... 38 Vice President of Engineering and Director David R. Welland.......................... 44 Vice President of Technology and Director John W. McGovern.......................... 44 Vice President and Chief Financial Officer Bradley J. Fluke.......................... 38 Vice President/General Manager Wireline Products Division Edmund G. Healy........................... 45 Vice President/General Manager Wireless Products Division Gary R. Gay............................... 49 Vice President of Sales Jonathan D. Ivester....................... 44 Vice President of Operations William P. Wood........................... 44 Director H. Berry Cash............................. 61 Director William G. Bock........................... 49 Director NAVDEEP S. SOOCH co-founded Silicon Laboratories in August 1996 and has served as our Chief Executive Officer and Chairman of the Board since its inception. From March 1985 until founding Silicon Laboratories, Mr. Sooch held various positions at Crystal Semiconductor/Cirrus Logic, a designer and manufacturer of integrated circuits, including Vice President of Engineering, as well as Product Planning Manager of Strategic Marketing and Design Engineer. From May 1982 to March 1985, Mr. Sooch was a Design Engineer with AT&T Bell Labs, a communications company. Mr. Sooch holds a B.S. in electrical engineering from the University of Michigan and a M.S. in electrical engineering from Stanford University. JEFFREY W. SCOTT co-founded Silicon Laboratories in August 1996 and has served as our Vice President of Engineering and as a director since its inception. From October 1989 until founding Silicon Laboratories, Mr. Scott held various positions at Crystal Semiconductor/Cirrus Logic, including Vice President of Engineering (Computer Products), Design Manager and Design Engineer. From 1985 until 1989, Mr. Scott served as a Design Engineer with AT&T Bell Labs. Mr. Scott holds a B.S. in electrical engineering from Lehigh University and a M.S. in electrical engineering from the Massachusetts Institute of Technology. DAVID R. WELLAND co-founded Silicon Laboratories in August 1996 and has served as our Vice President of Technology and as a director since its inception. From November 1991 until founding Silicon Laboratories, Mr. Welland held various positions at Crystal Semiconductor/Cirrus Logic, including Senior Design Engineer. Mr. Welland holds a B.S. in electrical engineering from the Massachusetts Institute of Technology. JOHN W. MCGOVERN joined Silicon Laboratories in December 1996 as our Vice President and Chief Financial Officer. From February 1985 to September 1996, Mr. McGovern held various positions at Crystal Semiconductor/Cirrus Logic including Vice President of Finance and Division Controller. Mr. McGovern holds a B.B.A. in accounting from the University of Texas and is a licensed Certified Public Accountant. BRADLEY J. FLUKE has served as our Vice President and General Manager of our Wireline Products Division since January 1999 and as our Vice President of Marketing from April 1997 to December 1998. Previously, he served as the Director of Marketing of the Computer Products Division of Crystal Semiconductor/Cirrus Logic from June 1990 to April 1997. From 1984 to 1990, Mr. Fluke held various 45
marketing positions in the Data Converter Group for Analog Devices, a designer and manufacturer of integrated circuits. Mr. Fluke holds a B.S. in electrical engineering from the Rochester Institute of Technology. EDMUND G. HEALY has served as Vice President and General Manager of our Wireless Products Division since June 1998. From September 1992 to June 1998, Mr. Healy worked as General Manager of the Magnetic Storage Division at Crystal Semiconductor/Cirrus Logic. Mr. Healy held various Senior Marketing and Product Planning positions for Zilog, a designer and manufacturer of application specific standard products, and GEC Plessey Semiconductor, from 1987 to 1992. From 1983 to 1987, Mr. Healy was an Assistant Professor of Electrical Engineering at the United States Military Academy after serving as an Infantry Officer from 1976 to 1981. Mr. Healy holds a B.S. in electrical engineering from the United States Military Academy, a M.S. in electrical engineering from Georgia Institute of Technology and a M.S. in management from Stanford University. GARY R. GAY joined Silicon Laboratories in October 1997 as our Vice President of Sales. Previously, Mr. Gay was with Crystal Semiconductor/Cirrus Logic from 1985 to September 1997 where he most recently served as Vice President of North American Sales. From 1979 to 1985, Mr. Gay was International Sales Manager and Asia Pacific Sales Manager with Burr-Brown Corporation, a designer and manufacturer of semiconductor components. Mr. Gay holds a B.S. in electrical engineering from the Rochester Institute of Technology. JONATHAN D. IVESTER joined Silicon Laboratories in September 1997 as Vice President of Manufacturing. From May 1984 to September 1997, Mr. Ivester was with Applied Materials and served as Director of Manufacturing and Director of U.S. Procurement in addition to various engineering management positions. Mr. Ivester was a scientist at Bechtel Corporation, an engineering and construction company, from 1980 to 1982 and at Abcor, Inc., an ultrafiltration company and subsidiary of Koch Industries, from 1978 to 1980. Mr. Ivester holds a B.S. in chemistry from the Massachusetts Institute of Technology and a M.B.A. from Stanford University. WILLIAM P. WOOD has served as a director of Silicon Laboratories since March 1997. Since 1984, Mr. Wood has been a general partner, and for funds created since 1996, a special limited partner, of various funds associated with Austin Ventures, a venture capital firm located in Austin, Texas. Mr. Wood serves on the board of directors of Crossroads Systems, a provider of storage routers for storage area networks, and several private companies. Mr. Wood holds an A.B. in history from Brown University and a M.B.A. from Harvard University. H. BERRY CASH has served as a director of Silicon Laboratories since June 1997. Mr. Cash has served as general partner of InterWest Partners, a venture capital firm, since 1986. Mr. Cash currently serves on the board of directors of the following public companies: Ciena Corporation, a designer and manufacturer of multiplexing systems for fiber optic networks; i2 Technologies, a provider of marketplace services; Liberte Investors Inc., an investment company; and Panja, Inc., a provider of electronic information integration equipment. In addition, Mr. Cash is a director of several privately held companies. Mr. Cash holds a B.S. in electrical engineering from Texas A&M University and a M.B.A. from Western Michigan University. WILLIAM G. BOCK has served as a director of Silicon Laboratories since March 2000. Since February 1997, Mr. Bock has served as the President and Chief Executive Officer of Dazel Corporation, a developer of information delivery software solutions. Dazel became a wholly-owned subsidiary of the Hewlett- Packard Company in June 1999. From October 1994 to February 1997, Mr. Bock served as Chief Operating Officer at Tivoli Systems, a client server software company. Tivoli became a wholly-owned subsidiary of IBM in March 1996. Mr. Bock serves on the board of directors of all.com, a privately held company. Mr. Bock holds a B.S. in Computer Science from Iowa State University and an M.S. in Industrial Administration from Carnegie Mellon University. 46
CLASSIFIED BOARD OF DIRECTORS At the first annual meeting of stockholders following the closing of our initial public offering, our board of directors will be divided into three classes of directors, as nearly equal in size as is practicable, to serve staggered three-year terms: - Class I, whose term will expire at the annual meeting of stockholders to be held in 2002; - Class II, whose term will expire at the annual meeting of stockholders to be held in 2003; and - Class III, whose term will expire at the annual meeting of stockholders to be held in 2004. Upon expiration of the term of a class of directors, directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which such term expires. Each director's term is subject to the election and qualification of his successor, or his earlier death, resignation or removal. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors established an audit committee in March 1999. The members of the audit committee are Messrs. Wood, Cash and Bock. The audit committee reports to the board of directors with regard to the selection of our independent auditors, the scope and methods of our annual audits, the fees to be paid to the independent auditors, the performance of our independent auditors, compliance with our accounting and financial policies, and management's procedures and policies relative to the adequacy of our internal accounting controls. Our board of directors established a compensation committee in December 1998. The members of the compensation committee are Messrs. Wood, Cash and Bock. The compensation committee reviews and makes recommendations to the board regarding our compensation policies and all forms of compensation to be provided to our executive officers and other employees. In addition, the compensation committee has authority to administer our stock option and stock purchase plans. Prior to this offering, the entire board of directors administered our stock option plan. DIRECTOR COMPENSATION Non-employee directors will receive option grants at periodic intervals under the automatic option grant program of our 2000 Stock Incentive Plan, and non-employee directors will be eligible to receive option grants under the discretionary option grant program of that plan. We reimburse directors for all reasonable out-of-pocket expenses incurred in attending meetings of the board of directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee. Of the members of the compensation committee, Mr. Sooch has served as our Chief Executive Officer and Chairman of the Board since August 1996 and neither Mr. Wood, Mr. Cash nor Mr. Bock serves or has previously served as an officer or employee of Silicon Laboratories. For a description of investments in our company made by Mr. Wood and Mr. Cash, and their respective affiliates, see "Certain Transactions" below. LIMITATION OF LIABILITY AND INDEMNIFICATION Our certificate of incorporation limits the personal liability of our board members for breaches by the directors of their fiduciary duties. Our bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. We have entered into indemnification agreements with all of our directors and executive officers and have purchased directors' and officers' liability insurance. 47
EXECUTIVE COMPENSATION The following table provides the total compensation paid to our chief executive officer and our next four most highly-compensated executive officers in fiscal 1999. SUMMARY COMPENSATION TABLE LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------- ------------ SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS - --------------------------- -------- -------- ------------ ------------ Navdeep S. Sooch................................ $170,000 $43,932 $175 -- Chief Executive Officer and Chairman of the Board Jeffrey W. Scott................................ 140,000 29,000 148 -- Vice President of Engineering David R. Welland................................ 140,000 29,000 148 -- Vice President of Technology Bradley J. Fluke................................ 140,000 29,000 148 18,000 Vice President/General Manager Wireline Products Division Gary R. Gay..................................... 150,000 46,019 157 20,000 Vice President of Sales OPTION GRANTS IN LAST FISCAL YEAR The following table provides information concerning individual grants of stock options made during fiscal 1999 to each of our executive officers named in the Summary Compensation Table. The percentage of total options granted to our employees in the last fiscal year is based on options granted to purchase an aggregate of 2,484,200 shares of common stock during fiscal 1999. We have never granted any stock appreciation rights. The exercise prices represent our board's estimate of the fair market value of the common stock on the grant date. In establishing these prices, our board considered many factors, including our financial condition and operating results, transactions involving the issuances of shares of our preferred stock, the senior rights and preferences accorded issued shares of preferred stock, and the market for comparable stocks. We granted these options under our 1997 Stock Option/Stock Issuance Plan. Each option has a maximum term of ten years, subject to earlier termination if the optionee's services are terminated. Except as otherwise noted, these options are immediately exercisable, but we have the right to repurchase at the exercise price any shares that have not vested. If we are acquired in a stockholder-approved transaction by merger, consolidation or asset sale, the option shares will accelerate in full unless the option is assumed by the successor corporation and our repurchase rights with respect to the unvested option shares are assigned to such corporation. In the event that the option is so assumed by, and our repurchase rights with respect to unvested shares are assigned to, the successor corporation and, within 18 months following the acquisition, the optionee's position is reduced to a lesser position or the optionee's employment is involuntarily terminated, the option shares will accelerate and become fully vested. The amounts shown as potential realizable value represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. 48
The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future price of our common stock. Actual gains, if any, on stock option exercises depend on the future performance of the trading price of our common stock. The amounts reflected in the table may not necessarily be achieved. The following table sets forth information concerning the individual grants of stock options to each of our named executive officers in fiscal 1999. OPTION GRANTS IN FISCAL 1999 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM -------------------------------------------------------- ----------------------- NUMBER OF SECURITIES PERCENT OF TOTAL UNDERLYING OPTIONS GRANTED EXERCISE OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANTED(1) FISCAL 1999 PER SHARE DATE 5% 10% ------------ ---------------- --------- ---------- -------- -------- Navdeep S. Sooch.............. -- --% $ -- -- $ -- $ -- Jeffrey W. Scott.............. -- -- -- -- -- -- David R. Welland.............. -- -- -- -- -- -- Bradley J. Fluke.............. 18,000 0.73 1.75 7/19/09 19,811 50,203 Gary R. Gay................... 20,000 0.81 1.75 7/19/09 22,012 55,781 - ------------------------ (1) These options are fully exercisable on the date of grant but if the employee leaves us before he has vested in his option shares, we have the right to repurchase, at the exercise price, any shares that have not vested. These options vest as to 20% on the first anniversary of the date of grant and vest as to the remaining 80% in equal monthly installments over the following 48 months. FISCAL YEAR-END OPTION VALUES The following table provides information about stock options held as of January 1, 2000 by each of our executive officers named in the Summary Compensation Table. The value realized by Mr. Gay is based on the difference between the fair market value of the shares on the date of purchase, as determined by our board of directors, and the price paid for such shares. There was no public trading market for our common stock as of January 1, 2000. Accordingly, we have based the value of unexercised in-the-money options at January 1, 2000 on an assumed initial public offering price of $22.00 per share, less the applicable exercise price per share, multiplied by the number of shares underlying the options. Actual gains on exercise, if any, will depend on the value of our common stock on the date on which the shares are sold. FISCAL 1999 OPTION VALUES NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED OPTIONS AT JANUARY 1, 2000 JANUARY 1, 2000 ON VALUE ---------------------------- --------------------------- EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE -------- -------- ----------- ------------- ----------- ------------- Navdeep S. Sooch.................. -- $ -- -- -- $ -- -- Jeffrey W. Scott.................. -- -- -- -- -- -- David R. Welland.................. -- -- -- -- -- -- Bradley J. Fluke.................. -- -- 60,000 -- 1,278,000 -- Gary R. Gay....................... 52,000 59,000 28,000 -- 581,000 -- 49
2000 STOCK INCENTIVE PLAN The 2000 Stock Incentive Plan is intended to serve as the successor equity incentive program to our 1997 Stock Option/Stock Issuance Plan. The 2000 Stock Incentive Plan became effective upon its adoption by the board of directors on January 5, 2000 and has been approved by the stockholders. We have reserved 5,389,498 shares of our common stock for issuance under the 2000 Stock Incentive Plan. This share reserve consists of the shares which were available for issuance under the predecessor plan on the effective date of the 2000 Stock Incentive Plan plus an additional increase of 2,000,000 shares. The share reserve will automatically be increased on the first trading day of January each calendar year, beginning in January 2001, by a number of shares equal to 2% of the total number of shares of our common stock outstanding on the last trading day of the immediately preceding calendar year, but no such annual increase will exceed 1,000,000 shares. The share reserve will also increase by the number of shares repurchased by the Company, at the original exercise or issue price, pursuant to its repurchase rights under the predecessor plan but such increase will not exceed 3,357,204 shares. In no event may any one participant in the 2000 Stock Incentive Plan receive option grants or direct stock issuances for more than 1,000,000 shares in the aggregate per calendar year. Outstanding options under the predecessor plan will be incorporated into the 2000 Stock Incentive Plan upon the date of this offering, and no further option grants will be made under that plan. The incorporated options will continue to be governed by their existing terms, unless the compensation committee extends one or more features of the 2000 Stock Incentive Plan to those options. However, except as otherwise noted below, the outstanding options under the predecessor plan contain substantially the same terms and conditions summarized below for the discretionary option grant program under the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan has four separate programs: - the discretionary option grant program under which eligible individuals in our employ or service (including officers, non-employee board members and consultants) may be granted options to purchase shares of our common stock; - the stock issuance program under which such individuals may be issued shares of common stock directly, through the purchase of such shares or as a bonus tied to the performance of services; - the salary investment option grant program under which executive officers and other highly compensated employees may elect to apply a portion of their base salary to the acquisition of special below-market stock option grants; and - the automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the exercise or purchase price for each such grant or issuance (which may be less than, equal to or greater than the fair market value of the shares), the status of any granted option as either an incentive stock option or a non-statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The committee will also select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is activated for one or more calendar years. Neither the compensation committee nor the board will exercise any administrative discretion with respect to option grants made under the salary investment option grant program or under the automatic option grant program for the non-employee board members. 50
The exercise price for the options may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option also may be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the compensation committee may allow a participant to pay the option exercise price or direct issue price (and any associated withholding taxes incurred in connection with the acquisition of shares) with a full-recourse, interest-bearing promissory note. In the event that the company is acquired, whether by merger or asset sale or board-approved sale by the stockholders of more than 50% of our voting stock, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation or otherwise continued will automatically accelerate in full, and all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent the repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in effect. The compensation committee may grant options and issue shares which will accelerate (1) in the acquisition even if the options are assumed and repurchase rights assigned, (2) in connection with a hostile change in control (effected through a successful tender offer for more than 50% of our outstanding voting stock or by proxy contest for the election of board members), or (3) upon a termination of the individual's service following a change in control or hostile takeover. In the event of an acquisition of the company (by merger or asset sale), options currently outstanding under the 1997 plan will accelerate unless assumed by the successor corporation; and all assumed options will accelerate upon the optionee's involuntary termination (including a forced resignation) within 18 months following the acquisition. Such options are not by their terms subject to acceleration in connection with any other change in control or hostile takeover. Stock appreciation rights may be issued under the discretionary option grant program which will provide the holders with the election to surrender their outstanding options for an appreciation distribution from the company equal to the fair market value of the vested shares subject to the surrendered option less the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of common stock. There are currently no outstanding stock appreciation rights under the predecessor plan. The compensation committee has the authority to cancel outstanding options under the discretionary option grant program (including options incorporated from predecessor plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. In the event the compensation committee elects to activate the salary investment option grant program for one or more calendar years, each executive officer and each other highly compensated employee selected for participation may elect to reduce his or her base salary for that calendar year by a specified dollar amount not less than $5,000 nor more than $50,000. In return, the individual will automatically be granted, on the first trading day in the calendar year for which the salary reduction is to be in effect, a non-statutory option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option exercise price will be equal to one-third of the fair market value of the option shares on the grant date. As a result, the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the salary reduction amount. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting in the event of an acquisition or change in control of the company. Under the automatic option grant program, each individual who is serving as a non-employee member of our board of directors on the date the underwriting agreement for this offering is executed will receive an option for 30,000 shares of our common stock with an exercise price equal to the price at which shares are sold in this offering, provided such individual has not been in our prior employ. Each individual who 51
first joins the board after the effective date of this offering as a non-employee board member will automatically be granted an option for 30,000 shares of our common stock at the time of his or her commencement of board service; provided such individual has not been in our prior employ. In addition, on the date of each annual stockholders meeting, beginning with the 2001 meeting, each individual who has served as a non-employee board member for at least six months and is to continue to do so will receive an option grant to purchase 5,000 shares of common stock. Each automatic grant will have an exercise price equal to the fair market value per share of our common stock on the grant date and will have a maximum term of 10 years, subject to earlier termination following the optionee's cessation of board service. Each option will be immediately exercisable, subject to our right to repurchase any unvested shares, at the original exercise price, at the time of the board member's cessation of service. Each 30,000-share option grant will vest, and the repurchase right will lapse, in a series of four equal successive annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. Each 5,000-share option grant will vest, and the repurchase right will lapse, upon the optionee's completion of one year of board service measured from the grant date. However, each such outstanding option will immediately vest upon a change in control, a hostile take-over or the death or disability of the optionee while serving as a board member. Limited stock appreciation rights will automatically be included as part of each grant made under the automatic option grant and salary investment option grant programs and may be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with such a limited stock appreciation right may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share equal to the highest price per share of common stock paid in connection with the tender offer less the exercise price payable for such share. The board may amend of modify the 2000 Stock Incentive Plan at any time, subject to any required stockholder approval. The 2000 Stock Incentive Plan will terminate no later than January 4, 2010. EMPLOYEE STOCK PURCHASE PLAN Our Employee Stock Purchase Plan was adopted by the board on January 5, 2000 and will be approved by the stockholders prior to the date of this offering. The plan will become effective immediately upon the execution of the underwriting agreement for this offering. The plan is designed to allow eligible employees to purchase shares of common stock, at semi-annual intervals, through their periodic payroll deductions. A total of 400,000 shares of our common stock will initially be issued under the plan. The share reserve will automatically increase on the first trading day of January each year beginning in January 2001, by 0.5% of the total shares of common stock outstanding on the last trading day of the immediately preceding calendar year, but no such annual increase will exceed 250,000 shares. In no event, however, may any participant purchase more than 200 shares, nor may all participants in the aggregate purchase more than 75,000 shares on any one semi-annual purchase date. The plan will have a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period will begin on the day the underwriting agreement is executed in connection with this offering and will end on the last business day in April 2002. The next offering period will begin on the first business day in May 2002, and subsequent offering periods will be set by the compensation committee. Shares will be purchased for the participants semi-annually (the last business day of April and October each year) during the offering period. The first purchase date will occur on October 31, 2000. Should the fair market value of the common stock on any semi-annual purchase date be less than the fair market value on the first day of the offering period, then the current offering period will automatically end and a new offering period will begin, based on the lower fair market value. 52
Individuals who are eligible employees on the start date of any offering period may enter the plan on that start date or on any subsequent semi-annual entry date (generally May 1 or November 1 each year). Individuals who become eligible employees after the start date of the offering period may join the plan on any subsequent semi-annual entry date within that period. A participant may contribute up to 15% of his or her base salary through payroll deductions and the accumulated payroll deductions will be applied to the purchase of shares on the participant's behalf on each semi-annual purchase date. The purchase price per share will be 85% of the lower of the fair market value of our common stock on the participant's entry date into the offering period or the fair market value on the semi-annual purchase date. The board may at any time amend or modify the plan. The plan will terminate no later than the last business day in April 2010. 53
CERTAIN TRANSACTIONS PRIVATE PLACEMENTS OF EQUITY 5% STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS. Since our inception in August 1996, we have raised capital primarily through the sale of our preferred stock, including the following sales to holders of more than 5% of our outstanding common stock, directors and executive officers: In March and June 1997, we sold shares of our Series A preferred stock at a price of $0.98214425 per share to the following: - 3,818,177 shares to funds affiliated with Austin Ventures - 254,545 shares to Silverton Partners - 254,545 shares to H. Berry Cash Concurrently with the closing of the financing, investment funds affiliated with Austin Ventures became a 5% stockholder. In addition, William P. Wood, a general partner of Silverton Partners and some investment funds affiliated with Austin Ventures, and a special limited partner of other funds associated with Austin Ventures, and H. Berry Cash became members of our board of directors. In June 1998, we sold shares of our Series B preferred stock at a price of $4.76 per share to the following. - 423,451 shares to funds affiliated with Austin Ventures - 28,230 shares to Silverton Partners - 21,009 shares to H. Berry Cash - 42,017 shares to Berry and Dianne Cash Grandchildrens' Trust - 52,522 shares to Jonathan D. Ivester, our Vice President of Manufacturing Although the number of shares of Series A and Series B preferred stock outstanding was not affected by the 2-for-1 split of our common stock, as a result of this stock split, each share of Series A and Series B preferred stock automatically adjusted and became convertible into two shares of our common stock. OTHER TRANSACTIONS REGISTRATION RIGHTS. For more information on registration rights we have granted to our 5% stockholders and other stockholders, please see "Description of Capital Stock--Registration Rights." LOANS TO EXECUTIVE OFFICERS. In June 1998, we loaned $56,500 to Edmund G. Healy, our Vice President/General Manager Wireless Products Division, to allow him to purchase shares of our common stock. Mr. Healy delivered a full-recourse promissory note to us with respect to his loan and the promissory note is secured by the purchased shares and accrues interest at a rate of 5.69% per annum, compounded semi-annually. As of January 1, 2000, the outstanding indebtedness on such note was $61,406, which was the largest aggregate amount of indebtedness outstanding during fiscal 1999. This promissory note becomes due in June 2003. STOCK OPTIONS GRANTED TO DIRECTORS AND EXECUTIVE OFFICERS. For more information regarding the grant of stock options to directors and executive officers, please see "Management--Director Compensation" and "--Executive Compensation." INDEMNIFICATION AND INSURANCE. Our bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. We have entered into indemnification agreements with all of our directors and executive officers and have purchased directors' and officers' liability insurance. In addition, our certificate of incorporation limits the personal liability of our board members for breaches by the directors of their fiduciary duties. 54
PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of March 3, 2000, and as adjusted to reflect the sale of common stock offered by us and by selling stockholders in this offering, for: - each person known by us to beneficially own more than 5% of our outstanding shares of common stock; - each executive officer named in the Summary Compensation Table; - each of our directors; - all of our executive officers and directors as a group; and - each selling stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Unless otherwise indicated below and except to the extent authority is shared by spouses under applicable law, to our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock used to calculate the percentage ownership of each listed person includes the shares of common stock underlying options or warrants held by such persons that are exercisable within 60 days of this offering. The percentage of beneficial ownership before the offering is based on 43,882,418 shares, consisting of 30,040,244 shares of common stock outstanding as of March 3, 2000, and 13,842,174 shares issuable upon the conversion of our outstanding convertible preferred stock. The percentage of beneficial ownership after the offering is based on 46,602,418 shares, including 2,720,000 shares sold by us in this offering. Unless otherwise indicated, the address of each person owning more than 5% of the outstanding shares of common stock is c/o Silicon Laboratories Inc., 4635 Boston Lane, Austin, Texas 78735: SHARES BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OFFERING SHARES OWNED AFTER OFFERING --------------------- BEING --------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - ------------------------ ---------- -------- -------- ---------- -------- EXECUTIVE OFFICERS AND DIRECTORS: Navdeep S. Sooch(1)........................ 9,013,028 20.5% 160,000 8,853,028 19.0% Jeffrey W. Scott........................... 5,766,664 13.1 160,000 5,606,664 12.0 David R. Welland........................... 6,966,664 15.9 160,000 6,806,664 14.6 Bradley J. Fluke(2)........................ 446,000 1.0 446,000 1.0 Gary R. Gay(3)............................. 280,000 * 280,000 * William P. Wood(4)......................... 10,697,780 24.4 10,697,780 23.0 H. Berry Cash(5)........................... 903,106 2.1 903,106 1.9 William G. Bock............................ -- -- -- -- OTHER 5% STOCKHOLDERS: Funds affiliated with Austin Ventures(6)... 10,083,204 23.0 10,083,204 21.6 All directors and executive officers as a group (11 persons)(7).................... 35,280,692 80.0 480,000 34,800,692 74.3 - ------------------------ * Represents beneficial ownership of less than one percent. (1) Includes 300,000 shares held in trust for the benefit of Mr. Sooch's children and 250,000 shares held in a family limited partnership. Mr. Sooch disclaims beneficial ownership of the 300,000 shares held in trust for the benefit of his children and the 250,000 shares held in a family limited partnership. 55
(2) Includes 60,000 shares issuable upon exercise of stock options. (3) Includes 28,000 shares issuable upon exercise of stock options. (4) Includes 614,576 shares held by Silverton Partners and 10,083,204 shares held by funds affiliated with Austin Ventures. Mr. Wood is a general partner of Silverton Partners. Mr. Wood also is a general partner of AV Partners IV, L.P., which is a general partner of Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. Mr. Wood is a special limited partner of AV Partners V, L.P., which is a general partner of Austin Ventures V, L.P. and Austin Ventures V Affiliates Fund, L.P. Mr. Wood disclaims beneficial ownership of the shares held by funds affiliated with Austin Ventures, except to the extent of his pecuniary interest in shares arising from his partnership interests in these funds. Mr. Wood's address is c/o Austin Ventures, 114 West Seventh Street, Suite 1300, Austin, Texas 78701. (5) Includes 99,346 shares held in trust for the benefit of Mr. Cash's grandchildren. Mr. Cash disclaims beneficial ownership of the 99,346 shares held in trust for the benefit of his grandchildren. (6) Includes: - 1,095,324 shares held by Austin Ventures IV-A, L.P. - 2,297,978 shares held by Austin Ventures IV-B, L.P. - 6,371,334 shares held by Austin Ventures V, L.P. - 318,568 shares held by Austin Ventures V Affiliates Fund, L.P. These partnerships may be deemed to beneficially own each other's shares because the general partners of each partnership are affiliated. Each partnership, however, disclaims beneficial ownership of the others' shares. The address of the investment funds affiliated with Austin Ventures is 114 West Seventh Street, Suite 1300, Austin, Texas 78701. (7) Includes 238,000 shares issuable upon exercise of stock options. 56
DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, our authorized capital stock will consist of 250,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share, the rights and preferences of which may be established from time to time by our board of directors. The following summary is qualified in its entirety by reference to our certificate of incorporation and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK As of January 1, 2000, there were 30,015,944 shares of common stock outstanding that were held of record by 116 stockholders. As of January 1, 2000, there were also 2,380,226 shares of common stock subject to outstanding options, all of which were immediately exercisable, and 143,182 shares subject to outstanding warrants. As of January 1, 2000, 11,910,298 shares of the outstanding common stock were unvested and subject to rights of repurchase which lapse according to a time-based vesting schedule. Of the shares unvested and subject to rights of repurchase, 7,467,000 shares will vest upon, and as a result of, the completion of this offering. Holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of common stock are not entitled to cumulative voting rights with respect to the election of directors, and as a result, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to limitations under Delaware law and preferences that may apply to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends or other distributions, if any, as may be declared by our board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preference of any outstanding preferred stock. The common stock has no preemptive, conversion or other rights to subscribe for additional securities of Silicon Laboratories. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of the offering will be, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. PREFERRED STOCK As of January 1, 2000, there were 6,921,087 shares of preferred stock outstanding. Upon the closing of this offering, all outstanding shares of preferred stock will automatically convert into 13,842,174 shares of common stock. Our board of directors will have the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each such series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying or preventing our change in control without further action by the stockholders. At present, we have no plans to issue any shares of preferred stock. REGISTRATION RIGHTS According to the terms of an investors' rights agreement among us, our preferred stockholders and Messrs. Sooch, Scott, Welland and McGovern, at any time after March 21, 2002, investors in our preferred stock holding an aggregate of at least two-thirds of the shares of common stock issued upon conversion of the preferred stock will be entitled to demand that we file a registration statement with respect to the registration of their shares under the Securities Act of 1933, provided that those investors request that such registration statement register the resale of at least half of the outstanding shares held by them. We are not 57
required to effect more than two such registrations or more than one such registration during any 365 day period. In addition, the holders of up to 38,023,632 shares of common stock, including Messrs. Sooch, Scott, Welland, McGovern, Cash, Silverton Partners and entities affiliated with Austin Ventures and other stockholders and warrant holders, have piggyback registration rights with respect to the future registration of shares of our common stock under the Securities Act. If we propose to register any shares of common stock under the Securities Act, the holders of shares having piggyback registration rights are entitled to receive notice of such registration and are entitled to include their shares in the registration. At any time after we become eligible to file a registration statement on Form S-3, holders of registration rights may require us to file up to three registration statements on Form S-3 under the Securities Act with respect to their shares of common stock. These registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock to be included in the registration. We are generally required to bear all of the expenses of all registrations under the investors' rights agreement, except underwriting discounts and commissions. The investors' rights agreement also contains our commitment to indemnify the holders of registration rights for certain losses they may incur in connection with registrations under the agreement. Registration of any of the shares of common stock held by security holders with registration rights would result in those shares becoming freely tradeable without restriction under the Securities Act. ANTI-TAKEOVER EFFECTS Provisions of Delaware law, our certificate of incorporation, our bylaws and contracts to which we are a party, could have the effect of delaying or preventing a third party from acquiring us, even if the acquisition would benefit our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by the board of directors and to discourage types of transactions that may involve an actual or threatened change of control of Silicon Laboratories. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares, or an unsolicited proposal for the restructuring or sale of all or part of Silicon Laboratories. DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. Subject to exceptions, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: - Prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - Upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding, those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - On or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the 58
affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For purposes of Section 203, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, with an "interested stockholder" being defined as a person who, together with affiliates and associates, owns, or within three years prior to the date of determination whether the person is an "interested stockholder," did own, 15% or more of the corporation's voting stock. In addition, provisions of our certificate of incorporation and bylaws may have an anti-takeover effect. These provisions may delay, defer or prevent a tender offer or takeover attempt of our company that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. The following summarizes these provisions. CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides that at the first annual meeting following the closing of our initial public offering, our board of directors will be divided into three classes of directors, as nearly equal in size as is practicable, serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected each year. These provisions, when coupled with the provisions of our certificate of incorporation and bylaws authorizing our board of directors to fill vacant directorships or increase the size of our board, may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of incorporation eliminates the ability of stockholders to act by written consent. Our bylaws provide that special meetings of our stockholders may be called only by a majority of our board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDERS PROPOSALS AND DIRECTORS NOMINATIONS. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide us with timely written notice of their proposal. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 120 days before the date in the current year that corresponds to the date we released the notice of annual meeting to stockholders in connection with the previous year's annual meeting. If, however, no meeting was held in the prior year or the date of the annual meeting has been changed by more than 30 days from the date contemplated in the notice of annual meeting, notice by the stockholder in order to be timely must be received a reasonable time before we release the notice of annual meeting to stockholders. Our bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES. Our authorized but unissued shares of common stock and preferred stock are available for our board to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of our authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of our company by means of a proxy context, tender offer, merger or other transaction. SUPERMAJORITY VOTE PROVISIONS. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation includes supermajority vote provisions that require the affirmative vote of the holders of at least two-thirds of the combined voting power of all then-outstanding shares of our voting capital stock in order to amend the 59
provisions of our certificate of incorporation relating to the classified board of directors and the elimination of action by written consent of stockholders. INDEMNIFICATION. Our bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. We have entered into indemnification agreements with all of our directors and executive officers and have purchased directors' and executive officers' liability insurance. In addition, our certificate of incorporation limits the personal liability of our board members for breaches by the directors of their fiduciary duties to the fullest extent permitted under Delaware law. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is EquiServe Trust Company and its address is 150 Royall Street, Canton, MA 02021. NASDAQ NATIONAL MARKET LISTING Our common stock has been approved for trading and quotation on the Nasdaq National Market under the trading symbol "SLAB." 60
SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our common stock in the public market following this offering, the prevailing market price of our common stock could decline. Furthermore, because we do not expect any shares will be available for sale for at least 120 days after the date of this prospectus as a result of contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon the closing of this offering, we will have outstanding an aggregate of 46,578,118 shares of our common stock, based upon the number of shares outstanding at January 1, 2000 and assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants and no grant of additional options or warrants. Of these shares, all shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act unless they are purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining shares will be eligible for sale in the public market as follows: NUMBER OF SHARES DATE - ---------------- -------------------------------------------------------- 0............................. Immediately. 12,954,470............................ 120 days after the date of this prospectus due to a release of 30% of the shares, and shares underlying options, held by each stockholder from lock-up agreements with the underwriters if the conditions described below under "--Lock-up Agreements" are satisfied. 27,508,907............................ 181 days after the date of this prospectus upon the expiration of the lock-up agreements with the underwriters (plus any shares not already released from the lock-up agreements). 2,914,741............................ At various times after 181 days following the date of this prospectus, subject to compliance with securities laws and upon the lapse of any applicable vesting restrictions. LOCK-UP AGREEMENTS. All of our directors, officers, stockholders, option holders and warrant holders have signed lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock for 180 days after the date of this prospectus. However, if the last reported sale price of our common stock is at least two times the initial public offering price per share for each of the 20 trading days preceding the 120th day after the date of this prospectus, then 30% of the shares, and shares underlying options, held by each stockholder on the date of this prospectus shall be released from the 180 day restrictions. This early release shall occur: (a) on the 120th day after the date of this prospectus if we make a public release of our quarterly or annual results during the period beginning on the eleventh trading day after the date of this prospectus and ending on the day prior to the 120th day after the date of this prospectus, or (b) otherwise, on the second trading day after the first public release of our quarterly or annual results occurring on or after the 120th day after the date of this prospectus. Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time and without prior notice or announcement, release all or any portion of shares subject to the lock-up agreements. RULE 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of prior owners other than affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (a) 1% of the number of shares of our common stock then outstanding, which will equal approximately 465,782 shares immediately after the 61
offering, or (b) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. RULE 144(K). Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale and who has beneficially owned shares for at least two years, including the holding period of certain prior owners other than affiliates, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the closing of this offering. RULE 701. In general, under Rule 701 of the Securities Act as currently in effect, each of our directors, officers, employees, consultants or advisors who purchased shares from us before the date of this prospectus in connection with a compensatory stock plan or other written compensatory agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS. After this offering, investors who purchased our preferred stock and Messrs. Sooch, Scott, Welland and McGovern will be entitled to rights with respect to the registration of their shares of common stock under the Securities Act. See "Description of Capital Stock--Registration Rights." After any registration of these shares, such shares will be freely tradeable without restriction under the Securities Act. These sales could cause the market price of our common stock to decline. STOCK PLANS. As of January 1, 2000, options to purchase 2,380,226 shares of common stock were outstanding under our stock option and incentive plans. After this offering, we intend to file a registration statement on Form S-8 under the Securities Act of 1933 covering shares of common stock reserved for issuance under our stock incentive plan and our employee stock purchase plan. Based on the number of options outstanding and shares reserved for issuance under our stock incentive plan and our employee stock purchase plan, the Form S-8 registration statement would cover 5,789,498 shares. The Form S-8 registration statement will become effective immediately upon filing. At that point, subject to the satisfaction of applicable exercisability periods, Rule 144 volume limitations applicable to affiliates and the agreements with the underwriters referred to above, shares of common stock to be issued upon exercise of outstanding options granted pursuant to our stock incentive plan and shares of common stock issued pursuant to our employee stock purchase plan (to the extent that such shares are not held by affiliates) will be available for immediate resale in the public market. 62
UNDERWRITERS Under the terms and subject to the conditions contained in the underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Salomon Smith Barney Inc. are acting as representatives, have severally agreed to purchase, and we and the selling stockholders have severally agreed to sell to them, the respective number of shares of our common stock indicated: NUMBER OF NAME SHARES - ---- --------- Morgan Stanley & Co. Incorporated........................... Lehman Brothers Inc......................................... Salomon Smith Barney Inc.................................... --------- Total..................................................... 3,200,000 ========= The underwriters are offering the shares subject to their acceptance of the shares from us and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the delivery of legal opinions by their counsel as well as other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any shares are taken. However, the underwriters are not required to take or pay for the shares covered by the over-allotment option described below. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and part to securities dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to other securities dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley & Co. Incorporated, may act as a selected dealer in connection with the offering to facilitate Internet distribution. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 480,000 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with this offering. To the extent such option is exercised, each underwriter will become obligated to purchase approximately the same percentage of such additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriter's over-allotment option is exercised in full, the total price to public would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to us would be $ before deducting estimated offering expenses of $ . Silicon Laboratories and our directors, officers and other stockholders have each agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the period ending 180 days after the date of this prospectus, each of us will not, directly or indirectly: - Offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or 63
- Enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. If the last reported sale price of our common stock on the Nasdaq National Market is at least twice the initial public offering per share for the 20 consecutive trading days ending on the last trading day preceding the 120th day after the date of this prospectus, 30% of the shares of our common stock subject to the 180-day restriction described above will be released from these restrictions. This early release shall occur: (a) on the 120th day after the date of this prospectus if we make a public release of our quarterly or annual results during the period beginning on the eleventh trading day after the date of this prospectus and ending on the day prior to the 120th day after the date of this prospectus, or (b) otherwise, on the second trading day after the first public release of our quarterly or annual results occurring on or after the 120th day after the date of this prospectus. The restrictions described in the previous paragraph do not apply to: - The sale of shares to the underwriters; - The issuance by Silicon Laboratories of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; or - Transactions by any person other than Silicon Laboratories relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares of common stock. The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. Our common stock has been approved for trading and quotation on the Nasdaq National Market under the symbol "SLAB." In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We and the selling stockholders and the underwriters have agreed to indemnify each other against liabilities arising out of misstatements and omissions in the prospectus, including liabilities under the Securities Act. DIRECTED SHARE PROGRAM At our request, the underwriters have reserved up to 320,000 shares of common stock to be sold in this offering, at the public offering price, to our customers, vendors, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent such individuals and entities purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares. 64
PRICING OF THE OFFERING Prior to this offering, there has been no public market for the shares of common stock. Consequently, the public offering price for the shares of common stock will be determined by negotiations among us, the selling stockholders and the representatives of the underwriters. Among the factors to be considered in determining the public offering price are our record of operations, our current financial position and future prospects, the industry in general, the experience of our management, our sales, earnings and other financial and operating information in recent periods, the price-earnings ratios, price-sales ratios, market prices of securities and financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering range listed on the cover page of this prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, Austin, Texas. Other legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at January 2, 1999 and January 1, 2000, and for each of the three years in the period ending January 1, 2000, as set forth in their report. We've included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT SILICON LABORATORIES We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits, schedules and amendments, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information included in the registration statement. For further information about us and the shares of our common stock to be sold in this offering, please refer to this registration statement. Complete exhibits have been filed with our registration statement on Form S-1. You may read and copy any contract, agreement or other document that we have filed as an exhibit to our registration statement or any other portion of our registration statement or any other information from our filings at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the public reference room. Our filings with the Securities and Exchange Commission, including our registration statement, are also available to you on the Securities and Exchange Commission's Web site, HTTP://WWW.SEC.GOV. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, and will file and furnish to our stockholders annual reports containing financial statements audited by our independent auditors, make available to our stockholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the Commission. 65
SILICON LABORATORIES INC. FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000........................................... F-3 Consolidated Statements of Operations for the three years ended January 1, 2000..................................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the three years ended January 1, 2000....... F-5 Consolidated Statements of Cash Flows for the three years ended January 1, 2000..................................... F-6 Notes to Consolidated Financial Statements.................. F-7 F-1
REPORT OF INDEPENDENT AUDITORS The Board of Directors Silicon Laboratories Inc. We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. as of January 2, 1999 and January 1, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 1, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silicon Laboratories Inc. at January 2, 1999 and January 1, 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. [/S/ ERNST & YOUNG LLP] Austin, Texas January 11, 2000 F-2
SILICON LABORATORIES INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED PRO FORMA REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' JANUARY 2, JANUARY 1, EQUITY AT 1999 2000 JANUARY 1, 2000 ---------- ---------- ---------------- ASSETS Current assets: Cash and cash equivalents................................ $ 2,867 $ 8,197 Short-term investments................................... 2,957 6,509 Accounts receivable, net of allowance for doubtful accounts of $56 and $569 at January 2, 1999 and January 1, 2000, respectively.......................... 2,875 10,322 Inventories.............................................. 635 2,837 Deferred income taxes.................................... -- 963 Prepaid expenses and other............................... 135 435 ------- ------- -------- Total current assets....................................... 9,469 29,263 Property, equipment and software, net...................... 4,418 12,350 Other assets............................................... 127 345 ------- ------- -------- Total assets............................................... $14,014 $41,958 ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable......................................... $ 3,142 $ 7,374 Accrued expenses......................................... 229 1,083 Deferred revenue......................................... -- 1,006 Current portion of long-term obligations................. 889 2,697 Income taxes payable..................................... -- 2,822 ------- ------- -------- Total current liabilities.................................. 4,260 14,982 Long-term debt and leases, net of current maturities....... 2,153 6,081 Other long-term obligations................................ -- 142 ------- ------- -------- Total liabilities.......................................... 6,413 21,205 Redeemable convertible preferred stock..................... 12,750 12,750 -- Stockholders' equity (deficit): Common stock--$.0001 par value; 52,000 shares authorized; 28,642 and 30,016 shares issued and outstanding in fiscal 1998 and 1999 respectively, 43,858 shares on a pro forma basis........................................ 3 3 4 Additional paid-in capital............................... 721 19,014 31,763 Stockholder notes receivable............................. (215) (1,472) (1,472) Deferred stock compensation.............................. (406) (15,330) (15,330) Retained earnings (deficit).............................. (5,252) 5,788 5,788 ------- ------- -------- Total stockholders' equity (deficit)....................... (5,149) 8,003 20,753 ------- ------- -------- Total liabilities and stockholders' equity (deficit)....... $14,014 $41,958 $ 41,958 ======= ======= ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3
SILICON LABORATORIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED ------------------------------------ JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- Sales....................................................... $ -- $ 5,609 $46,911 Cost of goods sold.......................................... -- 2,371 15,770 ------- ------- ------- Gross profit................................................ -- 3,238 31,141 Operating expenses: Research and development.................................. 1,364 4,587 8,297 Selling, general and administrative....................... 627 2,095 7,207 Amortization of deferred stock compensation............... -- 8 976 ------- ------- ------- Operating expenses.......................................... 1,991 6,690 16,480 ------- ------- ------- Operating income (loss)..................................... (1,991) (3,452) 14,661 Other (income) and expenses: Interest income........................................... (178) (261) (402) Interest expense.......................................... 22 206 699 ------- ------- ------- Income (loss) before tax expense............................ (1,835) (3,397) 14,364 Income tax expense.......................................... -- -- 3,324 ------- ------- ------- Net income (loss)........................................... $(1,835) $(3,397) $11,040 ======= ======= ======= Net income (loss) per share: Basic..................................................... $ (1.04) $ (.37) $ .73 Diluted................................................... $ (1.04) $ (.37) $ .25 Weighted average common shares outstanding: Basic..................................................... 1,760 9,129 15,152 Diluted................................................... 1,760 9,129 43,657 Pro forma net income per share (unaudited): Basic $ .30 Diluted $ .25 Pro forma weighted average common shares outstanding (unaudited): Basic..................................................... 36,461 Diluted................................................... 43,657 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4
SILICON LABORATORIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) COMMON STOCK ---------------------------------- TOTAL ADDITIONAL STOCKHOLDER DEFERRED RETAINED STOCKHOLDERS' NUMBER OF PAID-IN NOTES STOCK EARNINGS EQUITY SHARES PAR VALUE CAPITAL RECEIVABLE COMPENSATION (DEFICIT) (DEFICIT) --------- --------- ---------- ----------- ------------ --------- ------------- Balance as of January 1, 1997...... 22,600 $ 2 $ -- $ -- $ -- $ (20) $ (18) Exercises of stock options....... 5,511 1 143 (77) -- -- 67 Payments received on stockholder notes.......................... -- -- -- 10 -- -- 10 Repurchase and cancellation of common stock................... (407) -- -- -- -- -- -- Net loss......................... -- -- -- -- -- (1,835) (1,835) ------ ---- ------- ------- -------- ------- ------- Balance as of January 3, 1998...... 27,704 3 143 (67) -- (1,855) (1,776) Exercises of stock options....... 938 -- 164 (148) -- -- 16 Deferred stock compensation...... -- -- 414 -- (414) -- -- Amortization of deferred stock compensation................... -- -- -- -- 8 -- 8 Net loss......................... -- -- -- -- -- (3,397) (3,397) ------ ---- ------- ------- -------- ------- ------- Balance as of January 2, 1999...... 28,642 3 721 (215) (406) (5,252) (5,149) Exercises of stock options....... 1,411 -- 2,047 (1,267) -- -- 780 Income tax benefit from exercise of stock options............... -- -- 91 -- -- -- 91 Repurchase and cancellation of unvested shares................ (37) -- (10) 10 -- -- Compensation expense related to stock options and direct stock issuances to non-employees..... -- -- 266 -- -- -- 266 Deferred stock compensation...... -- -- 15,899 -- (15,899) -- -- Amortization of deferred stock compensation................... -- -- -- -- 975 -- 975 Net income....................... -- -- -- -- -- 11,040 11,040 ------ ---- ------- ------- -------- ------- ------- Balance as of January 1, 2000...... 30,016 $ 3 $19,014 $(1,472) $(15,330) $ 5,788 $ 8,003 ====== ==== ======= ======= ======== ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5
SILICON LABORATORIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED ------------------------------------ JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- OPERATING ACTIVITIES Net income (loss)........................................... $(1,835) $(3,397) $11,040 Adjustment to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization expense..................... 133 816 1,972 Amortization of deferred stock compensation............... -- 8 975 Amortization of note/lease end-of-term interest payments................................................ -- -- 142 Compensation expense related to stock options and direct stock issuance to non-employees......................... -- -- 266 Income tax benefit for stock option exercise.............. -- -- 91 Changes in operating assets and liabilities: Prepaid expenses and other.............................. (64) (65) (300) Accounts receivable..................................... -- (2,875) (7,447) Inventories............................................. -- (635) (2,202) Other assets............................................ (7) (120) (218) Accounts payable........................................ 1,499 1,643 4,232 Accrued expenses........................................ 55 175 854 Deferred revenue........................................ -- -- 1,006 Deferred income taxes................................... -- -- (963) Income taxes payable.................................... -- -- 2,822 ------- ------- ------- Net cash provided by (used in) operating activities......... (219) (4,450) 12,270 INVESTING ACTIVITIES Purchases of short-term investments......................... (6,152) (5,616) (9,385) Maturities of short-term investments........................ 3,083 5,728 5,833 Purchases of property and equipment......................... (2,258) (3,066) (9,904) ------- ------- ------- Net cash used in investing activities....................... (5,327) (2,954) (13,456) FINANCING ACTIVITIES Proceeds from long-term debt................................ 996 1,499 6,424 Payments on long-term debt.................................. -- (249) (1,274) Repayment of note........................................... (200) -- -- Proceeds from equipment lease financing..................... -- 825 976 Payments on capital leases.................................. -- (30) (390) Net proceeds from issuances of convertible preferred stock..................................................... 5,250 7,500 -- Net proceeds from exercises of stock options................ 77 17 780 ------- ------- ------- Net cash provided by financing activities................... 6,123 9,562 6,516 ------- ------- ------- Increase in cash and cash equivalents....................... 577 2,158 5,330 Cash and cash equivalents at beginning of year.............. 132 709 2,867 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 709 $ 2,867 $ 8,197 ======= ======= ======= Supplemental disclosure of cash flow information: Interest paid............................................. $ 22 $ 199 $ 593 ======= ======= ======= Income taxes paid......................................... -- -- 1,489 ======= ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 1, 2000 1. ORGANIZATION Silicon Laboratories Inc. (the "Company"), a Delaware corporation, develops and markets mixed-signal analog/intensive integrated circuits or ICs. The Company's products serve both the wireline and wireless communications markets. Within the semiconductor industry, the Company is known as a "fabless" company meaning that the ICs are manufactured by third-party semiconductor companies. The Company was incorporated in 1996, and emerged from the development stage in fiscal 1998. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION As of January 1, 1997, the Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal year 1997 ended on January 3, 1998, fiscal year 1998 ended on January 2, 1999, and fiscal year 1999 ended on January 1, 2000. PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Silicon Laboratories UK Limited. All significant intercompany balances and accounts have been eliminated. The functional currency of the Company's subsidiary is the U.S. dollar, accordingly, all translation gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in net income. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash deposits and investments with a maturity of three months or less when purchased. SHORT-TERM INVESTMENTS Cash investments in highly liquid financial instruments with original maturities greater than three months that mature within one year are classified as short-term investments. The Company's short-term investments consist of U.S. Government backed securities, which are classified as held-to-maturity and reported at amortized cost. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist principally of cash and cash equivalents, short-term investments, receivables, accounts payable, and borrowings. The Company believes all of the financial instruments' recorded values approximate current market values. F-7
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Inventories consist of the following (in thousands): JANUARY 2, JANUARY 1, 1999 2000 ---------- ---------- Work in progress........................................ $511 $1,902 Finished goods.......................................... 124 935 ---- ------ $635 $2,837 ==== ====== PROPERTY, EQUIPMENT, AND SOFTWARE Property, equipment, and software are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets (generally four to five years). Amortization of assets recorded under capital leases is computed using the straight-line method over the shorter of the asset's useful life or the term of the lease and such amortization is included with depreciation expense. See also Note 4. Leasehold improvements are depreciated over the contractual obligation of the lease period or their useful life, whichever is shorter. Property, equipment and software consist of the following (in thousands): JANUARY 2, JANUARY 1, 1999 2000 ---------- ---------- Equipment............................................... $3,221 $10,014 Computers and purchased software........................ 1,854 3,779 Furniture and fixtures.................................. 86 326 Leasehold improvements.................................. 209 1,155 ------ ------- 5,370 15,274 Accumulated depreciation and amortization............... (952) (2,924) ------ ------- $4,418 $12,350 ====== ======= USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and such differences could be material to the financial statements. RISKS AND UNCERTAINTIES Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short-term investments primarily in market rate accounts and U.S. Treasury bills. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The Company provides an allowance for doubtful F-8
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accounts receivable based upon the expected collectibility of such receivables. The following table summarizes the changes in the allowance for doubtful accounts receivable (in thousands): Balance at January 1, 1997.................................. $ Additions charged to costs and expenses..................... -- Write-off of uncollectible accounts......................... -- ---- Balance at January 3, 1998.................................. $ -- Additions charged to costs and expenses..................... 56 Write-off of uncollectible accounts......................... -- ---- Balance at January 2, 1999.................................. $ 56 Additions charged to costs and expenses..................... 513 Write-off of uncollectible accounts......................... -- ---- Balance at January 1, 2000.................................. $569 All of the Company's products are currently manufactured by two companies in Taiwan. A manufacturing disruption experienced by either of the Company's manufacturing partners could impact the production of the Company's products for a substantial period of time, which could have a material adverse effect on the Company's business, financial condition and results of operations. The following is a detail of customers that accounted for greater than 10% of gross revenue in the respective fiscal years: YEAR ENDED ------------------------------------ JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- Customer A.................................... --% 78% 62% Customer B.................................... -- -- 12 Customer C.................................... -- 20 10 INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and 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. REVENUE RECOGNITION Revenue from product sales direct to customers is 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 product is sold by the distributors. ADVERTISING Advertising costs are expensed as incurred. Advertising expenses were $4,269, $66,804 and $296,692 in the fiscal years ended January 3, 1998, January 2, 1999, and January 1, 2000, respectively. F-9
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Financial Accounting Standards Board's ("FASB") SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, the Company has elected to continue to account for its employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. OTHER COMPREHENSIVE INCOME (LOSS) In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and display of comprehensive income and its components in the financial statements. There were no differences between net income (loss) and comprehensive income (loss) during any of the periods presented. SEGMENT INFORMATION Effective April 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The adoption of SFAS No. 131 did not have a significant effect on the disclosure of segment information as the Company continues to consider its business activities as a single segment. The Company has one operating segment with two product divisions (the Wireline and Wireless Divisions). The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. The Wireline Division accounted for substantially all of the sales in all periods. Approximately $0, $3,994, and $3,371,722 of the Company's revenues were from export sales for the fiscal years ended January 3, 1998, January 2, 1999, and January 1, 2000, respectively. The operations and assets of Silicon Laboratories UK Limited were immaterial in all periods presented. NET INCOME PER SHARE The Company computes net income (loss) per share in accordance with SFAS No. 128, EARNINGS PER SHARE. Under SFAS No. 128, basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. F-10
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data): YEAR ENDED ------------------------------------ JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- Net income (loss)........................................... $ (1,835) $ (3,397) $ 11,040 ======== ======== ======== Basic: Weighted-average shares of common stock outstanding....... 25,730 28,245 29,177 Weighted-average shares of common stock subject to repurchase.............................................. (23,970) (19,116) (14,025) -------- -------- -------- Shares used in computing basic net income (loss) per share................................................... 1,760 9,129 15,152 -------- -------- -------- Effect of dilutive securities: Weighted-average shares of common stock subject to repurchase.............................................. -- -- 13,370 Convertible preferred stock and warrants.................. -- -- 13,965 Stock options............................................. -- -- 1,170 -------- -------- -------- Shares used in computing diluted net income (loss) per share................................................... 1,760 9,129 43,657 ======== ======== ======== Basic net income (loss) per share........................... $ (1.04) $ (.37) $ .73 Diluted net income (loss) per share......................... $ (1.04) $ (.37) $ .25 Pro forma (unaudited): Basic: Shares used above......................................... 15,152 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock............... 13,842 Pro forma adjustment to reflect weighted average effect of shares subject to repurchase which vest upon an initial public offering......................................... 7,467 -------- Shares used in computing pro forma basic net income per share................................................... 36,461 ======== Pro forma basic net income per share........................ $ .30 RECLASSIFICATIONS Certain reclassifications have been made to prior year financial statements to conform with current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income. The Company does not expect that the adoption of SFAS No. 133 will have a material impact on its financial statements because the Company does not believe it currently holds any derivative instruments. In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB No. 101"), which provides guidance on the F-11
SILICON LABORATORIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) recognition, presentation and disclosure of revenue in financial statements. The application of SAB No. 101 did not have a material impact on the financial statements of the Company. On March 31, 1999, the FASB issued an exposure draft entitled "Accounting for Certain Transactions Involving Stock Compensation," which is a proposed interpretation of APB Opinion No. 25. However, the exposure draft has not been finalized. Once finalized and issued, the current accounting practices for transactions involving stock compensation may need to change and such changes could affect the Company's future earnings. 3. SHORT-TERM INVESTMENTS The Company's short-term investments consist of U.S. Treasury bills with interest rates ranging from 4.72% to 5.10% which mature at varying dates through May 25, 2000 and are considered to be held-to-maturity. Securities classified as held-to-maturity, which consist of securities that management has both the ability and positive intent to hold to maturity, are carried at amortized cost which approximates fair value. 4. LONG-TERM OBLIGATIONS Long-term debt and leases consist of the following: JANUARY 2, JANUARY 1, 1999 2000 ---------- ---------- (IN THOUSANDS) Bank term loans due in monthly installments of $27,669 and $41,645 plus interest at bank prime (8.5% at January 1, 2000) through March 31, 2001 and January 31, 2002, respectively.............................................. $2,246 $1,456 Note payable, at 9.08%, payable in monthly installments of $24,810 through March 1, 2003 with a $200,600 interest payment due at maturity................................... -- 835 Note payable, at 9.77%, payable in monthly installments of $4,113 through June 1, 2003............................... -- 146 Note payable, at 9.91%, payable in monthly installments of $14,050 through September 1, 2003......................... -- 526 Note payable, at 10.22%, payable in monthly installments of $5,829 through December 1, 2003........................... -- 231 Note payable, at 6.71%, payable in monthly installments of $30,635 through February 28, 2003 with a $243,000 interest payment due at maturity................................... -- 1,046 Note payable, at 6.92%, payable in monthly installments of $19,340 through July 31, 2003 with a $152,900 interest payment due at maturity................................... -- 719 Note payable, at 7.13%, payable in monthly installments of $40,017 to $46,005 through April 30, 2004 with a $399,200 interest payment due at maturity.......................... -- 1,956 Note payable, at 7.5%, payable in monthly installments of $9,912 to $11,399 through April 30, 2004 with a $98,116 interest payment due at maturity.......................... -- 481 Capital lease obligations................................... 796 1,382 ------ ------ 3,042 8,778 Current portion............................................. (889) (2,697) ------ ------ Long-term portion........................................... $2,153 $6,081 ====== ====== F-12
SILICON LABORATORIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM OBLIGATIONS (CONTINUED) The amounts outstanding under the above term loans are in connection with a $2.5 million loan facility (see Note 5 for discussion of warrants issued). In addition, the Company obtained new loan facilities in December 1999 totaling $4 million, of which no amounts were outstanding as of January 1, 2000. These additional facilities also bear interest at bank prime (8.5% as of January 1, 2000). The collateral for these loans includes a blanket lien on all otherwise unsecured tangible property, inventory, and accounts receivable. These loans and the letter of credit (See Note 6) are cross-collateralized and cross-defaulted. There are covenants related to net worth and liquidity associated with these financing lines, with which the company is in compliance as of January 1, 2000. The Company has a revolving line of credit agreement (the Agreement) with a bank that is collateralized by certain assets of the company. Under the provisions of the Agreement, the line of credit allows for borrowings of up to $3 million or 80% of eligible accounts receivable at bank prime (8.5% as of January 1, 2000). There were no amounts outstanding under this facility as of January 2, 1999 and January 1, 2000. The notes payable and capital lease obligations are borrowings with three institutional financing providers for equipment financing. The indebtedness is secured by a security interest in the underlying equipment. Periodically, the Company will purchase or make advance deposits toward the purchase of machinery and equipment; and within one to three months enter into leasing arrangements to finance these assets. These leasing arrangements result in the reimbursement of the amounts initially paid by the Company and do not result in any gains or losses. Such reimbursements have been reflected in the statement of cash flows as proceeds from equipment lease financings. The Company has financed the acquisition of certain computers and other equipment under capital lease transactions which are accounted for as financings and mature through fiscal year 2003. As of January 2, 1999 and January 1, 2000, equipment under capital lease included in property, equipment and software was $796,000 and $1,382,000, respectively. At January 1, 2000, contractual maturities of debt and future minimum annual payments due under capital lease obligations are as follows (in thousands): CAPITAL FISCAL YEAR DEBT LEASES TOTAL - ----------- -------- -------- -------- 2000.............................................. $ 2,188 $ 646 $ 2,834 2001.............................................. 2,117 637 2,754 2002.............................................. 1,740 343 2,083 2003.............................................. 1,125 12 1,137 2004.............................................. 226 -- 226 ------- ------ ------- 7,396 1,638 9,034 Less amount representing interest................. -- (256) (256) ------- ------ ------- 7,396 1,382 8,778 Less current portion.............................. (2,188) (509) (2,697) ------- ------ ------- Long-term debt and leases......................... $ 5,208 $ 873 $ 6,081 ======= ====== ======= F-13
SILICON LABORATORIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY REDEEMABLE CONVERTIBLE PREFERRED STOCK Redeemable Convertible Preferred Stock is as follows (in thousands except per share data): SHARE ISSUED AND OUTSTANDING ------------------------------------ PAR SHARES JANUARY 3, JANUARY 2, JANUARY 1, LIQUIDATION SERIES VALUE AUTHORIZED 1998 1999 2000 PREFERENCE - ------ -------- ---------- ---------- ---------- ---------- ----------- Undesignated...................... $.0001 998 -- -- -- -- A................................. $.0001 5,391 5,345 5,345 5,345 $ 5,250 B................................. $.0001 1,611 -- 1,576 1,576 7,500 ----- ----- ----- ----- ------- 8,000 5,345 6,921 6,921 $12,750 ===== ===== ===== ===== ======= Changes in Redeemable Convertible Preferred Stock are as follows (in thousands): TOTAL REDEEMABLE ADDITIONAL CONVERTIBLE NUMBER OF PAR PAID-IN PREFERRED SHARES VALUE CAPITAL STOCK --------- -------- ---------- ----------- Balance as of January 1, 1997.......... -- $ -- $ -- $ -- Issuance of Series A Redeemable Convertible Preferred Stock........ 5,345 535 4,715 5,250 ----- ---- ------- ------- Balance as of January 3, 1998.......... 5,345 535 4,715 5,250 Issuance of Series B Redeemable Convertible Preferred Stock........ 1,576 158 7,342 7,500 ----- ---- ------- ------- Balance as of January 2, 1999 and January 1, 2000...................... 6,921 $693 $12,057 $12,750 ===== ==== ======= ======= The Certificate of Incorporation authorizes the issuance of up to 8,000,000 shares of Convertible Preferred Stock with par value of $0.0001 per share. Each share is convertible at the option of the stockholder into two shares of common stock, subject to certain anti-dilution adjustments. The Convertible Preferred Stockholders are entitled to the number of votes equal to the number of shares of common stock into which each share of Convertible Preferred Stock could be converted on the record date. Conversion is automatic upon the closing of an underwritten public offering of the Company's common stock meeting certain criteria; or if less than one-third of the Convertible Preferred Stock remain outstanding for that series. Additional contractual obligations by and between the holders of Convertible Preferred Stockholders and the holders of common stock exist with regards to registration rights, indemnification, rights of first offer, rights of first refusal and voting of shares. The stockholders of Series A and Series B Convertible Preferred Stock are entitled to cumulative dividends of $0.0589286 and $0.2856 per share, respectively, beginning January 1, 2002 and continuing thereafter whether or not earned or declared. In the event of conversion to common stock, the preferred stockholders shall receive, when applicable after January 1, 2002, consideration at conversion for all accrued and unpaid dividends. In the event of a liquidation or winding up of the Company, stockholders of Series A and Series B Convertible Preferred Stock shall have a liquidation preference of $0.982144225 and $4.76 per share, respectively, plus declared and unpaid dividends, over holders of common stock. After F-14
SILICON LABORATORIES INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) distributions pursuant to the liquidation preference, holders of Series A and Series B Convertible Preferred Stock shall participate in additional distributions pro rata with other classes of stock until such holders shall have received $2.946432675 and $14.28 per share, respectively. Series A and Series B Convertible Preferred Stock are convertible at the option of each holder into common stock on a one-for-two basis, subject to certain anti-dilution adjustments. A majority of the holders of Series A and Series B Convertible Preferred Stock, voting as one group, may elect to require the Company, for an amount per share equal to the liquidation price, to redeem on or after the dates specified below up to a cumulative total of that percentage of the shares on Series A and B Convertible Preferred Stock, net of any shares previously redeemed: CUMULATIVE PERCENTAGE OF SHARES REDEMPTION DATE WHICH MAY BE REDEEMED - --------------- ------------------------------- March 21, 2005.................................... 33 1/3% March 21, 2006.................................... 66 2/3% March 21, 2007.................................... 100 % WARRANTS A warrant to purchase 45,818 shares of Series A Convertible Preferred Stock at $0.982144225 per share was outstanding at January 1, 2000. The warrant is exercisable at any time before November 20, 2002. The warrant was issued in 1997 to a commercial bank in connection with the extension of debt financing (see Note 4). A warrant to purchase 21,008 shares of Series B Convertible Preferred Stock at $4.76 per share was outstanding at January 1, 2000. The warrant is exercisable at any time before September 22, 2008, or the earlier consummation of an initial public offering. The warrant was issued in 1998 to an equipment lessor in connection with the extension of lease and debt financing (see Notes 4 and 6). A warrant to purchase 4,765 shares of Series B Convertible Preferred Stock at $4.76 per share was outstanding at January 1, 2000. The warrant is exercisable at any time before September 4, 2003. The warrant was issued in 1998 to a commercial bank in connection with the issuance of a letter of credit facility for leasehold improvements (see Note 6). No amount was allocated to the value of the above warrants as such amounts were not significant. COMMON STOCK The Company had 30,015,944 shares of common stock outstanding as of January 1, 2000. Of these shares, 11,910,298 shares were unvested and are subject to rights of repurchase that lapse according to a time based vesting schedule. Of the shares unvested and subject to rights of repurchase, 7,467,000 shares vest upon an initial public offering of common stock that meet certain criteria. F-15
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) Common stock reserved at January 1, 2000 consists of the following: For exercise of Convertible Preferred Stock................. 13,842,174 For exercise of Convertible Preferred Stock Warrants........ 143,182 For issuance under the Company's 1997 Stock Option/Stock Issuance Plan............................................. 3,389,498 ---------- 17,374,854 ========== STOCK SPLIT On November 3, 1999, the Company effected a two-for-one stock split through a stock dividend of common stock. All references to common stock share and per share amounts including options to purchase common stock have been retroactively restated to reflect the stock split as if such split had taken place at the inception of the Company. Also, the conversion ratio of the redeemable convertible preferred stock has been adjusted from one-for-one to one-for-two. STOCK OPTION/STOCK ISSUANCE PLAN The Company has a 1997 Stock Option/Stock Issuance Plan (the "Plan") whereby employees, members of the Board of Directors and independent advisors may be granted options to purchase shares of the Company's common stock or may be issued shares of the Company's common stock ("direct issuance shares") as a direct purchase or as a bonus for services rendered to the Company. These direct issuances of common stock are usually subject to rights of repurchase. At January 1, 2000, 8,561,808 shares were authorized for issuance under the Plan. The term of each option is no more than ten years from the date of grant. The options generally vest over a five to eight year period, and are immediately exercisable subject to a repurchase agreement which generally lapses in accordance with the vesting schedule. The direct issuance shares are also subject to repurchase rights which generally lapse over a five to eight year period. The repurchase rights provide that upon certain defined events, the Company can repurchase unvested shares at the price paid per share and gives the Company the right of first refusal for any proposed disposition of shares issued under the Plan. The Company recorded deferred stock compensation expense of $414,000 and $15,899,000 in connection with stock options granted for 355,500 shares and 2,464,200 shares of common stock during fiscal 1998 and 1999, respectively. These amounts represent the difference between the exercise price of the stock option and the subsequently deemed fair value of the Company's common stock. The deferred stock compensation is amortized over the vesting periods of the applicable options, resulting in amortization of $8,000 and $976,000 for the year ended January 2, 1999 and the year ended January 1, 2000, respectively. During fiscal 1997, 1998 and 1999, the Company made full recourse loans to employees of $77,000, $147,500 and $1,267,500, respectively, in connection with the employees' purchase of shares through exercises of options. These full recourse notes are secured by the shares of stock, are interest bearing at rates ranging from 4.8% to 6.7%, have terms of five years, and must be repaid upon the sale of the underlying shares of stock. F-16
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) A summary of the Company's stock option and direct issuance activity and related information follows: WEIGHTED- SHARES OPTIONS AVERAGE AVAILABLE AND DIRECT EXERCISE EXERCISE FOR GRANT ISSUANCES PRICES PRICE ---------- ----------- -------------- --------- Plan adopted, March 1997...................... 5,294,536 Granted....................................... (3,630,000) 3,630,000 $0.05 $0.05 Exercised..................................... -- (2,860,000) .05 .05 ---------- ---------- -------------- ----- Balance at January 3, 1998.................... 1,664,536 770,000 0.05 0.05 Additional shares reserved.................... 1,067,272 Granted....................................... (1,542,500) 1,542,500 0.05 - 1.25 0.35 Exercised..................................... -- (938,168) 0.05 - .25 0.18 Cancelled..................................... 61,832 (61,832) 0.05 0.05 ---------- ---------- -------------- ----- Balance at January 2, 1999.................... 1,251,140 1,312,500 0.05 - 1.25 0.31 Additional shares reserved.................... 2,200,000 Granted....................................... (2,484,200) 2,484,200 1.25 - 16.00 3.08 Exercised..................................... -- (1,411,474) 0.05 - 5.00 1.45 Cancelled..................................... 5,000 (5,000) 0.25 - 1.75 .77 Repurchase and cancellation of unvested shares...................................... 37,332 -- .25 .25 ---------- ---------- -------------- ----- Outstanding at January 1, 2000................ 1,009,272 2,380,226 $0.05 - $16.00 $2.52 ========== ========== ============== ===== In addition, the following table summarizes information about stock options that were outstanding and exercisable at January 1, 2000. OPTIONS WEIGHTED OUTSTANDING AVERAGE AND REMAINING WEIGHTED RANGE OF EXERCISABLE AT CONTRACTUAL AVERAGE EXERCISE PRICES JANUARY 1, 2000 LIFE IN YEARS EXERCISE PRICE - ----------------- --------------- ------------- -------------- $.050 to $.050 457,000 4.85 $ 0.050 .250 to .375 301,626 8.50 0.253 1.250 to 1.250 422,200 9.12 1.250 1.750 to 1.750 401,100 9.53 1.750 2.000 to 2.500 284,800 9.74 2.207 5.000 to 5.000 243,000 9.89 5.000 10.000 to 10.000 250,500 9.95 10.000 16.000 to 16.000 20,000 9.89 16.000 --------- $0.050 to $16.000 2,380,226 8.54 $ 2.520 Pro forma information regarding net income (loss) is required by Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6%; no expected dividends; an expected life of one year; and no volatility. F-17
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY (CONTINUED) The weighted-average fair value of options granted during fiscal 1998 and 1999 was $.61 and $9.55, respectively. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands, except per share data): YEAR ENDED ------------------------------------ JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- Pro forma net income (loss)................... $(1,835) $(3,400) $11,014 Pro forma basic net income (loss) per share... (1.04) (.37) .73 Pro forma diluted net income (loss) per share....................................... (1.04) (.37) .25 Option valuation models incorporate highly subjective assumptions. Because changes in the subjective assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. Because the determination of fair value of all employee stock options granted after such time as the Company becomes a public entity will include an expected volatility factor and because, for pro forma disclosure purposes, the estimated fair value of the Company's employee stock options is treated as if amortized to expense over the options' vesting period, the effects of applying SFAS No 123 for pro forma disclosures are not necessarily indicative of future amounts. 6. COMMITMENTS AND CONTINGENCIES The Company's main executive, administrative and technical offices occupy approximately 37,800 square feet in Austin, Texas under a lease that expires in April 2006, with one five year renewal option. Monthly rental payments increase by $1,575 per month in April 2002 and again in April 2004. The Company has an additional lease commitment for approximately 34,000 square feet in Austin, Texas for supplemental office space under a 76 month lease with one five year renewal option. The Company expects occupancy to commence in February 2000. Monthly rental payment increase from $22,301 to $48,919 per month at various intervals throughout the term of the lease. To provide security for the landlord on the main offices, the Company provided a long-term cash deposit of $113,400 and a letter of credit for $453,600. At January 1, 2000, there were no outstanding amounts under the letter of credit. Based on certain financial performance criteria, the letter of credit requirements could be reduced to $255,600. (see also Note 4). To provide security to the landlord on the additional lease commitment for February 2000 occupancy, the Company provided a long-term cash deposit of $64,800 and a letter of credit for $500,000. At January 1, 2000, no amounts were outstanding under the letter of credit. The letter of credit requirements could be reduced in even annual installments based upon satisfactory performance under the lease or eliminated entirely based on certain financial performance criteria. This letter of credit is provided under the revolving line of credit from a commercial bank (see Note 4). F-18
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) The minimum annual future rentals under the terms of these leases at January 1, 2000 are as follows (in thousands): FISCAL YEAR - ----------- 2000........................................................ $ 832 2001........................................................ 988 2002........................................................ 1,033 2003........................................................ 1,042 2004........................................................ 1,071 Thereafter.................................................. 1,487 ------ Total minimum lease payments................................ $6,453 ====== Rent expense for operating leases was approximately $45,740, $144,784 and $373,983 for the years ended January 3, 1998, January 2, 1999, and January 1, 2000, respectively. The Company is involved in various legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the consolidated financial position and results of operations. 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the values used for income tax purposes. Significant components of the Company's deferred taxes as of January 2, 1999 and January 1, 2000 are as follows: JANUARY 2, JANUARY 1, 1999 2000 ---------- ---------- Deferred tax liabilities: Depreciable assets.................................... $ (209) $ -- Deferred tax assets: Depreciable assets.................................... -- $ 28 Reserves and allowances............................... 113 568 Net operating loss and tax credit carryforwards....... 2,231 -- Deferred revenue...................................... -- 381 Deferred compensation................................. -- 46 Accrued liabilities & other........................... 29 55 ------- ------ 2,164 1,078 ------- ------ Net deferred tax assets before valuation allowance.... 2,164 1,078 ------- ------ Valuation allowance for net deferred tax asset........ (2,164) -- ------- ------ Net deferred taxes.................................... $ -- $1,078 ======= ====== F-19
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) The Company established a valuation allowance of $2,164,000 for the year ended January 2, 1999, due to uncertainties regarding the realization of net deferred tax assets because of the Company's lack of earnings history. The valuation allowance decreased by $2,164,000 for the year ended January 1, 2000, as a result of the increased earnings of the Company during the current year. Significant components of the provision (benefit) for income taxes attributable to continuing operations are as follows: JANUARY 3, JANUARY 2, JANUARY 1, 1998 1999 2000 ---------- ---------- ---------- Current: Federal..................................... $-- $-- $ 4,009 State....................................... -- -- 393 --- --- ------- Total Current............................... -- -- 4,402 Deferred: Federal..................................... -- -- (993) State....................................... -- -- (85) --- --- ------- Total Deferred.............................. -- -- (1,078) --- --- ------- $ 0 $ 0 $ 3,324 === === ======= The Company's provision (benefit) for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as a result of the following: JANUARY 3, 1998 JANUARY 2, 1999 JANUARY 1, 2000 --------------- --------------- --------------- Pre-tax book income (loss) at statutory rate....... (34.0)% (34.0)% 35.0% State taxes, net of federal benefit................ (2.9) (3.0) 3.0 Permanent items.................................... 1.0 0.3 .1 Deferred compensation expense...................... -- -- 2.6 Tax credits........................................ -- -- (2.4) Change in valuation allowance...................... 35.9 36.7 (15.2) ----- ----- ----- 0.0% 0.0% 23.1% ===== ===== ===== The exercise of certain stock options which have been granted under the Company's stock option plan result in compensation which is includable in the taxable income of the exercising option holder and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair market value of the Company's common stock subsequent to the date of grant of the exercised stock options and, in accordance with APB 25, such compensation is not recognized as an expense for financial accounting purposes; however, the related tax benefits are recorded as an addition to Additional Paid-in-Capital. 8. EMPLOYEE BENEFIT PLAN During fiscal 1997, the Company established the Silicon Laboratories Inc. 401(k) Plan ("the 401(k) Plan") for the benefit of substantially all employees. The Company is the administrator of the 401(k) Plan. F-20
SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EMPLOYEE BENEFIT PLAN (CONTINUED) To be eligible for the 401(k) Plan, employees must have reached the age of 21. Participants may elect to contribute up to 15% of their compensation to the 401(k) Plan. The Company may make discretionary matching contributions of up to 10% of a participant's compensation as well as discretionary profit-sharing contributions to the 401(k) Plan. The Company's contributions to the 401(k) Plan vest over four years at a rate of 25% per year. The Company has not contributed to the Plan to date. 9. SUBSEQUENT EVENTS On January 5, 2000 the Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its common stock to the public. In connection with this authorization, the Board approved increasing the authorized shares of common stock to 250,000,000. On January 5, 2000 the Company's Board of Directors approved The 2000 Stock Incentive Plan ("Plan"). The Plan has been approved by the Company's stockholders. The Company has reserved 5,389,498 shares of common stock for issuance under this plan (consisting of the shares available under the predecessor plan on the effective date plus an additional 2,000,000 shares). Also on January 5, 2000 the Board adopted the Employee Stock Purchase Plan. The plan has been approved by the Company's stockholders and will become effective upon the execution of the underwriting agreement for the Company's currently proposed initial public offering. F-21
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discount, payable by registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $ 22,345 NASD filing fee............................................. 8,964 Nasdaq National Market listing fee.......................... 95,000 Printing and engraving expenses............................. 200,000 Legal fees and expenses..................................... 350,000 Accounting fees and expenses................................ 200,000 Blue sky fees and expenses.................................. 7,000 Transfer agent fees......................................... 12,000 Miscellaneous............................................... 104,691 ---------- Total..................................................... $1,000,000 ========== - ------------------------ * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in effect, that any person made a party to any action by reason of the fact that he is or was a director, officer, employee or agent of Silicon Laboratories may and, in some cases, must be indemnified by Silicon Laboratories against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorneys' fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Silicon Laboratories. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to Silicon Laboratories, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expenses, and, in a non-derivative action, to any criminal proceeding in which such person had no reasonable cause to believe his conduct was unlawful. Our certificate of incorporation, provides that no director shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the DGCL. Our bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. We have entered into indemnification agreements with all of our directors and executive officers and have purchased directors' and officers' liability insurance. Reference is made to the underwriting agreement to be filed as Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify our officers and directors against certain liabilities under the Securities Act. Silicon Laboratories has entered into Indemnification Agreements with each director and executive officer, a form of which is filed as Exhibit 10.1 to this Registration Statement. Pursuant to such agreements, we will be obligated, to the extent permitted by applicable law, to indemnify such directors and executive officers against all expenses, judgments, fines and penalties incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they were directors or executive II-1
officers of Silicon Laboratories or assumed responsibilities at the direction of Silicon Laboratories. Silicon Laboratories also intends to purchase directors and officers liability insurance in order to limit its exposure to liability for indemnification of directors and executive officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Between August 1996 and January 1, 2000, we issued unregistered securities to a limited number of people as described below. 1. In August and December 1996 and May 1997, we issued an aggregate of 24,843,634 shares to Navdeep S. Sooch, David R. Welland, Jeffrey W. Scott and John W. McGovern at purchase prices ranging from $0.00005 to $0.0005 per share in compliance with Rule 506. 2. In March, April and June 1997, Silicon Laboratories issued shares of Series A Preferred Stock for $0.98214425 per share, for an aggregate purchase price of $5,250,002. The following stockholders purchased our Series A Preferred Stock: Austin Ventures IV-A, L.P.; Austin Ventures IV-B, L.P.; Austin Ventures V, L.P.; Silverton Partners; Donald Brooks; Dietrich R. Erdmann; and H. Berry Cash. Although the number of shares of Series A preferred stock outstanding was not affected by the 2-for-1 split of our common stock, as a result of this stock split, each share of Series A preferred stock automatically adjusted and became convertible into two shares of our common stock. These shares were issued to accredited investors in compliance with Rule 506. 3. In June 1998, Silicon Laboratories issued shares of Series B Preferred Stock for $4.76 per share, for an aggregate purchase price of $7,500,037. The following stockholders purchased our Series B Preferred Stock: Austin Ventures IV-A, L.P.; Austin Ventures IV-B, L.P.; Austin Ventures V, L.P.; Austin Ventures V Affiliates Fund, L.P.; Silverton Partners; Donald W. and Theresa Brooks; Drutan Investments, Ltd.; Brooks + Brooks Investments, Ltd.; Current Ventures Group, Ltd.; CenterPoint Venture Partners, L.P.; Thomas M. Brooks; Dietrich R. Erdmann; Berry and Dianne Cash Grandchildren's Trust; Charles H. Cash; H. Berry Cash; KLM Capital Partners Fund; L.J. Sevin; and Jonathan D. Ivester. Although the number of shares of Series B preferred stock outstanding was not affected by the 2-for-1 split of our common stock, as a result of this stock split, each share of Series B preferred stock automatically adjusted and became convertible into two shares of our common stock. These shares were issued to accredited investors in compliance with Rule 506. 4. Through January 1, 2000, Silicon Laboratories has issued 5,172,310 shares of its common stock to directors, employees and consultants upon the exercise of options granted or directly issued under its 1997 Stock Option/Stock Issuance Plan at a weighted average purchase price of $.45 per share. These shares were issued to employees and consultants in compliance with Rule 701. II-2
5. From time to time Silicon Laboratories has granted stock options to employees, directors and consultants in compliance with Rule 701. The following table sets forth information regarding these grants: NUMBER OF EXERCISE PRICE DATE OF GRANT OR ISSUANCE SHARES PER SHARE - ------------------------- --------- -------------- May 1997--April 1998................................. 3,946,000 $0.05 June 1998--July 1998................................. 933,000 $0.25 September 1998....................................... 27,500 $0.275 October 1998......................................... 32,000 $0.325 November 1998........................................ 31,000 $0.375 December 1998--April 1999............................ 968,000 $1.25 June 1999--July 1999................................. 526,700 $1.75 September 1999....................................... 348,000 $2.00 October 1999......................................... 274,000 $2.50 November 1999........................................ 288,000 $5.00 November 1999........................................ 20,000 $16.00 December 1999........................................ 262,500 $10.00 6. In connection with bank financings and equipment leasing arrangements, we issued warrants exercisable for an aggregate of 143,182 shares of common stock to Imperial Bank and Comdisco in compliance with Rule 506. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS. 1.1 Form of Underwriting Agreement by and among Silicon Laboratories Inc. and the Underwriters 3.1+ Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. 3.2+ Form of Amended and Restated Bylaws of Silicon Laboratories Inc. 4.1 Specimen certificate for shares of common stock 5.1+ Opinion of Brobeck, Phleger & Harrison LLP 10.1+ Form of Indemnification Agreement between Silicon Laboratories Inc. and each of its directors and executive officers 10.2+ Silicon Laboratories Inc. 2000 Stock Incentive Plan 10.3+ Silicon Laboratories Inc. Employee Stock Purchase Plan 10.4+ Amended and Restated Investors' Rights Agreement dated June 2, 1998 by and among Silicon Laboratories Inc. and certain holders of preferred stock or common stock 10.5+ Lease Agreement dated June 26, 1998 by and between Silicon Laboratories Inc. and S.W. Austin Office Building Ltd. 10.6+ Lease Agreement dated October 27, 1999 by and between Silicon Laboratories Inc. and Stratus 7000 West Joint Venture 10.7+ Master Loan and Security Agreement dated April 22, 1999 by and between Silicon Laboratories Inc. and FINOVA Capital Corporation II-3
10.8+ Commitment Letter dated April 19, 1999 by and between Silicon Laboratories and Imperial Bank 10.9+ Security and Loan Agreement dated June 25, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.10+ Letter of Credit Agreement dated July 30, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.11+ Letter of Credit Agreement dated November 19, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.12+ Commitment Letter dated December 9, 1999 by and between Silicon Laboratories and Imperial Bank 10.13+ First Amendment to Credit Terms and Conditions and Attachment Thereto dated December 16, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.14+ Promissory Note dated December 16, 1999 by and between Silicon Laboratories and Imperial Bank 10.15+ Promissory Note dated December 16, 1999 by and between Silicon Laboratories and Imperial Bank 10.16+ Preferred Stock Purchase Warrant dated November 20, 1997 by and between Silicon Laboratories and Imperial Bank 10.17+ Preferred Stock Purchase Warrant dated September 4, 1998 by and between Silicon Laboratories and Imperial Bank 10.18+ Volume Purchase Agreement dated June 1, 1998 by and between Silicon Laboratories Inc. and PC-Tel, Inc. 23.1+ Consent of Ernst & Young LLP, Independent Auditors 23.2+ Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit 5.1 24.1+ Power of Attorney (included in signature page with respect to William G. Bock) 27.1+ Financial Data Schedule - ------------------------ * To be included by amendment. + Previously filed. (B) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated Financial Statements or the related Notes. ITEM 17. UNDERTAKINGS. The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the DGCL, our Certificate of Incorporation or our Bylaws, the underwriting agreement or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers, or II-4
controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-5
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, we have duly caused this registration statement to be signed on our behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on March 17, 2000. SILICON LABORATORIES INC. By: /s/ NAVDEEP S. SOOCH ----------------------------------------- Navdeep S. Sooch CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: NAME TITLE DATE ---- ----- ---- Chief Executive Officer and /s/ NAVDEEP S. SOOCH Chairman of the Board ------------------------------------------- (principal executive March 17, 2000 Navdeep S. Sooch officer) Vice President and Chief /s/ JOHN W. MCGOVERN* Financial Officer ------------------------------------------- (principal financial and March 17, 2000 John W. McGovern accounting officer) /s/ JEFFREY W. SCOTT* ------------------------------------------- Vice President of March 17, 2000 Jeffrey W. Scott Engineering and Director /s/ DAVID R. WELLAND* ------------------------------------------- Vice President of March 17, 2000 David R. Welland Technology and Director /s/ WILLIAM P. WOOD* ------------------------------------------- Director March 17, 2000 William P. Wood /s/ H. BERRY CASH* ------------------------------------------- Director March 17, 2000 H. Berry Cash /s/ WILLIAM G. BOCK* ------------------------------------------- Director March 17, 2000 William G. Bock *By: /s/ NAVDEEP S. SOOCH -------------------------------------- Navdeep S. Sooch ATTORNEY-IN-FACT II-6
INDEX TO EXHIBITS 1.1 Form of Underwriting Agreement by and among Silicon Laboratories Inc. and the Underwriters 3.1+ Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. 3.2+ Form of Amended and Restated Bylaws of Silicon Laboratories Inc. 4.1 Specimen certificate for shares of common stock 5.1+ Opinion of Brobeck, Phleger & Harrison LLP 10.1+ Form of Indemnification Agreement between Silicon Laboratories Inc. and each of its directors and executive officers 10.2+ Silicon Laboratories Inc. 2000 Stock Incentive Plan 10.3+ Silicon Laboratories Inc. Employee Stock Purchase Plan 10.4+ Amended and Restated Investors' Rights Agreement dated June 2, 1998 by and among Silicon Laboratories Inc. and certain holders of preferred stock or common stock 10.5+ Lease Agreement dated June 26, 1998 by and between Silicon Laboratories Inc. and S.W. Austin Office Building Ltd. 10.6+ Lease Agreement dated October 27, 1999 by and between Silicon Laboratories Inc. and Stratus 7000 West Joint Venture 10.7+ Master Loan and Security Agreement dated April 22, 1999 by and between Silicon Laboratories Inc. and FINOVA Capital Corporation 10.8+ Commitment Letter dated April 19, 1999 by and between Silicon Laboratories and Imperial Bank 10.9+ Security and Loan Agreement dated June 25, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.10+ Letter of Credit Agreement dated July 30, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.11+ Letter of Credit Agreement dated November 19, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.12+ Commitment Letter dated December 9, 1999 by and between Silicon Laboratories and Imperial Bank 10.13+ First Amendment to Credit Terms and Conditions and Attachment Thereto dated December 16, 1999 by and between Silicon Laboratories Inc. and Imperial Bank 10.14+ Promissory Note dated December 16, 1999 by and between Silicon Laboratories and Imperial Bank 10.15+ Promissory Note dated December 16, 1999 by and between Silicon Laboratories and Imperial Bank 10.16+ Preferred Stock Purchase Warrant dated November 20, 1997 by and between Silicon Laboratories and Imperial Bank 10.17+ Preferred Stock Purchase Warrant dated September 4, 1998 by and between Silicon Laboratories and Imperial Bank 10.18+ Volume Purchase Agreement dated June 1, 1998 by and between Silicon Laboratories Inc. and PC-Tel, Inc. 23.1+ Consent of Ernst & Young LLP, Independent Auditors 23.2+ Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit 5.1 24.1+ Power of Attorney (included in signature page with respect to William G. Bock) 27.1+ Financial Data Schedule - ------------------------ * To be included by amendment. + Previously filed.
3,200,000 SHARES SILICON LABORATORIES INC. COMMON STOCK, PAR VALUE $0.0001 PER SHARE UNDERWRITING AGREEMENT March [23], 2000
March [23], 2000 Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Salomon Smith Barney Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: Silicon Laboratories Inc., a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters named in Schedule II hereto (the "UNDERWRITERS"), and certain shareholders of the Company (the "SELLING SHAREHOLDERS") named in Schedule I hereto severally propose to sell to the several Underwriters, an aggregate of 3,200,000 shares of common stock, par value $0.0001 per share, of the Company (the "FIRM SHARES"), of which 2,720,000 shares are to be sold by the Company and 480,000 shares are to be sold by the Selling Shareholders, each Selling Shareholder selling the amount set forth opposite such Selling Shareholder's name in Schedule I hereto. Morgan Stanley & Co. Incorporated ("MORGAN STANLEY"), Lehman Brothers Inc. and Salomon Smith Barney Inc. shall act as representatives (the "REPRESENTATIVES") of the several Underwriters. The Company also proposes to issue and sell to the several Underwriters not more than an additional 480,000 shares of its common stock, par value $0.0001 per share (the "ADDITIONAL SHARES"), if and to the extent that the Representatives shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES." The shares of common stock, $0.0001 par value per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK." The Company and the Selling Shareholders are hereinafter sometimes collectively referred to as the "SELLERS." The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement, including a prospectus, relating to the Shares. The registration statement as amended or supplemented at the time it 1
becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration Statement. Morgan Stanley has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to the Company's directors, officers, employees and business associates and other parties related to the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriters" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program are referred to hereinafter as the "DIRECTED SHARES." Any Directed Shares not orally confirmed for purchase by any Participants by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Company's knowledge threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to 2
statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (d) The Company has only one subsidiary, Silicon Laboratories UK Limited, which has only nominal assets and is used solely for marketing purposes. (e) This Agreement has been duly authorized, executed and delivered by the Company. (f) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (g) The shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable. (h) The shares of Common Stock of the Company to be issued upon conversion of the Company's Series A Preferred Stock and Series B Preferred Stock (collectively, the "CONVERTIBLE PREFERRED STOCK") have been duly authorized and, when issued and delivered pursuant to the terms of the Company's Fourth Amended and Restated Certificate of Incorporation, will be validly issued, fully paid and non-assessable. (i) The Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. 3
(j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company that is material to the Company, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (l) There are no legal or governmental proceedings pending, or to the Company's knowledge threatened, to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (m) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (n) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (o) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the 4
protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company. (p) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company. (q) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (r) The Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, stock option plans or other compensation plans for the benefit of employees, directors and consultants of the Company or pursuant to outstanding options, rights or warrants. (s) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as described in the Registration Statement and the Prospectus, (i) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction which, in either case, was not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends and the two-for-one 5
stock effected on November 3, 1999; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company. (t) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects, except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, in each case except such as described in the Prospectus. (u) The Company owns or possesses, or has no reason to believe it cannot acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by it in connection with its business, and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company. (v) No material labor dispute with the employees of the Company exists, except as described in the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company. (w) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it is engaged; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to 6
continue its business at a cost that would not have a material adverse effect on the Company, except as described in the Prospectus. (x) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its businesses and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company, except as described in the Prospectus. (y) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) The Registration Statement, the Prospectus and any preliminary prospectus comply, and any amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program. (aa) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered. (bb) The Company has not offered, or caused Morgan Stanley to offer, Shares to any person pursuant to the Directed Share Program with the intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. 7
(cc) The Company has reviewed its operations to evaluate the extent to which the business or operations of the Company have been or could be affected by the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); as a result of such review, the Company has no reason to believe, and does not believe, that the Year 2000 Problem will have a material adverse effect on the condition, financial or otherwise, or on the earnings, business or operations of the Company. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of the Selling Shareholders, severally and not jointly, represents and warrants to and agrees with each of the Underwriters that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder. (b) The execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement and the Irrevocable Power of Attorney and Custody Agreement signed by such Selling Shareholder appointing certain individuals as such Selling Shareholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement, and [EquiServe Trust Company], as Custodian, relating to the deposit of the Shares to be sold by such Selling Shareholder (the "POWER OF ATTORNEY AND CUSTODY AGREEMENT") will not contravene any provision of applicable law, or any agreement or other instrument binding upon such Selling Shareholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement or the Power of Attorney and Custody Agreement of such Selling Shareholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (c) Such Selling Shareholder has, and on the Closing Date will have, valid title to the Shares to be sold by such Selling Shareholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Power of Attorney and Custody 8
Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder. (d) The Shares to be sold by such Selling Shareholder pursuant to this Agreement have been duly authorized and are validly issued, fully paid and non-assessable. (e) The Power of Attorney and Custody Agreement has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder. (f) Delivery of the Shares to be sold by such Selling Shareholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (g) (i)The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 2(g) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein. 3. AGREEMENTS TO SELL AND PURCHASE. Each Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Seller at $- a share (the "PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have a 9
one-time right to purchase, severally and not jointly, up to 480,000 Additional Shares at the Purchase Price. If the Representatives, on behalf of the Underwriters, elect to exercise such option, the Representatives shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. Each Seller hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, the last reported sale price of the Common Stock per share on the NASDAQ National Market is at least twice the Public Offering Price (as defined in Section 5 below) per share of the Common Stock sold in the offering for the 20 consecutive trading days ending on the trading day immediately preceding the 120th day after the date of the Prospectus, then 30% of the shares of Common Stock and Common Stock equivalents held by each Selling Shareholder on the date of the Prospectus shall be released from the 180 day restrictions. This early release shall occur on: (a) the 120th day after the date of the Prospectus if the Company makes a public release of its quarterly or annual results during the period beginning on the eleventh trading day after the date of the Prospectus and ending on the day prior to the 120th day after the date of the Prospectus, or (b) the second trading day after the first public release of the Company's quarterly or annual results occurring on or after the 120th day after the date of the Prospectus, otherwise. 10
The restrictions in the preceding paragraph shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing or (C) transactions by any person other than the Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares. In addition, each Selling Shareholder, agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. 4. TERMS OF PUBLIC OFFERING. The Sellers are advised by the Representatives that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in the judgment of the Representatives is advisable. The Sellers are further advised by the Representatives that the Shares are to be offered to the public initially at $- a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by the Representatives at a price that represents a concession not in excess of $- a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $- a share, to any Underwriter or to certain other dealers. 5. PAYMENT AND DELIVERY. Payment for the Firm Shares to be sold by each Seller shall be made to such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on [March 28], 2000, or at such other time on the same or such other date, not later than [April 4], 2000, as shall be designated in writing by the Representatives. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 3 or at such other time on the same or on such other date, in any event not later than [May 4], 2000, as shall be designated in writing by the Representatives. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." 11
Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as the Representatives shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to the Representatives on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the Sellers to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [5:00 pm] (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in the judgment of the Representatives, is material and adverse and that makes it, in the judgment of the Representatives, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of 12
the Company, to the effect set forth in Section 6(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Brobeck, Phleger & Harrison LLP, outside counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in the States of Texas, California, Georgia, Colorado, New Jersey and Massachusetts; (ii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus under the captions "Capitalization" and "Description of Capital Stock"; (iii) the shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued and, to our knowledge, are fully paid and non-assessable; (iv) the shares of Common Stock of the Company to be issued upon conversion of the Convertible Preferred Stock have been duly authorized and, when issued and delivered pursuant to the terms of the Company's Fourth Amended and Restated Certificate of Incorporation, will be validly issued, fully paid and non-assessable; (v) the Shares to be sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms of this 13
Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive rights arising under the Company's Fourth Amended and Restated Certificate of Incorporation or the Delaware General Corporation Law, or to its knowledge, any similar rights that entitle or will entitle any person to acquire any shares of capital stock of the Company upon the issuance and sale of the Shares; (vi) this Agreement has been duly authorized, executed and delivered by the Company; (vii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement (A) will not result in any violation of any existing law, (B) will not violate the certificate of incorporation or by-laws of the Company or, (C) will not constitute a breach of, or a default under any agreement or other instrument binding upon the Company that is an exhibit to the Registration Statement, or (D) will not constitute a breach of, or a default under any judgment, order or decree known to us and applicable to the Company of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares; (viii) the statements (A) in the Prospectus under the captions "Certain Transactions", "Description of Capital Stock", "Business - Legal Proceedings" and, to the extent of the description of this Agreement, "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (ix) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the 14
Registration Statement or the Prospectus and are not so described or of any contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (x) the Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; In addition, such counsel shall also state in its opinion that (A) the Registration Statement and Prospectus (except for financial statements and schedules and other financial and statistical data included therein as to which such counsel need not express any opinion), as of the date of the Registration Statement complied, and of the Closing Date will comply, as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (B) it has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) it has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Prospectus, as of the date hereof, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Underwriters shall have received on the Closing Date an opinion of Fish & Neave, outside intellectual property counsel for the Company, dated the Closing Date, covering such matters as the Underwriters may reasonably request. (e) The Underwriters shall have received on the Closing Date an opinion of O'Keefe, Egan & Peterman, L.L.P., outside intellectual property counsel for the Company, dated the Closing Date, covering such matters as the Underwriters may reasonably request. 15
(f) The Underwriters shall have received on the Closing Date an opinion of Brobeck, Phleger & Harrison LLP, special transaction counsel for the Selling Shareholders, dated the Closing Date, to the effect that: (i) this Agreement has been duly executed and delivered by or on behalf of each of the Selling Shareholders; (ii) the execution and delivery by each Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement and the Power of Attorney and Custody Agreement of such Selling Shareholder will not contravene any provision of applicable law, or to such counsel's knowledge, any agreement or other instrument binding upon such Selling Shareholder or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of his obligations under this Agreement or the Power of Attorney and Custody Agreement of such Selling Shareholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with offer and sale of the Shares (as to which such counsel need not render an opinion); (iii) each of the Selling Shareholders is the sole registered owner of the Shares to be sold by such Selling Shareholder and has the legal right and power to enter into this Agreement and the Power of Attorney and Custody Agreement of such Selling Shareholder and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder; (iv) the Power of Attorney and Custody Agreement of each Selling Shareholder has been duly executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder; and (v) upon the delivery and payment for the Shares to be sold by such Selling Shareholder as contemplated in this Agreement, each of the Underwriters will receive valid title to the Shares purchased by it from such Selling Shareholder, free of any adverse claim, assuming the Underwriters purchase such Shares for value, in good faith and without notice of any adverse claim, as 16
such terms are defined by the Uniform Commercial Code in effect in the State of Texas. (g) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 6(c)(iv), 6(c)(v), 6(c)(vii) (but only as to the statements in the Prospectus under "Underwriters") and 6(c)(xi) above. With respect to Section 6(c)(xi) above, Brobeck, Phleger & Harrison LLP and Davis Polk & Wardwell may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. With respect to Section 6(e) above, Brobeck, Phleger & Harrison LLP may rely upon an opinion or opinions of counsel for any Selling Shareholders and, with respect to factual matters and to the extent such counsel deems appropriate, upon the representations of each Selling Shareholder contained herein and in the Power of Attorney and Custody Agreement of such Selling Shareholder and in other documents and instruments; PROVIDED that (A) each such counsel for the Selling Shareholders is satisfactory to counsel for the Underwriters, (B) a copy of each opinion so relied upon is delivered to the Representatives and is in form and substance satisfactory to the Representatives, (C) copies of such Power of Attorney and Custody Agreement and of any such other documents and instruments shall be delivered to the Representatives and shall be in form and substance satisfactory to the Representatives and (D) Brobeck, Phleger & Harrison LLP shall state in their opinion that they are justified in relying on each such other opinion. The opinions of Brobeck, Phleger & Harrison LLP, Fish & Neave, and O'Keefe, Egan & Peterman, L.L.P., described in Sections 6(c), 6(d), 6(e) and 6(f) above (and any opinions of counsel for any Selling Shareholder referred to in the immediately preceding paragraph) shall be rendered to the Underwriters at the request of the Company or one or more of the Selling Shareholders, as the case may be, and shall so state therein. (h) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration 17
Statement and the Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (i) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between the Representatives and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to the Representatives on or before the date hereof, shall be in full force and effect on the Closing Date. (j) The Nasdaq National Market shall have approved the Common Stock for listing, subject only to official notice of issuance. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to the Representatives on the Option Closing Date of such documents as the Representatives may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 7. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to the Representatives, without charge, four signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to the Representatives in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as the Representatives may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to the Representatives a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which the Representatives reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. 18
(c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Shares may have been sold by the Representatives on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request; provided however, that the Company will not be required to qualify in any jurisdiction where it would be required to (i) give a general consent to the service of process or submit to general personal jurisdiction or (ii) assume any ongoing reporting obligation to the authorities in such jurisdiction. (e) To make generally available to the Company's security holders and to the Representatives as soon as practicable an earning statement covering the three-month period ending March 31, 2000 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) To place stop transfer orders on any Directed Shares that have been sold to Participants subject to the three month restriction on sale, transfer, assignment, pledge or hypothecation imposed by NASD Regulation, Inc. under its Interpretative Material 2110-1 on free-riding and withholding to the extent necessary to ensure compliance with the three month restrictions. (g) To comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 19
8. EXPENSES. (a) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of the obligations of the Sellers under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and counsel for the Selling Shareholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (ix) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and 20
stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program, and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 9 and the last paragraph of Section 12 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves. (b) Each Selling Shareholder, severally and not jointly, agrees to pay or cause to be paid (i) all taxes, if any, on the transfer and sale of the Shares being sold by such Selling Shareholder and (ii) such Selling Shareholder's fees, disbursements and expenses of its own counsel (which counsel is separate from the Company's counsel). 9. INDEMNITY AND CONTRIBUTION.(a) Sellers, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been 21
delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure is the result of noncompliance by the Company with Section 7(a) hereof. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Shareholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 9(a) or 9(b), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of 22
more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such control persons of any Selling Shareholders, such firm shall be designated in writing by the persons named as attorneys-in-fact for the Selling Shareholders under the Power of Attorney and Custody Agreement. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) To the extent the indemnification provided for in Section 9(a) or 9(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a 23
result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(d)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (e) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not 24
guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) The indemnity and contribution provisions contained in this Section 9 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement,(ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Shareholder or any person controlling any Selling Shareholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. (g) The obligation of each Selling Shareholder to indemnify or provide contribution to any person or party under this Section 9 shall be limited to an amount equal to the aggregate net proceeds to such Selling Shareholder from the sale of such Shares sold by such Selling Shareholder hereunder. 10. DIRECTED SHARE PROGRAM INDEMNIFICATION.(a) The Company agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant has agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities. (b) In case any proceeding (including any governmental investigation) shall be instituted involving any Morgan Stanley Entity in respect of which indemnity may be sought pursuant to Section 10(a), the Morgan Stanley Entity seeking indemnity shall promptly notify the Company in writing and the Company, upon request of the Morgan Stanley Entity, shall retain counsel reasonably satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity and any others the Company may designate in such proceeding and 25
shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Morgan Stanley Entity shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the expense of such Morgan Stanley Entity unless (i) the Company shall have agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the Morgan Stanley Entity and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Company shall not, in respect of the legal expenses of the Morgan Stanley Entities in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Morgan Stanley Entities. Any such firm for the Morgan Stanley Entities shall be designated in writing by Morgan Stanley. The Company shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the Morgan Stanley Entities from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time a Morgan Stanley Entity shall have requested the Company to reimburse it for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Company agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by the Company of the aforesaid request and (ii) the Company shall not have reimbursed the Morgan Stanley Entity in accordance with such request prior to the date of such settlement. The Company shall not, without the prior written consent of Morgan Stanley, effect any settlement of any pending or threatened proceeding in respect of which any Morgan Stanley Entity is or could have been a party and indemnity could have been sought hereunder by such Morgan Stanley Entity, unless such settlement includes an unconditional release of the Morgan Stanley Entities from all liability on claims that are the subject matter of such proceeding. (c) To the extent the indemnification provided for in Section 10(a) is unavailable to a Morgan Stanley Entity or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then the Company in lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to the amount paid or payable by the Morgan Stanley Entity as a result of such losses, claims, damages or liabilities (i)in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Morgan Stanley Entities on the other hand from the offering of the Directed Shares or (ii) if the allocation provided by clause 10(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 10(c)(i) above but also the relative fault of the Company on 26
the one hand and of the Morgan Stanley Entities on the other hand in connection with any statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Morgan Stanley Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the Morgan Stanley Entities for the Directed Shares, bear to the aggregate Public Offering Price of the Directed Shares. If the loss, claim, damage or liability is caused by an untrue or alleged untrue statement of a material fact, the relative fault of the Company on the one hand and the Morgan Stanley Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged omission relates to information supplied by the Company or by the Morgan Stanley Entities and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (d) The Company and the Morgan Stanley Entities agree that it would not be just or equitable if contribution pursuant to this Section 10 were determined by PRO RATA allocation (even if the Morgan Stanley Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 10(c). The amount paid or payable by the Morgan Stanley Entities as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by the Morgan Stanley Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 10, no Morgan Stanley Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were offered to the public exceeds the amount of any damages that such Morgan Stanley Entity has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The remedies provided for in this Section 10 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Morgan Stanley Entity at law or in equity. (e) The indemnity and contribution provisions contained in this Section 10 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Morgan Stanley Entity or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Directed Shares. 27
11. TERMINATION. This Agreement shall be subject to termination by notice given by the Representatives to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade,(ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market,(iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Representatives, is material and adverse and (b) in the case of any of the events specified in clauses 11(a)(i) through 11(a)(iv), such event, singly or together with any other such event, makes it, in the judgment of the Representatives, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 12. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representatives may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to the Representatives, the Company and the Selling Shareholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling 28
Shareholders. In any such case either the Representatives or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 13. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 14. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 15. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. 29
Very truly yours, SILICON LABORATORIES INC. By: ------------------------------------- Name: Title: The Selling Shareholders named in Schedule I hereto, acting severally By: ------------------------------------- Attorney-in-Fact Accepted as of the date hereof Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Salomon Smith Barney Inc. Acting severally on behalf of themselves and the several Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. Incorporated By: ------------------------------------------ Name: Title: 30
SCHEDULE I NUMBER OF FIRM SELLING SHAREHOLDER SHARES TO BE SOLD ----------------------------------------------- ------------------- Jeffrey W. Scott........................... 160,000 Navdeep S. Sooch........................... 160,000 David R. Welland........................... 160,000 ------------------- Total 480,000 =================== I-1
SCHEDULE II NUMBER OF FIRM SHARES TO BE UNDERWRITER PURCHASED --------------------------------------------------- ----------------- Morgan Stanley & Co. Incorporated.............. - Lehman Brothers Inc............................ - Salomon Smith Barney Inc....................... - ----------------- Total 2,720,000 ================= II-1
EXHIBIT A FORM OF LOCK-UP LETTER - , 2000 Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Salomon Smith Barney Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with Silicon Laboratories Inc., a Delaware corporation (the "Company"), providing for the public offering (the "Public Offering") by the several Underwriters, including Morgan Stanley (the "Underwriters"), of - shares (the "Shares") of Common Stock ($0.0001 par value) of the Company (the "Common Stock"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. If the last reported sale price of the Common Stock per share on the NASDAQ National Market is at least twice the initial public offering price per share of the Common Stock sold in A-1
the Public Offering for the 20 consecutive trading days ending on the trading day immediately preceding the 120th day after the date of the Prospectus, then 30% of the shares of Common Stock and Common Stock equivalents held by the undersigned on the date of the Prospectus shall be released from the 180 day restrictions. This early release shall occur on: (a) the 120th day after the date of the Prospectus if the Company makes a public release of its quarterly or annual results during the period beginning on the eleventh trading day after the date of the Prospectus and ending on the day prior to the 120th day after the date of the Prospectus, or (b) the second trading day after the first public release of the Company's quarterly or annual results occurring on or after the 120th day after the date of the Prospectus, otherwise. The restrictions in the preceding paragraph shall not apply to (a) the sale of any Shares to the Underwriters pursuant to the Underwriting Agreement or (b) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Public Offering. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending 180 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, -------------------------------------- (Name) -------------------------------------- (Address) A-2
- --------------------------------------- -------------------------------------------------------------- AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: MARY TARTAGLIA: 215-764-8621 55TH AND SANSOM ST. PROOF OF MARCH 3, 2000 PHILA., PA 19139 SILICON LABORATORIES INC. (215) 784-8800 H 65315 Fc - --------------------------------------- -------------------------------------------------------------- SALES: M. SANDHU: 415-543-8585 OPERATOR: MT/LR - --------------------------------------- -------------------------------------------------------------- HOME 15 / LIVE JOBS / S / SILICON 65315 rev 1 - --------------------------------------- -------------------------------------------------------------- =============================================================================================================== COUNTERSIGNED AND REGISTERED: EQUISERVE TRUST COMPANY, N.A. TRANSFER AGENT AND REGISTRAR BY /s/ illegible AUTHORIZED SIGNATURE NUMBER SHARES SLB [LOGO] S I L I C O N L A B O R A T O R I E S INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS OF THE STATE OF DELAWARE CUSIP 826919 10 2 ------------------------------------------------------------------------------------------- THIS CERTIFIES THAT IS THE RECORD HOLDER OF ------------------------------------------------------------------------------------------- FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.0001 PAR VALUE, OF --------------------------- SILICON LABORATORIES INC. ---------------------------- ------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [SEAL] /s/ John W. McGovern /s/ Navdeep S. Sooch VICE PRESIDENT AND CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD =============================================================================================================== AMERICAN BANK NOTE COMPANY
The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- __________ Custodian ___________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ____________________________ in common (State) UNIF TRF MIN ACT -- _____ Custodian (until age ____) (Cust) ________ under Uniform Transfers (Minor) to Minors Act __________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received, _____________________________________________ hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- ________________________________________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________ _________________________________________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _________________________________________________ X _______________________________________________________ X _______________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By _____________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-1E. - --------------------------------------- -------------------------------------------------------------- AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: MARY TARTAGLIA: 215-764-8621 55TH AND SANSOM ST. PROOF OF FEBRUARY 16, 2000 PHILA., PA 19139 SILICON LABORATORIES INC. (215) 784-8800 H 65315 bk - --------------------------------------- -------------------------------------------------------------- SALES: M. SANDHU: 415-543-8585 OPERATOR: MT - --------------------------------------- -------------------------------------------------------------- HOME 15 / LIVE JOBS / S / SILICON 65315 NEW - --------------------------------------- --------------------------------------------------------------