UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the yearly period ended December 29, 2001
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Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number:
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SILICON LABORATORIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 74-2793174
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4635 Boston Lane, Austin, Texas 78735
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(Address of principal executive offices) (Zip Code)
(512) 416-8500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $851,153,000 as of December 29, 2001, based upon
the closing sale price on the Nasdaq National Market System reported for such
date. Shares of common stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 48,696,980 shares of the Registrant's common stock issued and
outstanding as of January 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
SILICON LABORATORIES INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I.
ITEM 1. Business and Factors Affecting Future Operating Results......... 1
ITEM 2. Properties...................................................... 21
ITEM 3. Legal Proceedings............................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders............. 21
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 22
ITEM 6. Selected Consolidated Financial Data............................ 22
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 23
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...... 31
ITEM 8. Financial Statements and Supplementary Data..................... 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 31
PART III.
ITEM 10. Directors and Executive Officers of the Registrant.............. 31
ITEM 11. Executive Compensation.......................................... 31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 31
ITEM 13. Certain Relationships and Related Transactions.................. 31
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 32
PART I
Item 1. Business and Factors Affecting Future Operating Results
GENERAL
Silicon Laboratories Inc. designs, manufactures and markets proprietary
high-performance mixed-signal integrated circuits (ICs) for various
communications industries. Mixed-signal ICs are electronic components that
convert real-world analog signals, such as sound and radio waves, into digital
signals that electronic products can process. Therefore, mixed-signal ICs are
critical components of numerous communications products, including wireless
phones, cable and satellite set-top boxes, modems, telephone equipment and
optical networking equipment. To develop our business rapidly, we initially
focused our efforts on developing ICs for the personal computer modem market. We
applied our mixed-signal and communications expertise to the development of ICs
for other high growth communications devices such as wireless telephones and
optical network applications. Our world-class, mixed-signal design engineers use
standard complementary metal oxide semiconductor, or CMOS, technology to create
innovative ICs that can dramatically reduce the cost, size and system power
requirements of devices that our customers sell to their end-user customers. Our
expertise in analog CMOS and mixed-signal IC design allows us to develop new and
innovative products rapidly, which enables our customers to improve their
time-to-market with end products that respond to consumer demand in the
communications industry.
INDUSTRY BACKGROUND
In a December 2001 report, Dataquest projected that the communications
semiconductor market will enter a growth phase beginning in 2002, with an
estimated 17% compound annual growth rate through 2006. This forecast projects
total communications semiconductor market revenues will reach $64 billion by
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2004. This growth is being driven in large part by the demand for
communications services, which has increased at a rapid rate in recent years
due to a number of factors, including the growth of Internet usage,
development of new communications technologies, availability of improved
communications services at lower costs, broad deployment of optical networks
and remote access requirements for corporate networks. This demand has fueled
tremendous growth in the number of wireless and wireline communications
devices and optical networking applications. For example, in wireless
markets, the demand for wireless phones and other wireless devices, such as
pagers and personal digital assistants, has grown rapidly as digital wireless
services have become increasingly popular and affordable. In wireline
markets, demand has increased for communications capabilities in a wide range
of products, including personal computers, cable and satellite set-top boxes,
fax machines, credit card verification machines, automated teller machines
and remote gaming systems. Consumers increasingly demand higher capacity
connections at their residences using cable modems or high speed digital
subscriber lines (DSL). The demand for greater and faster Internet access by
households and businesses has increased the need to significantly upgrade the
communications backbone to handle this traffic, increasing the need for
smaller, faster and better performing optical networking systems that route
this traffic.
Digital communications devices typically require mixed-signal circuits that
provide analog-to-digital functionality to access the communications networks to
which they are connected. Traditional designs for communications devices have
used mixed-signal circuits built with numerous discrete analog and digital
components. While these traditional designs provide the required functionality,
they can be inefficient and inadequate for use in markets where size, price and
performance are increasingly important product differentiators. In order to
improve their competitive position, communications device manufacturers need
advanced mixed-signal ICs that reduce the number of discrete components and
required board space to create smaller products with improved price/performance
characteristics. Additionally, these manufacturers require programmable ICs that
can be reconfigured to comply with numerous and constantly evolving
international communications standards without altering the fundamental design
of a product.
Manufacturers of communications devices face accelerating time-to-market
demands and must adapt to evolving industry standards and new technologies.
Because analog-intensive, mixed-signal IC design expertise is difficult to find,
these manufacturers increasingly are turning to third parties to provide
advanced mixed-signal ICs. Designing the analog component of a mixed-signal IC
involves great complexity and difficulty, because the performance of an analog
IC depends on the creative analog expertise of engineers to optimize speed,
power, amplitude and resolution within the constraints of standard manufacturing
processes. The development of analog design expertise typically requires years
of practical analog design experience under the guidance of a senior engineer,
and engineers with the required level of skill and expertise are in short
supply.
Many third-party IC providers lack sufficient analog expertise to develop
compelling mixed-signal ICs. As a result, manufacturers of communications
devices are often faced with inadequate mixed-signal ICs and are challenged to
find third-party providers that can supply them with mixed-signal ICs with
greater functionality, smaller size and lower power requirements at a reduced
cost and shorter time-to-market.
PRODUCTS
We provide mixed-signal ICs for use in various communication applications
across eight product lines. Our products integrate the functions of numerous
discrete components required by most existing mixed-signal solutions for
communications devices into single chips or chipsets. By doing so, we are able
to create products that:
- require less board space;
- can offer superior performance;
- provide increased reliability;
- reduce system power requirements; and
- reduce costs.
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The following table summarizes the ICs for the various markets that we
currently offer or have introduced to customers:
PRODUCT LINES and DESCRIPTION APPLICATIONS
RF Synthesizer
A radio frequency, or RF, synthesizer generates high - GSM/GPRS wireless phones
frequency signals that are used in wireless - GSM/GPRS data communications
communications systems to select a particular radio devices
channel. We provide RF Synthesizers to the Global System - Wideband CDMA 3G handsets
for Mobile Communications (GSM)/General Packet Radio - wireless local area networks
Services (GPRS) markets, as well as third generation(3G) - cordless phones
wireless data handsets, industrial, science and medical - Satellite radio receivers
(ISM) band applications, and Wideband Code Division - handheld point-of-sale
Multiple Access (W-CDMA) applications. GPRS, or General terminals
Packet Radio Service, brings wireless Internet access to - Wireless headsets
GSM users through data transfer and signaling over GSM
radio networks. Market dynamics drive a need for new,
highly-integrated electronics that reduce component count
and consume less power. Our synthesizers address that
requirement.
Aero-TM- Transceiver
This chipset provides highly integrated transmit - GSM/GPRS wireless phones
and receive radio electronics that are found - GSM/GPRS data communications
between the antennae electronics and the digital baseband devices
section of a GSM/GPRS mobile handset or wireless data - Personal digital assistants
communication devices. The Aero Transceiver addresses - PCMCIA data cards
dual or triple band requirements, requires a smaller
footprint than competing solutions in this form-factor
sensitive market and supports wireless data transmission.
The Aero Transceiver chipset is designed using 100%
standard CMOS process technology which enables an
aggressive roadmap to future cost reduction and further
integration. The most popular standard world-wide for
mobile handsets is the GSM. The Aero Transceiver chipset
is highly optimized to satisfy the GSM specifications.
Silicon Direct Access Arrangement Products (DAA)
Provides the functionality of both a DAA and a codec. A DAA - personal computer modems
provides electrical isolation between a wireline device, - host modems
such as a modem, and the telephone line to guard against - data/fax/voice modems
power surges in the telephone line, while the codec - Audio Modem Riser Cards
provides analog-to-digital and - Mobile Daughter Cards
digital-to-analog conversion. Traditional DAA - Communication and Network
implementations contain numerous discrete components to Riser (CNR) Cards
provide functionality comparable to that which we provide - Modem on Motherboard
in a single chipset. This family of products includes - Mini PCI cards
offerings to support different computer interface - fax machines
standards. Some versions of this chipset are programmable - handheld organizers
for differing international telephone standards, which - set-top boxes
enables manufacturers to distribute their products globally - video conferencing systems
without costly country-specific design modifications. A - speaker phones
complimentary voice codec product can be combined with the - PBXs
DAA to support speakerphone applications. - voice recognition systems
- Web telephony products
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ISOmodem-TM-
The ISOmodem combines an analog modem with a silicon DAA, - set-top boxes
resulting in a complete modem implemented in a very small - digital cable boxes
form factor. The ISOmodem products are designed for - credit card verification
embedded modem applications, which are typically found - industrial power meters
outside of the personal computer area. The ISOmodem - postage meters
contains a programmable line interface that meets global - security systems
telephone line requirements, allowing manufacturers to - remote medical monitoring
implement a single modem design world-wide. The ISOmodem
family includes embedded modem solutions for speeds
ranging from 2400 bps to 56Kbps, suitable for a wide
range of applications
ProSLIC-TM-
The ProSLIC provides the analog telephone interface on - telephone switchboard systems
the source end of the telephone which generates dial - cable telephony
tone, busy tone, caller ID and ring signal. Telephone - wireless local loop providing
source end electronics have historically been at the remote access for a wireline
telephone company central office, but recently have been system
migrating to the customer premises. Our ProSLIC product - voice over Internet protocol
family has offerings for short-haul applications suitable - voice over digital subscriber
for the customer premises as well as long-haul lines
applications suitable for the traditional telephone - digital broadband to analog
company central office. This family includes a dual telephone adapters
ProSLIC that provides for higher port density and lower
cost per phone line.
DSL Analog Front End
The DSL Analog Front End, or AFE, is designed to provide -personal computer modems
the connectivity functions for business or residential -external modems
asymmetric digital subscriber line, or ADSL, connection -residential gateways
at the user end in customer premises equipment. Such a -network interface devices
connection addresses the business and residential demand
for DSL broadband higher capacity connectivity as
compared to traditional standard dial-up analog phone
line transmission speeds. The DSL AFE supports several
ADSL communication standards enabling various upload and
download data rates. When combined with our DAA products
for analog phone line connectivity, our combined product
offering provides a single modem design to address both
the prevalent analog modem and the emerging ADSL
services. The ability to dial up the analog phone line in
order to provision the ADSL connection or run remote
diagnostics can assist in the implementation and
maintenance of this ADSL broadband connection. This
product is in early stages of customer evaluation and is
not yet being produced in volume.
SiPHY-TM- Optical Physical Layer Transceivers
We offer a family of high-speed physical layer ICs that - Optical port cards for SONET
meet the high-speed fiber Synchronous Optical Network, or - SONET/SDH/ATM routers
SONET, specifications. The transceiver operates at a rate - SONET/SDH test equipment
of 2.5 gigahertz transmission speed commonly referred to - Optical transponder modules
as OC-48 and 10 gigahertz speed commonly referred to as - Add/drop multiplexers
OC-192. A transceiver provides both the transmit and - SONET/SDH regenerators
receive function in the physical layer. In addition to - Digital cross connects
the transceiver products, we offer a stand-alone - Board-level serial links
transmitter and stand-alone receiver product. We also
offer a family of clock and data recovery chips to
provide specific functions at multiple speeds up to the
OC-48 rate. This IC family utilizes our proprietary
digital signal processing technology to reduce the
device's sensitivity to board-level noise and improve
performance. This product is in early stages of customer
evaluation and is not yet being produced in volume.
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Cesium-TM- Precision Clocks Integrated Circuits
This precision clock product family includes various - Optical port cards for SONET
products ranging from general purpose clock multiplier - SONET/SDH test equipment
products up to high performance multi-port, redundant, - SONET/SDH/ATM switches
multiple frequency range clock multipliers and - SONET/SDH/ATM routers
regenerators. SONET optical network systems operate in a - Optical transponder modules
synchronous manner requiring very high precision clock
sources. Our knowledge gained in developing the physical
layer transceiver subsections provided us the technology
to offer these highly precise clock products.
Traditionally, these clock sources have been performed by
expensive, bulky modules, complicated discrete
implementations requiring numerous components or current
incomplete IC offerings needing supplemental corrective
circuitry in order to meet specifications. As the optical
network market makes a transition from OC-48 transmission
speeds to OC-192 speeds, the need for precision clock
sources throughout the synchronous optical network becomes
a key design feature for our customers.
CUSTOMERS, SALES AND MARKETING
We market our products to original equipment manufacturers and other
providers of applications in the wireless, wireline and optical networking
communications markets. The following is a list of certain customers that
purchased our products in fiscal 2001 for inclusion in products or devices
offered to their customers:
- - 3Com - Ciena - PC-TEL - Sony
- - Agere Systems - Echostar - Samsung - Texas Instruments
- - Ambit - Panasonic - Smart Link - Thomson
We maintain four sales offices in North America and provide European sales
support through our United Kingdom subsidiary. The Asia Pacific area is
supported through our Japanese 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. We maintain a dedicated Web site for our field sales
organization, which includes technical documentation, backlog information, order
status, product availability and new product introduction information, to
support our communications with that organization. Additionally, we provide
direct communication to all field sales personnel as part of a structured sales
communications program.
We also utilize independent sales representatives and distributors to
generate sales of our products. We have relationships with many independent
sales representatives and distributors worldwide whom we have selected based on
their understanding of the mixed-signal IC marketplace and their ability to
provide effective field sales support for our products. For the year ended
December 29, 2001, sales through these representatives and distributors
accounted for 57% of our sales.
Our marketing efforts are targeted at both identified industry leaders and
emerging market participants. Direct marketing activities are supplemented by a
focused communications effort that seeks to generate 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 customers to support the design-win
process, and can significantly accelerate the customer's time required to bring
a product to market. A design-win occurs when a customer has designed our ICs
into its product architecture. A considerable amount of effort to assist the
customer in incorporating our ICs into its products 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.
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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 experienced
analog and mixed-signal engineering talent and expertise to create new ICs that
integrate functions typically performed inefficiently by multiple discrete
components. This integration generally results in lower costs, smaller die
sizes, lower power demands and enhanced price/performance characteristics. We
attempt to reuse successful techniques for integration in new applications where
similar benefits can be realized. We believe that reliable and precise analog
and mixed-signal ICs can only be developed by teams of engineers that coordinate
their efforts under the direction of senior engineers who have significant
analog experience and are familiar with the intricacies of designing these ICs
for commercial volume production. The development of test methodologies is a
critical activity in releasing a new product for commercial success. We believe
that we have attracted some of the best engineers in our industry. As of
December 29, 2001, we had 111 employees involved in research and development.
Research and development expenses were $29.0 million, $19.4 million, and
$8.3 million in fiscal 2001, 2000, and 1999, respectively.
TECHNOLOGY
Our product development process facilitates the design of highly innovative
mixed-signal ICs. Our senior engineers start the product development process by
forming an understanding of our customers' products and then design alternatives
for decreasing power, size and cost requirements. Our engineers' deep knowledge
of existing and emerging communications standards and performance requirements
help us to assess the technical feasibility of a particular IC. We target areas
where we can provide compelling product improvements. Once we have solved the
primary challenges, our field engineers continue to work closely with our
customers' design teams to maintain and develop an understanding of our
customers' needs, allowing us to formulate derivative products and refined
features.
In providing mixed-signal ICs for our customers, we believe our key
competitive advantages are: (1) analog CMOS design expertise; (2) digital signal
processing design expertise; and (3) our broad understanding of communication
systems technology and trends. To fully capitalize on these advantages, we have
assembled a world-class development team with exceptional analog and
mixed-signal design expertise led by accomplished senior engineers.
ANALOG CMOS DESIGN EXPERTISE
We believe that our most significant core competency is our world-class
analog design capability. Additionally, we strive to design all of our ICs in
CMOS processes. There are several modern process technologies for manufacturing
semiconductors including CMOS, Bipolar, BiCMOS, silicon germanium and gallium
arsenide. While it is significantly more difficult to design analog ICs in CMOS,
CMOS provides multiple benefits versus existing alternatives, including
significantly reduced cost, reduced technology risk and greater worldwide
foundry capacity. CMOS is the most commonly used process technology for
manufacturing digital ICs and as a result is most likely to be used for the
manufacturing of ICs with finer line geometries, which enable smaller and faster
ICs. By designing our ICs in CMOS, we enable our products to benefit from this
trend towards finer line geometries, which lowers the cost of the digital
circuitry in our products and allows us to integrate more digital functionality
into our mixed-signal IC's.
Designing analog ICs is significantly more complicated than designing
digital ICs. While advanced software tools exist to help automate digital IC
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design, there are far fewer tools for advanced analog IC design. In many
cases, our analog circuit design efforts begin at the fundamental transistor
level. We believe that we have a demonstrated ability to design the most
difficult analog, optical electronics and RF circuits using standard CMOS
technologies. For example, our DAA product family replaces bulky, discrete
modem components, such as transformers, relays and opto-isolators, with
highly integrated CMOS mixed-signal ICs. Similarly, bulky wireless phone
components such as oscillators are replaced by our integrated CMOS frequency
synthesizer products. Our design expertise in the technically challenging
optical networking market has allowed us to reduce the number of supplemental
components used in our customers' products while providing lower levels of
noise in the circuit operation. This is a key technical consideration in high
speed optical networks.
DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE
We consider the partitioning of a circuit's functionality to be a
proprietary and creative design technique. Our digital signal processing design
expertise maximizes the price/performance characteristics of both the analog and
digital functions and allows our ICs to work in an optimized manner to
accomplish particular tasks. Generally, we surround core analog circuitry with
inexpensive digital CMOS transistors, which allows our ICs to perform the
required analog functions with increased digital capabilities. For example, our
ProSLIC product is designed to function more efficiently than traditional
products for the source end of the telephone line which involve a two chip
combination requiring more board space and numerous external components. The
ProSLIC product is partitioned by combining a core analog design that provides
analog-to-digital conversion and digital-to-analog conversion with optimized
digital signal processing functions such as data compression, data expansion,
filtering and tone generation. In this manner, we can isolate the higher voltage
required to ring a telephone in low-cost, off-chip high voltage transistors or a
small, complimentary high voltage chip, thereby enabling us to fulfill the
remaining core functions with a single CMOS chip. As a further example, our
SiPHY Optical Physical Layer Transceivers utilize an architecturally advanced
phase locked loop circuit based principally on digital signal processing. By
performing a significant portion of this function in the digital domain in a
monolithic chip, the circuit has been able to satisfy the demanding
specifications of the optical network SONET standard using inexpensive CMOS
transistors.
UNDERSTANDING OF COMMUNICATION SYSTEMS TECHNOLOGY AND TRENDS
Our focused expertise in communications ICs is rooted in our founders'
previous experience at AT&T Bell Labs working in CMOS design for communications
applications. This expertise, which we consider a competitive advantage, is the
foundation of our in-depth understanding of the technology and trends that
impact communications systems and markets. We believe we have a unique ability
to predict product evolution and design compelling ICs for communications
manufacturers. Our expertise spans from single line plain old telephone service
(POTS) to high speed SONET based optical networks. We have also expanded our
knowledge base into wireless communications. Our understanding of the role of
analog/digital interfaces within communications systems and the key domestic and
international telecommunications standards that must be supported are particular
areas of our expertise.
MANUFACTURING
As a fabless IC manufacturer, we conduct IC design and development in our
facilities in the United States and electronically transfer our proprietary IC
designs to third-party semiconductor fabricators who process silicon wafers to
produce the ICs that we design. Our IC designs use industry-standard
complementary metal oxide semiconductor, or CMOS, manufacturing process
technology to achieve a level of performance normally associated with more
expensive special-purpose IC fabrication technology. We believe the use of CMOS
technology facilitates the rapid production of our ICs within a lower cost
framework. Our IC production employs submicron process geometries which are
readily available from leading foundry suppliers worldwide, thus ensuring the
availability of manufacturing capability over our products' life cycles. We
currently rely on Taiwan Semiconductor Manufacturing Co. and its affiliate,
Vanguard International Semiconductor, to manufacture substantially all of our
semiconductor wafers.
Once the silicon wafers have been produced, they are shipped directly to our
third-party assembly subcontractors. The assembled ICs are then forwarded for
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final testing, typically to our facilities, prior to shipping to our customers.
We believe that our fabless manufacturing model significantly reduces our
capital requirements and allows us to focus our resources on the design,
development and marketing of our ICs.
COMPETITION
The markets for semiconductors generally, and for analog and mixed-signal
ICs in particular, are intensely competitive. We believe the principal
competitive factors in our industry are:
- - level of integration; - intellectual property;
- - product capabilities; - customer support;
- - reliability; - reputation; and
- - price; - ability to rapidly introduce new
- - performance; products to market.
We believe that we are competitive with respect to these factors,
particularly because our ICs typically are smaller in size, are highly
integrated, achieve high performance specifications at lower price points than
competitive products and are manufactured in standard CMOS which generally
enables us to supply them on a relatively rapid basis to customers to meet their
product introduction schedules. However, disadvantages we face include our
relatively short operating history in certain of our markets and the need for
customers to redesign their products and modify their software to implement our
ICs in their products.
We anticipate that the market for our products will continually evolve and
will be subject to rapid technological change. In addition, as we target and
supply products to numerous communications markets and applications, we face
competition from a relatively large number of competitors. Across our product
offerings, we compete with Agere Systems, AMCC, Analog Devices, Broadcom,
Conexant, CP Claire, Cypress, ESS, Fujitsu, Hitachi, Infineon Technologies,
Legerity (formerly the Advanced Micro Devices telecom division), Maxim
Integrated Products, National Semiconductor, Philips, Semtech, Texas
Instruments, Vitesse Semiconductor Corp, and others. We expect to face
competition in the future from our current competitors, other manufacturers
and designers of semiconductors, and innovative start-up semiconductor design
companies. Our competitors may also offer bundled chipset kit arrangements
offering a more complete product despite the technical merits or advantages of
our products. In addition, our customers could develop products or
technologies internally that would replace their need for our products and
would become a source of competition. As the markets for 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,
complimentary product offerings, and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other resources than us.
Current and potential competitors have established or may establish financial
and strategic relationships between themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share.
INTELLECTUAL PROPERTY
Our future success depends in part upon our proprietary technology. We seek
to protect our technology through a combination of patents, copyrights, trade
secrets, trademarks and confidentiality procedures. As of December 29, 2001, we
had been granted 39 United States patents in the IC field. We also have filed 86
applications for additional patents covering our proprietary technology. There
can be no assurance that patents will ever be issued with respect to these
applications. Furthermore, it is possible that any patents held by us may be
invalidated, circumvented, challenged or licensed to others. In addition, there
can be no assurance that such patents will provide us with competitive
advantages or adequately safeguard our proprietary rights.
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In addition, we claim copyright protection for proprietary documentation
used in our products. We have filed for registration, or are in the process of
filing for registration, the visual image of each IC that we have manufactured
in commercial quantities with the United States Copyright Office. We have
registered the "Silicon Laboratories" logo as a trademark in the United States.
All other trademarks, service marks or trade names appearing in this report are
the property of their respective owners. We also attempt to protect our trade
secrets and other proprietary information through agreements with our customers,
suppliers, employees and consultants, and through other security measures. We
intend to protect our rights vigorously, but there can be no assurance that our
efforts will be successful. In addition, the laws of other countries in which
our products are sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States.
While our ability to effectively compete depends in large part on our
ability to protect our intellectual property, we believe that our technical
expertise and ability to introduce new products in a timely manner will be an
important factor in maintaining our competitive position.
Many participants in the semiconductor and communications industries have a
significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. From time to time, third parties may assert infringement
claims against us. We may not prevail in any such litigation or may not be able
to license any valid and infringed patents from third parties on commercially
reasonable terms, if at all. Litigation, regardless of the outcome, is likely to
result in substantial cost and diversion of our resources, including our
management's time. Any such litigation could materially adversely affect us.
Other than industry standard licenses with our vendors, such as wafer
fabrication tool libraries, computer-aided design applications and business
software applications, we do not have material licenses.
EMPLOYEES
As of December 29, 2001, we employed 279 people, including 65 in
manufacturing, 111 in engineering development, 63 in marketing, 23 in sales and
17 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.
ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various environmental controls
on the storage, use, discharge and disposal of certain chemicals and gases used
in the semiconductor industry. Our compliance with these laws and regulations
has not had a material impact on our financial position or results of
operations.
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION
COULD BE HARMED
Our future success will depend on our ability to reduce our dependence on our
DAA products by developing new ICs and product enhancements that achieve
market acceptance in a timely and cost-effective manner. The development of
mixed-signal ICs is highly complex, and we occasionally have experienced delays
in completing the development and introduction of new products and product
enhancements. Successful product development and market acceptance of our
products depend on a number of factors, including:
- changing requirements of customers within the communications
markets;
- accurate prediction of market requirements;
- timely completion and introduction of new designs;
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- 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 products which we recently have
developed or may develop in the future will achieve market acceptance. We have
introduced to market or are in development of many ICs including:
- a family of RF synthesizers, which are used to generate high
frequency signals that are used in wireless communications
systems to select a particular radio channel;
- an Aero-TM- Transceiver chipset, providing a highly integrated
radio communication section of a GSM wireless handset with
versatile interfaces to other electronic sections of the
handset;
- an ISOmodem, which is a miniaturized modem that can be
embedded in electronic devices with low transmission
requirements, such as credit card verification devices, to
provide quick network access;
- a higher speed ISOmodem product to serve additional embedded
modem markets demanding faster transmission requirements such
as next generation set-top boxes;
- a family of ProSLIC products, which provides dial tone, busy
tone, caller ID and ring signal functions at the source end of
the telephone addressing long-haul and short-haul
applications;
- a Digital Subscriber Line, or DSL, Analog Front End providing
a highly integrated interface for DSL modems with legacy
support for traditional analog phone line functionality; and
- a family of optical networking products, which feature highly
integrated physical layer and clock circuits designed for
SONET/ATM routers, multiplexers, digital cross connects and
optical transceiver modules.
We also are actively developing other ICs. If our recently introduced or
other ICs fail to achieve market acceptance, our operating results and
competitive position could be adversely affected.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY
CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES
In fiscal 2001, our three largest customers, in the aggregate, accounted for
approximately 40% of our revenues. Of these customers, PC-Tel accounted for 15%,
Agere Systems for 13% and Samsung for 12% of our fiscal 2001 revenues. Most of
the markets for our products are dominated by a small number of potential
customers. Therefore, our operating results in the foreseeable future will
continue to depend on our ability to effect sales to these dominant customers,
10
as well as the ability of these customers to sell products that incorporate
our IC products. In the future, these customers may decide not to purchase
our ICs at all, purchase fewer ICs than they did in the past or alter their
purchasing patterns, particularly because:
- we do not have any material long-term purchase arrangements
with these or any of our other customers;
- substantially all of our sales to date have been made on a
purchase order basis, which permits our customers to cancel,
change or delay product purchase commitments with little or no
notice to us and without penalty; and
- some of our customers have sought or are seeking relationships
with current or potential competitors which may affect our
customers' purchasing decisions.
Our largest customer, PC-TEL, has reported declines in its revenues in recent
periods from comparable fiscal periods in 1999 and 2000. If PC-TEL's revenues
continue to decline or remain at reduced levels, we believe that our results of
operations will be significantly and adversely affected.
While we have been the sole supplier of the direct access arrangement, or
DAA, IC used in PC-TEL's soft modem DAA products, we anticipate that PC-TEL will
regularly evaluate alternative sources of supply in the future in order to
diversify its supplier base, which would increase its negotiating leverage with
us and protect its ability to secure DAA components. We believe that any second
source of DAA ICs for PC-TEL could have an adverse effect on the prices we are
able to charge PC-TEL and the volume of DAA ICs that we sell to PC-TEL, which
would negatively affect our revenues 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 revenues and adversely affect
our business.
WE HAVE DEPENDED ON OUR DAA FAMILY OF PRODUCTS FOR A MAJORITY OF OUR REVENUES IN
FISCAL 2001, AND SUBSTANTIAL REDUCTIONS IN ORDERS FOR DAA PRODUCTS WOULD
SIGNIFICANTLY REDUCE OUR REVENUES
A majority of our sales in fiscal 2001 were derived from sales of our DAA
family of ICs. This product family, in turn, is highly dependent on sales to
the personal computer industry which currently faces reduced levels of demand
relative to earlier forecasts. Continued diversification of our sales through
the introduction and commercial acceptance of products other than DAA will be
required to reduce our reliance on sales of our DAA products. A decline in
overall demand for personal computers, reduced market acceptance of our DAA
products or the introduction of products with superior price/performance
characteristics by our competitors could significantly reduce our sales. In
addition, substantially all of our DAA products that we have sold include
technology related to one or more of our issued U.S. patents. If these patents
are found to be invalid or unenforceable, our competitors could introduce
competitive products that could reduce both the volume and price per unit of
our products.
In August 2001, TDK Semiconductor Corporation filed suit against us alleging
that certain of our DAA products infringe a TDK-held patent. We have filed a
response denying the alleged infringement. If our DAA products are found to
infringe TDK's patent, our future operating results and financial condition
could be substantially adversely affected.
During fiscal 2001, we experienced a significant reduction in orders for
our DAA family of products as a result of reduced demand for personal
computers relative to earlier forecasts. Due to this reduction and other
factors, we experienced a decline of 28.1% in revenues in fiscal 2001 as
compared to fiscal 2000, which resulted in a significant reduction in gross
profits, lower gross margins and net losses in fiscal 2001.
WE MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD QUARTERLY AND ANNUAL FLUCTUATIONS
IN OUR REVENUES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR
STOCK PRICE
We may experience significant period-to-period fluctuations in our revenues
and operating results in the future due to a number of factors, and any such
variations may cause our stock price to fluctuate. It is likely that in some
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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 revenues and
operating results, including:
- the timing and volume of orders received from our customers;
- the rate of acceptance of our products by our customers,
including the acceptance of new products we may develop for
integration in the products manufactured by such customers,
which we refer to as "design wins";
- the time lag between "design wins" and production orders;
- the demand for, and life cycles of, the products incorporating
our ICs;
- the rate of adoption of mixed-signal ICs in the markets we
target;
- deferrals of customer orders in anticipation of new products
or product enhancements from us or our competitors or other
providers of ICs;
- changes in product mix; and
- the rate at which new markets emerge for products we are
currently developing or for which our design expertise can be
utilized to develop products for these new markets.
The mobile telephone market is characterized by rapid fluctuations in demand
which results in corresponding fluctuations in the demand for our wireless
products that are incorporated in mobile telephones. 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 can quickly accelerate and demand can
quickly decline for the product that the new IC replaces.
Due to the terrorist attacks of September 11, 2001 and subsequent world
events, the demand for consumer-oriented products, such as personal computers
and mobile wireless handsets, may face significant declines for a prolonged
period of time. The supply chain for these consumer-oriented products
experienced weak consumer demand, excess inventory, low factory utilization
rates, a pattern of slower upgrade cycles for personal computers, delay of next
generation of mobile handset technology and overall sluggishness even before the
events of September 11, 2001. The combination of the then existing business
conditions and the loss of consumer confidence driven by the events of September
11, 2001 may result in a deterioration in demand for our semiconductor component
products which could unfavorably impact our revenues, operating results and
stock price.
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 revenues until the
second quarter of 1998. As a result, we have only a short history from which to
predict future revenues. This limited operating experience, combined with the
rapidly evolving nature of the markets in which we sell our products and other
factors which are beyond our control, reduce our ability to accurately forecast
quarterly or annual revenues. Additionally, because most of our expenses are
fixed in the short term or incurred in advance of anticipated revenues, we may
not be able to decrease our expenses in a timely manner to offset any shortfall
of revenues. During fiscal 2001, despite our reduced level of revenues relative
to fiscal 2000, we expanded our staffing and increased our expenses in
anticipation of future sales growth. If our sales do not increase as and to the
extent that we anticipated, we likely will incur significant losses due to our
higher expense levels.
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WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS
Our products are currently used by our customers to produce modems, telephone
equipment, mobile telephones, various wireless devices, and optical networking
equipment. We rely on our customers to provide hardware, software, intellectual
property indemnification and other technical support for the devices that use
our products. If our customers do not provide the required functionality or if
our customers do not provide satisfactory support for their products, the demand
for these devices that incorporate our products may diminish. Any reduction in
the demand for these devices would significantly reduce our revenues.
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
principally on two third-party assembly contractors, Advanced Semiconductor
Engineering and Amkor, to assemble and package the silicon chips provided by the
wafers for use in final products. Additionally, we rely on third-party vendors
for a minor portion of the testing requirements of our products prior to
shipping.
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;
- potential increases in prices; and
- their inability to supply or support new or changing packaging
technologies.
We currently do not have long-term supply contracts with any of our
third-party vendors, and therefore, they are not obligated to perform services
or supply products to us for any specific period, or in any specific quantities,
except as may be provided in a particular purchase order. Although we believe
that other semiconductor foundries or assembly contractors can adequately
address our needs, we expect that it would take approximately two to nine months
to transition performance of these services from our current providers to new
providers. Such a transition may also require a qualification process by our
customers or their end customers. We generally place orders for products with
some of our suppliers approximately four months prior to the anticipated
delivery date, with order volumes based on our forecasts of demand from our
customers. Accordingly, if we do not accurately forecast demand for our
products, we may be unable to obtain adequate foundry or assembly capacity from
our third-party contractors to meet our customers' delivery requirements, or we
may accumulate excess inventories. On occasion, we have been unable to
adequately respond to unexpected increases in customer purchase orders, and
therefore, were unable to benefit from this incremental demand. None of our
third-party foundry or assembly contractors have provided assurances to us that
adequate capacity will be available to us within the time required to meet
additional demand for our products.
From our inception through fiscal 2001, substantially all of the silicon
wafers for the products that we shipped were manufactured either by Taiwan
Semiconductor Manufacturing Co. or Vanguard International Semiconductor, an
affiliate of Taiwan Semiconductor Manufacturing Co. Our customers typically
complete their own qualification process. If we fail to balance customer demand
across semiconductor fabrications properly, we might not be able to fulfill
demand for our products, which would adversely affect our operating results.
Additionally, a resulting write off of unusable or excess inventories would
contribute to a decline in earnings.
13
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 deliver fabricated silicon wafers of satisfactory quality in a timely
manner, we will be unable to meet our customers' demand for our products in a
timely manner, which would adversely affect our operating results and damage our
customer relationships.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
As part of our growth strategy, we will continue to evaluate opportunities to
acquire other businesses or technologies that would complement our current
offerings, expand the breadth of our markets or enhance our technical
capabilities. Acquisitions that we may potentially make in the future entail a
number of risks that could materially and adversely affect our business and
operating results, including:
- problems integrating the acquired operations, technologies or
products with our existing business and products;
- diversion of management's time and attention from our core
business;
- difficulties in retaining business relationships with
suppliers and customers of the acquired company;
- risks associated with entering markets in which we lack prior
experience; and
- potential loss of key employees of the acquired company.
OUR CURRENT MANUFACTURERS, ASSEMBLERS AND CUSTOMERS 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 OR SALES
Our current semiconductor manufacturers are located in the same region within
Taiwan and our assembly contractors are located in the Pacific Rim region. In
addition, many of our customers, particularly mobile telephone manufacturers,
are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the
Pacific Rim region is significant due to the proximity of major earthquake fault
lines in the area. We are not currently covered by insurance against business
disruption caused by earthquakes as such insurance is not currently available on
terms that we believe are commercially reasonable. Earthquakes, fire, flooding
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. In addition, a natural disaster, labor strike, war or
political unrest where our customers' facilities are located would likely reduce
our sales to such customers.
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
14
demand for our products may not materialize, manufacturing based on forecasts
subjects us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.
WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH RATE
Although we experienced revenue and earnings growth in annual periods prior
to 2001, we may not be able to return to these growth rates. Our fiscal 2001
revenues declined sequentially from fiscal 2000 by 28.1% which resulted in a
significant reduction in gross profits, lower gross margin percentage and a net
loss in fiscal 2001. Although we may gain significant market share in a
relatively short period of time following the introduction of a new product,
resulting in revenue growth, incremental gains in market share for these newly
introduced products may not occur. Additionally, the time lag by a customer from
purchase of initial orders of our product to follow-on production volume orders,
if any, may extend for several quarterly periods. Accordingly, you should not
rely on the results of any prior quarterly or annual periods as an indication of
our future operating performance.
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 in 1998 led to the
creation of Conexant which is a significant competitor. Conexant has announced
further plans to spin off multiple businesses to create focus in specific areas.
Additionally, Siemens spun off its semiconductor business in 1999 to create a
more focused company named Infineon Technologies. In July 2000, Lucent
Technologies spun off its microelectronics business, which included its
optoelectronics components and integrated circuits division, into a separate
company named Agere Systems in order to accelerate the growth of the business
and alleviate strategic conflicts with Lucent's competitors. 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, sales and marketing
personnel. Specifically, we believe that our future success is highly
dependent on Navdeep Sooch, our co-founder, Chief Executive Officer and
Chairman of the Board, Daniel Artusi, our Chief Operating Officer, Jeffrey
Scott, our co-founder and Vice President, and David Welland, our co-founder
and Vice President. 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 primary source for our technological and product innovations. We
may not be
15
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 various markets.
As a result, we have devoted and expect to continue to devote a large amount of
resources to develop products based on new and emerging technologies and
standards that will be commercially introduced in the future. In fiscal 2001,
our research and development expense was $29.0 million, which represented 39.1%
of our revenues compared to $19.4 million, or 18.8% of our revenues in fiscal
2000. A number of large companies in the communications ICs industries are
actively involved in the development of these new technologies and standards.
Should any of these companies delay or abandon their efforts to develop
commercially available products based on new technologies and standards, our
research and development efforts with respect to these technologies and
standards likely would have no appreciable value. In addition, if we do not
correctly anticipate new technologies and standards, or if the products that we
develop based on these new technologies and standards fail to achieve market
acceptance, our competitors may be better able to address market demand than
would we. Furthermore, if markets for these new technologies and standards
develop later than we anticipate, or do not develop at all, demand for our
products that are currently in development would suffer, resulting in lower
sales of these products than we currently anticipate. We have introduced to
market a RF synthesizer product for use in wireless phones operating on the GSM
standard. The RF synthesizer is also compatible with GPRS standard, which is the
emerging data communications protocol for GSM based wireless phones. We cannot
be certain whether these standards will not change, thereby making our products
unsuitable or impractical. In the area of optical networking, our clock and data
recovery integrated circuit operates within stringent specifications for high
speed communications systems known as SONET. Changes to this standard could make
our products uncompetitive or unsuitable to changing system requirements and
result in our inability to sell these products.
OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED
ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR
REVENUES
Our products are complex and may contain errors when first introduced or as
new versions are released. We rely primarily on our in-house testing personnel
to design test operations and procedures to detect any errors prior to delivery
of our products to our customers. Because our products are manufactured by third
parties, should problems occur in the operation or performance of our ICs, we
may experience delays in meeting key introduction dates or scheduled delivery
dates to our customers. These errors also could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.
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 REVENUES
Although our DAA 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.
16
We have a large installed base of direct access arrangement products in the
field. As part of our ongoing support of this product line, we verify the
performance of our products through regulatory agency qualifications, customer
acceptance procedures, evaluation of end customer technical support information,
and analysis of field returns. Certain customer modem implementations of our
direct access arrangement products have been identified to be susceptible to a
particular class of electrical surges originating from lightning strikes that
are not adequately described in regulatory agency qualifications. We have
provided application guidelines to our customers to enhance their implementation
of the modem function to protect our devices from these lightning strike
electrical surges.
Damage from these electrical surges could result in product liability claims
against our customers that produce these modems or against us. Our customers may
seek indemnification or other compensation from us with respect to any liability
that they incur. Even if our DAA product is not the source of the problem and we
are not contractually liable for such indemnification, we may incur costs in an
effort to maintain good relations with our customers. If we are held liable for
these claims or incur other costs in order to maintain good relations, this
problem could adversely affect our operating results.
A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED
INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS
In fiscal 2001, substantially all of our test operations were performed
in-house. A minor portion of test operations is provided by our contract
manufacturers or other third parties. While we expect that performing testing
in-house provides us with advantages in terms of lower per unit cost, quality
control and shorter time required to bring a product to market, we may
encounter difficulties and delays in maintaining or expanding our internal
test capabilities. In addition, final testing of complex semiconductors
requires substantial resources to acquire state-of-the-art testing equipment
and hiring additional qualified personnel, which has increased our fixed
costs. If demand for our products does not support the effective utilization
of these employees and additional equipment, we may not realize any benefit
from foregoing the use of outside vendors and utilizing internal final
testing. Any decrease in the demand for our products could result in the
underutilization of our testing equipment and personnel. If our internal test
operations are underused or mismanaged, we may incur significant costs that
could adversely affect our operating results.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL
COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS
We have opened additional sales offices in international markets to expand
our international sales activities in Europe and the Pacific Rim region and
intend to increase our staffing in international sales. 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;
- high levels of distributor inventory subject to rights of
return to us; 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.
17
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
In recent periods, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
279 employees at December 29, 2001. This growth has placed, and any future
growth of our operations will continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of our accounting and other
internal management systems. We also expect that we will need to continue to
expand, train, manage and motivate our workforce. All of these endeavors will
require substantial management effort. If we are unable to effectively manage
our expanding operations, our business could be materially and adversely
affected.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
Our products rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to sustain market acceptance
of our products. Therefore, we believe that the protection of our intellectual
property rights is and will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and business partners, and control access to and
distribution of our documentation and other proprietary information. Despite
these efforts, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. Monitoring unauthorized use of our technology is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
cannot be certain that patents will be issued as a result of our pending
applications nor can we be certain that any issued patents would protect or
benefit us or give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or
unenforceable. We also cannot be certain that others will not develop effective
competing technologies on their own.
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time,
we receive letters from various industry participants alleging infringement of
patents, trademarks or misappropriation of trade secrets. The exploratory
nature of these inquiries has become relatively common in the semiconductor
industry. We typically respond when appropriate and as advised by legal
counsel. We have been involved in litigation to protect our intellectual
property rights in the past and may become involved in such litigation again
in the future. In the future, we may become involved in litigation to defend
allegations of infringement asserted by others. Legal proceedings could
subject us to significant liability for damages or invalidate our proprietary
rights. Legal proceedings initiated by us to protect our intellectual property
rights could also result in counterclaims or countersuits against us. Any
litigation, regardless of its outcome, would likely be time consuming and
expensive to resolve and would divert our management's time and attention. Any
intellectual property litigation also could force us to take specific actions,
including:
- cease selling products that use the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
18
- redesign those products that use infringing intellectual
property; or
- pursue legal remedies with third parties to enforce our
indemnification rights, which may not adequately protect our
interests.
In August 2001, TDK Semiconductor Corporation commenced a lawsuit against us
for alleged willful infringement by our DAA products of a TDK-held patent. TDK's
complaint seeks unspecified treble damages, costs and attorneys' fees, and an
injunction. In September 2001, we served and filed an answer to TDK's complaint,
in which we denied the alleged infringement and asserted that their patent is
invalid. This lawsuit may involve significant expense and may also divert our
management's time and attention from other aspects of our business. Due to the
inherent uncertainties of litigation, we are unable to predict the outcome of
this matter. For further information regarding this litigation, please see
"Part II, Item 1. Legal Proceedings."
FAILURE TO MANAGE OUR DISTRIBUTION CHANNEL RELATIONSHIPS COULD IMPEDE OUR FUTURE
GROWTH
The future growth of our business will depend in part on our ability to
manage our relationships with current and future distributors and sales
representatives, develop additional channels for the distribution and sale of
our products and manage these relationships. As we execute our indirect sales
strategy, we will need to manage the potential conflicts that may arise with our
direct sales efforts. The inability to successfully execute or manage a
multi-channel sales strategy could impede our future growth.
RISKS RELATED TO OUR INDUSTRY
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. Specific
areas of the communications markets have contributed to the overall decline
and volatility of the semiconductor industry. For example, the semiconductor
industry has suffered a downturn due to reductions in the actual unit sales of
personal computers and wireless phones as compared to previous robust
forecasts, and forecasts of excess capacity in the fiber optic networks.
Additionally, changing and competing technical standards in airwave interfaces
such as GSM and CDMA for mobile handsets, migration to higher speed
communication protocols in the optical space and the return to prominence of
the traditional bell regional operating companies compared to the competitive
local exchange companies all have contributed to the volatility in the
communications area of the semiconductor industry. This downturn has resulted
in a material adverse effect on our business and operating results. The
severity and duration of these industry-wide trends are currently unclear and
the material adverse effect on our business may continue in the future.
Due to the cyclical nature of the semiconductor industry, any upturn in
business 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.
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, we face competition from a relatively large number of
competitors. Across all of our product areas, we compete with Agere Systems,
AMCC, Analog Devices, Broadcom, Conexant, CP Clare, Cypress, ESS, Fujitsu,
Hitachi, Infineon Technologies, Legerity (formerly the Advanced Micro Devices
19
telecom division), Maxim Integrated Products, National Semiconductor,
Philips, Semtech, Texas Instruments, Vitesse Semiconductor Corp, and others.
We expect to face competition in the future from our current competitors,
other manufacturers and designers of semiconductors, and innovative start-up
semiconductor design companies. Some of our customers, such as Agere Systems,
Intel, Motorola, and Texas Instruments, are also large, established
semiconductor suppliers. Our sales to and support of these customers may
enable them to become a source of competition to us, despite our efforts to
protect our intellectual property rights. As the markets for communications
products grow, we also may face competition from traditional communications
device companies. These companies may enter the mixed-signal semiconductor
market by introducing their own ICs or by entering into strategic
relationships with or acquiring other existing providers of semiconductor
products.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND REVENUES
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. Our customers may use their current excess
inventory situation to negotiate lower prices 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 revenues 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 revenues 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 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.
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 affecting
industry standards than we are. Some industry standards may not be widely
adopted or implemented uniformly, and competing standards may emerge that may be
preferred by our customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, market
acceptance of our products could be adversely affected which would harm our
business.
Products for communications applications are based on industry standards that
are continually evolving. 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
20
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.
Item 2. Properties
The Company's primary facilities, housing test operations, research, design
engineering, administration, as well as elements of sales and marketing are
located in Austin, Texas. These facilities consist of approximately 107,000
square feet with lease terms expiring through January 2007. In addition to these
properties, we lease approximately 5,600 square feet in Nashua, New Hampshire
for engineering activities and various other locations throughout the United
States, England, and Japan, each under 1,500 square feet, for sales, marketing
and design activities.
We believe that these facilities are sufficient to meet our needs through
December 2002.
Item 3. Legal Proceedings
PATENT INFRINGEMENT LITIGATION
On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit in the
United States District Court for the Central District of California against us
for alleged infringement of TDK's United States Patent No. 5,654,984. TDK's
complaint asserts that we have infringed their '984 patent by making, using and
selling in the United States certain DAA semiconductor chipsets, including our
Si3035 and Si3044 products, and that the infringement was and continues to be
willful. Their complaint seeks unspecified treble damages, costs and attorneys'
fees, and an injunction.
On September 27, 2001, we served and filed an answer to their complaint, in
which we denied infringement and asserted that TDK's '984 patent is invalid.
For a description of risks associated with this pending lawsuit, please see
"Risk Factors - 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."
SECURITIES LITIGATION
On December 6, 2001, a class action complaint for violations of U.S.
federal securities laws was filed in the United States District Court, Southern
District of New York against Silicon Laboratories Inc., four officers
individually and the three investment banking firms who served as
representatives of the underwriters in connection with our initial public
offering of common stock which became effective on March 23, 2000. The
complaints allege liability against us and the individual defendants under
Sections 11 and 15 of the Securities Act of 1933 and against the underwriters
under Sections 11 and 12(a) of the Securities Act of 1933 and Sections 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
These claims are brought on the grounds that the registration statement and
prospectus for our initial public offering did not disclose that (1) the
underwriters solicited and received additional, excessive and undisclosed
commissions from certain investors, and (2) the underwriters had agreed to
allocate shares of the offering in exchange for a commitment from the customers
to purchase additional shares in the aftermarket at pre-determined higher
prices. We are aware that at least 1000 purported securities class action
lawsuits against approximately 45 underwriter defendants and at least 300
issuer companies and certain of their current and former officers have been
made in connection with various initial and secondary public offerings
conducted in recent years. No specific amount of damages is claimed. These
cases are subject to the Private Securities Litigation Reform Act of 1995. This
case and all of the other lawsuits filed in the Southern District of New York
making similar allegations have been coordinated before the Honorable Shira A.
Scheindlin. We intend to vigorously contest this case. We are unable at this
time to determine whether the outcome of the litigation will have a material
impact on our results of operations or financial condition in any future
period. Furthermore, there can be no assurances regarding the outcome of the
litigation or any related claims for indemnification or contribution between or
among us, any of the underwriters, or any of our officers and directors.
We are not currently involved in any other material legal proceedings.
Item 4. Submission of Matter to a Vote of Security Holders
21
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock has been quoted on the Nasdaq National Market under the
symbol "SLAB" since our initial public offering on March 23, 2000. The table
below shows the high and low per-share sales prices of our common stock for the
periods indicated, as reported by the Nasdaq National Market. As of December 29,
2001, there were 331 holders of record of our common stock.
HIGH LOW
---------- ----------
Year Ended December 30, 2000
First Quarter................................... $105.75 $62.98
Second Quarter.................................. 102.75 45.50
Third Quarter................................... 78.00 36.00
Fourth Quarter.................................. 42.13 10.13
For Fiscal 2000................................... 105.75 10.13
Year Ended December 29, 2001
First Quarter................................... 26.00 11.25
Second Quarter.................................. 28.99 14.23
Third Quarter................................... 24.20 12.95
Fourth Quarter.................................. 41.24 10.23
For Fiscal 2001................................... 41.24 10.23
We have never declared or paid any cash dividends on our common stock and we
do not intend to pay cash dividends in the foreseeable future. We currently
expect to retain any future earnings to fund the operation and expand of our
business. In addition, our credit agreements with our bank lender prohibit us
from paying cash dividends on our capital stock without the prior consent of the
lender.
Our registration statement (Registration No. 333-94853) under the Securities
Act of 1933, as amended, relating to our initial public offering of our common
stock became effective on March 23, 2000. A total of 3,680,000 shares of common
stock were registered. We sold a total of 3,200,000 shares of our common stock
and selling stockholders sold a total of 480,000 shares to an underwriting
syndicate. The managing underwriters were Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and
was completed on March 24, 2000, at a price to the public of $31.00 per share.
The initial public offering resulted in net proceeds to us of $90.6 million,
after deducting underwriting commissions of $6.9 million and offering expenses
of $1.6 million. We used $15 million of the proceeds as part of the
consideration paid in the acquisition of Krypton Isolation, Inc. (Krypton) on
August 9, 2000. Another $4.3 million was used to pay off equipment loans
provided by Imperial Bank. We used another $1.0 million of the proceeds as part
of the consideration paid in the acquisition of SNR Semiconductor Incorporated
(SNR) on October 2, 2000. As of December 29, 2001, the remaining proceeds were
invested in government securities and other short-term, investment-grade,
interest bearing instruments.
Item 6. Selected Consolidated Financial Data
The selected consolidated balance sheet data as of fiscal year end 2001 and
2000 and the selected consolidated statements of operations data for fiscal
2001, 2000 and 1999 have been derived from audited consolidated financial
statements included in this Form 10-K. The selected consolidated balance sheet
data as of fiscal year end 1999, 1998 and 1997 and the selected consolidated
statements of operations data for fiscal 1998 and 1997 have been derived from
audited consolidated financial statements not included in this Form 10-K. You
should read this selected consolidated financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and the notes to those
statements included in this Form 10-K. (In thousands, except per share data).
22
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Fiscal Year
-----------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- -------- ---------
Revenues..........................................$ 74,065 $103,103 $46,911 $ 5,609 $ --
Cost of revenues.................................. 31,930 35,601 15,770 2,371 --
--------- --------- -------- -------- ---------
Gross profit...................................... 42,135 67,502 31,141 3,238 --
Operating expenses:
Research and development........................ 28,978 19,419 8,297 4,587 1,364
Selling, general and administrative............. 20,056 17,648 7,207 2,095 627
Write off of in-process research & development.. -- 394 -- -- --
Goodwill amortization........................... 4,187 3,307 -- -- --
Impairment of goodwill and other intangible
assets........................................ 34,885 -- -- -- --
Amortization of deferred stock compensation..... 5,276 3,761 976 8 --
--------- --------- -------- -------- ---------
Operating expenses................................ 93,382 44,529 16,480 6,690 1,991
Operating income (loss)........................... (51,247) 22,973 14,661 (3,452) (1,991)
Other income (expenses):
Interest Income................................. 3,622 4,038 402 261 178
Interest Expense................................ (751) (1,162) (699) (206) (22)
--------- --------- -------- -------- ---------
Income (loss) before income taxes................. (48,376) 25,849 14,364 (3,397) (1,835)
Provision (benefit) for income taxes.............. (2,803) 11,832 3,324 -- --
--------- --------- -------- -------- ---------
Net income (loss).................................$(45,573) $14,017 $11,040 $(3,397) $(1,835)
========= ========= ======== ======== =========
Net income (loss) per share:
Basic...........................................$ (.99) $ .37 $ .73 $ (.37) $ (1.04)
Diluted.........................................$ (.99) $ .29 $ .25 $ (.37) $ (1.04)
Weighted-average common shares outstanding:
Basic........................................... 45,914 38,326 15,152 9,129 1,760
Diluted......................................... 45,914 48,788 43,657 9,129 1,760
CONSOLIDATED BALANCE SHEET DATA:
December 29, December 30, January 1, January 2, January 3,
2001 2000 2000 1999 1998
------------ ------------ ---------- ---------- ----------
Cash, cash equivalents and
short-term investments..................... $101,248 $96,438 $14,706 $5,824 $3,778
Working capital............................... 106,556 103,347 14,281 5,209 2,045
Total assets.................................. 145,021 184,840 41,958 14,014 6,023
Long-term liabilities......................... 3,817 5,125 6,223 2,153 747
Redeemable convertible
preferred stock............................. -- -- 12,750 12,750 5,250
Total stockholders' equity
(deficit)................................... 125,407 162,951 8,003 (5,149) (1,776)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT
ON FORM 10-K. EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN,
THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF SILICON LABORATORIES AND ITS MANAGEMENT AND MAY BE
SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR
SIMILAR LANGUAGE. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS REPORT. OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52- OR 53-
WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. FISCAL 1999 HAD 52
WEEKS AND ENDED ON JANUARY 1, 2000. FISCAL 2000 HAD 52 WEEKS AND ENDED ON
DECEMBER 30, 2000. FISCAL 2001 HAD 52 WEEKS AND ENDED ON DECEMBER 29, 2001.
23
OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal ICs for
the rapidly growing communications industry. Our innovative ICs can dramatically
reduce the cost, size and system power requirements of the products that our
customers sell to their end-user customers. We currently offer ICs that can be
incorporated into communications devices, such as modems and wireless phones, as
well as cable and satellite set-top boxes, residential communication gateways
for cable or DSL, cable modems, optical network equipment and remote gaming
devices. Customers during fiscal 2001 included 3Com, Agere Systems, Ambit,
Ciena, Echostar, Panasonic, PC-TEL, Samsung, Smart Link, Sony, Texas Instruments
and Thomson.
Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 279
employees at the end of fiscal 2001, from 256 at the end of fiscal 2000, 148 at
the end of fiscal 1999, and 42 at the end of fiscal 1998. 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.
We offer numerous mixed-signal communication ICs across eight product lines.
We commenced research and development for our first IC product, the direct
access arrangement, or DAA, in October 1996. We introduced our DAA product in
the first quarter of fiscal 1998, and first received acceptance of this product
for inclusion in a customer's device, which we refer to as a "design win", in
March 1998. The first commercial shipment of our DAA product was made in April
1998. Based on the success of our family of DAA products, we became profitable
in the fourth quarter of fiscal 1998. A majority of our sales to date have
been derived from sales of our various DAA products and we expect to
diversify our sales with new products. In fiscal 1999, we 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, we
introduced our RF synthesizer product in fiscal 1999. In fiscal 2000, we
introduced our ProSLIC product and a clock and data recovery product suitable
for SONET physical layer applications. In fiscal 2001, we introduced a GSM
transceiver chipset, a digital subscriber line analog front end and added
several new optical networking products, among other product introductions.
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 eight product lines, please see "Part I, Item 1. Business--Products."
Since our inception, a few customers have accounted for a substantial
portion of our revenues. During fiscal 2001, our three largest customers
accounted for 40% of our sales, including 15% for PC-TEL, 13% for Agere Systems
and 12% for Samsung. In fiscal 2000, PC-TEL accounted for 46% of our revenues.
In fiscal 1999, our three largest customers accounted for 84% of our revenues,
including 62% for PC-TEL, 12% for Smart Link and 10% for 3Com. No other customer
accounted for more than 10% of our revenues in any of these years. To date, a
significant portion of our revenues has been generated through our direct sales
force. In fiscal 1998, we began to establish a network of independent sales
representatives and distributors worldwide to support our sales and marketing
activities. We anticipate that sales through these representatives and
distributors will increase as a percentage of our revenues in future periods.
However, we expect to continue to experience significant customer concentration
in direct sales to key customer accounts until we are able to diversify revenues
with new customers.
On October 22, 2001, our largest customer, PC-TEL, announced that its
revenues for the quarter ended on September 30, 2001 were below PC-TEL's
previous expectations due to lack of demand for personal computers. PC-TEL also
reported significant operating losses. Additionally, PC-TEL has recently
announced changes to its executive team, including in the chief executive
officer, chief financial officer and vice president, development positions. We
believe that this revenue shortfall and corresponding operating losses by PC-TEL
combined with the changes in the executive team creates uncertainty for us as to
the level of business we may derive from PC-TEL in the first half of fiscal year
2002.
24
The percentage of our revenues to customers located outside of the United
States was 66% in fiscal 2001, 21% in fiscal 2000 and 7% in fiscal 1999. All of
our revenues to date have been denominated in U.S. dollars. We believe that a
greater percentage of our revenues will be made to customers outside of the
United States as our products receive greater acceptance in international
markets.
The sales cycle for the test and evaluation of our ICs can range from 1
month to 12 months or more. An additional 3 to 6 months or more may be required
before a customer ships a significant volume of devices that incorporate our
ICs. Due to this lengthy sales cycle, we may experience a significant delay
between incurring expenses for research and development and selling, general and
administrative efforts, and the generation of corresponding sales, if any.
Consequently, if sales in any quarter do not occur when expected, expenses and
inventory levels could be disproportionately high, and our operating results
for that quarter and, potentially, future quarters would be adversely affected.
Our limited operating history and rapid growth makes it difficult for us to
assess the impact of seasonal factors on our business. Because many of our ICs
are designed for use in consumer products such as PCs and wireless telephones,
we expect that the demand for our products will be subject to seasonal demand
resulting in increased sales in the third and fourth quarters of each year when
customers place orders to meet holiday demand. We expect to experience seasonal
fluctuations in the demand for our products as customer demand increases in
greater volume across our product offerings.
The following describes the line items set forth in our consolidated
statements of operations:
REVENUES. Revenues are generated principally by sales of our ICs. We
recognize revenue upon the transfer of title, which generally occurs upon
shipment to our customers. Revenues are deferred on shipments to distributors
until they are resold by such distributors. Our products typically carry a
one-year replacement warranty. Our revenues are subject to variation from period
to period due to the volume of shipments made within a period and the prices we
charge for our products. The vast majority of our revenues were negotiated at
prices that reflect a discount from the list prices for our products. These
discounts are made for a variety of reasons, including to establish a
relationship with a new customer, as an incentive for customers to purchase
products in larger volumes or in response to competition. In addition, as a
product matures, we expect that the average selling price for that product will
decline due to the greater availability of competing products. Therefore, our
ability to increase revenues in the future is dependent on increased demand for
our established products and our ability to ship larger volumes of those
products in response to such demand, as well as customer acceptance of newly
introduced products.
COST OF REVENUES. Cost of revenues includes the cost of purchasing finished
silicon wafers processed by independent foundries; costs associated with
assembly, test and shipping of those products; costs of personnel and equipment
associated with manufacturing support, logistics and quality assurance; an
allocated portion of our occupancy costs; and allocable depreciation of testing
equipment and leasehold improvements. Generally, we depreciate equipment over
four years on a straight line basis. We also depreciate our leasehold
improvements over the shorter of the estimated useful life or the applicable
lease term. Recently introduced products tend to have higher cost of revenues
per unit due to initially low production volumes required by our customers and
higher costs associated with new package variations. Generally, as production
volumes for a product increase, unit production costs tend to decrease as our
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.
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 design of new
products and creation of test methodologies to assure compliance with required
specifications.
25
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of personnel-related expenses, related allocable
portion of our occupancy costs, sales commissions to independent sales
representatives, professional fees, directors and officers liability insurance,
other promotional and marketing expenses and reserves for bad debt. Write offs
of uncollectible accounts have been insignificant to date.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development reflects the write off of in-process research and
development costs which we acquired in connection with our acquisition of
Krypton.
GOODWILL AMORTIZATION. Goodwill amortization includes the amortization of
goodwill purchased in connection with our acquisitions of Krypton and SNR.
Goodwill is amortized over four to five years using the straight line method.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. Impairment of goodwill
and other intangible assets reflects the charge to write-down that portion of
the carrying value of goodwill and other intangible assets that is in excess of
their fair value.
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, representing, for accounting purposes, 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. The deferred stock compensation is amortized
over the vesting period of the applicable options or shares, generally five to
eight years. The amortization of deferred stock compensation is recorded as an
operating expense.
INTEREST INCOME. Interest income reflects interest earned on average cash,
cash equivalents and investment balances.
INTEREST EXPENSE. Interest expense consists of interest on our long-term
debt and capital lease obligations.
PROVISION (BENEFIT) FOR INCOME TAXES. We accrue a provision (benefit) for
federal and state income taxes at the applicable statutory rates, as adjusted
for certain credits, permanent differences and other items.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 2001 TO FISCAL 2000
REVENUES. Revenues in fiscal 2001 were $74.1 million, representing a
decrease of $29.0 million or 28.1% from revenues of $103.1 million in fiscal
2000. The decrease in the dollar amount of revenues was primarily due to a
decline in the sales volume of our DAA family of products, reflecting the rapid
deterioration in demand for personal computers. Revenues from non-DAA products,
such as the ISOmodem, the ProSLIC, the RF Synthesizer and our optical networking
products, accounted for approximately 45.1% of revenues in fiscal 2001 as
compared to 13.2% of revenues in fiscal 2000.
GROSS PROFIT. Cost of revenues decreased $3.6 million, or 10.1%, to $32.0
million in fiscal 2001 from $35.6 million in fiscal 2000, and represented 43.2%
of revenues in fiscal 2001 and 34.5% of revenues in fiscal 2000, respectively.
Gross profit in fiscal 2001 was $42.1 million or 56.8% of revenues, a decrease
of $25.4 million or 37.6% as compared with gross profit of $67.5 million or
65.5% of revenues in fiscal 2000. The decrease in both the dollar amount of
gross profit and gross margin percentage was primarily due to the substantial
decrease in sales volume, decreased utilization of our testing capacity and
higher reserves for excess inventory due to greater fluctuations in demand
for our products. The future direction of gross margins is uncertain due to
many factors such as the severity and duration of the personal computer
industry downturn, our ability to sell existing inventory on hand, our
ability to successfully introduce to market and sell new products, the
selling prices for existing and new products, the extent to which our
competitors introduce new products to market, and future product cost
considerations with our vendors.
RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2001
was $29.0 million or 39.1% of revenues, which reflected an increase of $9.6
26
million or 49.5% as compared with research and development expense of $19.4
million or 18.8% of revenues in fiscal 2000. The increase in the dollar
amount of research and development expense was principally due to significant
increases in new product development initiatives, usage of more expensive
advanced silicon CMOS processes, and increased spending to develop test
methodologies for new products. As a percentage of revenues, research and
development expense increased significantly due to the substantial decrease
in sales volume in fiscal 2001. We expect that research and development
expense will continue to increase in absolute dollars in future periods as we
develop new ICs, and may fluctuate as a percentage of revenues due to changes
in sales volume and new product development initiatives.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense in fiscal 2001 was $20.0 million or 27.0% of revenues, which reflected
an increase of $2.3 million or 13.0% as compared to selling, general and
administrative expense of $17.7 million or 17.1% of revenues in fiscal 2000. The
increase in the dollar amount of selling, general and administrative expense was
principally attributable to increased staffing, but was partially offset by a
decrease in spending on patent litigation fees. We expect our legal expenses to
increase as a result of the infringement lawsuit filed against us by TDK
Semiconductor Corporation in August 2001. We also expect that selling, general
and administrative expense will increase in absolute dollars in future periods
as we expand our sales channels, marketing efforts and administrative
infrastructure. In addition, we expect selling, general and administrative
expense to fluctuate as a percentage of revenues because of (1) the likelihood
that indirect distribution channels, which entail the payment of commissions,
will account for a larger portion of our revenues in future periods and,
therefore, increase our selling, general and administrative expense relative to
a direct sales force performing at satisfactory levels of productivity; (2)
fluctuating usage of advertising to promote our products and, in particular, our
newly introduced products; and (3) potential significant variability in our
future sales volume. We expect our directors and officers liability insurance
premiums to increase or our coverage limits to decline, or both, as a result of
significantly constrained capacity in this segment of the insurance industry.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. There was no write off of
in-process research & development in fiscal 2001. Write off of in-process
research & development in fiscal 2000 was $0.4 million as a result of the
acquisition of Krypton.
GOODWILL AMORTIZATION. Goodwill amortization in fiscal 2001 was $4.2 million
compared to $3.3 million in fiscal 2000. This increase was primarily due to the
timing of the acquisitions of Krypton and SNR in late fiscal 2000. In fiscal
2001 we recorded a charge to reduce the carrying value of goodwill as discussed
below in "IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS."
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. During fiscal 2001, we
performed an assessment of the carrying value of our long-lived assets recorded
in connection with our acquisitions of Krypton and SNR. This assessment was
performed because we became aware of the following factors and circumstances:
- - The revenue streams associated with those assets had decreased
significantly since their acquisition and we did not expect to have any
significant or identifiable future cash flows related to those assets;
- - We determined that further development or alternative uses of the acquired
technologies were remote; and
- - The Krypton office was closed in August of 2001 and the related employees
had since either ceased to work for us or been reassigned to new projects
which were unrelated to the projects on which they previously worked.
As a result of this assessment, the Company concluded that the value of these
assets had become permanently impaired and recorded charges of $33.3 million to
write off related goodwill and $1.6 million to reduce the carrying value of
related intangible assets to their fair value.
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,
27
which resulted in amortization expense of $5.3 million in fiscal 2001 as
compared to $3.8 million in fiscal 2000. The increase in the dollar amount of
amortization of deferred stock compensation was due to additional deferred
stock compensation for options and restricted stock issued.
INTEREST INCOME. Interest income in fiscal 2001 was $3.6 million as compared
to $4.0 million in fiscal 2000. This decrease was primarily due to lower
interest rates.
INTEREST EXPENSE. Interest expense in fiscal 2001 was $0.8 million as
compared to $1.2 million in fiscal 2000. The decrease in interest expense was
primarily due to lower levels of debt in fiscal 2001.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate, excluding the
impacts of non-deductible write off of in-process research & development,
amortization of goodwill, impairment of goodwill and other intangible assets and
deferred stock compensation, was a benefit of 69.6% in fiscal 2001, as compared
to our effective tax provision rate of 35.5% in fiscal 2000. The current
period's tax benefit rate was higher than the prior comparable period's tax
provision rate primarily due to the current period's increased tax benefit from
the estimated research and development tax credit in proportion to the amount of
the current period's pre-tax loss.
COMPARISON OF FISCAL 2000 TO FISCAL 1999
REVENUES. Revenues in fiscal 2000 were $103.1 million, representing an
increase of $56.2 million or 120% from revenues of $46.9 million in fiscal 1999.
The increase was attributable to the strong acceptance of our DAA family of
products, and new product revenues from our ISOmodem, ProSLIC, voice codec, and
RF synthesizer products. These new products represented 13.2% of total revenues
in fiscal 2000 and 21.6% of revenues in the quarter ended December 30, 2000.
Increased revenues reflected an increase in the number of customers that
purchased our IC products and an increase in the volume that those customers
bought.
GROSS PROFIT. Cost of revenues increased $19.8 million, or 126%, to $35.6
million in fiscal 2000 from $15.8 million in fiscal 1999, and represented 34.5%
of revenues in fiscal 2000 and 33.6% of revenues in fiscal 1999, respectively.
Gross profit in fiscal 2000 was $67.5 million or 65.5% of revenues, a increase
of $36.4 million or 117% as compared with gross profit of $31.1 million or 66.4%
of revenues in fiscal 1999. The decline in gross margin percentage from fiscal
1999 to 2000 was due to increased capital equipment costs for our Austin, Texas
based test facility to ensure adequate test capacity, and year-to-year declines
in average selling prices as is customary in the semiconductor industry. These
factors were partially offset by leveraging production tooling and inbound
freight expenses over higher sales volume.
RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2000
was $19.4 million or 18.8% of revenues, which reflected an increase of $11.1
million or 134% as compared with research and development expense of $8.3
million or 17.7% of revenues in fiscal 1999. The increased research and
development expense was due to product development activities in all product
lines to develop new products and new test methodologies.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense in fiscal 2000 was $17.7 million or 17.1% of revenues, which reflected
an increase of $10.4 million or 145% as compared to selling, general and
administrative expense of $7.2 million or 15.4% of revenues in fiscal 2000. The
increase in the dollar amount of selling, general and administrative expense was
attributable to our legal expenses of $2.8 million, or 2.7% of revenues, related
to the infringement lawsuit we filed against Analog Devices and 3Com in January
2000 and settled during the quarter ended December 30, 2000. Increases in
staffing in all areas of selling, general and administration also contributed to
the rise in spending. Promotional activities for new product introductions and
expenses related to operating as a public company, such as increased legal,
investor relations and directors and officers liability insurance, added to
these higher levels of expense as compared to the prior year. Selling, general
and administrative expense, excluding the legal fees associated with the
infringement lawsuit, decreased as a percentage of revenue due to substantially
higher revenue levels in fiscal 2000.
28
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred stock
compensation for the difference between the exercise price of option grants, or
the issuance price of direct issuances of stock, and the deemed fair value of
our common stock at the time of such grants or issuances. We are amortizing this
amount over the vesting periods of the applicable options or restricted stock,
which resulted in amortization expense of $3.8 million for fiscal 2000 and $1.0
million for fiscal 1999. Our amortization expense increased in fiscal 2000 due
to an increase in deferred stock compensation for options and restricted stock
issued in fiscal 2000 and fiscal 1999.
WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process
research & development was $0.4 million in fiscal 2000 as a result of the fiscal
2000 acquisition of Krypton.
GOODWILL AMORTIZATION. Goodwill amortization was $3.3 million in fiscal
2000 as a result of the fiscal 2000 acquisitions of Krypton and SNR.
INTEREST INCOME. Interest income was $4.0 million in fiscal 2000 as
compared to $0.4 million in fiscal 1999. The increase in interest income was
primarily due to higher cash balances invested in short-term investments
reflecting the proceeds of our initial public offering completed in March of
2000.
INTEREST EXPENSE. Interest expense was $1.2 million in fiscal 2000 as
compared to $0.7 million in fiscal 1999. The increase in interest expense was
primarily due to higher average levels of debt and lease financing during the
year used to finance capital expenditures, particularly relating to the
acquisition of IC testing equipment and leasehold improvements.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate excluding the
impact of non-deductible goodwill, deferred compensation and write-off of
in-process research & development was 35.5% and 21.7% for fiscal 2000 and fiscal
1999, respectively. Our tax rate increased in fiscal 2000 because we had
substantially utilized all of our net operating loss carryforwards by the end of
the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of December 29, 2001 consisted of
$101.2 million in cash, cash equivalents and short-term investments in addition
to our bank credit facilities. Our bank credit facilities include a revolving
line of credit available for borrowings and letters of credit of up to the
lesser of $5.0 million or 80% of eligible accounts receivable at the bank's
prime lending rate (4.75% as of December 29, 2001). At December 29, 2001, a
letter of credit for $0.4 million related to a building lease was outstanding
under the revolving line of credit and $4.6 million was available for new
borrowings based on the 80% of eligible accounts receivable limitation.
The bank facility is secured by our accounts receivable, inventories, capital
equipment and all other unsecured assets (excluding intellectual property). The
line of credit and the separate letter of credit facility contain provisions
that prohibit the payment of cash dividends and require the maintenance of
tangible net worth and compliance with financial ratios, which measure our
immediate liquidity and our ongoing ability to pay back our outstanding
obligations. Any default on one of the bank facilities will cause all of the
bank facilities to be in default under these agreements. We believe we were in
compliance with all covenants at December 29, 2001.
We also have entered into agreements with three institutional lenders for
equipment financing to purchase or lease equipment, leasehold improvements and
software. At December 29, 2001, the amount outstanding under these agreements
was $3.4 million. This indebtedness bears effective interest rates (including
end-of-term interest payments of $1.3 million) ranging from 12.5% to 14.6% per
annum, is secured by certain equipment, and is repayable over approximately the
next two years.
During fiscal 2001, cash provided by operating activities was $11.7 million.
This compares to cash provided by operating activities of $22.6 million during
fiscal 2000 and cash provided by operating activities of $12.3 million in fiscal
1999. This reduction in cash flow in fiscal 2001 was primarily due to the
significant reduction in revenues during the period.
29
Due to the nature of our business, we experience working capital needs in the
areas of accounts receivable and inventory. Typically, we bill our customers on
an open account basis with net 30 day payment terms or other specific terms and
conditions that may vary from account to account as individually negotiated with
customers. As of December 29, 2001, we had an accounts receivable balance of
$10.5 million. If sales levels were to increase, it is likely that the level of
receivables would also increase. In the event that customers delay their
payments to us, the levels of accounts receivable would also increase. In the
area of inventory, we believe that in order to maintain an adequate supply of
product for our customers, we must carry a certain level of inventory. This
inventory level may vary based principally upon either orders received from
customers or our forecast of demand for these products. Other considerations in
determining inventory levels may include the product life cycle stage of our
products, customer demands for consignment inventory arrangements, and
competitive situations in the marketplace. To address this difficult, subjective
and complex area of judgment of determining proper inventory levels in a
consistent manner, we apply a set of methods, assumptions and estimates to
arrive at the net inventory amount by completing the following procedures which
collectively comprise a critical accounting policy. First, we identify any
inventory that has been previously reserved in prior periods. This inventory
remains reserved until sold, destroyed or otherwise dispositioned. Second, we
examine the inventory line items that may have some form of obsolescence due to
non-conformance with electrical and mechanical standards as identified by our
quality assurance personnel. Third, the remaining inventory not otherwise
identified to be reserved is compared to an assessment of product history and
forecasted demand, typically six months, or actual firm backlog on hand.
Finally, an analysis of the result of this methodology is compared against
the product life cycle and competitive situations in the marketplace driving
the outlook for the consumption of the inventory and the appropriateness of
the resulting inventory levels. As of December 29, 2001, we had net inventory
balance of $5.2 million resulting from the application of this critical
accounting policy which we deemed adequate to address these inventory
considerations.
Capital expenditures decreased by $10.9 million to $6.2 million in fiscal
2001 from $17.1 million in fiscal 2000. This decrease in the dollar amount of
capital expenditures was primarily due to the completion of our internal test
floor for existing products in fiscal 2000 and spending controls implemented
during fiscal 2001. The expenditures in fiscal 2001 were incurred to purchase
semiconductor test equipment for new products, design software and engineering
tools, other computer equipment, leasehold improvements and software to support
our business capabilities. We anticipate capital expenditures of approximately
$14.0 million for fiscal 2002, primarily to fund additional test floor, high
speed capabilities and expand new product development activities.
Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and extent
of research and development projects and the expansion of our sales and
marketing activities. We believe our existing cash balances and credit
facilities are sufficient to meet our capital requirements through at least the
next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. We may enter into acquisitions or
strategic arrangements in the future which also could require us to seek
additional equity or debt financing. 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 July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142, BUSINESS
COMBINATIONS and GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 replaces
Accounting Principles Board (APB) No. 16 and eliminates pooling-of-interests
accounting prospectively. It also provides guidance on purchase accounting
related to the recognition of intangible assets and accounting for negative
goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS No. 142, goodwill will be
tested annually and whenever events or circumstances occur indicating that
goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all
business combinations completed after June 30, 2001. Upon adoption of SFAS No.
142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under SFAS No. 141 will be
30
reclassified to goodwill. Companies are required to adopt SFAS No. 142 for
fiscal years beginning after December 15, 2001, but early adoption is
permitted. We adopted SFAS No. 142 on December 30, 2001, which was the
beginning of fiscal 2002. In connection with the adoption of SFAS No. 142, we
will be required to perform a transitional goodwill impairment assessment.
The adoption of SFAS No. 141 and SFAS No. 142 will not have a material impact
on our results of operations and financial position since the Company's
existing balances of goodwill and other intangible assets are not significant
due to impairment charges recorded in fiscal 2001 under SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and supplementary data required by this item are
included in part IV, Item 14 of this Form 10-K and are presented beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Certain information required by Part III is omitted from this report because
we will file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy
Statement") no later than 120 days after the end of the fiscal year covered by
this report, and certain information to be included therein is incorporated
herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal 1 -- Election of
Directors", "Executive Compensation" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
Item 11. Executive Compensation
The information under the caption "Executive Compensation," appearing in the
Proxy Statement, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Ownership of Securities," appearing in
the Proxy Statement, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Transactions," appearing in the
Proxy Statement, is incorporated herein by reference.
31
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
SILICON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors................................................ F-1
Consolidated balance sheets at December 29, 2001 and December 30, 2000........ F-2
Consolidated statements of operations for the years ended December 29, 2001,
December 30, 2000, and January 1, 2000........................................ F-3
Consolidated statements of changes in stockholders' equity for the years ended
December 29, 2001, December 30, 2000, and January 1, 2000..................... F-4
Consolidated statements of cash flows for the years ended December 29, 2001,
December 30, 2000, and January 1, 2000........................................ F-5
Notes to consolidated financial statements ................................... F-6
2. Schedules
All schedules have been omitted since the information required by
the schedule is not applicable, or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements and notes thereto.
3. Exhibits
The exhibits listed on the accompanying index to exhibits
immediately following the financial statements are filed as part of,
or hereby incorporated by reference into, this Form 10-K
(b) Reports on Form 8-K.
During fiscal year 2001, we filed the following Current Reports on Form 8-K:
Not applicable
(c) Exhibits
Exhibit
Number
-------
3.1* Form of Fourth Amended and Restated Certificate of Incorporation
of Silicon Laboratories Inc. filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1
(Securities and Exchange Commission File No. 333-94853
(the "IPO Registration Statement")).
3.2* Form of Amended and Restated Bylaws of Silicon Laboratories Inc.
filed as Exhibit 3.2 to the IPO Registration Statement.
4.1* Specimen certificate for shares of common stock filed as
Exhibit 4.1 to the IPO Registration Statement.
10.1* Form of Indemnification Agreement between Silicon Laboratories
Inc. and each of its directors and executive officers (filed
as Exhibit 10.1 to the IPO Registration Statement).
10.2* Silicon Laboratories Inc. 2000 Stock Incentive Plan (filed as
Exhibit 10.2 to the IPO Registration Statement).
10.3* Silicon Laboratories Inc. Employee Stock Purchase Plan (filed as
Exhibit 10.3 to the IPO Registration Statement).
32
Exhibit
Number
-------
10.4* Amended and Restated Investors' Rights Agreement dated
June 2, 1998 by and among Silicon Laboratories Inc. and
certain holders of preferred stock or common stock (filed
as Exhibit 10.4 to the IPO Registration Statement).
10.5* Lease Agreement dated June 26, 1998 by and between Silicon
Laboratories Inc. and S.W. Austin Office Building Ltd. (filed
as Exhibit 10.5 to the IPO Registration Statement).
10.6* Lease Agreement dated October 27, 1999 by and between
Silicon Laboratories Inc. and Stratus 7000 West Joint
Venture (filed as Exhibit 10.6 to the IPO Registration
Statement).
10.7* Master Loan and Security Agreement dated April 22, 1999 by
and between Silicon Laboratories Inc. and FINOVA Capital
Corporation (filed as Exhibit 10.7 to the IPO Registration
Statement).
10.8* Lease Agreement dated June 29, 2000 by and between Silicon
Laboratories Inc. and Stratus 7000 West Joint Venture. (filed
as Exhibit 10.19 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 1, 2000)
10.9* Master Revolving Note dated September 5, 2001 by and
between Silicon Laboratories Inc. and Comerica Bank-Texas
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q
dated October 22, 2001.
10.10* Letter of Credit Agreement dated September 5, 2001 by and
between Silicon Laboratories Inc. and Comerica Bank-Texas
filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
dated October 22, 2001.
10.11* Security Agreement dated September 5, 2001 by and between
Silicon Laboratories Inc. and Comerica Bank-Texas filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q dated
October 22, 2001.
10.12* Advance Formula Agreement dated September 5, 2001 by and
between Silicon Laboratories Inc. and Comerica Bank-Texas
filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q
dated October 22, 2001.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ----------------
* Incorporated herein by reference to the indicated filing.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on
January 22, 2002.
SILICON LABORATORIES INC.
By: /s/ NAVDEEP S. SOOCH
----------------------
Navdeep S. Sooch
CHIEF EXECUTIVE
OFFICER AND CHAIRMAN
OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
Chief Executive Officer and
/s/ NAVDEEP S. SOOCH Chairman of the Board January 22, 2002
- ------------------------------- (principal executive officer)
Navdeep S. Sooch
Vice President and Chief
/s/ JOHN W. MCGOVERN Financial Officer January 22, 2002
- ------------------------------- (principal financial and
John W. McGovern accounting officer)
/s/ JEFFREY W. SCOTT Vice President and Director January 22, 2002
- -------------------------------
Jeffrey W. Scott
/s/ DAVID R. WELLAND Vice President and Director January 22, 2002
- -------------------------------
David R. Welland
/s/ WILLIAM P. WOOD Director January 22, 2002
- -------------------------------
William P. Wood
/s/ H. BERRY CASH Director January 22, 2002
- -------------------------------
H. Berry Cash
/s/ WILLIAM G. BOCK Director January 22, 2002
- -------------------------------
William G. Bock
34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Laboratories Inc.
We have audited the accompanying consolidated balance sheets of Silicon
Laboratories Inc. as of December 29, 2001 and December 30, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended December 29, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Silicon Laboratories Inc. at December 29, 2001 and December 30, 2000, and the
consolidated results of its operations and its cash flows for each of the
three fiscal years in the period ended December 29, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ERNST & YOUNG LLP
Austin, Texas
January 16, 2002
F-1
SILICON LABORATORIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 82,346 $ 51,902
Short-term investments....................... 18,902 44,536
Accounts receivable, net of allowance for
doubtful accounts of $490 at December 29,
2001 and $758 at December 30, 2000......... 10,543 13,616
Inventories.................................. 5,221 7,219
Deferred income taxes........................ 2,268 1,719
Prepaid expenses and other................... 3,073 1,119
------------ ------------
Total current assets........................... 122,353 120,111
Property, equipment and software, net.......... 20,038 22,625
Goodwill and other intangible assets........... 199 39,686
Other assets................................... 2,431 2,418
------------ ------------
Total assets................................... $145,021 $184,840
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 6,999 $ 8,728
Accrued expenses............................. 3,897 2,406
Deferred revenue............................. 2,862 2,640
Current portion of long-term liabilities..... 2,039 2,078
Income taxes payable......................... -- 912
------------ ------------
Total current liabilities...................... 15,797 16,764
Long-term debt and leases...................... 1,363 3,390
Other long-term liabilities.................... 2,454 1,735
------------ ------------
Total liabilities.............................. 19,614 21,889
Stockholders' equity:
Common stock--$.0001 par value; 250,000
shares authorized; 48,640 and 48,117
shares issued and outstanding at
December 29, 2001 and December 30, 2000,
respectively............................... 5 5
Additional paid-in capital................... 170,567 165,404
Stockholder notes receivable................. (794) (1,202)
Deferred stock compensation.................. (18,603) (21,061)
Retained earnings (accumulated deficit)...... (25,768) 19,805
------------ ------------
Total stockholders' equity..................... 125,407 162,951
------------ ------------
Total liabilities and stockholders' equity..... $145,021 $184,840
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-2
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
---------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Revenues................................ $ 74,065 $103,103 $46,911
Cost of revenues........................ 31,930 35,601 15,770
------------ ------------ ----------
Gross profit............................ 42,135 67,502 31,141
Operating expenses:
Research and development.............. 28,978 19,419 8,297
Selling, general and administrative 20,056 17,648 7,207
Write off of in-process research &
development......................... -- 394 --
Goodwill amortization................. 4,187 3,307 --
Impairment of goodwill and other
intangible assets................... 34,885 -- --
Amortization of deferred stock
compensation........................ 5,276 3,761 976
------------ ------------ ----------
Operating expenses...................... 93,382 44,529 16,480
------------ ------------ ----------
Operating income (loss)................. (51,247) 22,973 14,661
Other income (expense):
Interest income....................... 3,622 4,038 402
Interest expense...................... (751) (1,162) (699)
------------ ------------ ----------
Income (loss) before income taxes....... (48,376) 25,849 14,364
Provision (benefit) for income taxes.... (2,803) 11,832 3,324
------------ ------------ ----------
Net income (loss) ...................... $(45,573) $14,017 $11,040
============ ============ ==========
Net income (loss) per share:
Basic................................. $ (0.99) $ 0.37 $ 0.73
Diluted............................... $ (0.99) $ 0.29 $ 0.25
Weighted-average common shares outstanding:
Basic................................ 45,914 38,326 15,152
Diluted.............................. 45,914 48,788 43,657
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock
---------------------------- Total
Additional Stockholder Deferred Retained Stockholders'
Number Of Par Paid-In Notes Stock Earnings Equity
Shares Value Capital Receivable Compensation (Deficit) (Deficit)
--------- ----- ---------- ----------- ------------ --------- -------------
Balance as of January 2, 1999................ 28,642 $3 $ 721 $(215) $ (406) $(5,252) $(5,149)
Exercises of stock options.................. 1,411 -- 2,047 (1,267) -- -- 780
Income tax benefit from exercise of stock
options................................... -- -- 91 -- -- -- 91
Repurchase and cancellation of unvested
shares.................................... (37) -- (10) 10 -- -- --
Compensation expense related to stock
options and direct stock issuances to
non-employees............................. -- -- 266 -- -- -- 266
Deferred stock compensation................. -- -- 15,899 -- (15,899) -- --
Amortization of deferred stock compensation. -- -- -- -- 975 -- 975
Net income.................................. -- -- -- -- -- 11,040 11,040
--------- ----- ---------- ----------- ------------ --------- -------------
Balance as of January 1, 2000................ 30,016 3 19,014 (1,472) (15,330) 5,788 8,003
Conversion of Preferred Stock to Common
Stock..................................... 13,884 2 12,849 -- -- -- 12,851
Net Proceeds from Initial Public Offering... 3,200 -- 90,646 -- -- -- 90,646
Compensation expense related to warrants.... -- -- 153 -- -- -- 153
Exercises of stock options.................. 573 -- 1,705 -- -- -- 1,705
Income tax benefit from exercise of stock
options................................... -- -- 1,685 -- -- -- 1,685
Repurchase and cancellation of unvested
shares.................................... (25) -- (70) -- -- -- (70)
Repayment of stockholder notes receivable... -- -- -- 270 -- -- 270
Employee Stock Purchase Plan................ 29 -- 700 -- -- -- 700
Deferred stock compensation................. -- -- 9,458 -- (9,458) -- --
Amortization of deferred stock compensation. -- -- -- -- 3,761 -- 3,761
Purchase acquisitions....................... 440 -- 29,264 -- (34) -- 29,230
Net income.................................. -- -- -- -- -- 14,017 14,017
--------- ----- ---------- ----------- ------------ --------- -------------
Balance as of December 30, 2000.............. 48,117 5 165,404 (1,202) (21,061) 19,805 162,951
Exercises of stock options and warrants..... 469 -- 587 -- -- -- 587
Income tax benefit from exercise of stock
options................................... -- -- 662 -- -- -- 662
Repurchase and cancellation of unvested
shares.................................... (14) -- (24) 24 -- -- --
Repayment of stockholder notes receivable... -- -- -- 384 -- -- 384
Employee Stock Purchase Plan................ 68 -- 1,120 -- -- -- 1,120
Deferred stock compensation................. -- -- 2,818 -- (2,818) -- --
Amortization of deferred stock compensation. -- -- -- -- 5,276 -- 5,276
Net loss.................................... -- -- -- -- -- (45,573) (45,573)
--------- ----- ---------- ----------- ------------ --------- -------------
Balance as of December 29, 2001.............. 48,640 $5 $170,567 $(794) $(18,603) $(25,768) $125,407
========= ===== ========== =========== ============ ========= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
OPERATING ACTIVITIES
Net income (loss).................................................... $(45,573) $14,017 $11,040
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization of property, equipment and software.. 7,968 6,218 1,972
Amortization of goodwill, other intangible assets and other assets. 4,608 3,532 --
Impairment of goodwill and other intangible assets................. 34,885 -- --
Amortization of deferred stock compensation........................ 5,276 3,761 975
Amortization of note/lease end-of-term interest payments........... 322 323 142
Compensation expense related to stock options, direct
stock issuance, and warrants to non-employees.................... -- 153 266
Income tax benefit from exercise of stock options.................. 662 1,685 91
Changes in operating assets and liabilities:
Investment interest receivable................................... 706 (608) --
Accounts receivable.............................................. 3,072 (3,105) (7,447)
Inventories...................................................... 1,998 (3,847) (2,202)
Prepaid expenses and other....................................... 133 (557) (300)
Income tax receivable............................................ (2,086) -- --
Other assets..................................................... 71 (811) (218)
Accounts payable................................................. (979) 847 4,232
Accrued expenses................................................. 1,491 1,136 854
Deferred revenue................................................. 222 1,634 1,006
Deferred income taxes............................................ (152) (302) (963)
Income taxes payable............................................. (912) (1,466) 2,822
------------ ------------ ----------
Net cash provided by operating activities............................ 11,712 22,610 12,270
INVESTING ACTIVITIES
Purchases of short-term investments.................................. (59,210) (63,012) (9,385)
Maturities of short-term investments................................. 84,138 25,593 5,833
Purchases of property, equipment and software........................ (5,400) (15,843) (9,904)
Purchases of other assets............................................ (821) (1,250) --
Acquisition of businesses, net of cash acquired...................... -- (14,433) --
------------ ------------ ----------
Net cash provided by (used in) investing activities.................. 18,707 (68,945) (13,456)
FINANCING ACTIVITIES
Proceeds from long-term debt......................................... -- 3,532 6,424
Payments on long-term debt........................................... (1,535) (6,350) (1,274)
Proceeds from equipment lease financing.............................. -- -- 976
Payments on capital leases........................................... (531) (493) (390)
Proceeds from repayment of stockholder notes......................... 384 270 --
Proceeds from exercise of warrants................................... -- 100 --
Proceeds from Employee Stock Purchase Plan........................... 1,120 700 --
Repurchase and cancellation of common stock.......................... -- (70) --
Net proceeds from initial public offering............................ -- 90,646 --
Net proceeds from exercises of stock options......................... 587 1,705 780
------------ ------------ ----------
Net cash provided by financing activities............................ 25 90,040 6,516
------------ ------------ ----------
Increase in cash and cash equivalents................................ 30,444 43,705 5,330
Cash and cash equivalents at beginning of period..................... 51,902 8,197 2,867
------------ ------------ ----------
Cash and cash equivalents at end of period........................... $82,346 $51,902 $8,197
============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................ $ 424 $ 827 $ 593
============ ============ ==========
Income taxes paid (received)......................................... $(1,104) $11,855 $1,489
============ ============ ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2001
1. ORGANIZATION
Silicon Laboratories Inc. (the Company), a Delaware corporation, develops
and markets mixed-signal analog/intensive integrated circuits (ICs) for
various communications markets. Within the semiconductor industry, the
Company is known as a "fabless" company meaning that the ICs are manufactured
by third-party semiconductor companies. The Company was incorporated in 1996,
and emerged from the development stage in fiscal 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares financial statements on a 52-53 week year that ends on
the Saturday closest to December 31. Fiscal year 2001 ended on December 29,
2001, fiscal year 2000 ended on December 30, 2000, and fiscal year 1999 ended on
January 1, 2000. All of the periods presented have 52 weeks.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Silicon Laboratories Isolation,
Inc., Silicon Laboratories UK Ltd. and Silicon Laboratories K.K. All significant
intercompany balances and transactions have been eliminated. The functional
currency of the Company's foreign subsidiaries, Silicon Laboratories UK Ltd. and
Silicon Laboratories K.K., is the U.S. dollar; accordingly, all translation
gains and losses resulting from transactions denominated in currencies other
than U.S. dollars are included in net income (loss).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash deposits and investments with a
maturity of ninety days or less when purchased.
SHORT-TERM INVESTMENTS
The Company's short-term investments have original maturities greater than
ninety days and less than one year and have been classified as
available-for-sale securities in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The carrying
value of all available-for-sale securities approximates their fair value.
Short-term investments at December 29, 2001 and December 30, 2000 consist of
the following (in thousands):
Carrying Value
--------------------------------
December 29, December 30,
2001 2000
--------------- ----------------
Municipal Securities.......... $15,867 $17,529
Auction Rate Securities....... 3,035 11,242
U.S. Treasury Bills........... -- 15,765
--------------- ----------------
$18,902 $44,536
=============== ================
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, receivables, accounts payable, and
borrowings. The Company believes all of these financial instruments are recorded
at their current market values.
F-6
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consist of the following (in
thousands):
December 29, December 30,
2001 2000
--------------- ----------------
Work in progress............... $3,582 $4,302
Finished goods................. 1,639 2,917
--------------- ---------------
$5,221 $7,219
=============== ================
PROPERTY, EQUIPMENT, AND SOFTWARE
Property, equipment, and software are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets (generally four to
five years). Amortization of assets recorded under capital leases is computed
using the straight-line method over the shorter of the asset's useful life or
the term of the lease and such amortization is included with depreciation
expense (See also Note 5). Leasehold improvements are depreciated over the
contractual obligation of the lease period or their useful life, whichever is
shorter. Property, equipment and software consist of the following (in
thousands):
December 29, December 30,
2001 2000
--------------- ----------------
Equipment......................... $24,917 $21,618
Computers and purchased software.. 8,633 7,147
Furniture and fixtures............ 940 885
Leasehold improvements............ 2,182 1,979
--------------- ----------------
36,672 31,629
Accumulated depreciation.......... (16,634) (9,004)
--------------- ----------------
$20,038 $22,625
=============== ================
LONG-LIVED ASSETS
The Company evaluates its long-lived assets in accordance with FASB SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that their net book value may not be recoverable. When such factors and
circumstances exist, the Company compares the projected undiscounted future
cash flows associated with the related asset or group of assets over their
estimated useful lives against their respective carrying amounts. Impairment,
if any, is based on the excess of the carrying amount over the fair value of
those assets and would be written off in the period in which the determination
was made.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.
F-7
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts
and U.S. Treasury bills. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company provides an allowance for doubtful accounts receivable
based upon the expected collectibility of such receivables. The following
table summarizes the changes in the allowance for doubtful accounts
receivable (in thousands):
Balance at January 2, 1999............................ $ 56
Additions charged to costs and expenses............... 513
Write-off of uncollectible accounts................... --
----
Balance at January 1, 2000............................ 569
Balance acquired from Krypton purchase................ 56
Additions charged to costs and expenses............... 133
Write-off of uncollectible accounts................... --
----
Balance at December 30, 2000.......................... 758
Additions (reductions) charged to costs and expenses.. (229)
Write-off of uncollectible accounts................... (39)
----
Balance at December 29, 2001.......................... $490
====
All of the Company's products are currently fabricated by two companies in
Taiwan. The inability by either of these partners to timely deliver wafers to
the company could impact the production of the Company's products for a
substantial period of time, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The following is a detail of customers that accounted for greater than 10%
of revenue in the respective fiscal years:
Year Ended
-------------------------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
-------------------- ----------------- -----------------
Customer A........ 15% 46% 62%
Customer B........ 13 -- --
Customer C........ 12 -- --
Customer D........ -- -- 12
Customer E........ -- -- 10
REVENUE RECOGNITION
Revenue from product sales direct to customers is recognized upon title
transfer, which generally occurs upon shipment. Certain of the Company's sales
are made to distributors under agreements allowing certain rights of return and
price protection on products unsold by distributors. Accordingly, the Company
defers revenue and gross profit on such sales until the product is sold by the
distributors.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
$483,000, $718,000, and $296,700 in the fiscal years ended December 29, 2001,
December 30, 2000, and January 1, 2000, respectively.
F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
FASB SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS No. 123, the Company has
elected to continue to account for its employee stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES.
On March 31, 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION NO. 25. The Interpretation clarifies guidance for certain issues that
arose in the application of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The interpretation has been applied prospectively to new awards,
modifications to outstanding awards, and changes in employee status on or after
July 1, 2000, except as follows: (i) requirements related to the definition of
an employee apply to new awards granted after December 15, 1998; (ii)
modifications that directly or indirectly reduce the exercise price of an
award apply to modifications made after December 15, 1998; and (iii)
modifications to add a reload feature to an award apply to modifications made
after January 12, 2000. The adoption of this pronouncement had no impact on
the earnings or the financial condition of the Company, other than the impact
on the valuation of stock options assumed as part of the Krypton acquisition
in fiscal 2000.
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 material
differences between net income (loss) and comprehensive income (loss) during any
of the periods presented.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. This statement requires the use of the liability
method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
SEGMENT INFORMATION
The Company has one operating segment, mixed-signal communication ICs,
consisting of eight product lines. The Company's chief operating decision
maker is considered to be the Chief Executive Officer and Chairman of the
Board. The chief operating decision maker allocates resources and assesses
performance of the business and other activities at the operating segment
level.
Approximately $48,672,000, $22,059,000, and $3,372,000 of the Company's
revenues were from export sales for the fiscal years ended December 29, 2001,
December 30, 2000, and January 1, 2000, respectively. The operations and assets
of Silicon Laboratories UK Ltd. and Silicon Laboratories K.K. were immaterial in
all periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform with current year presentation.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
Year Ended
-----------------------------------------------------
December 29, December 30, January 1,
2001 2000 2000
----------------- --------------- ---------------
Net income (loss).......................... $(45,573) $14,017 $11,040
Basic:
Weighted-average shares of common stock
outstanding........................... 48,431 43,628 29,177
Weighted-average shares of common stock
subject to repurchase................. (2,517) (5,302) (14,025)
----------------- --------------- ---------------
Shares used in computing basic net
income (loss) per share............... 45,914 38,326 15,152
----------------- --------------- ---------------
Effect of dilutive securities:
Weighted-average shares of common stock
subject to repurchase................. -- 5,131 13,370
Convertible preferred stock and warrants -- 3,235 13,965
Stock options........................... -- 2,096 1,170
----------------- --------------- ---------------
Shares used in computing diluted net
income (loss) per share............... 45,914 48,788 43,657
================= =============== ===============
Basic net income (loss) per share.......... $(0.99) $0.37 $0.73
Diluted net income (loss) per share........ $(0.99) $0.29 $0.25
Approximately 4,199,000 common shares have been excluded from the diluted
loss per share calculation for the year ended December 29, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS Nos. 141 and 142, BUSINESS COMBINATIONS
and GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 replaces APB No. 16 and
eliminates pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of intangible assets
and accounting for negative goodwill. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under SFAS
No. 142, goodwill will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. SFAS No. 141 and 142 are
effective for all business combinations completed after June 30, 2001. Upon
adoption of SFAS No. 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under SFAS No. 141 will be reclassified to goodwill. Companies are required to
adopt SFAS No. 142 for fiscal years beginning after December 15, 2001, but early
adoption is permitted. The Company will adopt SFAS No. 142 on December 30, 2001,
the beginning of fiscal 2002. In connection with the adoption of SFAS No. 142,
the Company will be required to perform a transitional goodwill impairment
assessment. The adoption of SFAS No. 141 and 142 will not have a material impact
on the Company's results of operations and financial position since the
Company's existing balances of goodwill and other intangible assets are not
significant due to impairment charges recorded in fiscal 2001 under SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF.
F-10
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The components of intangible assets are as follows (in thousands):
Customer Acquired
Workforce Base Technology Patents Goodwill Total
--------- -------- ---------- ------- -------- --------
Balance at January 1, 2000......... $ -- $ -- $ -- $ -- $ -- $ --
Acquisition of assets.............. 345 1,006 952 120 40,794 43,218
Amortization....................... (36) (84) (89) (16) (3,306) (3,532)
--------- -------- ---------- ------- -------- --------
Balance at December 30, 2000....... 309 922 863 104 37,488 39,686
Amortization....................... (168) (101) (106) (40) (4,187) (4,602)
Write-down of assets............... (6) (821) (757) -- (33,301) (34,885)
--------- -------- ---------- ------- -------- --------
Net balance at December 29, 2001... $ 135 $ -- $ -- $ 64 $ -- $ 199
========= ======== ========== ======= ======== ========
During fiscal 2001, the Company performed an assessment of the carrying
value of the Company's long-lived assets recorded in connection with our
acquisitions of Krypton and SNR. This assessment was performed pursuant to
FASB SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. The Company performed this assessment
because it became aware of the following factors and circumstances:
- - The revenue streams associated with those assets had decreased
significantly since their acquisition and the Company did not expect to
have any significant or identifiable future cash flows related to those
assets;
- - The Company determined that further development or alternative uses of the
acquired technologies were remote; and
- - The Krypton office was closed in August of 2001 and the related workforce
had since either ceased to work for us or been reassigned to new projects
which were unrelated to the projects on which they previously worked.
The Company determined fair value for those assets that had separately
identifiable cash flows to be the projected undiscounted future cash flows to
be derived from those assets over their remaining estimated useful lives. The
Company placed no value on those assets that did not have separately
identifiable cash flows as the factors normally judged to constitute future
value, such as the expectation of future business and/or revenues, the
expectation of ongoing development of new products, the good name and
reputation of the acquired company, etc. appeared to be absent.
As a result of this assessment, the Company concluded that the value of
those assets had become permanently impaired and recorded charges for $33.3
million to write-off related goodwill and $1.6 million to reduce the carrying
value of related intangible assets to their fair value.
4. LONG-TERM LIABILITIES
The Company has a revolving line of credit agreement (the Agreement) with
a commercial bank. Under the provisions of the Agreement, the line of credit
allows for borrowings of up to the lesser of $5 million or 80% of eligible
accounts receivable at the bank's prime lending rate (4.75% as of December 29,
2001). The bank facility is secured by the Company's accounts receivable,
inventory, capital equipment and other unsecured assets (excluding intellectual
property). At December 29, 2001 and December 30, 2000, a letter of credit for
$0.4 million relating to a building lease was outstanding under the facility. As
a result, available borrowings under this facility were $4.6 million at December
29, 2001 and December 30, 2000. There are covenants related to net worth and
liquidity associated with this line of credit, with which the Company is in
compliance as of December 29, 2001.
F-11
4. LONG-TERM LIABILITIES (CONTINUED)
Long-term debt and leases consist of the following:
December 29, December 30,
2001 2000
---------------- ------------------
(in thousands)
Note payable, at 9.08%, payable in monthly
installments of $24,800 through March 1, 2003 with
a $200,600 interest payment due at maturity....... $ 351 $ 604
Note payable, at 9.77%, payable in monthly
installments of $4,100 through June 1, 2003....... 68 109
Note payable, at 9.91%, payable in monthly
installments of $14,000 through September 1, 2003. 270 404
Note payable, at 10.22%, payable in monthly
installments of $5,800 through December 1, 2003... 126 180
Note payable, at 6.71%, payable in monthly
installments of $30,600 through February 28, 2003
with a $243,200 interest payment due at maturity.. 411 739
Note payable, at 6.92%, payable in monthly
installments of $19,300 through July 31, 2003 with
a $152,900 interest payment due at maturity....... 347 548
Note payable, at 7.13%, payable in monthly
installments of $40,000 to $46,000 through
April 30, 2004 with a $399,200 interest payment
due at maturity................................... 1,184 1,605
Note payable, at 7.5%, payable in monthly
installments of $9,900 to $11,400 through
April 30, 2004 with a $98,100 interest payment
due at maturity................................... 292 395
Capital lease obligations........................... 353 884
---------------- ----------------
3,402 5,468
Current portion..................................... (2,039) (2,078)
---------------- ----------------
Long-term portion................................... $1,363 $3,390
================ ================
The notes payable and capital lease obligations are borrowings with three
institutional financing providers for equipment financing. The indebtedness is
secured by a security interest in the underlying equipment.
Periodically, the Company will purchase or make advance deposits toward the
purchase of machinery and equipment; and within one to three months enter into
leasing arrangements to finance these assets. These leasing arrangements result
in the reimbursement of the amounts initially paid by the Company and do not
result in any gains or losses. Such reimbursements have been reflected in the
statement of cash flows as proceeds from equipment lease financings.
The Company has financed the acquisition of certain computers and other
equipment under capital lease transactions which are accounted for as financings
and mature through fiscal year 2003. As of December 29, 2001 and December 30,
2000, equipment under capital lease included in property, equipment and software
was $353,000 and $884,000, respectively.
F-12
4. LONG-TERM LIABILITIES (CONTINUED)
At December 29, 2001, 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
---------- ---------- ----------
2002................................ $ 1,698 $ 364 $ 2,062
2003................................ 1,125 12 1,137
2004................................ 226 -- 226
---------- ---------- ----------
3,049 376 3,425
Less amount representing interest... -- (23) (23)
---------- ---------- ----------
3,049 353 3,402
Less current portion................ (1,698) (341) (2,039)
---------- ---------- ----------
Long-term debt and leases........... $ 1,351 $ 12 $ 1,363
========== ========== ==========
5. STOCKHOLDERS' EQUITY
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.
PREFERRED STOCK
As of December 29, 2001 and December 30, 2000, no shares of preferred stock
were outstanding. As of January 1, 2000, Redeemable Convertible Preferred Stock
was as follows (in thousands, except per share data):
Shares
Par Shares Issued and Liquidation
Series Value Authorized outstanding Preference
- ------------------ ---------- --------------- ---------------- ----------------
Undesignated...... $.0001 998 -- $ --
A................. $.0001 5,391 5,345 5,250
B................. $.0001 1,611 1,576 7,500
--------------- ---------------- ----------------
8,000 6,921 $12,750
=============== ================ ================
On March 23, 2000, simultaneously with the closing of the Company's initial
public offering, all outstanding shares of the Company's Redeemable Convertible
Preferred Stock were converted on a one-for-two ratio into an aggregate of
13,884,190 shares of the Company's common stock. Also upon completion of the
public offering, the number of authorized shares of preferred stock increased
from 8,000,000 to 10,000,000 shares. The Company's board of directors will have
the authority 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 of the series.
COMMON STOCK
The Company had 48,640,055 shares of common stock outstanding as of December
29, 2001. Of these shares, 1,745,134 shares were unvested and are subject to
rights of repurchase that lapse according to a time based vesting schedule.
F-13
5. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 29, 2001, the Company had reserved shares of common stock for
future issuance as follows:
Employee Stock Option Plans......... 7,037,014
Employee Stock Purchase Plan........ 543,265
------------
Total shares reserved............... 7,580,279
On January 2, 2002 the amount of shares reserved for the 2000 Stock
Incentive Plan and the Employee Stock Purchase Plan automatically increased by
2,432,003 and 243,200, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Company's board of directors on January 5, 2000. Eligible employees may purchase
a limited number of shares of the Company's common stock at 85% of the market
value at semi-annual intervals. As of December 29, 2001, a total of 640,587
shares of the Company's common stock were authorized for issuance under the
Purchase Plan. There were 67,981 and 29,341 shares issued under the Purchase
Plan in fiscal 2001 and fiscal 2000, respectively.
STOCK OPTION/STOCK ISSUANCE PLANS
In fiscal 2000, the Company's board of directors and stockholders approved
the 2000 Stock Incentive Plan (the 2000 Plan). The 2000 Plan contains programs
for (i) the discretionary granting of stock options to employees, non-employee
board members and consultants for the purchase of shares of the Company's common
stock, (ii) the discretionary issuance of common stock directly to employees
(direct issuance shares), (iii) the granting of special below-market stock
options to executive officers and other highly compensated employees of the
Company for which the exercise price can be paid using earnings deductions and
(iv) the automatic issuance of stock options to non-employee board members. Upon
the Company's initial public offering, the 2000 Plan incorporated all stock
options and direct issuance shares outstanding under the 1997 Stock Option/Stock
Issuance Plan (the 1997 Plan). Under the 1997 Plan, employees, members of the
Company's board of directors and independent advisors were granted stock options
or were issued direct issuance shares as a direct purchase or as a bonus for
services rendered to the Company. In connection with the acquisition of Krypton
in fiscal 2000, the Company assumed outstanding options for 90,449 shares of
the Company's common stock.
The 2000 Plan and the 1997 Plan contain similar terms. The direct issuance
shares and the stock options contain vesting provisions ranging from four to
eight years. If permitted by the Company, stock options can be exercised
immediately and, similar to the direct issuance shares, are subject to
repurchase rights which generally lapse in accordance with the vesting schedule.
The repurchase rights provide that upon certain defined events, the Company can
repurchase unvested shares at the price paid per share. The term of each stock
option is no more than ten years from the date of grant. At December 29, 2001,
13,024,157 shares were authorized for issuance under the 2000 Plan. No further
options or direct issuances may be granted under the 1997 Plan.
The Company recorded deferred stock compensation of $3,294,000, $9,492,000
and $15,899,000 in connection with stock options granted or assumed for
160,000 shares, 297,697 shares and 2,464,200 shares of common stock during
fiscal 2001, 2000 and 1999, respectively. These amounts represent the
difference between the exercise price of the stock option and the market
price or the subsequently deemed fair value of the Company's common stock.
The deferred stock compensation is amortized over the vesting periods of the
applicable options, resulting in amortization expense of $5,276,000,
$3,761,000 and $976,000 for fiscal years 2001, 2000 and 1999, respectively.
During fiscal 1999 and 1998, the Company made full recourse loans to
employees of $1,267,500 and $147,500, respectively, in connection with the
employees' purchase of shares through exercises of options. These full recourse
notes are secured by the shares of stock, are interest bearing at rates ranging
from 2.5% to 5.9%, have terms of five years, and must be repaid upon the sale of
the underlying shares of stock. No loans were issued during fiscal 2001 or 2000.
F-14
5. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option and direct issuance activity and
related information follows:
Outstanding
Shares Options Weighted-Average
Available And Direct Exercise Exercise
For Grant Issuances Prices Price
-------------- -------------- ----------------- ----------------
Balance at January 2, 1999.. 1,251,140 1,312,500 $0.05 - $1.25 $0.31
Additional shares reserved.. 2,200,000 -- -- --
Granted..................... (2,484,200) 2,484,200 1.25 - 16.00 3.08
Exercised................... -- (1,411,474) 0.05 - 5.00 1.45
Cancelled................... 5,000 (5,000) 0.25 - 1.75 0.77
Repurchase and cancellation
of unvested shares........ 37,332 -- 0.25 0.25
-------------- -------------- ----------------- ---------------
Balance at January 1, 2000.. 1,009,272 2,380,226 0.05 - 16.00 2.52
Additional shares reserved.. 2,090,449 -- -- --
Granted and assumed......... (2,413,331) 2,413,331 0.00 - 74.75 30.92
Exercised................... -- (573,308) 0.00 - 31.00 2.98
Cancelled................... 138,834 (138,834) 1.75 - 57.50 31.38
Repurchase and cancellation
of unvested shares........ 25,000 -- 2.50 - 10.00 2.80
-------------- -------------- ----------------- ---------------
Balance at December 30, 2000 850,224 4,081,415 0.00 - 74.75 18.26
Additional shares reserved.. 2,462,349 -- -- --
Granted..................... (3,110,300) 3,110,300 0.00 - 34.97 16.46
Exercised................... -- (370,641) 0.00 - 15.44 1.58
Cancelled................... 175,599 (175,599) 0.28 - 66.00 21.51
Repurchase and cancellation
of unvested shares........ 13,667 -- 0.05 - 2.00 1.76
-------------- -------------- ----------------- ---------------
Balance at December 29, 2001 391,539 6,645,475 $0.00 - $74.75 $18.26
============== ============== ================= ===============
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 29, 2001.
Outstanding Exercisable
-------------------------------------------------- -------------------------
Weighted-
Average Weighted-
Remaining Weighted- Average
Range of Number of Contractual Average Number of Exercise
Exercise Prices Options Life in Years Exercise Price Options Price
- --------------------- ----------- --------------- ---------------- ----------- ----------
$ 0.00 to $ 1.25 931,157 6.61 $ 0.55 875,157 $ 0.58
1.75 to 5.00 708,991 7.69 2.70 708,991 2.70
10.00 to 15.00 591,732 8.57 12.74 297,491 11.02
15.10 to 22.63 2,862,684 9.52 16.86 254,596 16.06
22.86 to 34.97 865,423 8.47 30.74 176,815 30.87
35.40 to 52.69 454,655 8.64 49.79 64,872 50.87
55.38 to 74.75 230,833 8.54 60.19 68,869 60.61
- --------------------- ----------- --------------- ---------------- ----------- ----------
$ 0.00 to $74.75 6,645,475 8.60 $18.26 2,446,791 $ 9.89
Pro forma information regarding net income (loss) is required by SFAS
No. 123, and has been determined as if the Company had accounted for its
stock-based awards to employees under the fair value method of that Statement.
F-15
5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of these stock-based awards was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Year Ended
----------------------------------------
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
Employee Stock Option Plans:
Expected stock price volatility 85% 88% --
Risk-free interest rate......... 4.6% 6.2% 6.0%
Expected life (in years)........ 5.1 5.6 1.0
Dividend yield.................. -- -- --
Employee Stock Purchase Plan:
Expected stock price volatility 85% 88% --
Risk-free interest rate......... 3.5% 5.0% --
Expected life (in months)....... 14 14 --
Dividend yield.................. -- -- --
The weighted-average fair values of options granted during fiscal 2001, 2000
and 1999 were $12.09, $26.80, and $9.55, respectively. The weighted-average fair
values for purchase rights granted under the Purchase Plan for fiscal 2001 and
2000 were $10.05 and $11.94, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
Company's stock-based awards to employees is amortized to expense over the
vesting period of the underlying instruments. The Company's pro forma
information is as follows (in thousands, except per share data):
Year Ended
----------------------------------------
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
Pro forma net income (loss)................... $(58,779) $9,120 $11,014
Pro forma basic net income (loss) per share... (1.28) .24 .73
Pro forma diluted net income (loss) per share. (1.28) .19 .25
Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because changes in the subjective
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's stock-based awards to employees.
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating
lease agreements that expire at various dates through 2007. Some of these
arrangements contain renewal options, and require the Company to pay taxes,
insurance and maintenance costs.
Rent expense under operating leases was $1,724,000, $1,065,000, and $374,000
for fiscal 2001, 2000 and 1999, respectively.
The minimum annual future rentals under the terms of these leases at
December 29, 2001 are as follows (in thousands):
FISCAL YEAR
2002.................................... $1,783
2003.................................... 1,795
2004.................................... 1,834
2005.................................... 1,863
2006.................................... 1,083
Thereafter.............................. 112
----------
Total minimum lease payments............ 8,470
Minimum Sublease Rental Income.......... (234)
----------
Total net minimum lease payments........ $8,236
==========
F-16
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 or results of operations.
On August 7, 2001, TDK Semiconductor Corporation commenced a lawsuit against
the Company for alleged willful infringement by our DAA products of a TDK-held
patent. TDK's complaint seeks unspecified treble damages, costs and attorneys'
fees, and an injunction. On September 27, 2001, the Company served and filed an
answer to TDK's complaint, in which the Company denied infringement and asserted
that TDK's patent is invalid. This lawsuit may involve significant expense and
may also divert management's time and attention from other aspects of the
Company's business. Due to the inherent uncertainties of litigation, we are
unable to predict the outcome of this matter.
On December 6, 2001, a class action complaint for violations of U.S. federal
securities laws was filed in the United States District Court, Southern District
of New York against the Company, four officers individually and the three
investment banking firms who served as representatives of the underwriters in
connection with the Company's initial public offering of common stock completed
on March 23, 2000. These claims are brought on the grounds that the registration
statement and prospectus for the Company's initial public offering did not
disclose that (1) the underwriters solicited and received additional, excessive
and undisclosed commissions from certain investors, and (2) the underwriters had
agreed to allocate shares in the aftermarket at pre-determined higher prices. No
specific amount of damages is claimed. The Company intends to vigorously contest
this case, and is unable at this time to determine whether the outcome of the
litigation will have a material impact on our results of operations or financial
condition in any future period.
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 December 29, 2001 and December 30, 2000 are
as follows:
December 29, December 30,
2001 2000
----------------- -------------------
Deferred tax liabilities:
Depreciable assets............ $1,242 $1,387
Prepaid expenses.............. 182 324
----------------- ------------------
1,424 1,711
----------------- ------------------
Deferred tax assets:
Research and development tax
credit carryforward......... 464 --
Reserves and allowances....... 1,083 906
Deferred revenue.............. 1,088 1,003
Accrued liabilities & other... 389 251
----------------- ------------------
3,024 2,160
----------------- ------------------
Net deferred taxes $1,600 $ 449
================= ==================
Upon the acquisition of Krypton in August 2000 and of SNR in October 2000,
the Company recorded a net deferred tax liability of approximately $360,000 and
$49,000, respectively, due to differences between the book and tax basis of
acquired assets and assumed liabilities.
F-17
7. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows:
December 29, December 30, January 1,
2001 2000 2000
---------------- ---------------- -------------
Current:
Federal.......... $(1,436) $10,695 $4,009
State............ (215) 917 393
---------------- ---------------- -------------
Total Current.... (1,651) 11,612 4,402
Deferred:
Federal.......... (1,031) 202 (993)
State............ (121) 18 (85)
---------------- ---------------- -------------
Total Deferred... (1,152) 220 (1,078)
---------------- ---------------- -------------
$(2,803) $11,832 $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:
December 29, December 30, January 1,
2001 2000 2000
--------------- ---------------- -------------
Pre-tax book income (loss) at statutory rate (35.0)% 35.0% 35.0%
State taxes, net of federal benefit......... (0.2) 4.0 3.0
Non-deductible intangible amortization and
impairment charges........................ 27.1 -- --
Non-deductible deferred compensation expense 3.8 5.1 2.6
Other permanent items....................... (0.5) 2.5 0.1
Tax credits................................. (1.0) (0.8) (2.4)
Change in valuation allowance............... -- -- (15.2)
--------------- ---------------- -------------
(5.8)% 45.8% 23.1%
The exercise of certain stock options which have been granted under the 2000
Plan results 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 No. 25, such compensation is
not recognized as an expense for financial accounting purposes; however, the
related tax benefits are recorded as an increase to additional paid-in capital.
8. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution or 401(k) Plan for the benefit
of substantially all employees. To be eligible for the 401(k) Plan, employees
must have reached the age of 21. Participants may elect to contribute up to 15%
of their compensation to the 401(k) Plan. The Company may make discretionary
matching contributions of up to 10% of a participant's compensation as well as
discretionary profit-sharing contributions to the 401(k) Plan. The Company's
contributions to the 401(k) Plan vest over four years at a rate of 25% per year.
The Company contributed $269,000 and $219,000 to the 401(k) Plan during fiscal
2001 and 2000, respectively. No matching contribution was made during fiscal
1999.
F-18
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
All of the quarterly periods reported here had thirteen weeks. Quarterly
financial information for fiscal 2001 and 2000 (in thousands of dollars except
per share amounts):
Fiscal 2001 Fiscal 2000
---------------------------------------- ---------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- ------- --------- --------- -------- ------- ---------
Revenues................................. $23,583 $ 19,925 $16,120 $14,437 $29,703* $29,427 $24,286 $19,687
Cost of revenues......................... 9,583 8,544 7,375 6,428 10,324 10,130 8,390 6,757
--------- --------- ------- --------- --------- -------- ------- ---------
Gross profit............................. 14,000 11,381 8,745 8,009 19,379 19,297 15,896 12,930
Operating expenses:
Research and development............... 7,728 7,672 7,070 6,508 6,132 5,263 4,444 3,580
Selling, general & administrative...... 5,858 5,362 4,746 4,090 4,947 5,128 4,355 3,218
Write-off of in-process research
and development...................... -- -- -- -- -- 394 -- --
Goodwill amortization.................. -- -- 2,084 2,103 2,067 1,240 -- --
Impairment of goodwill and other
intangible assets.................... -- 34,885 -- -- -- -- -- --
Amortization of deferred stock
compensation......................... 1,295 1,319 1,331 1,331 1,311 884 787 779
--------- --------- ------- --------- --------- -------- ------- ---------
Operating expenses....................... 14,881 49,238 15,231 14,032 14,457 12,909 9,586 7,577
--------- --------- ------- --------- --------- -------- ------- ---------
Operating income (loss).................. (881) (37,857) (6,486) (6,023) 4,922 6,388 6,310 5,353
Other income (expense):
Interest income........................ 682 857 1,044 1,039 1,284 1,248 1,258 248
Interest expense....................... (173) (179) (201) (198) (204) (339) (342) (277)
--------- --------- ------- --------- --------- -------- ------- ---------
Income (loss) before income taxes........ (372) (37,179) (5,643) (5,182) 6,002 7,297 7,226 5,324
Provision (benefit) for income taxes..... (801) (651) (757) (594) 3,136 3,332 3,045 2,319
--------- --------- ------- --------- --------- -------- ------- ---------
Net income (loss)........................ $ 429 $(36,528) $(4,886) $(4,588) $ 2,866 $3,965 $4,181 $3,005
========= ========= ======= ========= ========= ======== ======= =========
Net income (loss) per share:
Basic.................................. $ .01 $ (.79) $ (.11) $ (.10) $ .06 $ .09 $ .10 $ .14
Diluted................................ $ .01 $ (.79) $ (.11) $ (.10) $ .06 $ .08 $ .08 $ .07
Weighted-average common shares
outstanding:
Basic.................................. 46,659 46,210 45,840 45,367 44,820 43,917 43,279 21,221
Diluted................................ 50,890 46,210 45,840 45,367 49,435 49,987 49,812 45,952
* Includes $2,500 one-time non-refundable payment from Analog Devices, Inc.
pursuant to the patent infringement settlement
AS OF A PERCENTAGE OF REVENUES
Fiscal 2001 Fiscal 2000
---------------------------------------- ---------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- ------- --------- --------- -------- ------- ---------
Revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 40.6 42.9 45.8 44.5 34.8 34.4 34.5 34.3
--------- --------- ------- --------- --------- -------- ------- ---------
Gross profit............................. 59.4 57.1 54.2 55.5 65.2 65.6 65.5 65.7
Operating expenses:
Research and development............... 32.8 38.5 43.9 45.1 20.6 17.9 18.3 18.2
Selling, general & administrative...... 24.8 26.9 29.4 28.3 16.7 17.4 17.9 16.3
Write-off of in-process research and
development.......................... -- -- -- -- -- 1.3 -- --
Goodwill amortization.................. -- -- 12.9 14.6 7.0 4.2 -- --
Impairment of goodwill and other
intangible assets.................... -- 175.1 -- -- -- -- -- --
Amortization of deferred stock
compensation......................... 5.5 6.6 8.3 9.2 4.4 3.0 3.2 4.0
--------- --------- ------- --------- --------- -------- ------- ---------
Operating expenses....................... 63.1 247.1 94.5 97.2 48.7 43.9 39.5 38.5
--------- --------- ------- --------- --------- -------- ------- ---------
Operating income (loss).................. (3.7) (190.0) (40.3) (41.7) 16.5 21.7 26.0 27.2
Other income (expense):
Interest income........................ 2.9 4.3 6.5 7.2 4.3 4.2 5.2 1.3
Interest expense....................... (0.7) (0.9) (1.2) (1.4) (0.6) (1.2) (1.4) (1.4)
--------- --------- ------- --------- --------- -------- ------- ---------
Income (loss) before income taxes........ (1.5) (186.6) (35.0) (35.9) 20.2 24.8 29.8 27.0
Provision (benefit) for income taxes..... (3.4) (3.3) (4.7) (4.1) 10.5 11.3 12.5 11.8
--------- --------- ------- --------- --------- -------- ------- ---------
Net income (loss)........................ 1.9% (183.3)% (30.3)% (31.8)% 9.7% 13.5% 17.2% 15.3%
========= ========= ======= ========= ========= ======== ======= =========
F-19
Exhibit 21
SUBSIDIARIES OF THE COMPANY
The following is a list of the Company's subsidiaries:
Percentage Of Voting
Securities Owned By
Organized Registrant As Of
Under Law Of December 29, 2001
-------------------------- -----------------------------
Silicon Laboratories UK Ltd. United Kingdom 100%
Silicon Laboratories Isolation, Inc. State of California 100%
Silicon Laboratories K.K. Japan 100%
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-39528, 333-45682, and 333-60794) of our report dated January
16, 2002, with respect to the consolidated financial statements of Silicon
Laboratories Inc. included in the Annual Report (Form 10-K) for the year ended
December 29, 2001.
/s/ ERNST & YOUNG LLP
Austin, Texas
January 16, 2002
