UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,Washington, D.C. 20549
FORM 10-K
(Mark(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 28, 2002 Or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission file number: ______________________________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2004
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
SILICON LABORATORIES INC.
- -------------------------------------------------------------------------------- (Exact(Exact name of registrant as specified in its charter)
Delaware 74-2793174 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4635 Boston Lane, Austin, Texas 78735 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (512) 416-8500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 Par Value
Delaware
74-2793174
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4635 Boston Lane, Austin, Texas
78735
(Address of principal executive offices)
(Zip Code)
(512) 416-8500
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
/X/ý Yes/ /o NoIndicate 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'sregistrant’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./ /oIndicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
/X/ý Yes/ /o NoThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the
registrant'sregistrant’s most recently completed second fiscal quarter (June28, 2002)27, 2003) was$768,053,073$812,751,192 (assuming, for this purpose, that only directors and officers are deemed affiliates).There were
48,977,24251,243,786 shares of theregistrant'sregistrant’s common stock issued and outstanding as of January14, 2003.19, 2004.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the
registrant's 2003registrant’s 2004 Annual Meeting of Stockholders are incorporated by reference into Part II and Part III of this Form 10-K.SILICON LABORATORIES INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
CAUTIONARY STATEMENT
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS REPORT ON FORM 10-K (AS WELL AS DOCUMENTS INCORPORATED HEREIN BY REFERENCE) MAY BE CONSIDERED
"FORWARD-LOOKING"“FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF SILICON LABORATORIES AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS"EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES"“EXPECTS,” “ANTICIPATES,” “INTENDS,” “BELIEVES” OR SIMILAR LANGUAGE. YOU ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER"FACTORS“FACTORS AFFECTING OUR FUTURE OPERATINGRESULTS"RESULTS” AND ELSEWHERE IN THIS REPORT. SILICON LABORATORIES DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.Item 1. Business and Factors Affecting Our Future Operating Results
GENERAL
Silicon Laboratories Inc. designs and develops proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for
the communications industry.a broad range of applications. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic2products can process. Therefore, mixed-signal ICs are critical components ofin numerouscommunications products,applications,2
including
wireless phones,mobile handsets, cable and satellite set-top boxes, personal computer modems, Voice over Internet Protocol on data networks, voice over digital subscriber line (DSL) modems, personal video recorders, telephone equipment and optical networking equipment.To developWith ourbusiness rapidly,acquisition of Cygnal Integrated Products, weinitially focused our efforts on developing ICs for the personal computer modem market. We applied our mixed-signalnow sell 8-bit microcontrollers (MCUs), which are incorporated in a broad range of applications in a variety of industries, including automotive, communications, consumer, industrial, medical andcommunications expertise to the development of ICs for other high growth communications devices such as wireless telephones, cable and satellite set-top boxes, voice over DSL modems, personal video recorders and optical network applications.power management. Our world-class, mixed-signal design engineers use standard complementary metal oxide semiconductor, or CMOS, technology to create innovative ICs that can improve the performance and dramatically reduce the cost, size and system power requirements of devices that our customers sell to their end-user customers. Our expertise in analog-intensive, mixed-signal IC design in CMOS allows us to develop new and innovative products rapidly, which enables our customers to improve their time-to-market with end products that respond to their end customerdemand in the communications industry.demand.INDUSTRY BACKGROUND
In a
November 2002January 2004 report,the Semiconductor Industry Associationmarket research firm In-Stat projected that the analog IC market will grow by1929 percentin 2003to$28$36.4 billion intotal sales.2004. Recent growth in the market forcommunicationsICs has been due to a number of factors, including the growth of Internet usage, development of new communications technologies, availability of improved communications services at lower costs, broad deployment of optical networks and remote access requirements for corporate networks. This demand has fueled tremendous growth in the number ofwireless and wireline communicationselectronic devices. For example, inwirelessmobile handset markets, the demand for wireless phones and other wireless devices, such as personal digital assistants, has grown steadily as digital wireless services have become increasingly popular and affordable. Inwirelineother markets, demand has increased forcommunications capabilities ina wide range of electronic products, including personal computers (PCs), cable and satellite set-top boxes, fax machines, credit card verification machines, automated teller machines, satellite radios and personal video recorders. Consumers increasingly demand higher capacity connections at their residences using cable modems or high speed DSL. Voice over Internet Protocol technology, which enables voice traffic over data networks is emerging as a viable alternative to traditional telephone networks. The demand for greater and faster Internet access by households and businesses has increased the need to significantly upgrade the communications backbone to handle this traffic, increasing the need for smaller, faster and better performing optical networking systems that route this traffic.DigitalIn the 8-bit MCU and high performance analog market there is an increasing need for fully functional, analog intensive applications which are used in automotive, communications, consumer, industrial, medical and power management products.Numerous devices
typicallyrequire analog-intensive, mixed-signal circuits that provide analog-to-digitalfunctionality to access the communications networks to which they are connected.functionality. Traditional designs forcommunicationselectronic devices have used mixed-signal circuits built with numerous discrete analog and digital components. While these traditional designs provide the required functionality, they can be inefficient and inadequate for use in markets where size, cost, power consumption and performance are increasingly important product differentiators. In order to improve their competitive position,communicationselectronic 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 internationalcommunicationselectronic standards without altering the fundamental design of a product.Manufacturers of
communicationselectronic 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
communicationselectronic 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,3
smaller size and lower power requirements at a reduced cost and shorter time-to-market.
3PRODUCTS
We provide analog-intensive, mixed-signal ICs for use in
various communicationa variety of electronic products in a broad range of applicationsacross eight product areas.including mobile handsets, PC modems, satellite set top boxes, automotive controls and sensors, personal video recorders, central office telephone equipment and optical networking equipment. Our products integratethecomplex mixed-signal functionsofthat are frequently performed by numerous discrete componentsrequired by most existing mixed-signal solutions for communications devicesin competitive products into single chips or chipsets. By doing so, we are able to create products that, compared to many competitive products:-• Require less board space;
-• Reduce the use of external components;
-• Can offer superior performance;
-• Provide increased reliability;
-• Reduce system power requirements; and
-• Reduce costs.
We now group our products into two categories: mobile handset products or broad-based mixed-signal products. The mobile handset category includes the Aero™ Transceivers and, to the extent incorporated into handsets, the RF Synthesizers. The broad-based mixed-signal category includes our silicon DAA, ISOmodem®, ProSLIC®, DSL analog front end, clock chips, SiPHYTM, optical transceivers and clock & data recovery ICs (CDRs), general purpose RF Synthesizers for non-handset applications, as well as the Cygnal MCU products. The following table summarizes the diverse product areas and applications for the various ICs that we
currently sell orhave introduced to customers:
PRODUCT AREAS and DESCRIPTION
APPLICATIONS
WIRELESSMOBILE HANDSET PRODUCTS
RF Synthesizer for GSM
A radio frequency, or RF, synthesizer generates high
- GSM/GPRS wireless phonesfrequency signals that are used in wireless- GSM/GPRS data communicationscommunications systems to select a particular radiodeviceschannel. We provide RF Synthesizers for the Global System- Wideband CDMA 3G handsetsfor Mobile Communications (GSM)/General Packet Radio- Wireless local area networksServices (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 - Wireless headsets Multiple Access (W-CDMA) applications.markets. GPRS brings- Wireless LAN (802.11b) modemswireless Internet access to GSM users through data transfer and signaling over GSM radio networks. Our synthesizers are well-suited to meet the increasing requirement for highly-integrated electronics that reduce component count and consume less power.Aero(TM)Customers for our synthesizer products for mobile handsets are typically migrating to our Aero TransceiverThis chipsetfamily of products to utilize the higher levels of integration.• GSM/GPRS wireless phones
• GSM/GPRS data communications devicesAeroTransceiver
The Aero Transceiver family provides highly integrated transmit
- GSM/GPRS wireless phonesand receive radioelectronicsfunctionality thatareis found- GSM/GPRS data communicationsbetween the antennae electronics and the digital basebanddevicessection of a GSM/GPRS mobile handset or wireless data- Personal digital assistantscommunication device. The latest generation of the Aero Transceiver family, Aero I/I+ addresses dual,- PCMCIA data cardstriple ortriplequad band requirements, requires a smaller footprint than competing solutions in this form-factor sensitive market and supports wireless data transmission. The AeroTransceiver chipset isTransceivers are designed using 100% standard CMOS process technology which enables an aggressive roadmap for cost reduction and 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.• GSM/GPRS wireless phones
• GSM/GPRS data communications devices
• Personal digital assistants4
WIRELINEBROAD-BASED MIXED-SIGNAL PRODUCTS
Silicon Direct Access Arrangement (DAA)
Our DAA provides the functionality of both a direct access
- PCI desktop modemsarrangement and a codec. A direct access arrangement- Audio Modem Riser Cardsprovides electrical isolation between a wireline device,- Mobile Daughter Cardssuch as a modem, and the telephone line to guard against- Notebook modemspower surges in the telephone line, while the codec- Communication and Networkprovides analog-to-digital and digital-to-analogRiser (CNR) Cardsconversion. Traditional direct access arrangement- Modem on Motherboardimplementations contain numerous discrete components to- Mini PCI cardsprovide functionality comparable to that which we provide- Fax machinesin a single chipset. This family of products includes- Handheld organizersofferings to support different computer interface- Set-top boxesstandards. Some versions of this chipset are programmable- Video conferencing systemsfor differing international telephone standards, which- Speaker phonesenables manufacturers to distribute their products globally- PBXswithout costly country-specific design modifications.A -• PCI desktop modems
• Audio Modem Riser Cards
• Mobile Daughter Cards
• Notebook modems
• Communication and Network Riser (CNR) Cards
• Modem on motherboard
• Mini PCI cards
• Fax machines
• Handheld organizers
• Set-top boxes
• Video conferencing systems
• PBXs
• Voice recognition systemscomplementary voice codec product can be combined with our -
• Web telephony productsDAA to support speakerphone applications. ISOmodem(TM)
• Multi-function printer cardsISOmodemEmbedded Modems
The ISOmodem combines an analog modem with a silicon DAA,
- Set-top boxesresulting in a complete modem implemented in a very small- Digital cable boxesform factor. The ISOmodem products are designed for- Credit card verificationembedded modem applications, which are typically found- Industrial power metersoutside of the personal computer area. The ISOmodem- Postage meterscontains a programmable line interface that meets global- Security systemstelephone line requirements, allowing manufacturers to- Remote medical monitoringimplement a single modem design world-wide. The ISOmodem- Japan L-mode phonefamily includes embedded modem solutions for speeds- Personal video recordersranging from 2400 bps to 56Kbps, suitable for a wide-range of applications.• Set-top boxes
• Digital cable boxes
• Credit card verification
• Industrial monitoring
• Postage meters
• Security systems
• Remote medical monitoring
• Gaming consoles
• Personal video recorders
• Point of sale (POS)rangeterminalsGeneral Purpose RF Synthesizer
A radio frequency, or RF, synthesizer generates high frequency signals that are used in wireless communications systems to select a particular radio channel. We provide general purpose RF Synthesizers for a variety of wireless communications devices, other than mobile handsets, including the industrial, science and medical (ISM) band applications.
terminals ProSLIC(R)Our synthesizers are well-suited to meet the increasing requirement for highly-integrated electronics that reduce component count and consume less power.• Wireless local area networks
• Cordless phones
• Wireless headsets
• Wireless LAN (802.11b) modemsProSLIC® Subscriber Line Interface Circuits
The ProSLIC provides the analog telephone interface on
- Telephone switchboard systemsthe source end of the telephone which generates dial- Cable telephonytone, busy tone, caller ID and ring signal. Telephone- Wireless local loop providingsource end electronics have historically been at theremote access for a wirelinetelephone company central office, but recently have beensystemmigrating to the customer premises for voice over- Voice over Internet protocol internet protocol (VOIP)broadband systems. Our ProSLIC product- Voice over cable or digitalfamily has offerings for short-haul applications suitablesubscriber linesfor the customer premises as well as long-haul- Digital broadband to analogapplications suitable for the traditional telephonetelephone adapterscompany central office. This family includes a dual ProSLIC that provides for higher port density and lower cost per phone line. The dual ProSLIC is in the early stages of customer adoption and is not yet being produced in volume.• Telephone switchboard systems
• Cable telephony
• Wireless local loop providing remote access for a wireline system
• Voice over cable or digital subscriber lines
• Digital broadband to analog telephone adapters
• Wired long loop and central office systems
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DSL Analog Front End
The DSL Analog Front End, or AFE, is designed to provide
- Personal computer modemsthe connectivity functions for business or residential- External modemsasymmetric digital subscriber line, or ADSL, connection- Residential gatewaysat the user end in customer premises equipment. Such a- Network interface devicesconnection 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 the late stages of customer evaluation and is not yet being produced in volume.5
OPTICAL NETWORKING PRODUCTS SiPHY(TM)• Personal computer modems
• External modems
• Residential gateways
• Network interface devicesSiPHY TM Optical Physical Layer Transceivers
We offer a family of high-speed physical layer ICs that
- Optical port cards for SONETmeet the high-speed fiber Synchronous Optical Networkor - SONET/SDH/ATM routers SONET,(SONET) and Synchronous Digital Hierarchy (SDH) specifications.The transceiver operatesAs part of this family we offer transceivers that operate at a rate- SONET/SDH test equipmentof 2.5GHzGbps (giga bits per second), a transmission speed commonly referred to as- Optical transponder modules OC-48 and 10 GHz speed commonly referred to as OC-192. A - Add/drop multiplexersOC-48. The transceiver IC provides both the receive path deserialization and transmitand receive -path serialization as required by the SONET/SDHregenerators function in thephysical layer.In addition to the - Digital cross connects transceiver products, we offer a stand-alone transmitter - Board-level serial links 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 utilizesAll of our physical layer products utilize our proprietary digital signal processing technology to reduce thedevice'sdevice’s sensitivity to board-level noise and improve performance. This product is still in the early stages of customer adoption and has produced small amounts of revenue in certain product configurations.• Optical port cards for SONET/SDH optical networking equipment
• Optical test equipment
• High speed serial back plane interfaces
Precision
ClocksClock Integrated CircuitsThis precision clock product family includes various
- Optical port cards for SONETproducts ranging from general purpose clock multiplier- SONET/SDH test equipmentproducts up to high performance multi-port, redundant,- SONET/SDH/ATM switchesmultiple frequency range clock multipliers and-regenerators. SONET/SDH/ATM routers regenerators. SONETSDH optical network systemsoperate in a - Optical transponder modules synchronous manner requiringrequire very high precision, low jitter, clock sources. Our knowledge gained in developing the physical layer transceiver subsections provided us the technology to offer thesehighly precisehigh performance clock products. Traditionally, these clock sources have beenperformed byimplemented using expensive, bulky modules, complicated discreteimplementationscircuitry requiring numerous components, orcurrent incomplete IC offerings needing supplemental corrective circuitry in order to meet specifications. As thehybrid IC/discrete solutions that offer limited functionality. The frequency agility, performance, and integration offered by these devices are key design features for our customer base, especially as opticalnetwork market makes a transitionnetworking equipment transitions from OC-48transmission speedsto higher speed OC-192speeds, the need for precision clock sources throughout the synchronous optical network becomes a key design feature for our customers.(10Gbpps). This product is still in the early stages of customer adoption and has producedsmallmodest amounts of revenue in certain product configurations.• Optical port cards for SONET/SDH optical networking equipment
• Optical test equipment
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Satellite Radio Products
The Satellite Radio Tuner combines our RF Synthesizer with a highly integrated tuner for a complete satellite radio tuner chipset. By leveraging CMOS technology, our satellite radio tuner minimizes the use of external components such as external voltage-controlled oscillators (VCOs), varactor diodes, and loop filters. The tuner provides strong system performance, meets stringent quality standards and fits into a very small footprint.
• Consumer and automotive satellite radios
Microcontroller Products
On December 10, 2003, we completed the acquisition of Cygnal, allowing us to offer a portfolio of mixed-signal, 8-bit microcontroller products. Our C8051F family of microcontrollers integrate intelligent data capture in the form of high-resolution data converters, a traditional MCU computing function, Flash memory and a highly programmable set of communication interfaces in a single system on a chip. The combination of configurable high-performance analog, up to 100 MIPS 8051 core and in-system field programmability provides the user with design flexibility, improved time-to-market, superior system performance and greater end product differentiation. These products are designed for use in a large variety of end-markets, including the automotive, communications, consumer, industrial, medical and power management markets.
• Industrial automation and control
• Automotive sensors and controls
• Medical instrumentation
• Electronic test and measurement equipment
• Power management
• Weigh scales
• Optical line cards
• Digital cameras
• Computer peripherals
• Wireless headsets
• Magstripe readers
• Gaming consoles
• Electronic toysDuring fiscal year 2003, sales of our broad-based mixed-signal products and mobile handset products each accounted for approximately 50% of our revenues. During fiscal year 2002, sales of our
wirelinebroad-based mixed-signal products andwirelessmobile handset products accounted for54%63% and46%37% of our revenues, respectively. During fiscal year 2001, sales of ourwirelinebroad-based mixed-signal products andwirelessmobile handset products accounted for74%81% and25%19% of our revenues, respectively.During fiscal 2000, sales of our wireline products accounted for 95% of our revenues.CUSTOMERS, SALES AND MARKETING
We market our products to original equipment manufacturers (OEM) and other providers of applications in
the wireless, wireline and optical networking communicationsvarious markets through our direct sales staff, a network of independent sales representatives, and electronics distributors. Direct and distributor customers buy on an individual purchase order basis, rather than pursuant to long-term agreements.TwoWe consider our customer to be the end customer purchasing either directly from a distributor, a contract manufacturer or us. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer.
One of our distributors,
Uniquest andEdom Technology,eachselling to multiple end customers in Asia, represented20% and 16%12.9% of our fiscal2002 revenues, respectively.2003 revenues. Distributors are not considered end customers, but rather serve as a sales channel to our end customers. No other distributor accounted for 10% or more of revenues for fiscal2002.2003.7
During fiscal
2002,2003, our ten largest end customers accounted for67%64% of our revenues. We had one end customer, Samsung, which represented16%21% of our revenues. No other single end customer accounted for more than 10% of our6revenues. The following is a list of our largest end customers that purchased our products in fiscal 20022003 for inclusion in products or devices offered to their customers:- -• Agere Systems
- PC-TEL - Sony - Wavecom - - Ambit -• Broadcom
• Conexant/PC-Tel
• Echostar
• Hughes
• Sagem
• Samsung
-• Sendo
• Smart Link
• Texas Instruments
- - Echostar - Smart Link -• Thomson
• Wavecom
We maintain five sales offices in North
America andAmerica. We provide European sales support through our subsidiaries in the United Kingdomsubsidiary.and France. The Asia Pacific area is supported through ourJapanesesubsidiaries in Japan and Hong Kong,subsidiariesas well asa branchsalesofficeoffices inTaiwan.Korea, Taiwan and China. Our direct sales force includes regional sales managers in the field and area business managers at our headquarters to further support customer communications. Many of these managers have engineering degrees. We maintain a dedicated website for our field sales organization, which includes technical documentation, backlog information, order status, product availability and new product introduction information to support our communications with that organization. Additionally, we provide direct communication to all field sales personnel as part of a structured sales communications program.We also utilize independent sales representatives and distributors to generate sales of our products. We have relationships with many independent sales representatives and distributors worldwide whom we have selected based on their understanding of the mixed-signal IC marketplace and their ability to provide effective field sales applications support for our products. For the year ended
December 28, 2002,January 3, 2004, sales through these representatives and distributors accounted for52%27% of our sales.Our marketing efforts are targeted at both identified industry leaders and emerging market participants. Direct marketing activities are supplemented by a focused marketing communications effort that seeks to raise awareness of the company and our products. Our public relations efforts are focused on leading trade and business publications. Our external website is used to deliver corporate information and product information. We also pursue targeted advertising in key trade publications and we have a cooperative marketing program that allows our distributors and representatives to promote our products to their local markets in conjunction with their own advertising activities. Finally we maintain a presence at strategic trade shows and industry events. These activities, in combination with direct sales activities, help drive demand for our products.
Due to the complex and innovative nature of our ICs, we employ experienced applications engineers who work closely with customers to support the design-win process, and can significantly accelerate the
customer'scustomer’s time required to bring a product to market. A design-win occurs when a customer has designed our ICs into its product architecture. A considerable amount of effort to assist the customer in incorporating our ICs into its products is typically required prior to any sale. In many cases, our innovative ICs require significantly different implementations than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design-win can vary substantially depending on acustomer'scustomer’s development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Due to this extensive design-win process, once a completed design architecture has been implemented and produced in high volumes, our customers are reluctant to significantly alter their designs. We believe this process, coupled with our intellectual property protection, promotes relatively longer product life cycles for our ICs and high barriers to entry for competitive products, even if such competing products are offered at lower prices. Finally, our close collaboration with our customers provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions.RESEARCH AND DEVELOPMENT
Through our research and development efforts, we apply our experienced analog and mixed-signal engineering talent and expertise to create new ICs that integrate functions typically performed inefficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced price/performance characteristics. We attempt to reuse successful
8
techniques for integration in new applications where
7similar 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 28, 2002,January 3, 2004, we had128188 employees involved in research and development.Research and development expenses were $48.3 million, $32.0 million
$29.0 millionand$19.4$29.0 million in fiscal 2003, 2002, and 2001,and 2000,respectively.TECHNOLOGY
Our product development process facilitates the design of highly-innovative, analog-intensive, mixed-signal ICs. Our senior engineers start the product development process by forming an understanding of our
customers'customers’ products and then design alternatives with increased functionality and with decreasing power, size and cost requirements. Ourengineers'engineers’ deep knowledge of existing and emergingcommunicationsstandards 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 ourcustomers'customers’ design teams to maintain and develop an understanding of ourcustomers'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;
• microcontroller design expertise; and
(3)• our broad understanding of
communicationsystems 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 andallows us to integrate more digital functionality into our mixed-signal ICs.Designing analog ICs is significantly more complicated than designing digital ICs. While advanced software tools exist to help automate digital IC design, there are far fewer tools for advanced analog IC design. In many cases, our analog circuit design efforts begin at the fundamental transistor level. We believe that we have a demonstrated ability to design the most difficult analog and RF circuits using standard CMOS technologies. For example, our DAA product family replaces bulky, discrete modem components, such as transformers, relays and opto-isolators, with highly integrated CMOS mixed-signal ICs. Similarly, bulky wireless phone components such as voltage controlled oscillators are replaced by our integrated CMOS frequency synthesizer products. Our design expertise in the technically challenging optical networking market has allowed us to reduce the number of supplemental components
9
used in our
customers'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'scircuit’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 withinexpensivedigital CMOS transistors, which allows our ICs to perform the required analog8functions with increased digital capabilities. For example, our ProSLIC product is designed to function more efficiently than traditional products for the source end of the telephone line, which involve a two chip combination requiring more board space and numerous external components. The ProSLIC product is partitioned by combining a core analog design that provides analog-to-digital conversion and digital-to-analog conversion with optimized digital signal processing functions such as data compression, data expansion, filtering and tone generation. In this manner, we can isolate the higher voltage required to ring a telephone in low-cost, off-chip high voltage transistors or a small, complementary high voltage chip, thereby enabling us to fulfill the remaining core functions with a single CMOS chip. As a further example, our SiPHY Optical Physical Layer Transceivers utilize an architecturally advanced phase locked loop circuit based principally on digital signal processing. By performing a significant portion of this function in the digital domain in a monolithic chip, the circuit has been able to satisfy the demanding specifications of the optical network SONET standard using inexpensive CMOS transistors. MICROCONTROLLER DESIGN EXPERTISE
As a result of the acquisition of Cygnal Integrated Products, we now have the required engineering talent and circuit integration methodologies to combine precision analog, high-speed digital, Flash memory and in-system programmability into a single, monolithic CMOS integrated circuit. A microcontroller product is designed to capture an external analog signal, convert it to a digital signal, compute digital functions on the stream of data and then communicate the results through a standard digital interface. The ability to develop standard products with the broadest possible customer application base while being cost efficient with the silicon area of the monolithic CMOS integrated circuit requires a keen sense of customer value and engineering capabilities. Additionally, to manage the wide variety of signals on a monolithic piece of silicon including electrical noise, harmonics and other electronic distortions requires a fundamental knowledge of devices physics and accumulated design expertise.
UNDERSTANDING OF
COMMUNICATIONSYSTEMS TECHNOLOGY AND TRENDSOur focused expertise in
communicationsmixed-signal ICs is the result of the breadth of engineering talent we have assembled with experience working in analog-intensivemixed-signalCMOS design forcommunicationsa wide variety of applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends that impactcommunicationselectronic systems and markets.We believe we have a rare ability to predict product evolution and design compelling ICs for communications manufacturers.Our expertisespans fromincludes single line plain old telephone service (POTS)to, packet-based network interfaces and high speed SONET-based optical networks. We have also expanded our knowledge base into wirelesscommunications.technologies. Our microcontroller applications broaden our knowledge base as we participate in these diverse markets. Our understanding of the role of analog/digital interfaces withincommunicationselectronic systems and the key domestic and international telecommunications standards that must be supported are particular areas of our expertise.MANUFACTURING
As a fabless IC manufacturer, we conduct IC design and development in our facilities in the United States and electronically transfer our proprietary IC designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs use industry-standard CMOS manufacturing process technology to achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs within a lower cost framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus ensuring the availability of manufacturing capacity over our
products'products’ life cycles. We10
currently rely principally on Taiwan Semiconductor Manufacturing Co. (TSMC) to manufacture substantially all of our semiconductor wafers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on design, development and marketing of our ICs.
Once the silicon wafers have been produced, they are shipped directly to our third-party assembly subcontractors. The assembled ICs are then forwarded for final testing, either to our facilities in Austin, Texas or to our third-party test subcontractors, prior to shipping to our customers. We have increasingly utilized offshore third-party test subcontractors, typically in Asia where the parts are assembled and where the products are frequently delivered to our customers. During the fourth quarter of 2003, more than two-thirds of our units produced in volume were tested by offshore third-party test subcontractors. We expect this trend toward utilization of offshore third-party test subcontractors to
continue.continue in fiscal 2004.BACKLOG
Our sales are made primarily pursuantAs of January 3, 2004, our backlog was approximately $86.1 million, compared to
standardapproximately $46.0 million as of December 28, 2002. We include in backlog accepted product purchase ordersfor delivery of products, with such purchase orders officially acknowledged by us according to our own termsfrom customers andconditions. Because industry practice allows customers to cancelworldwide distributor stocking orders. We only include orders withlimited advance noticean expected shipping date from us within six months. Product orders in our backlog are subject tous prior to shipment,changes in delivery schedules or cancellation at the option of the purchaser typically without penalty. Our backlog may fluctuate significantly depending upon customer order patterns which may, in turn, vary considerably based on rapidly changing business circumstances. Backlog from distributors are not recognized as our revenues until the products are sold by the distributors. Additionally, our arrangements with distributors typically provide for price protection and stock rotation activities. Accordingly, we do not believe that our backlogasat any time is necessarily representative of actual sales for anyparticular date is not always a reliable indicator of our future revenue levels. 9succeeding period. COMPETITION
The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We believe the principal competitive factors in our industry are:
- -• Product size;
• Level of integration;
-• Product capabilities;
• Reliability;
• Price;
• Performance;
• Intellectual property;
- - 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
communicationsmarkets and applications, we face competition from a relatively large number of competitors. Across our product offerings, we compete with Agere Systems, Atmel, AMCC, Analog Devices, Broadcom, Conexant, Cypress, ESS, Fujitsu, Hitachi, Infineon Technologies, Legerity, Maxim Integrated Products, Microchip, Motorola, National Semiconductor, Philips, RF Micro Devices, Semtech, Skyworks Solutions,(the company resulting from the combination of Conexant's wireless business and Alpha Industries),Texas Instruments, Vitesse Semiconductor, and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and innovative start-up semiconductor design companies. Our competitors may also offer bundled chipset kit arrangements offering a more complete product, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. As the markets forcommunicationselectronic products grow, we also may face competition from traditionalcommunicationselectronic11
device companies. These companies may enter the mixed-signal semiconductor market by introducing their own products, including components within their products that would eliminate the need for our ICs, or by entering into strategic relationships with or acquiring other existing IC providers.
Many of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with our existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share.
INTELLECTUAL PROPERTY
Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality procedures. As of
December 28, 2002,January 3, 2004, we hadbeen granted 63more than 300 issued or pending United States patents in the IC field.We also have filed 98 applications for additional United States patents covering our proprietary technology.We also frequently file for patent protection in a variety of international jurisdictions with respect to the proprietary technology covered by our U.S. patents and patent applications. There can be no assurance that patents will ever be issued with respect to these applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. The patents and patent applications described above will expire at various times in the distant future.10In addition, we claim copyright protection for proprietary documentation used in our products. We have filed for registration, or are in the process of filing for registration, of the visual image of each IC that we have manufactured in commercial quantities with the United States Copyright Office. We have registered the
"Silicon Laboratories"“Silicon Laboratories” logo and a variety of other product and product family names as trademarks in the UnitedStates.States and selected foreign jurisdictions. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures. We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new products in a timely manner will be an important factor in maintaining our competitive position.
Many participants in the semiconductor and
communicationselectronics 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 ourmanagement'smanagement’s time. Any such litigation could materially adversely affect us. For further information regarding patent litigation, please see"Part“Part I, Item 3. Legal Proceedings."”Our licenses include industry standard licenses with our vendors, such as wafer fabrication tool libraries, third party core libraries, computer-aided design applications and business software applications.
EMPLOYEES
As of
December 28, 2002,January 3, 2004, we employed364486 people, including106115 in manufacturing,128188 in research and development,75102 in marketing,3148 in sales and2433 in administration. Our success depends on the continued service of our key technical12
and senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our employees are represented by a labor organization. We consider our employee relations to be good.
ENVIRONMENTAL REGULATION
Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in the semiconductor industry. Our compliance with these laws and regulations has not had a material impact on our financial position or results of operations.
FACTORS AFFECTING OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH
RATEAND MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICEAlthough we have experienced revenue
and earningsgrowth in ourthreeeleven most recent quarterly periods, we may not be able to sustainthese growth rates.this growth. We may also experience significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate. It is likely that in some future period our revenues or operating results will be below the expectations of public market analysts or investors. If this occurs, our stock price may drop, perhaps significantly.11A 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"“design wins”;-• the time lag between
"design wins"“design wins” and production orders;-• the demand for, and life cycles of, the products incorporating our ICs;
-• the rate of adoption of mixed-signal ICs in the markets we target;
-• deferrals of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of ICs;
-• changes in product mix;
-• the average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing;
• impairment charges related to inventory, equipment or other long-lived assets;
• significant legal costs to defend our intellectual property rights or respond to claims against us; and
-• the rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets.
The markets for mobile
telephones,handsets, personal computers, satellite television set-top boxes and voice over DSL applications are characterized by rapid fluctuations in demand and seasonalitywhichthat result in corresponding fluctuations in the demand for ourwireless and wirelineproducts that are incorporated in such devices. Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance. Once a new IC achieves market13
acceptance, demand for the new IC can quickly accelerate to a point and then level off such that rapid historical growth in sales of a product should not be viewed as indicative of continued future growth. In addition, demand can quickly decline for a product when a new IC product is introduced and receives market acceptance. For example, transceivers that provide some of the functionality provided by our RF Synthesizers have
recentlybeen introduced to market by us and our competitors.TheseThe introduction of these competing transceivers,are likely to resultincluding our Aero Transceiver, has resulted in a rapid decline in our sales of RF Synthesizers.If our Aero Transceiver does not gain sufficient market acceptance to offset the anticipated decline in our sales of RF Synthesizers, our future operating results and growth could be materially adversely affected.Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance.WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR REVENUES, AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES
The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business. During the fiscal
2002,year ended January 3, 2004, our ten largest customers accounted for67%64% of our revenues. We had one customer, Samsung,purchasing primarily through the distributor Uniquest,which represented16%21% of our revenues. No other single customer accounted for more than 10% of our revenues during the fiscal2002. Two distributors, Uniquest and Edom Technology, each selling to multiple customers in Asia, represented 20% and 16% of our fiscal 2002 revenues, respectively.year ended January 3, 2004. Most of the markets for our products are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability toaffect salessell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products. In the future, these customers may decide not to purchase our ICs at all, purchase fewer ICs than they did in the past or alter their purchasing patterns, particularly because:-• we do not have any material long-term purchase arrangements with these or any of our other customers;
12-• substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty;
• some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our ICs; and
-• some of our customers have
soughtdeveloped orare seeking relationshipsacquired products that compete directly withour current or potential competitorsproducts these customers purchase from us, whichmaycould affect ourcustomers'customers’ purchasingdecisions.decisions in the future.While we have been the sole supplier of the direct access arrangement, or DAA, ICs used in many of our
customers'customers’ soft modem DAA products and have also been a substantial supplier of synthesizers and transceivers to Samsung and other major GSM handset manufacturers,we anticipate thatour customerswillregularly evaluate alternative sources of supplyin the futurein order to diversify their supplier base, which would increase their negotiating leverage with us and protect their ability to secure these components. We believe that any expansion of ourcustomers'customers’ supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to supply to our customers, which would negatively affect our revenues and operating results.WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF REVENUE DIVERSIFICATION
We derive a substantial portion of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of these products, is therefore, critical to our future success. In addition, substantially all of our products that we have sold include technology related to one or more of our issued U.S. patents. If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our products. Our business, operating results, financial condition and cash flows could therefore be adversely affected by:
-• a decline in demand for any of our more significant products, including our Aero Transceiver, RF Synthesizer, DAA, ISOmodem or
ISOmodem; -ProSLIC;14
• failure of our products to achieve continued market acceptance;
-• an improved version of our products being offered by a competitor;
-• technological change that we are unable to address with our products; and
-• a failure to release new products or enhanced versions of our existing products on a timely basis and/or the failure of these
newproducts to achieve market acceptance.We are particularly dependent on sales of our
wirelessmobile handset products, which constitutedalmost half50% of our total revenues in fiscal 2003 and 37% of our total revenues in fiscal 2002. In particular, one mobile handset product, our Aero Transceiver, represented approximately 40% of our total revenues in fiscal 2003. If the market for the Aero Transceiver or the market for GSM mobile handsets in which these products are incorporated deteriorates, our operating results would be materially and adversely affected.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 364 employees at December 28, 2002. 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.IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION COULD BE HARMED
Our future success will depend on our ability to reduce our dependence on a few products by developing new ICs and product enhancements that achieve market
13acceptance 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; -customers;• accurate prediction of market requirements;
-• timely completion and introduction of new designs;
-• timely qualification and certification of our ICs for use in our
customers'customers’ products;-• commercial acceptance and volume production of the products into which our ICs will be incorporated;
-• availability of foundry, assembly and test capacity;
-• achievement of high manufacturing yields;
-• quality, price, performance, power use and size of our products;
-• availability, quality, price and performance of competing products and technologies;
-• our customer service and support capabilities and responsiveness;
-• successful development of our relationships with existing and potential customers;
-• changes in technology, industry standards or end-user preferences; and
-• cooperation of software partners and semiconductor partners to support our chips within a system.
We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in development of many ICs. If our
recently introduced or otherICs fail to achieve market acceptance, or if we fail to develop new productsor if these new products fail tothat achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected.OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
15
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
communicationselectronic devices in various markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Research and development expenseinfor the fiscal2002year ended January 3, 2004 was$32.0$48.3 million, or17.6%14.8% ofrevenues, compared with research and development expense of $29.0 million, or 39.1% of revenues, in fiscal 2001.revenues. A number of large companiesin the communications industryare actively involved in the development of these new technologies and standards. Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate. For example, we have introduced to market the Aero Transceiver product for use in wireless phones operating on the GSM standard.The Aero Transceiver is also compatible with the GPRS standard, which we believe is the emerging data communications protocol for GSM based wireless phones.We cannot be certain thatthese standardsthis standard will not change, thereby14making our products unsuitable or impractical. Additionally, despite the published GSM/GPRS specifications, mobile phone network operators may demand increasedOur MCU products are based on an 8-bit processor architecture. Should customers decide they need a higher performancebeyond specifications for this highly competitive market. 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 make16-bit processor, then our productsuncompetitive orwould be unsuitable and we would not realize sales from that opportunity.OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS
In recent periods, we have significantly increased the scope of our operations and expanded our workforce from 279 employees at the end of fiscal 2001 to
changing system requirements486 employees at the end of fiscal 2003. In December 2003, we added 60 employees with the acquisition of Cygnal. This growth has placed, andresult inany future growth of ourinabilityoperations will continue tosellplace, a significant strain on our management personnel, systems and resources. We anticipate that we will need to implement a variety of new and upgraded operational and financial systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and other internal management systems to manage this growth and comply with regulatory guidelines. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of theseproducts.endeavors will require substantial management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to plan for the succession from time to time of certain persons who have been key management and technical personnel. If we are unable to effectively manage our expanding global operations, our business could be materially and adversely affected.WE RELY ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR PRODUCTS AND THE FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
ASSEMBLERSSUBCONTRACTORS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTSWe do not have our own wafer fab manufacturing facilities. Therefore, we rely principally on one third-party vendor,
TSMC,Taiwan Semiconductor Manufacturing Co. (TSMC), to manufacture the ICs we design. We also currently rely principally on two offshore third-party assembly subcontractors, Advanced Semiconductor Engineering (ASE) and Amkor Technology, to assemble and package the silicon chips provided by the wafers for use in final products. Additionally, we rely onthird-party vendorsthese offshore subcontractors for a significant portion of the testing requirements of our products prior to shipping.WeAlthough we also maintain testing facilities in Austin,Texas. However,Texas, we have increasingly utilized offshore third-party test subcontractors, typically in Asia, where the parts are assembled and where the products are more frequently delivered to our customers. We expect this trend toward utilization of offshore third-party test subcontractors to continue.There are significant risks associated with relying on these third-party foundries and subcontractors, including:
-• failure by us, our customers or their end customers to qualify a selected supplier;
-• capacity shortages during periods of high demand;
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• potential insolvency of the third-party subcontractors;
-• reduced control over delivery schedules and quality;
-• limited warranties on wafers or products supplied to us;
-• potential increases in prices;
-• increased need for international-based supply, logistics and
logisticsfinancial management;-• their inability to supply or support new or changing packaging technologies; and
-• low test yields.
We
currently do nothavelong-termsupply contracts withany ofour third-party vendorsand, therefore, they are not obligatedwhich obligate the vendor to perform servicesorand supply products to us foranya specific period,orinanyspecific quantities,except as may be provided in a particularand at specific prices. We are not obligated to any fixed fee or minimum purchaseorder. Althoughobligations. In the event that these vendors failed to meet our demand for whatever reason, we believe that other semiconductor foundries or assembly or test subcontractorscancould adequately address ourneeds,needs. However, we expect that it would takeapproximately sixup to twelve months to transition performance of these services from our current providers to new providers. Such a transition may also require a qualification process by our customers or their end customers. We generally place orders for products withsome ofoursuppliersfoundry approximatelyfourthree months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from our customers. Accordingly, if we do not accurately forecast demand for our products, we may be unable to obtain adequate foundry or assembly capacity from our third-party foundry and assembly subcontractors to meet ourcustomers'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 ofBeyond our current forecast, our third-party foundry or assembly or test subcontractorshave provided assurancestypically do not provide guarantees to us that adequate capacity will be available to us within the time required to meet additional demand for our products.Since our inception, substantially all of the silicon wafers for the products that we have shipped were manufactured either by TSMC or its affiliates. Our customers typically complete their own qualification process. If we fail to
15properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to support the fab line transition, which would adversely affect our operating results. Additionally, a resulting write offwrite-off of unusable or excess inventories would contribute to a decline in earnings.WE HAVE INCREASED OUR INTERNATIONAL
SALESACTIVITIES SIGNIFICANTLY AND PLAN TO CONTINUE SUCH EFFORTS, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL AND FINANCIAL COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONSWe recently established
anadditional internationalsubsidiarysubsidiaries and have opened additionalsalesoffices in international markets to expand our internationalsalesactivities in Europe and the Pacific Rimregion and intend to increase our staffing in international sales.region. The percentage of our revenues to customers located outside of the United States was 80% in fiscal 2003, 79% in fiscal 2002 and 66% in fiscal2001 and 21% in fiscal 2000. This percentage increase in the two most recent years reflects our progress in the areas of product and customer diversification, as many of our wireless, and increasingly, wireline customers manufacture and design their products in the Pacific Rim region. Our planned international sales growth will be limited if we are unable to hire additional personnel and develop relationships with international distributors.2001. We may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including:-• increased complexity and costs of managing international operations;
-• protectionist laws and business practices that favor local competition in some countries;
-• multiple, conflicting and changing laws, regulations and tax schemes;
-• longer sales cycles;
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• greater difficulty in accounts receivable collection and longer collection periods;
-• high levels of distributor inventory subject to rights of return to us;
-• political and economic instability; and
-• greater difficulty in hiring qualified technical sales and applications engineers.
To date, all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less competitive.
MOST OF OUR CURRENT MANUFACTURERS, ASSEMBLERS, TEST SERVICE PROVIDERS, AND CUSTOMERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION, WHICH INCREASES THE RISK THAT A NATURAL DISASTER, EPIDEMIC, LABOR STRIKE, WAR OR POLITICAL UNREST COULD DISRUPT OUR OPERATIONS OR SALES
OurMost of our current semiconductor wafer
manufacturer'smanufacturer’s foundries and one of our assembly and test subcontractor’s sites are primarily located in the same region within Taiwan and our other assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers, particularly mobiletelephonehandset manufacturers, are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area. We are not currently covered by insurance against business disruption caused by earthquakes as such insurance is not currently available on terms that we believe are commercially reasonable. Earthquakes, fire, flooding, lack of water or other natural disasters in Taiwan or the Pacific Rim region, or an epidemic, political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturer, assemblers and test subcontractors are located, likely would result in the disruption of our16foundry, assembly or test capacity. There can be no assurance that such alternate capacity could be obtained on favorable terms, if at all. A natural disaster, epidemic, labor strike, war or political unrest where our
customers'customers’ facilities are located would likely reduce our sales to such customers. For example, Samsung, our largest customer, is based in South Korea and represented16%21% of our revenues in fiscal2002 revenues.2003. NorthKorea'sKorea’s recent decision to withdraw from the nuclear Non-Proliferation Treaty and related geopolitical maneuveringshashave created unrest. Such unrest could create economic uncertainty or instability, could escalate to war or otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results. In addition, a significant portion of the assembly andtest fortesting of ourwirelessmobile handset products occurs in South Korea. Any disruption resulting from these events could also cause significant delays in shipments of our products until we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third-party vendor.THE SEMICONDUCTOR MANUFACTURING PROCESS IS HIGHLY COMPLEX AND, FROM TIME TO TIME, MANUFACTURING YIELDS MAY FALL BELOW OUR EXPECTATIONS, WHICH COULD RESULT IN OUR INABILITY TO SATISFY DEMAND FOR OUR PRODUCTS IN A TIMELY
MANNER.MANNERThe manufacture of
silicon wafers forour products is a highly complex and technologically demanding process. This is particularly the case when multiple chips are packaged in a multi-chip module, such as the Aero I/I+ Transceiver. Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries from time to time have experienced lower than anticipated manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies. If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet ourcustomers'customers’ demand for our products in a timely manner, which would adversely affect our operating results and damage our customer relationships.18
OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUES
Our products are complex and may contain errors when first introduced or as new versions are released. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors prior to delivery of our products to our customers. Because our products are manufactured by third parties, should problems occur in the operation or performance of our ICs, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers. These errors also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR PRODUCTS COULD BE HARMED
We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel.
Specifically, weWe believe that our future successis highlywill be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. For example, at the beginning of fiscal 2004, Navdeep Sooch, our co-founderChief Executive OfficerandChairmanchairman of theBoard,board, transitioned out of his role as CEO and Daniel Artusi, ourPresident andChief Operating OfficerJeffrey Scott, our co-founderandVicePresident,and David Welland, our co-founder and Vice President.assumed the role of CEO. There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signalcommunicationsICs. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense. Our key technical personnel represent a significant asset and serve as the primary source for our technological and product innovations. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. The loss of any of our key employees or the inability to attract or retain qualified personnel both in the United States and internationally, including engineers and sales and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products.17ANY ACQUISITIONS WE
ARE ENGAGED IN A PATENT LAWSUIT WITH TDK SEMICONDUCTOR CORPORATION In August 2001, TDK Semiconductor Corporation commenced a lawsuit against us for alleged willful infringement byMAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITIONOn December 10, 2003, we acquired Cygnal. As part of our
DAA productsgrowth and product diversification strategy, we will continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth ofa TDK-held patent. TDK's complaint seeks unspecified treble damages, costsour markets or enhance our technical capabilities. The Cygnal acquisition andattorneys' 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. On March 27, 2002, we filed an amended answer and counterclaims in which we claimed that the TDK-held patent is unenforceable due to inequitable conduct and asserted counterclaims seeking a declaration that the TDK-held patent is invalid, not infringed and unenforceable. On November 6, 2002, the court denied our motion for summary judgment,other acquisitions that wedid not infringe TDK's semiconductor patent rights. On January 6, 2003,may potentially make in thecourt extended discovery through July 3, 2003, setfuture entail afinal date for all summary judgment motionsnumber ofAugust 4, 2003,risks that could materially andextendedadversely affect our business and operating results, including:• problems integrating the
trial date to November 2003. This lawsuit may involve significant expenseacquired operations, technologies or products with our existing business andmay also divert our management'sproducts;• diversion of management’s time and attention from
other aspectsour core business;• need for financial resources above our planned investment levels;
• difficulties in retaining business relationships with suppliers and customers of the acquired company;
• risks associated with entering markets in which we lack prior experience;
• potential loss of key employees of the acquired company; and
• potential impairment of related goodwill and intangible assets.
In connection with the Cygnal acquisition, we are obligated to issue up to 1,290,963 shares of our
business. Duecommon stock based upon the achievement of Cygnal product revenue milestones, which could distract our management and employees and lead to disputes with former Cygnal stockholders. Future acquisitions also could cause us19
to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the
inherent uncertaintiesownership percentages oflitigation, we are unable to predict the outcome of this matter. For further information regarding this litigation, please see "Part I, Item 3. Legal Proceedings."existing shareholders.WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE
Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products. Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop effective competing technologies on their own.
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. From time to time, we receive letters from various industry participants alleging infringement of patents, trademarks or misappropriation of trade
secrets.secrets or from customers requesting indemnification for claims brought against them by third parties. The exploratory nature of these inquiries has become relatively common in the semiconductor industry. We typically respond when appropriate and as advised by legal counsel. We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future. For example, in April 2003, we paid $17 million to settle patent infringement claims brought against us by TDK Semiconductor Corporation. In January 2004, Digcom commenced a lawsuit against us and several other major companies in the GSM/GPRS wireless market for alleged past infringement of one of their expired patents. In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers. Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, would likely betime consumingtime-consuming and expensive to resolve and would divert ourmanagement'smanagement’s time and attention.AnyMost intellectual property litigation also could force us to take specific actions, including:-• cease selling products that use the challenged intellectual property;
-• obtain from the owner of the infringed intellectual property a right to a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;
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.
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
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these relationships. As we execute our indirect sales strategy, we will need to manage the potential conflicts that may arise with our direct sales efforts. For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor. The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth.
A SUBSTANTIAL PORTIONWE COULD SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED INTERNALLY BYEQUITY OR DEBT SECURITIES, BUT ADDITIONAL CAPITAL MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US,WHICH INCREASES OUR FIXED COSTS In fiscal 2001, substantially all ofOR AT ALLWe believe that our
test operations were performed in-house. During fiscal 2002, we significantly expandedexisting cash, cash equivalents and investments will be sufficient to meet ourinternal test capabilities to support our wireless products.working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However,during this same period we also outsourced a portion of test operations to our contract manufacturers or other third parties. While we expectit is possible thatperforming a substantial portion of testing in-house provides us with advantages in terms of quality control and shorter time required to bring a product to market,we mayencounter difficulties and delays in maintainingneed to raise additional funds to finance our activities orexpanding our internal test capabilities.to facilitate acquisitions of other businesses, products or technologies. We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors. In addition,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,even though we may notrealize any benefit from performing the final testing internally. 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,need additional funds, we mayincur significant costs that could adversely affect our operating results.still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. However, we may not be able to obtain additional funds on favorable terms, or at all. If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced.OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE QUALIFICATION PROCESS
WHICH DOES NOT ENSUREWITHOUT ANY ASSURANCE OF PRODUCT SALESPrior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the
customer'scustomer’s system as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does not ensure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the IC, changes in its manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer.WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS, AND SOME OF OUR CUSTOMERS OFFER COMPETING PRODUCTS
Our products are currently used by our customers to produce modems, telephony equipment, mobile
telephones, various wireless devices andhandsets, optical networkingequipment.equipment and a broad range of other devices. We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products supplied by our customers. If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that incorporate our products may diminish or we may otherwise be materially adversely affected. Any reduction in the demand for these devices would significantly reduce our revenues.19In certain products such as the DAA, some of our customers (including Conexant and Smart Link) offer their own competitive products. These customers may find it advantageous to support their own offerings in the marketplace in lieu of promoting our products.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE ORDERS FOR THE PRODUCTS
In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer. As a result, we
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incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs and increased obsolescence and may increase our operating costs. These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers because this causes us to have less visibility regarding the accumulated levels of inventory for such customers.
WE ARE SUBJECT TO CREDIT RISKS RELATED TO OUR ACCOUNTS RECEIVABLE, ESPECIALLY WHEN OVERSEAS CUSTOMERS PURCHASE OUR PRODUCTS
THROUGH DISTRIBUTORS AND CONTRACT MANUFACTURERS.We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers. Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities. If we are unable to collect our accounts receivable, our operating results could be materially harmed.
A significant and increasing portion of our revenues are realized through indirect channels such as distributors and contract manufacturers, with a growing portion being located outside the United States. At December 28, 2002, gross receivable balances from distributors and contract manufacturers totaled $20.6 million versus $5.9 million at December 29, 2001. Typically, distributors and contract manufacturers are dependent on receiving payment from the ultimate customers for the resources necessary to pay us. None of our shipments to distributors and contract manufacturers are guaranteed by the ultimate customer. If for any reason a customer does not pay the distributor or contract manufacturer, there are no assurances that our direct contractual customers will have adequate working capital to enable the collection of our accounts receivable.We continue to monitor the credit worthiness and payment practice of each oftheour customers, distributorsorand contract manufacturers, and to date have not had any significantwrite offswrite-offs of receivable balances from them.WE COULD SEEK TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF EQUITY OR DEBT SECURITIES, BUT ADDITIONAL CAPITAL MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US, OR AT ALL. We believe that our existing cash, cash equivalents, investments and bank credit facility will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, it is possible that we may need to raise additional funds to finance our activities or to consummate acquisitions of other businesses, products or technologies. We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. However, we may not be able to obtain additional funds on favorable terms, or at all. If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced.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
20decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products. Our competitors may also offer bundled chipset kit arrangements offering a more complete product despite the technical merits or advantages of our products. These competitors may elect not to support our products which could complicate our sales efforts. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. Competition could decrease our prices, reduce our sales, lower our marginsgross profits or decrease our market share.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; - need for financial resources above our planned investment levels; - difficulties in retaining business relationships with suppliers and customers of the acquired company; - risks associated with entering markets in which we lack prior experience; - potential loss of key employees of the acquired company; and - potential requirement to amortize intangible assets or write off in-process research and development and other acquisition-related expenses. Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could impact the ownership percentages of existing shareholders.OUR STOCK PRICE MAY BE
VOLATILE.VOLATILEThe market price of our common stock has been volatile in the past and may be volatile in the future. The market price of our common stock may be significantly affected by the following factors:
-• actual or anticipated fluctuations in our operating results;
-• changes in financial estimates by securities analysts or our failure to perform in line with such estimates;
-• changes in market valuations of other technology companies, particularly semiconductor companies;
-• announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
-• introduction of technologies or product enhancements that reduce the need for our products;
-• the loss of one or more key
OEMoriginal equipment manufacturers (OEM) customers;• dilution from the issuance of our stock in connection with acquisitions; and
-• departures of key personnel.
The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance.
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable. For example, our certificate
orof incorporation and bylaws provide for:-• the division of our board of directors into three classes to be elected on a staggered basis, one class each year;
-• the ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;
-• a prohibition on stockholder action by written consent;
-• elimination of the right of stockholders to call a special meeting of stockholders;
-• a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders; and
-• a requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation.
We also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of our common stock.
THE PERFORMANCE OF OUR
NEXT GENERATION DIRECT ACCESS ARRANGEMENTDSL ANALOG FRONT END (AFE) AND MODEM RELATED PRODUCTS MAY BE ADVERSELY AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUESAlthough our
DAADSL AFE and modem related products are compliant with published specifications, these established specifications might not adequately address all conditions that must be satisfied in order to operate in harsh environments. This includes environments where there are wide variations in electrical quality, telephone line quality, static electricity and operating temperatures or that may be affected by lightning or improper handling by customers and end users.Our next generation products have had a limited period of time in the field under operation, and theseThese environmental factors may result in unanticipated returns of our products. Any necessary modifications could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems.RISKS RELATED TO OUR INDUSTRY
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in particular, are intensely competitive. We expect that the market for our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous markets and applications, we face competition from a relatively large number of competitors. Across all of our product areas, we compete with Agere Systems, Atmel, AMCC, Analog Devices, Broadcom, Conexant, Cypress, ESS, Fujitsu, Hitachi, Infineon Technologies, Legerity, Maxim Integrated Products, Microchip, Motorola, National Semiconductor, Philips, RF Micro Devices, Semtech, Skyworks Solutions Inc.
(the company resulting from the combination of Conexant's wireless business and Alpha Industries), Texas Instruments, Vitesse Semiconductor and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, andinnovativestart-up semiconductor design companies. Some of our customers, such as Agere Systems, Broadcom, Intel, Motorola, Samsung and Texas Instruments, are also large, established semiconductor suppliers. Our sales to and support of these customers may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights. As the markets for communications products grow, we also may face competition from traditional communications device companies.22These companies may enter the mixed-signal semiconductor market by 23
introducing their own ICs or by entering into strategic relationships with or acquiring other existing providers of semiconductor products.
We anticipate increasing competitive pressure because sales of our wireless products into the highly competitive GSM handset market are expected to comprise a larger percentage of our future revenues.In addition,
our largest competitorslarge companies may restructure their operations to create separate companies or may acquire new businesses that aremorefocused on providing the types of products weproduce.produce or acquire our customers. For example, in May 2003, Conexantisacquired PC-Tel’s modem business. In the future, Conexant may seek to supplant our silicon DAA products that have historically been incorporated in PC-Tel’s products with Conexant’s own competing DAA product. As an additional example, in October 2003, Motorola announced it would separate its semiconductor operations into asignificant competitor of ours across multiple product areas. In June 2002, Conexant completed the spin-out of Skyworks Solutions, resulting from the combination of Conexant's wireless business with Alpha Industries. In July 2000, Lucent Technologies spun off its microelectronics business, which included its optoelectronics componentspublicly traded company focused on communications and integratedcircuits division, intoelectronic systems. Also, in November 2003, Conexant and GlobespanVirata announced aseparateplan to merge that will focus the combined companynamed Agere Systems in order to accelerate the growth of the business and alleviate strategic conflicts with Lucent's competitors. Additionally, Siemens spun off its semiconductor business in 1999 to create a more focused company named Infineon Technologies.on all broadband applications.THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY NEGATIVELY IMPACT OUR REVENUES AND GROSS
MARGINS AND REVENUESPROFITSWe may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We have reduced the average unit price of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. The highly competitive GSM handset market is extremely cost sensitive due to the potentially very high volumes and stringent expectations placed on consumer electronics component suppliers for aggressive and sustained price reductions which do result in declining average selling prices. We expect that these factors will create downward pressure on our average selling prices and gross
margins.profit percentages. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes and corresponding production cost reductions, our gross profits and revenues will suffer. To maintain our grossmargins,profit percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs. Our failure to do so would cause our revenues and grossmarginsprofit percentage to decline.WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY, WHICH HAS BEEN SUBJECT TO SIGNIFICANT DOWNTURNS
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor
companies'companies’ and theircustomers'customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Specific areas of the communications markets have contributed to the overall decline and volatility of the semiconductor industry in the recent past. For example, in fiscal 2001, the semiconductor industry suffered a downturn due to reductions in the actual unit sales of personal computers and wireless phones as compared to previous robust forecasts. Additionally, changing and competing technical standards in airwave interfaces such as GSM andCDMACode Division Multiple Access (CDMA) for mobile handsets, migration to higher speed communication protocols in the optical space and the return to prominence of the traditionalbellregional Bell operating companies compared to the competitive local exchange companies allhavecontributed to the volatility in the communications area of the semiconductor industry. This downturn resulted in a material adverse effect on our business and operating results in fiscal 2001.Due to the cyclical nature of the semiconductor industry, an upturn in business could result in increased competition for access to third-party foundry, assembly and test capacity. We are dependent on the availability of such capacity to manufacture, assemble and test our ICs. None of our third-party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us.
23OUR 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
communicationsdevice. 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 the24
devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in affecting industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business.
Products for communications applications are based on industry standards that are continually evolving. For example, GSM mobile handsets now commonly use the GPRS specification for enabling data communications. Certain suppliers are now offering mobile handsets utilizing the Enhanced Data Rates for Global Evolution (EDGE) protocol to support higher data communication rates on GSM networks. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense.
AVAILABLE INFORMATION
Our Internet website address is http://www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our
Internetinternet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC.Securities and Exchange Commission (SEC). Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.Item
2.2. PropertiesThe Company'sOur primary facilities, housing test operations, sales and marketing, research and development, and administration, are located in Austin, Texas. These facilities consist of approximately 124,000 square feet of leased floor space with lease terms expiring at various dates through December 2007. In addition to these properties, we lease approximately 5,600 square feet in Nashua, New Hampshire for engineering activities and various other smaller locations throughout the United States, England, France, Japan, Malaysia, Korea, Taiwan and
MalaysiaChina for sales, marketing, design and manufacturing support activities.We believe that these facilities are suitable and adequate to meet our current operating needs.
Item
3.3. Legal ProceedingsPATENT INFRINGEMENT LITIGATIONPatent Infringement Litigation
On
August 7, 2001, TDK Semiconductor Corporation (TDK)January 14, 2004, Digcom, Inc., commenced a lawsuit in the United States District Court for theCentralSouthern District of California against us and other major companies in the GSM/GPRS wireless market for alleged infringement ofTDK's United StatesDigcom’s U.S. Patent No.5,654,984. TDK's4,567,602, which was issued on January 28, 1986 and expired on June 13, 2003. Digcom’s complaint asserts that we and the other major companies have infringedTDK's '984their ‘602 patent bymaking,manufacturing, using and selling products and equipment for operation inthe United States certain DAA semiconductor chipsets,GSM/GPRS wireless networks, including ourSi3035 and Si3044 products, and that the infringement was and continues to be willful. TDK's complaint seeks unspecified treble damages, costs and attorneys' fees, and an injunction. On September 27, 2001, we served and filed an answer to TDK's complaint, in which we denied infringement and asserted that TDK's '984 patent is invalid. On March 27, 2002, we filed an amended answer and counterclaims in which we claimed that the TDK-held patent is unenforceable due to inequitable conduct and 24asserted counterclaims seeking a declaration that the TDK-held patent is invalid, not infringed and unenforceable. On November 6, 2002, the court denied our motion for summary judgment that we did not infringe TDK's `984 patentAero/Aero+ GSM Transceiver Chipsets as amatterwhole and the Si4200 and Si4201 Chips individually. We do not believe that an injunction can be sought since the alleged patent has expired. Accordingly, we do not expect any impact on the sale oflaw. On January 6, 2003, the court extended discovery through July 3, 2003, setour products as afinal date for all summary judgment motionsresult ofAugust 4, 2003, and extended the trial date to November 2003.this lawsuit. We are currentlyininvestigating Digcom’s allegations, and intend to respond with appropriate defenses. Due to thediscovery phaseearly stage of thislitigation. We intend to vigorously contest this case, and are unable at this time to determine whetherlitigation, we cannot estimate the outcome of this matter or thelitigation will have a materialresulting financial impacton our results of operations or financial condition in any future period. For a description of risks associated with this pending lawsuit, please see "Risk Factors - Significant litigation over intellectual property in our industry may causeto us,to become involved in costly and lengthy litigation which could seriously harm our business." SECURITIES LITIGATIONif any.25
Securities Litigation
On December 6, 2001, a class action complaint for violations of U.S. federal securities laws was filed in the United States District Court for the Southern District of New York against us, four officers individually and the three investment banking firms who served as representatives of the underwriters in connection with our initial public offering of common stock which became effective on March 23, 2000. On April 19, 2002, a
consolidated amended complaint,Consolidated Amended Complaint, which is now the operative complaint, was filed in the same court. Theaction is being coordinated with over 300 other nearly identical actions filed against other companies. These claims are premised on allegationscomplaint alleges that the registration statement and prospectus for our initial public offering did not disclose that (1) the underwriters solicited and received additional, excessive and undisclosed commissions from certain investors, and (2) the underwriters had agreed to allocate shares of the offering in exchange for a commitment from the customers to purchase additional shares in the aftermarket at pre-determined higher prices. The action seeks damages in an unspecifiedamount.amount and is being coordinated with approximately 300 other nearly identical actions filed against other companies. On July 15, 2002, we moved to dismiss all claims against us and the individual defendants. A court order dated October 9, 2002 dismissed without prejudice numerous individual defendants, including the four officers of our company who had been named individually. OnJuly 15, 2002, we movedFebruary 19, 2003, the Court denied the motion to dismissall claimsthe complaint against us. We have approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a proposed settlement between the plaintiff class and us and theindividual defendants. The court has not ruled on this motion. Manyvast majority of theparties in these actions,other approximately 300 issuer defendants. It is anticipated that any potential financial obligation of us to plaintiffs due pursuant to the terms of the MOU and related agreements would be covered by existing insurance. Therefore, we do not expect that the proposed settlement would involve any payment by us. The MOU and related agreements are subject to a number of contingencies, includingus, are participating in mediation discussions. Although these discussions are underway, there are no assurances that such discussionsthe negotiation of a settlement agreement and approval by the Court. We cannot be certain as to whether or when a settlement willresult in any meaningful progress towards an acceptable settlement. We intend to vigorously contest this case,occur or be finalized and are unable at this time to determine whether the outcome of the litigation will have a material impact on our results of operations or financial condition in any future period.We are not currently involved in any other material legal proceedings.
Item
4.4. Submission of Matter to a Vote of Security HoldersNone.
Item
5.5. Market for theRegistrant'sRegistrant’s Common Equity and Related Stockholder MattersOur common stock has been quoted on the Nasdaq National Market under the symbol
"SLAB"“SLAB” since our initial public offering on March 23, 2000.25The 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 28, 2002,January 3, 2004, the end of our20022003 fiscal year, there were296424 holders of record of our common stock.
HIGH LOW ---------- ----------Fiscal 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 Fiscal Year Ended December 28, 2002 First Quarter................................... $ 39.65 $ 21.56 Second Quarter.................................. 37.54 21.39 Third Quarter................................... 29.09 16.40 Fourth Quarter.................................. 30.40 17.10
HIGH
LOW
Fiscal Year Ended December 28, 2002
First Quarter
$
39.65
$
21.56
Second Quarter
37.54
21.39
Third Quarter
29.09
16.40
Fourth Quarter
30.40
17.10
Fiscal Year Ended January 3, 2004
First Quarter
$
30.27
$
18.89
Second Quarter
32.56
24.22
Third Quarter
53.01
26.10
Fourth Quarter
58.88
39.61
We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business.
In addition,On December 10, 2003, we issued 1,190,034 shares of our
credit agreements with our bank lender prohibits us from paying cash dividends on ourcommon stock in exchange for the outstanding capital stockwithoutof Cygnal Integrated Products, Inc. The issuance of our common stock in connection with theprior consentacquisition of Cygnal was deemed exempt from registration under Section 5 of thelender.Securities Act of 1933 in reliance upon Section 3(a)(10) thereof, pursuant to a fairness hearing conducted by the California Department of Corporations.Our registration statement (Registration No. 333-94853) under the Securities Act of 1933, as amended, relating to our initial public offering of our common stock became effective on March 23, 2000. A total of 3,680,000 shares of common stock
26
were registered. We sold a total of 3,200,000 shares of our common stock and selling stockholders sold a total of 480,000 shares to an underwriting syndicate. The managing underwriters were Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and was completed on March 24, 2000, at a price to the public of $31.00 per share. The initial public offering resulted in net proceeds to us of $90.6 million, after deducting underwriting commissions of $6.9 million and offering expenses of $1.6 million. We used $15 million of the proceeds as part of the consideration paid in the acquisition of Krypton Isolation, Inc. on August 9, 2000. Another $4.3 million was used to pay off equipment loans provided by Imperial Bank. We used another $1.0 million of the proceeds as part of the consideration paid in the acquisition of SNR Semiconductor Incorporated (SNR) on October 2, 2000. In December 2002, we prepaid $2.4 million in satisfaction of our remaining debt and lease obligations to three equipment financing institutions. In December 2003, we paid $0.9 million in direct acquisition costs for professional and legal fees related to the acquisition of Cygnal. As of
December 28, 2002,January 3, 2004, the remaining proceeds were invested in short-term, investment-grade, interest bearing instruments.The information under the caption “Equity Compensation Plan Information” appearing in the Proxy Statement, is incorporated herein by reference.
Item
6.6. Selected Consolidated Financial DataThe selected consolidated balance sheet data as of fiscal year ended
20022003 and20012002 and the selected consolidated statements of operations data for fiscal 2003, 20022001and20002001 have been derived from audited consolidated financial statements included in this Form 10-K. The selected consolidated balance sheet data as of fiscal year ended 2001, 20001999and19981999 and the selected consolidated statements of operations data for fiscal19992000 and19981999 have been derived from audited consolidated financial statements not included in this Form 10-K.26You should read this selected consolidated financial data in conjunction with "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” our consolidated financial statements and the notes to those statements included in this Form 10-K.27
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Fiscal Year --------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- --------- --------- --------- ---------- (in thousands, except per share data)Revenues .................................. $ 182,016 $ 74,065 $ 103,103 $ 46,911 $ 5,609 Cost of revenues .......................... 79,939 31,930 35,601 15,770 2,371 --------- --------- --------- --------- --------- Gross profit .............................. 102,077 42,135 67,502 31,141 3,238 Operating expenses: Research and development ................ 32,001 28,978 19,419 8,297 4,587 Selling, general and administrative ........................ 33,877 20,056 17,648 7,207 2,095 Write off of in-process research & development ................ -- -- 394 -- -- Goodwill amortization ................... -- 4,187 3,307 -- -- Impairment of goodwill and other intangible assets ............... 37 34,885 -- -- -- Amortization of deferred stock compensation .................... 5,173 5,276 3,761 976 8 --------- --------- --------- --------- --------- Operating expenses ........................ 71,088 93,382 44,529 16,480 6,690 Operating income (loss) ................... 30,989 (51,247) 22,973 14,661 (3,452) Other income (expenses): Interest income ......................... 1,582 3,624 3,964 402 261 Interest expense ........................ (617) (751) (1,162) (699) (206) Other income (expense) .................. (647) (2) 74 -- -- --------- --------- --------- --------- --------- Income (loss) before income taxes ................................... 31,307 (48,376) 25,849 14,364 (3,397) Provision (benefit) for income taxes ................................... 10,590 (2,803) 11,832 3,324 -- --------- --------- --------- --------- --------- Net income (loss) ......................... $ 20,717 $ (45,573) $ 14,017 $ 11,040 $ (3,397) ========= ========= ========= ========= ========= Net income (loss) per share: Basic ................................... $ .44 $ (.99) $ .37 $ .73 $ (.37) Diluted ................................. $ .41 $ (.99) $ .29 $ .25 $ (.37) Weighted-average common shares outstanding: Basic ................................... 47,419 45,914 38,326 15,152 9,129 Diluted ................................. 50,811 45,914 48,788 43,657 9,129
Fiscal Year
2003
2002
2001
2000
1999
(in thousands, except per share data)
Revenues
$
325,305
$
182,016
$
74,065
$
103,103
$
46,911
Cost of revenues
162,173
79,939
31,930
35,601
15,770
Gross profit
163,132
102,077
42,135
67,502
31,141
Operating expenses:
Research and development
48,296
32,001
28,978
19,419
8,297
Selling, general and administrative
42,836
33,877
20,056
17,648
7,207
Write off of in-process research & development
1,600
—
—
394
—
Goodwill amortization
—
—
4,187
3,307
—
Impairment of goodwill and other intangible assets
—
37
34,885
—
—
Amortization of deferred stock compensation
4,986
5,173
5,276
3,761
976
Operating expenses
97,718
71,088
93,382
44,529
16,480
Operating income (loss)
65,414
30,989
(51,247
)
22,973
14,661
Other income (expenses):
Interest income
1,368
1,582
3,624
3,964
402
Interest expense
(49
)
(617
)
(751
)
(1,162
)
(699
)
Other income (expense)
(537
)
(647
)
(2
)
74
—
Income (loss) before income taxes
66,196
31,307
(48,376
)
25,849
14,364
Provision (benefit) for income taxes
21,480
10,590
(2,803
)
11,832
3,324
Net income (loss)
$
44,716
$
20,717
$
(45,573
)
$
14,017
$
11,040
Net income (loss) per share:
Basic
$
.92
$
.44
$
(.99
)
$
.37
$
.73
Diluted
$
.86
$
.41
$
(.99
)
$
.29
$
.25
Weighted-average common shares outstanding:
Basic
48,850
47,419
45,914
38,326
15,152
Diluted
52,288
50,811
45,914
48,788
43,657
CONSOLIDATED BALANCE SHEET DATA:
December 28, December 29, December 30, January 1, January 2, 2002 2001 2000 2000 1999 ------------- ------------ ------------ ---------- ----------Cash, cash equivalents and .............. $ 115,166 $ 101,248 $ 96,438 $ 14,706 $ 5,824 short-term investments Working capital ......................... 122,354 106,556 103,347 14,281 5,209 Total assets ............................ 197,065 145,021 184,840 41,958 14,014 Long-term liabilities ................... 949 3,817 5,125 6,223 2,153 Redeemable convertible preferred stock ....................... -- -- -- 12,750 12,750 Total stockholders' equity (deficit) ............................. 155,722 125,407 162,951 8,003 (5,149)27
January 3,
2004
December 28,
2002
December 29,
2001
December 30,
2000
January 1,
2000
Cash, cash equivalents and short-term investments
$
190,313
$
115,166
$
101,248
$
96,438
$
14,706
Working capital
202,712
122,354
106,556
103,347
14,281
Total assets
378,095
197,065
145,021
184,840
41,958
Long-term obligations
9,962
949
3,817
5,125
6,223
Redeemable convertible preferred stock
—
—
—
—
12,750
Total stockholders’ equity
287,205
155,722
125,407
162,951
8,003
Item
7. Management's7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsTHE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT ON FORM 10-K. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. PLEASE SEE THE
"CAUTIONARY STATEMENT"“CAUTIONARY STATEMENT” ABOVE AND"FACTORS“FACTORS AFFECTING OUR FUTURE OPERATINGRESULTS"RESULTS” UNDER ITEM 1 FOR A DISCUSSION OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS. OUR FISCAL YEAR-END FINANCIAL REPORTING PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO DECEMBER 31ST. FISCAL 2003 HAD 53 WEEKS WITH THE EXTRA WEEK OCCURRING IN THE FOURTH QUARTER OF THE YEAR AND ENDED ON JANUARY 3, 2004. FISCAL 2002 HAD 52 WEEKS AND ENDED ON DECEMBER 28, 2002. FISCAL 2001 HAD 52 WEEKS AND ENDED ON DECEMBER 29, 2001.FISCAL 2000 HAD 52 WEEKS AND ENDED ON DECEMBER 30, 2000. FISCAL YEAR 2003 WILL HAVE 53 WEEKS WITH THE EXTRA WEEK OCCURRING IN THE FOURTH QUARTER OF THE YEAR.OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for
the communications industry.a broad range of applications. Our innovative ICs can dramatically reduce the cost, size and system power requirements of the products that our customers sell to consumers. We currently offer ICs that can be incorporated into communications devices, such as wireless phones and modems, as28
well as cable and satellite set-top boxes, residential communication gateways for cable or
DSL,digital subscriber line (DSL), satellite radios and optical network equipment.CustomersWith our recent acquisition of Cygnal Integrated Products, Inc. we offer a family of 8-bit MCUs for use in a broad array of applications such as industrial automation and control, automotive sensors and controls, medical instrumentation, and electronic test and measurement equipment. Our customers during fiscal20022003 included Agere Systems,Ambit,Broadcom, Conexant/PC-Tel, Echostar,PC-TEL,Hughes Network Systems, Sagem, Samsung, Sendo, Smart Link,Sony,Texas Instruments, Thomson and Wavecom.Our company was founded in 1996. Our business has grown rapidly since our inception, as reflected by our employee headcount, which increased to 486 at the end of fiscal 2003, from 364 employees at the end of fiscal 2002
fromand 279 employees at the end of fiscal2001, 256 at the end of fiscal 2000, and 148 at the end of fiscal 1999.2001. As a"fabless"“fabless” semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We also rely onthird-party assemblersthird-parties in Asia to assemble, package, and,packagein the majority of cases, test these diepriorand ship these units tofinal productour customers. We plan to increase the amount of testingand shipping. We offer numerous mixed-signal communication ICs across eight product areas. We commenced research and development for our first IC product, the 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,performed by such third parties, which wereferanticipate will facilitate faster delivery of products toas a design win,our customers (particularly those located inMarch 1998. The first commercial shipmentAsia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity. We have implemented supply chain management software which we believe will improve our ability to scale our operations, reduce our inventory requirements and improve the quality of ourDAAshipment scheduling commitments with our customers through improved efficiency.Our product
was madeset has expanded to a broad portfolio targeting the mobile handset and broad-based mixed-signal applications. Our expertise inApril 1998. Based on the success ofanalog-intensive, high-performance, mixed signal ICs enables us to develop highly differentiated solutions that address large markets. For example, ourfamily of DAA products, we achieved profitability in the fourth quarter of fiscal 1998. In 1999, we introduced a voice codec product, an ISOmodem product and our RF synthesizer product. In 2000, we introduced our ProSLIC product and a clock and data recovery product suitable for SONET physical layer applications. In 2001, we introduced several products, including a GSM transceiver chipset, a digital subscriber line analog front end and added several new optical networking products. In 2002, we expanded our existing product areas by introducing the third-generationsilicon DAA product familyAero+ Transceiver and Wideband Dual ProSLIC. During fiscal 2002,is optimized for the PC modem market; ourwireless products were responsible for almost halfISOmodem® family ofour revenues. Although we have made progress in diversifying our revenue across a variety of product areas, we expect to generally become more dependent on our wireless products for our future sales as, and to the extent, those products become moreembedded modems has been widely adopted byGSM handset manufacturers. Forsatellite set-top box manufacturers; and our Aero™ Global System for Mobile Communications (GSM)/General Packet Radio Services (GPRS) transceiver family is being shipped in mobile handsets worldwide. We continue to introduce next generation ICs with added functionality and further integration. In fiscal 2003, we expanded our Aero Transceiver family with the launch of Aero I/I+, a single package GSM/GPRS transceiver, and we introduced a new ISOmodem product family that integrates our third generation silicon DAA. Through our recently acquired MCU business and our internal development efforts, we furtherdescriptiondiversified our product portfolio. We plan to continue to diversify our product portfolio by introducing products that increase the amount of content we provide for existing applications and by introducing ICs for markets we do not currently address, thereby expanding our total available market opportunity.During fiscal 2003 and 2002, one customer, Samsung, represented 21% and 16% of our
eight product areas, please see "Part I, Item 1. Business and Factors Affecting Future Operating Results - Products." Manyrevenues, respectively. No other single end customer accounted for more than 10% of our revenues in either of these years. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer.During fiscal 2002,There was oneend customer, Samsung, represented 16%distributor, Edom Technology, which accounted for 13% of ourrevenues. Duringtotal revenues during fiscal2001, three customers, in the aggregate, represented 40% of our revenues, including 15% for PC-TEL, 13% for Agere Systems and 12% for Samsung. In fiscal 2000, PC-TEL accounted for 46% of our revenues. No other single end customer accounted for more than 10% of our revenues in any of these years.2003. Two of our distributors, Uniquest and Edom Technology,each selling products to several customers in Asia,represented 20% and 16% of our fiscal 2002revenues, and 14% and 12% of our fiscal 2001 28revenues, respectively. No other distributor accounted for more than 10% of our revenues in fiscal years 2002, 20012003 or2000.2002.The percentage of our revenues derived from customers located outside of the United States was 80% in fiscal 2003, 79% in fiscal 2002 and 66% in fiscal
2001,2001. This percentage increase in the two most recent years reflects our product and21%customer diversification, as many of our mobile handset, and increasingly, broad-based mixed signal customers manufacture and design their products infiscal 2000.the Pacific Rim region. All of our revenues to date have been denominated in U.S. dollars. We believe that alarge percentagemajority of our revenues will continue to be derived from customers outside of the United States as our products receive acceptance in international markets.29
The sales cycle for the test and evaluation of our ICs can range from
1one month to 12 months or more. An additional3three to6six months or more may be required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we may experience a significant delay between incurring expenses for research and development and selling, general and administrative efforts, and the generation of corresponding sales, if any. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever,generally iscan be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.Our limited operating historyRapid changes in our markets and
rapid growthacross our product areasmakesmake it difficult for us toassessestimate the impact of seasonal factors on our business. Because many of our ICs are designed for use in consumer products such asPCspersonal computers (PCs) and wireless telephones, we expect that the demand for our products will be subject to seasonal demand resulting in increased sales in the third and fourth quarters of each year when customers place orders to meet holiday demand.We now group our products into two categories, mobile handset products or broad-based mixed-signal products. Mobile handset products include the Aero Transceivers and, to the extent incorporated into handsets, the RF Synthesizers. Broad-based mixed-signal products include our silicon DAA, ISOmodem, ProSLIC, satellite tuner, DSL analog front end, clock chips, optical transceivers and CDRs, general purpose RF Synthesizers for non-handset applications, as well as the Cygnal MCU products. Comparison of prior year financial results also have been revised to reflect this change in product grouping.
The following describes the line items set forth in our consolidated statements of operations:
REVENUES. Revenues are generated principally by sales of our ICs. We recognize revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales direct to customers and contract manufacturers upon
the transfershipment. Certain oftitle, which generally occurs upon shipment toourcustomers. Revenuessales aredeferred on shipmentsmade to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, We defer the revenue and gross profit on such sales untilthey are resold by suchthe distributors sell the product to the endcustomers.customer. Our products typically carry a one-year replacementguarantee.warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period and the prices we charge for our products. The vast majority of our revenueswaswere negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including to establish a relationship with a new customer, as an incentive for customers to purchase products in larger volumes, to provide profit margin to our distributors who resell our products or in response to competition. In addition, as a product matures, we expect that the average selling price forour productssuch product will decline due to the greater availability of competingproducts. The sales of our wireless products into the highly competitive GSM handset market are expected to comprise a larger percentage of our revenue, resulting in increased downward pressure on our average selling prices for individualproducts. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products.COST OF REVENUES. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties and amortization of purchased software,
andother intellectual property licensecosts;costs, and certain acquired intangible assets; an allocated portion of our occupancy costs;andallocable depreciation of testing equipment and leaseholdimprovements.improvements; impairment charges related to certain manufacturing equipment held for sale or abandoned; and a portion of the settlement costs associated with the TDK Semiconductor Corporation (TDK) patent infringement lawsuit. Generally, we depreciate equipment over four years on a straight line basis and leasehold improvements over the shorter of the estimated useful life or the applicable lease30
term. Recently introduced products tend to have higher cost of revenues per unit due to initially low production volumes required by our customers and higher costs associated with new package variations. Generally, as production volumes for a product increase, unit production costs tend to decrease as our yields improve and our semiconductor fabricators, assemblers and
our internaltest operations achieve greater economies of scale for that product.29Additionally, the cost of wafer procurement and assembly and test services, which is aare significantcomponentcomponents of cost of goods sold,variesvary cyclically with overall demand for semiconductors andavailabilityour suppliers’ available capacity ofsupply from our foundries.such products and services.RESEARCH AND DEVELOPMENT. Research and development expense consists primarily of compensation and related costs of employees engaged in research and development activities,
and the relatednew product mask, wafer andwaferpackaging costs, external consulting and services costs, amortization of purchased software, equipment tooling, amortization of acquired intangible assets, as well as an allocated portion of our occupancy costs for such operations. We generally depreciate our research and development equipment over four years and amortize our purchased software from computer-aided design tool vendors over three to four years. Development activities include the design of new products, refinement of existing products andcreationdesign ofnew product masks and wafers andtest methodologies to ensure compliance with required specifications.SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense consists primarily of personnel-related expenses, related allocable portion of our occupancy costs, sales commissions to independent sales representatives, professional fees,
directors'directors’ andofficers'officers’ liability insurance, patent litigation legal fees, other promotional and marketing expenses, and reserves for bad debt.Write offsWrite-offs of uncollectible accounts have been insignificant to date.WRITE OFF OF IN-PROCESS RESEARCH & DEVELOPMENT. Write off of in-process research & development reflects the write off of in-process research and development costs which we acquired in connection with our acquisition of Cygnal Integrated Products, Inc. (Cygnal) in fiscal 2003 and Krypton Isolation, Inc. (Krypton)
.in fiscal 2000.GOODWILL AMORTIZATION. We adopted Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, at the beginning of fiscal 2002 and accordingly ceased amortization of goodwill. Goodwill amortization through December 2001 includes the amortization of goodwill purchased in connection with our acquisitions of Krypton in August 2000 and SNR in October 2000. Goodwill was amortized over four to five years using the straight line method.
We adopted Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, at the beginning of fiscal 2002 and accordingly have ceased amortization of goodwill.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
arewas in excess oftheirits fair market value.AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant of stock options and direct issuances of stock to our employees, we
recordedrecord deferred stock compensation, representing, for accounting purposes, the difference between the exercise price of option grants, or the issuance price of direct issuances of stock, as the case may be, and thedeemedfair value of our common stock at the time of such grants or issuances. The deferred stock compensation is amortized over the vesting period of the applicable options or shares, generally five to eight years. The amortization of deferred stock compensation is recorded as an operating expense.INTEREST INCOME. Interest income reflects interest earned on average cash, cash equivalents and investment balances. We may from time to time elect to invest in tax-advantaged short-term investments yielding lower nominal interest proceeds.
INTEREST EXPENSE. Interest expense consists of interest on our long-term debt, capital leases and
capital leaseother long-term obligations.OTHER INCOME (EXPENSE). Other income (expense) reflects our share of income and losses
inrelated to our equity investment in ASIC Design Services, Inc. (ADS) and the gain on the disposal of fixed assets.PROVISION
(BENEFIT)FOR INCOME TAXES. We accrue a provision(benefit)for federal and state income tax at the applicable statutory rates adjusted for non-deductible expenses, research and development tax credits and interest income from tax-advantaged short-term investments.31
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 2003 TO FISCAL 2002
REVENUES. Revenues in fiscal 2003 were $325.3 million, an increase of $143.3 million, or 78.7%, from revenues of $182.0 million in fiscal 2002. The increase was primarily attributable to significant growth in the volume of sales for our Aero Transceiver used in GSM mobile handsets and ISOmodem products used in satellite set top boxes, primarily reflecting gains in market share and an increase in the overall market size. We also continued to see significant growth in the sales of our DAA products, primarily reflecting an increase in the overall market demand for these products and strength in mobile notebook computer modems. During fiscal 2003, we experienced normal decreases in the average selling prices for certain products. However, these price decreases were offset by the significant increases in sales volumes for our products and the introduction of higher priced next generation products and product extensions. As a product becomes more mature, we expect it to experience additional decreases in average selling prices in the future. Our revenue will be dependent on our ability to increase sales volumes and introduce higher priced next generation products and product extensions.
GROSS PROFIT. Gross profit in fiscal 2003 was $163.1 million, or 50.1% of revenues, an increase of $61.0 million, or 59.8%, as compared with gross profit of $102.1 million, or 56.1% of revenues, in fiscal 2002. The increase in gross profit dollars was primarily due to the substantial increase in sales volume. The decrease in gross margin percentage was primarily due to (1) a $15.3 million charge associated with a patent litigation settlement in fiscal 2003; (2) a greater portion of our sales being comprised of our lower margin mobile handset products; and (3) a $0.8 million impairment charge associated with test equipment held for sale. We expect to experience continued declines in the average selling prices of our mobile handset products. This downward pressure on gross profit as a percentage of revenues may be offset to the extent we are able to introduce higher margin new products and continue to gain market share with our broad-based mixed-signal ICs.
RESEARCH AND DEVELOPMENT. Research and development expense in fiscal 2003 was $48.3 million, or 14.8% of revenues, which reflected an increase of $16.3 million, or 50.9%, as compared with research and development expense of $32.0 million, or 17.6% of revenues, in fiscal 2002. The increase in the dollar amount of research and development expense was principally due to increased staffing and associated costs to pursue new product development opportunities, and continue to develop new testing methodologies for newly introduced and existing products. As a percentage of revenues, research and development expense decreased due to the substantial increase in revenues in fiscal 2003. We expect that research and development expense will increase in absolute dollars in future periods as we continue to increase our staffing and associated costs to pursue additional new product development opportunities, and may fluctuate as a percentage of revenues due to changes in sales volume and the timing of certain expensive items related to new product development initiatives, such as engineering mask and wafer costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense in fiscal 2003 was $42.8 million, or 13.2% of revenues, which reflected an increase of $8.9 million, or 26.4%, as compared to selling, general and administrative expense of $33.9 million or 18.6% of revenues, in fiscal 2002. The increase in the dollar amount of selling, general and administrative expense was principally attributable to increased staffing and associated costs, sales commissions associated with our higher revenues and the conversion of our largest customer account, Samsung, from a non-commission bearing distributor account to a commission bearing direct account, and employee bonuses resulting from increased earnings. This increase was partially offset by lower patent litigation-related legal costs following settlement of the TDK litigation. We expect that selling, general and administrative expense will increase in absolute dollars in future periods as we expand our sales channels, marketing efforts and administrative infrastructure. In addition, we expect selling, general and administrative expense to fluctuate as a percentage of revenues because of (1) potential significant variability in our future sales volumes; (2) the likelihood that indirect sales distribution channels, which typically entail the payment of commissions, will account for a larger portion of our revenues in future periods and, therefore, increase our selling, general and administrative expense relative to a direct sales force performing at satisfactory levels of productivity; (3) fluctuating usage of advertising to promote our products and, in particular, our newly introduced products; and (4) fluctuating legal costs related to litigation and intellectual property matters.
32
WRITE OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. We wrote off $1.6 million of in-process research and development in fiscal 2003 related to our acquisition of Cygnal. We did not have any write-offs in fiscal 2002.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. We did not recognize any impairment of goodwill and other intangible assets during fiscal 2003. During fiscal 2002, we wrote off $37 thousand, which represented the remaining goodwill related to the fiscal 2000 acquisition of Krypton.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock compensation for the difference between the exercise price of option grants or the issuance price of direct issuances of stock, as the case may be, and the deemed fair value of our common stock at the time of such grants or issuances. We are amortizing this amount over the vesting periods of the applicable options or issuances, which resulted in amortization expense of $5.0 million in fiscal 2003, as compared to $5.2 million in fiscal 2002. In fiscal 2004, we expect our amortization expense to remain at approximately this same level.
INTEREST INCOME. Interest income in fiscal 2003 was $1.4 million, as compared to $1.6 million in fiscal 2002. The decrease was generally due to lower interest rates on cash and short-term investments balances during the current year and our transition to tax-exempt investments which bear even lower interest rates.
INTEREST EXPENSE. Interest expense in fiscal 2003 was $49 thousand as compared to $0.6 million in fiscal 2002. The decrease in interest expense was primarily due to lower debt, lease and other long-term payable balances during the recent period. We expect our interest expense to remain at a modest level in fiscal 2004.
OTHER INCOME (EXPENSE). Other expense in fiscal 2003 was $0.5 million as compared to $0.6 million in fiscal 2002, which primarily reflects our share of the losses in our investment in ADS.
PROVISION (BENEFIT) FOR INCOME TAXES. Our tax provision rate, excluding the impact of the amortization of deferred stock compensation, the write off of in-process research and development and impairment of goodwill and other intangibles, was 30% in fiscal 2003 as compared to the 29% rate in fiscal 2002. This increase was due in part to the fact that our tax-advantaged interest income as a percentage of pre-tax income was lower in fiscal 2003 than it was in fiscal 2002. For fiscal 2003, our tax provision reflects a deduction for the amount of employee income attributable to employee stock-based awards that relates to the amortization of deferred stock compensation. In prior years such deductions were recorded as an increase to additional paid-in capital. The impact of not reflecting these deductions in the tax provision (benefit) in prior years is not material. The tax provision rate differs from the statutory rate due to the impact of research and development tax credits, state taxes, tax-advantaged interest income and other permanent items.
COMPARISON OF FISCAL 2002 TO FISCAL 2001
REVENUES.REVENUES. Revenues in fiscal 2002 were $182.0 million, an increase of $107.9 million, or 146%, from revenues of $74.1 million in fiscal 2001. The increase
30was primarily attributable to significant growth in the volume of sales for our wirelessmobile handset products,including the Aero Transceiver and RF Synthesizer,reflecting a growing number of customers adopting these products into their offerings. We also continued to see significant growth in the sales of ourwireline products,broad-based mixed-signal ICs, particularly the ISOmodem and DAA, reflecting increasing demand by existing customers for these products. During fiscal 2002, we experienced normal decreases in the average selling prices for certain products. However, these price decreases were offset by the significant increases in sales volumes for our products and the introduction of higher priced next generation products and product extensions.GROSS
PROFIT.PROFIT. Gross profit in fiscal 2002 was $102.1 million, or 56.1% of revenues, an increase of $59.9 million, or 142%, as compared with gross profit of $42.1 million, or 56.8% of revenues, in fiscal 2001. The increase in gross profit dollars was primarily due to the substantial increase in sales volume. The decrease in gross margin percentage was primarily due to a greater portion of our sales being comprised of our lower marginwirelessmobile handset products which have lower average selling prices and higher material costs than our other products. The gross margin33
percentage in fiscal year 2002 was also negatively impacted by start up costs associated with the rapid production ramp of our Aero Transceiver product.
RESEARCH AND
DEVELOPMENT.DEVELOPMENT. Research and development expense in fiscal 2002 was $32.0 million, or 17.6% of revenues, which reflected an increase of $3.0 million, or 10.4%, as compared with research and development expense of $29.0 million, or 39.1% of revenues, in fiscal 2001. The increase in the dollar amount of research and development expense was principally due to increased staffing and associated costs to pursue new product development opportunities, and continue to develop new testing methodologies for newly introduced and existing products. As a percentage of revenues, research and development expense decreased significantly due to the substantial increase in revenues in fiscal 2002.We expect that research and development expense will increase in absolute dollars in future periods as we continue to increase our staffing and associated costs to pursue additional new product development opportunities, and may fluctuate as a percentage of revenues due to changes in sales volume and the timing of certain expensive items related to new product development initiatives, such as engineering mask and wafer costs.SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense in fiscal 2002 was $33.9 million, or 18.6% of revenues, which reflected an increase of $13.8 million, or 68.9%, as compared to selling, general and administrative expense of $20.0 million or 27.0% of revenues, in fiscal 2001. The increase in the dollar amount of selling, general and administrative expense was principally attributable to increased staffing and associated costs, legal fees incurred during patent litigation, sales commissions associated with our higher revenues and employee bonuses resulting from increased earnings.
We expect to continue to incur significant legal expenses, fluctuating with case activity, during fiscal year 2003 as a result of the ongoing infringement lawsuit filed against us by TDK Semiconductor Corporation in August 2001. We expect that selling, general and administrative expense will increase in absolute dollars in future periods as we expand our sales channels, marketing efforts and administrative infrastructure. In addition, we expect selling, general and administrative expense to fluctuate as a percentage of revenues because of (1) the likelihood that indirect sales distribution channels, which typically entail the payment of commissions, will account for a larger portion of our revenues in future periods and, therefore, increase our selling, general and administrative expense relative to a direct sales force performing at satisfactory levels of productivity; (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.GOODWILL AMORTIZATION. We did not incur goodwill amortization in fiscal 2002 due to the adoption of SFAS No. 142. Goodwill amortization in fiscal 2001 was $4.2 million. In fiscal 2001, we wrote off the majority of our goodwill balances after determining that they were permanently impaired.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS. During fiscal 2001, we performed an assessment of the carrying value of our long-lived assets recorded in connection with our acquisitions of Krypton and SNR. As a result of this assessment, we concluded that the value of these assets had become permanently impaired and recorded charges of $33.3 million to write off related goodwill and $1.6 million to reduce the carrying value of related intangible
31assets to their fair value. During fiscal 2002, we determined that the remaining goodwill of $37,000 related to Krypton was impaired and wrote off the balance. There were no other impairments of goodwill and other intangible assets in fiscal 2002. AMORTIZATION OF DEFERRED STOCK
COMPENSATION.COMPENSATION. We recorded deferred stock compensation for the difference between the exercise price of option grants or the issuance price of direct issuances of stock, as the case may be, and the deemed fair value of our common stock at the time of such grants or issuances. We are amortizing this amount over the vesting periods of the applicable options orrestricted stock,issuances, which resulted in amortization expense of $5.2 million in fiscal 2002, as compared to $5.3 million in fiscal 2001.In fiscal 2003, we expect our amortization expense to stay at roughly this same level.INTEREST INCOME. Interest income in fiscal 2002 was $1.6 million, as compared to $3.6 million in fiscal 2001. The decrease was generally due to lower interest rates on cash and short-term investments balances during the current year and our transition to tax-exempt investments which bear even lower interest rates.
INTEREST
EXPENSE.EXPENSE. Interest expense in fiscal 2002 was $0.6 million as compared to $0.8 million in fiscal 2001. The decrease in interest expense was primarily due to lower debt and lease payable balances during the recent period. In December2002.2002, we prepaid $2.4 million in satisfaction of our remaining debt and lease obligations to three equipment financing institutions.As a result, we expect to pay little to no interest expense in fiscal 2003.OTHER INCOME (EXPENSE). Other expense in fiscal 2002 was $0.6 million, which primarily reflects our share of the losses in our investment in ADS. We did not have any equity investments, and therefore no corresponding losses, in fiscal 2001.
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax provision rate, excluding the impact of goodwill amortization, impairment of goodwill and other intangible assets, and deferred stock compensation amortization, was 29.0% in fiscal 2002, as compared to our effective tax benefit rate of 69.6% in fiscal 2001. Such fiscal 2002 effective tax provision rate reflects our tax benefits from our estimated research and development tax credit, tax-exempt interest income, and other deductions. The effective tax benefit in fiscal 2001 was attributable to our pre-tax loss as well as tax benefits from our estimated research and development tax credit, tax-exempt interest income and other deductions.
For additional information regarding our provision (benefit) for income taxes, see Note 8 of the Notes to Consolidated Financial Statements. 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. 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 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 32products. As a percentage of revenues, research and development expense increased significantly due to the substantial decrease in sales volume in fiscal 2001. 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. 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, we concluded that the value of these assets had become permanently impaired and recorded charges of $33.3 million to write off related goodwill and $1.6 million to reduce the carrying value of related intangible assets to their fair value. 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 $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 prevailing 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. OTHER INCOME (EXPENSE). Other expense in fiscal 2001 was $2,000 as compared to other income of $0.1 million in fiscal 2000. 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 fiscal 2001 33tax benefit rate was higher than the fiscal 2000 tax provision rate primarily due to the fiscal 2001 increased tax benefit from the estimated research and development tax credit in proportion to the amount of the fiscal 2001 pre-tax loss.34
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of
December 28, 2002January 3, 2004 consisted of$115.2$190.3 million in cash, cash equivalents and short-term investments. Ourshort termshort-term investments consist primarily of obligations of municipalities and agencies of the U.S. government that have initial maturities of less than one year.In
addition,August 2003, wehave credit available under aterminated our bank credit facilitywithfor a revolving line of credit for borrowings and letters ofcredit of up to the lesser of $5.0 million or 80% of eligible accounts receivable at the bank's prime lending rate, which was 4.25% as of December 28, 2002.credit. AtDecember 28, 2002,January 3, 2004, a letter of credit for $0.4 million related to a building lease was outstanding underthe revolving linea letter of creditand $4.6 million was available for new borrowings or letters of credit. The bank facility is secured byagreement with ouraccounts receivable, inventories, capital equipment and all other unsecured assets (excluding intellectual property). The line of credit prohibits the payment of cash dividends and requires the maintenance of tangible net worth and compliance with financial ratios that measure our immediate liquidity and our ongoing ability to pay back our outstanding obligations. We believe we were in compliance with all covenants at December 28, 2002.bank.Net cash provided by operating activities was $71.9 million during the fiscal year ended January 3, 2004, compared to $39.0 million
induring the fiscal2002, compared to $11.7 million in fiscal 2001. Fiscal 2002 operating cash flows reflect our net income of $20.7 million, as adjusted for non-cash charges (depreciation and amortization and equity investment loss) of $19.4 million, and a net decrease in the non-cash components of our working capital of $1.1 million.year ended December 28, 2002. The increasein operating cash flow during fiscal 2002was principally due tonet incomerevenues generated by a higher volume of sales over a relatively fixed cost structure. This increase was partially offset by a $15.3 million cash payment relating to the settlement of patent litigation with TDK. Operating cash flows during the fiscal year ended January 3, 2004 reflect our net income of $44.7 million, as adjusted for non-cash adjustments (depreciation, amortization, write-off of in-process research and development, equity investment losses, and tax benefits associated with the exercise of stock options) of $34.5 million, and a net decrease in the components of our working capital of $7.3 million.Net cash used in investing activities was
$46.3$11.2 millioninduring the fiscal2002,year ended January 3, 2004, compared to net cashgeneratedused of$18.7$46.3 millioninduring the fiscal2001.year ended December 28, 2002. The decreasein cash flows from investing activities during fiscal 2002was principally due tothean increase in netpurchasematurities of short-term investments of$22.1$2.0 million,capital expendituresnet cash acquired of$21.5$5.4 millionand investment in other assets of $2.7 million. Capital expenditures increased by $16.1 million from 2001 principally duerelated to the purchase ofadditional semiconductor test equipment to allow us to test our wireless products for GSM mobile handsets. We also made investmentsCygnal, and a decrease of $18.6 million in purchases of fixed assets and otherassets of $2.7 million to acquire certain technology rights during fiscal 2002, including a $1.3 million equity investment in ADS, a privately-held company engaged in the development of ICs for networking devices.assets.We anticipate capital expenditures of
$12approximately $20.0 million for fiscal2003. Assuming the achievement by ADS of certain development milestones and satisfaction of other conditions, we may be required to make an additional equity investment in ADS of $1.5 million in fiscal 2003.2004. Additionally, as part of our growth strategy, wewill also continueexpect to evaluate opportunities to invest in or acquire otherbusinessbusinesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities.Net cash
used inprovided by financing activities was$1.1$16.7 millioninduring the fiscal2002,year ended January 3, 2004, compared to net cashgeneratedused of$25,000 in$1.1 million during the fiscal2001.year ended December 28, 2002. Thedecreaseincrease in cash flows from financing activities during the fiscal2002year ended January 3, 2004 was principally due tothe prepayment of $2.4 million to extinguish our debt and lease obligations with three institutional lenders. The decrease was partially offset by theproceeds fromstock option exercises andthe exercise of employee stockpurchases. Theoptions and purchases under our employee stock purchase plan.In our day-to-day business activities, we incur certain commitments to make future payments under contracts such as purchase orders, leases and other long-term contracts. Maturities under these contracts are set forth in the following
is a summarytable as ofour consolidated contractual payment obligations at December 28, 2002 (see Note 7 of the consolidated financial statements),January 3, 2004, in thousands:
2003 2004 2005 2006 2007 Thereafter ------- ------- ------- ------- ------- ------------Facilities leases, net ............ $ 2,071 $ 2,088 $ 2,144 $ 1,691 $ 1,022 $ --34
Payments due by period
2004
2005
2006
2007
2008
Thereafter
Operating lease obligations
$
2,544
$
2,719
$
2,384
$
1,451
$
316
$
393
Purchase obligations
83,477
—
—
—
—
—
Other long-term obligations
—
6,644
1,945
1,229
144
—
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, and the expansion of our sales and marketing activities. We believe our existing cash
balancesandcredit facilityinvestment balances are sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.35
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted
accounting principlesin the United States requires that we make estimates and assumptions that affect the amounts reported. Changes inthefacts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates. We also have other policies that we consider to be key accounting policies, such as our policies for revenue recognition, including the deferral of revenues and gross profit on sales to distributors; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective.Allowance for doubtful accounts – We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance to reduce the net receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on a variety of factors including the length of time the receivables are past their contractual due date, the current business environment, and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions worsened, additional allowances may be required in the future. Accounts receivable write-offs to date have been minimal.
Inventory Valuation - We assess the recoverability of inventories through an on-going review of inventory levels in relation to sales history, backlog and forecasts, product marketing plans and product life cycles. To address the difficult, subjective and complex area of judgment in determining appropriate inventory valuation in a consistent manner, we apply a set of methods, assumptions and estimates to arrive at the net inventory amount by completing the following: First, we identify any inventory that has been previously reserved in prior periods. This inventory remains reserved until sold, destroyed or otherwise disposed of. Second, we examine the inventory line items that may have some form of obsolescence due to non-conformance with electrical and mechanical standards as identified by our quality assurance personnel and provide reserves. Third, the remaining inventory not otherwise identified to be reserved is compared to an assessment of product history and forecasted demand, typically over the last six months and next six months, or actual firm backlog on hand. However, microcontroller product history and forecasted demand is typically measured over the last twelve months and next twelve months, respectively, due to the breadth of customers and markets served and longer product life cycles. Finally,
an analysis ofthe result of this methodology is compared against the product life cycle and competitive situations in the marketplace driving the outlook for the consumption of the inventory and the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required.Impairment of long-lived assets
-– We review long-lived assets which are held and used, includinggoodwill,fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast.AllowanceOccasionally, we may hold certain assets fordoubtful accounts -sale. In those cases, the assets are reclassified on our balance sheet from long-term to current, and the carrying value of such assets are reviewed and adjusted each period thereafter to the fair value less expected cost to sell.We
evaluatealso review thecollectibilitycarrying values of goodwill and other intangible assets with indefinite lives annually for possible impairment. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value for such assets to our net book value. In determining fair value, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. The second step of the36
analysis compares the implied fair value of our
accounts receivable based on a combinationgoodwill to its carrying amount. If the carrying amount offactors. In circumstances where we are aware of a specific customer's inability to meetgoodwill exceeds itsfinancial obligations to us, we record a specific allowance to reduce the net receivable to the amount we reasonably believe will be collected. For all other customers,implied fair value, we recognizeallowancesan impairment loss equal to that excess amount. We test our goodwill fordoubtful accounts based on a varietyimpairment annually as offactors includingthelength of time the receivables are past their contractual due date, the current business environment, and our historical experience. If the financial conditionfirst day of ourcustomers were to deteriorate orfourth fiscal quarter and in interim periods ifeconomic conditions worsened, additional allowancescertain events occur indicating that the carrying value of goodwill may berequired in the future. Accounts receivable write-offs to date have been immaterial.impaired.Income Taxes
-– We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our35consolidated balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered from future taxable income (loss) and, to the extent we believe that recovery is not likely, we must establish a valuation allowance against the deferred tax asset. WeFurther, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve and could result in additional assessments of income tax. In our opinion, adequate provisions for income taxes have been made for allyears.periods.RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2001,January 2003, theFinancial Accounting Standards Board (FASB)FASB issued FASB Interpretation No. 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. There has been no material impact to our financial statements from potential VIEs entered into after January 31, 2003 and we do not expect there to be a material impact to our financial statements from the adoption of the deferred provisions in the first quarter of fiscal year 2004.In May 2003, the FASB issued SFAS
Nos. 141No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150 establishes standards on the classification and142, BUSINESS COMBINATIONSmeasurement of certain financial instruments with characteristics of both liabilities andGOODWILL AND OTHER INTANGIBLE ASSETS.equity. The provisions of SFASNo. 141 replaced Accounting Principles Board (APB) No. 16 and eliminates pooling-of-interests accounting. 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. 142150 are effective for financial instruments entered into or modified after May 31, 2003 and to allbusiness combinations completed after June 30, 2001. Upon a company's adoptionother instruments that exist as ofSFAS No. 142, a company ceases to amortize goodwill recorded for business combinations consummated prior to July 1, 2001, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 are reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001. We adopted SFAS No. 142 on December 30, 2001,the beginning offiscal 2002. In connection withtheadoption of SFAS No. 142, we performed a transitional goodwill impairment assessment.first interim financial reporting period beginning after June 15, 2003. The adoption of SFASNo. 141 and SFAS No. 142150 did not have a material impact on our results of operations or financial position.In
August 2001,December 2003, theFASBSEC issuedSFASStaff Accounting Bulletin (SAB) No.144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,104, REVENUE RECOGNITION (SAB No. 104), whichsupersedes SFAScodifies, revises and rescinds certain sections of SAB No.121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF; however, it retains the fundamental provisions of that statement related101, REVENUE RECOGNITION, in order tothe recognitionmake this interpretive guidance consistent with current authoritative accounting andmeasurement of the impairment of long-lived assets to be "heldauditing guidance andused." In addition, the Statement provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed of other than by sale be classified as "heldSEC rules andused" until it is disposed of, and establishes more restrictive criteria to classify an asset as "held for sale." We adopted SFASregulations. The changes noted in SAB No.144 on December 30, 2001, but the adoption104 did not have a materialimpacteffect on our consolidated results of operations, consolidated financial position orfinancial position. In June 2002 the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. We do not believe that the adoption of SFAS No. 146 will have a material impact on our financial statements. In December 2002, FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about those effects in interim financial information. Since we are continuing to account for stock- based compensation according to APB 25, our adoption of SFAS No. 148 requires us to provide prominent disclosures about the effects of FAS 123 on reported income and will require us to disclose these affects in the interim financial statements as well.consolidated cash flows.Item
7A.7A. Quantitative and Qualitative Disclosures about Market RiskAll of our investments are entered into for other than trading purposes. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in
36short-term instruments. Based on our investment holdings as of December 28, 2002,January 3, 2004, an immediate1%1 percentage point decline in theinterest ratesyield for such instruments would decrease our annual interest income by$1.1$1.9 million. We believe that our investment policy is conservative, both in terms of the average maturity of our investments and the credit quality of the investments we hold.37
Item
8.8. Financial Statements and Supplementary DataThe Financial Statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning on page F-1.
Item
9.9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.
PART III Certain information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference.We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
("CEO")(CEO) and Chief Financial Officer("CFO")(CFO), of the effectivenessof the design and operationof our disclosure controls and procedures, as defined in Rule13a-14(c)13a-15(e) under the Securities Exchange Act of 1934 (the"Exchange Act")Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as ofDecember 28, 2002January 3, 2004 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the38SEC'sSEC’s rules and forms. There have been no significant changes in our internal controls or other factors that could significantly affect our internal controls subsequent toDecember 28, 2002.January 3, 2004.Certain information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned “Proposal 1 — Election of Directors”, “Executive Compensation” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934.”
Item 11. Executive Compensation
The information under the caption “Executive Compensation,” appearing in the Proxy Statement, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption “Ownership of Securities” and “Equity Compensation Plan Information” appearing in the Proxy Statement, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption “Certain Transactions,” appearing in the Proxy Statement, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information related to audit fees and services appearing in the Proxy Statement, is incorporated herein by reference.
38
Item
15.15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K(a) 1. Financial Statements
(a)
1.
Financial Statements
SILICON LABORATORIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
2. Schedules
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
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.10-K.
(b)
Reports on Form 8-K.
During the fourth quarter of fiscal
year 2002,2003, we filed the following Current Reports on Form 8-K:We filed a Form
8-K8-K/A on October 3, 2003 (Item 2 and 7) providing the Agreement and Plan of Reorganization, dated September12, 2002 (Item 5) announcing the appointment of Russell J. Brennan as chief financial officer.25, 2003, by and among Silicon Laboratories Inc., Homestead Enterprises, Inc., and Cygnal Integrated Products, Inc.We filed a Form 8-K on October
22, 200220, 2003 (Item9)7 and 12) providingcertificationthe press release describing our results of operations for the fiscal quarter ended September 27, 2003.We filed a Form 8-K/A on November 14, 2003 (Item 2 and 7) providing the financial statements and pro forma financial information of Cygnal Integrated Products, Inc., which was required due to our plan to acquire all of Cygnal’s outstanding capital stock.
We filed a Form 8-K on December 11, 2003 (Item 5) announcing the completion of the acquisition of Cygnal Integrated Products, Inc., pursuant to the
SecuritiesAgreement andExchange Commission, as required by Section 906Plan ofthe Sarbanes-Oxley Act of 2002.Reorganization dated September 25, 2003.39
(c) Exhibits
Exhibit
Number2.1*
Agreement and Plan of Reorganization, dated September 25, 2003, by and among Silicon Laboratories Inc., Homestead Enterprises, Inc., and Cygnal Integrated Products, Inc. (filed as Exhibit
Number ------2.1 to the Form 8-K filed October 3, 2003). 3.1*
Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. filed as Exhibit 3.1 to the
Registrant'sRegistrant’s Registration Statement on Form S-1 (Securities and Exchange Commission File No. 333-94853 (the"IPO“IPO RegistrationStatement"Statement”)).39
Exhibit Number ------3.2* Form of3.2
Second 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
10.299.1 to theIPORegistrant’s RegistrationStatement)Statement on Form S-8 (Securities and Exchange Commission File No. 333-60794) filed on May 11, 2001).10.3*
Silicon Laboratories Inc. Employee Stock Purchase Plan (filed as Exhibit 10.3 to the IPO Registration Statement).
10.4*
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*10.5*
Lease Agreement dated October 27, 1999 by and between Silicon Laboratories Inc. and Stratus 7000 West Joint Venture (filed as Exhibit 10.6 to the IPO Registration Statement).
10.7*10.6*
Lease Agreement dated June 29, 2000 by and between Silicon Laboratories Inc. and Stratus 7000 West Joint Venture. (filed as Exhibit 10.19 to the
Registrant'sRegistrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2000)10.8* Master Revolving Note dated September 5, 2001 by and between.10.7
Silicon Laboratories Inc.
and Comerica Bank-Texas filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q dated October 22, 2001. 10.9* 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. 10.10* 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. 10.11* Letter Agreement dated June 4, 2002 by and between Silicon Laboratories Inc. and Comerica Bank-Texas filed as Exhibit 10.13 to the Quarterly Report on Form 10-Q dated July 22, 2002.2004 Bonus Plan.21
Subsidiaries of the Registrant.
23.1
Consent of Ernst & Young LLP, Independent Auditors.
99.131.1
Certification
toof theSecurities and Exchange Commission,Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of the Principal Accounting Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated herein by reference to the indicated filing.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on January
22, 2003. SILICON LABORATORIES INC. By: /s/ Navdeep S. Sooch ---------------------- Navdeep S. Sooch CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD26, 2004.
SILICON LABORATORIES INC.
By:
/s/ Daniel A. Artusi
Daniel A. Artusi
CHIEF EXECUTIVE
OFFICER AND PRESIDENTPursuant 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//s/ Navdeep S. Sooch
Chairman of the Board
January
22, 2003 - ---------------------------------- (principal executive officer)26, 2004Navdeep S. Sooch
Chief Executive Officer,
/s/ Daniel A. Artusi
President and Director
January 26, 2004
Daniel A. Artusi
(principal executive officer)
Vice President and Chief
/s/ Russell J. Brennan/s/ John W. McGovern
Financial Officer
January
22, 2003 - ---------------------------------- (principal26, 2004John W. McGovern
(principal financial and
Russell J. Brennanaccounting officer)/s/ Jeffrey W. Scott/s/ David R. Welland
Vice President and Director
January
22, 2003 - ---------------------------------- Jeffrey W. Scott /s/26, 2004David R. Welland
Vice President and/s/ William G. Bock
Director
January
22, 2003 - ---------------------------------- David R. Welland /s/26, 2004William G. Bock
/s/ H. Berry Cash
Director
January 26, 2004
H. Berry Cash
/s/ Robert Ted Enloe, III
Director
January 26, 2004
Robert Ted Enloe, III
/s/ Laurence G. Walker
Director
January 26, 2004
Laurence G. Walker
/s/ William P. Wood
Director
January
22, 2003 - ----------------------------------26, 2004William P. Wood
/s/ H. Berry Cash Director January 22, 2003 - ---------------------------------- H. Berry Cash /s/ William G. Bock Director January 22, 2003 - ---------------------------------- William G. Bock41
CERTIFICATIONS I, Navdeep S. Sooch, certify that: 1. I have reviewed this annual report on Form 10-K of Silicon Laboratories Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 22, 2003 /s/ Navdeep S. Sooch - -------------------------- Navdeep S. Sooch CHAIRMAN AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) 42CERTIFICATIONS I, Russell J. Brennan, certify that: 1. I have reviewed this annual report on Form 10-K of Silicon Laboratories Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 22, 2003 /s/ Russell J. Brennan - -------------------------- Russell J. Brennan VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) 43REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Laboratories Inc.We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. as of January 3, 2004 and December 28, 2002,
and December 29, 2001,and the related consolidated statements of operations,stockholders'stockholders’ equity, and cash flows for each of the three fiscal years in the period endedDecember 28, 2002.January 3, 2004. These financial statements are the responsibility of theCompany'sCompany’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 LaboratoriesSiliconLaboratories Inc. at January 3, 2004 and December 28, 2002,and December 29, 2001,and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period endedDecember 28, 2002,January 3, 2004, in conformity with accounting principles generally accepted in the United States./s/ ERNST & YOUNG LLP Austin, Texas
/s/ ERNST & YOUNG LLP
Austin, Texas
January 22, 2004
F-1
Silicon Laboratories Inc.
(in thousands, except per share data)
JANUARY 3,
2004
DECEMBER 28,
2002
ASSETS
Current assets:
Cash and cash equivalents
$
151,359
$
73,950
Short-term investments
38,954
41,216
Accounts receivable, net of allowance for doubtful accounts of $1,079
at January 3, 2004 and $945 at December 28, 2002
47,879
27,501
Inventories
34,064
13,319
Deferred income taxes
5,784
4,921
Prepaid expenses and other
5,600
1,841
Total current assets
283,640
162,748
Property, equipment and software, net
34,376
29,781
Goodwill
38,613
98
Other intangible assets, net
14,744
352
Other assets, net
6,722
4,086
Total assets
$
378,095
$
197,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
45,488
$
13,272
Accrued expenses
11,251
8,505
Deferred income on shipments to distributors
11,526
10,147
Income taxes payable
12,663
8,470
Total current liabilities
80,928
40,394
Long-term obligations
9,962
949
Total liabilities
90,890
41,343
Commitments and contingencies
Stockholders’ equity:
Common stock—$.0001 par value; 250,000 shares authorized;
51,237 and 48,904 shares issued and outstanding at January 3, 2004 and December 28, 2002, respectively
5
5
Additional paid-in capital
256,792
174,088
Stockholder notes receivable
—
(228
)
Deferred stock compensation
(9,257
)
(13,092
)
Retained earnings (deficit)
39,665
(5,051
)
Total stockholders’ equity
287,205
155,722
Total liabilities and stockholders’ equity
$
378,095
$
197,065
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Silicon Laboratories Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
YEAR ENDED
JANUARY 3,
2004
DECEMBER 28,
2002
DECEMBER 29,
2001
Revenues
$
325,305
$
182,016
$
74,065
Cost of revenues
162,173
79,939
31,930
Gross profit
163,132
102,077
42,135
Operating expenses:
Research and development
48,296
32,001
28,978
Selling, general and administrative
42,836
33,877
20,056
Write off of in-process research & development
1,600
—
—
Goodwill amortization
—
—
4,187
Impairment of goodwill and other intangible assets
—
37
34,885
Amortization of deferred stock compensation
4,986
5,173
5,276
Operating expenses
97,718
71,088
93,382
Operating income (loss)
65,414
30,989
(51,247
)
Other income (expense):
Interest income
1,368
1,582
3,624
Interest expense
(49
)
(617
)
(751
)
Other income (expense), net
(537
)
(647
)
(2
)
Income (loss) before income taxes
66,196
31,307
(48,376
)
Provision (benefit) for income taxes
21,480
10,590
(2,803
)
Net income (loss)
$
44,716
$
20,717
$
(45,573
)
Net income (loss) per share:
Basic
$
0.92
$
0.44
$
(0.99
)
Diluted
$
0.86
$
0.41
$
(0.99
)
Weighted-average common shares outstanding:
Basic
48,850
47,419
45,914
Diluted
52,288
50,811
45,914
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Silicon Laboratories Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands)
Common Stock
Number
Of
Shares
Par
Value
Additional
Paid-In
Capital
Stockholder
Notes
Receivable
Deferred
Stock
Compensation
Retained
Earnings
(Deficit)
Total
Stockholders’
Equity
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 employee stock-based awards
—
—
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
Exercises of stock options
238
—
1,483
—
—
—
1,483
Income tax benefit from employee stock-based awards
—
—
1,170
—
—
—
1,170
Repurchase and cancellation of unvested shares
(51
)
—
(98
)
—
—
—
(98
)
Repayment of stockholder notes receivable
—
—
—
566
—
—
566
Employee Stock Purchase Plan
77
—
1,304
—
—
—
1,304
Deferred stock compensation
—
—
(338
)
—
338
—
—
Amortization of deferred stock compensation
—
—
—
—
5,173
—
5,173
Net income
—
—
—
—
—
20,717
20,717
Balance as of December 28, 2002
48,904
5
174,088
(228
)
(13,092
)
(5,051
)
155,722
Exercises of stock options
1,063
—
14,739
—
—
—
14,739
Income tax benefit from employee stock-based awards
—
—
6,969
—
—
—
6,969
Repurchase and cancellation of unvested shares
(5
)
—
(21
)
—
—
—
(21
)
Repayment of stockholder notes receivable
—
—
—
228
—
—
228
Employee Stock Purchase Plan
85
—
1,793
—
—
—
1,793
Deferred stock compensation
—
—
1,151
—
(1,151
)
—
—
Amortization of deferred stock compensation
—
—
—
—
4,986
—
4,986
Purchase acquisition
1,190
58,073
58,073
Net income
—
—
—
—
—
44,716
44,716
Balance as of January 3, 2004
51,237
$
5
$
256,792
$
—
$
(9,257
)
$
39,665
$
287,205
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Silicon Laboratories Inc.
Consolidated Statements of Cash Flows
(in thousands)
YEAR ENDED
JANUARY 3,
2004
DECEMBER 28,
2002
DECEMBER 29,
2001
OPERATING ACTIVITIES
Net income (loss)
$
44,716
$
20,717
$
(45,573
)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of property, equipment and software
15,427
11,755
7,968
Impairment of property, equipment and software
1,087
—
—
Write off of in-process research & development
1,600
—
—
Amortization of goodwill, other intangible assets and other assets
3,742
445
4,608
Impairment of goodwill and other intangible assets
—
37
34,885
Amortization of deferred stock compensation
4,986
5,173
5,276
Amortization of note/lease end-of-term interest payments
—
214
322
Equity investment loss
663
662
—
Income tax benefit from employee stock-based awards
6,969
1,170
662
Changes in operating assets and liabilities:
Accounts receivable
(19,543
)
(16,958
)
3,072
Inventories
(19,201
)
(8,098
)
1,998
Prepaid expenses and other
(1,030
)
(1,099
)
839
Income tax receivable
—
2,086
(2,086
)
Other assets
(18
)
20
71
Accounts payable
24,681
6,273
(979
)
Accrued expenses
1,916
4,501
1,491
Deferred income on shipments to distributors
1,188
7,285
222
Deferred income taxes
505
(3,614
)
(152
)
Income taxes payable
4,194
8,470
(912
)
Net cash provided by operating activities
71,882
39,039
11,712
INVESTING ACTIVITIES
Purchases of short-term investments
(80,871
)
(77,062
)
(59,210
)
Maturities of short-term investments
82,854
54,993
84,138
Purchases of property, equipment and software
(11,438
)
(21,498
)
(5,400
)
Purchases of other assets
(7,124
)
(2,719
)
(821
)
Net cash acquired in connection with acquisition of business
5,367
—
—
Net cash provided by (used in) investing activities
(11,212
)
(46,286
)
18,707
FINANCING ACTIVITIES
Payments on long-term debt
—
(3,940
)
(1,535
)
Payments on capital leases
—
(464
)
(531
)
Proceeds from repayment of stockholder notes
228
566
384
Proceeds from Employee Stock Purchase Plan
1,793
1,304
1,120
Repurchase and cancellation of common stock
(21
)
(98
)
—
Net proceeds from exercises of stock options
14,739
1,483
587
Net cash provided by (used in) financing activities
16,739
(1,149
)
25
Increase (decrease) in cash and cash equivalents
77,409
(8,396
)
30,444
Cash and cash equivalents at beginning of period
73,950
82,346
51,902
Cash and cash equivalents at end of period
$
151,359
$
73,950
$
82,346
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
$
49
$
319
$
424
Income taxes paid (received), net
$
10,326
$
3,248
$
(1,104
)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Accrued software licenses and maintenance
$
9,514
$
—
$
—
Stock issued for acquisition of business
$
58,074
$
—
$
—
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
January
15, 2003 F-1SILICON LABORATORIES INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 28, DECEMBER 29, 2002 2001 ------------ ------------ASSETS Current assets: Cash and cash equivalents ................... $ 73,950 $ 82,346 Short-term investments ...................... 41,216 18,902 Accounts receivable, net of allowance for doubtful accounts of $945 at December 28, 2002 and $490 at December 29, 2001 ........ 27,501 10,543 Inventories ................................. 13,319 5,221 Deferred income taxes ....................... 4,921 2,268 Prepaid expenses and other .................. 1,841 3,073 ------------ ------------ Total current assets ........................... 162,748 122,353 Property, equipment and software, net .......... 29,781 20,038 Goodwill and other intangible assets ........... 450 199 Other assets ................................... 4,086 2,431 ------------ ------------ Total assets ................................... $ 197,065 $ 145,021 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................ $ 13,272 $ 6,999 Accrued expenses ............................ 8,505 3,897 Deferred income on shipments to distributors. 10,147 2,862 Current portion of long-term obligations .... -- 2,039 Income taxes payable ........................ 8,470 -- ------------ ------------ Total current liabilities ...................... 40,394 15,797 Long-term debt and leases ...................... -- 1,363 Other long-term obligations .................... 949 2,454 ------------ ------------ Total liabilities .............................. 41,343 19,614 Commitments and contingencies Stockholders' equity: Common stock--$.0001 par value; 250,000 shares authorized; 48,904 and 48,640 shares issued and outstanding at December 28, 2002 and December 29, 2001, respectively .............................. 5 5 Additional paid-in capital .................. 174,088 170,567 Stockholder notes receivable ................ (228) (794) Deferred stock compensation ................. (13,092) (18,603) Retained earnings (deficit) ................. (5,051) (25,768) ------------ ------------ Total stockholders' equity ..................... 155,722 125,407 ------------ ------------ Total liabilities and stockholders' equity ..... $ 197,065 $ 145,021 ============ ============THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-2SILICON LABORATORIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED -------------------------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 30, 2002 2001 2000 ------------ ------------ ------------Revenues .................................. $ 182,016 $ 74,065 $ 103,103 Cost of revenues .......................... 79,939 31,930 35,601 ------------ ------------ ------------ Gross profit .............................. 102,077 42,135 67,502 Operating expenses: Research and development ............... 32,001 28,978 19,419 Selling, general and administrative .... 33,877 20,056 17,648 Write off of in-process research & development .......................... -- -- 394 Goodwill amortization .................. -- 4,187 3,307 Impairment of goodwill and other intangible assets .................... 37 34,885 -- Amortization of deferred stock compensation ......................... 5,173 5,276 3,761 ------------ ------------ ------------ Operating expenses ........................ 71,088 93,382 44,529 ------------ ------------ ------------ Operating income (loss) ................... 30,989 (51,247) 22,973 Other income (expense): Interest income ........................ 1,582 3,624 3,964 Interest expense ....................... (617) (751) (1,162) Other income (expense) ................. (647) (2) 74 ------------ ------------ ------------ Income (loss) before income taxes ......... 31,307 (48,376) 25,849 Provision (benefit) for income taxes ...... 10,590 (2,803) 11,832 ------------ ------------ ------------ Net income (loss) ......................... $ 20,717 $ (45,573) $ 14,017 ============ ============ ============ Net income (loss) per share: Basic .................................. $ 0.44 $ (0.99) $ 0.37 Diluted ................................ $ 0.41 $ (0.99) $ 0.29 Weighted-average common shares outstanding: Basic .................................. 47,419 45,914 38,326 Diluted ................................ 50,811 45,914 48,788THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3
SILICON LABORATORIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS) Common Stock ----------------------------------- Number Additional Stockholder Deferred Retained Total Of Par Paid-In Notes Stock Earnings Stockholders' Shares Value Capital Receivable Compensation (Deficit) Equity --------- --------- ---------- ----------- ------------ --------- -------------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 Exercises of stock options ...... 238 -- 1,483 -- -- -- 1,483 Income tax benefit from exercise of stock options ..... -- -- 1,170 -- -- -- 1,170 Repurchase and cancellation of unvested shares ............... (51) -- (98) -- -- -- (98) Repayment of stockholder notes receivable .................... -- -- -- 566 -- -- 566 Employee Stock Purchase Plan .... 77 -- 1,304 -- -- -- 1,304 Deferred stock compensation ..... -- -- (338) -- 338 -- -- Amortization of deferred stock compensation .................. -- -- -- -- 5,173 -- 5,173 Net income ...................... -- -- -- -- -- 20,717 20,717 --------- --------- --------- --------- --------- --------- --------- Balance as of December 28, 2002 .. 48,904 5 $ 174,088 $ (228) $ (13,092) $ (5,051) $ 155,722 ========= ========= ========= ========= ========= ========= ========= 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 28, DECEMBER 29, DECEMBER 30, 2002 2001 2000 ------------ ------------ ------------OPERATING ACTIVITIES Net income (loss) .................................................................. $ 20,717 $ (45,573) $ 14,017 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization of property, equipment and software ................ 11,755 7,968 6,218 Amortization of goodwill, other intangible assets and other assets ............... 445 4,608 3,532 Impairment of goodwill and other intangible assets ............................... 37 34,885 -- Amortization of deferred stock compensation ...................................... 5,173 5,276 3,761 Amortization of note/lease end-of-term interest payments ......................... 214 322 323 Equity investment loss ........................................................... 662 -- -- Compensation expense related to stock options, direct stock issuance, and warrants to non-employees ............................................................... -- -- 153 Income tax benefit from exercise of stock options ................................ 1,170 662 1,685 Changes in operating assets and liabilities: Accounts receivable ............................................................ (16,958) 3,072 (3,105) Inventories .................................................................... (8,098) 1,998 (3,847) Prepaid expenses and other ..................................................... (1,099) 839 (1,165) Income tax receivable .......................................................... 2,086 (2,086) -- Other assets ................................................................... 20 71 (811) Accounts payable ............................................................... 6,273 (979) 847 Accrued expenses ............................................................... 4,501 1,491 1,136 Deferred income on shipments to distributors ................................... 7,285 222 1,634 Deferred income taxes .......................................................... (3,614) (152) (302) Income taxes payable ........................................................... 8,470 (912) (1,466) ------------ ------------ ------------ Net cash provided by operating activities .......................................... 39,039 11,712 22,610 INVESTING ACTIVITIES Purchases of short-term investments ................................................ (77,062) (59,210) (63,012) Maturities of short-term investments ............................................... 54,993 84,138 25,593 Purchases of property, equipment and software ...................................... (21,498) (5,400) (15,843) Purchases of other assets .......................................................... (2,719) (821) (1,250) Acquisition of businesses, net of cash acquired .................................... -- -- (14,433) ------------ ------------ ------------ Net cash provided by (used in) investing activities ................................ (46,286) 18,707 (68,945) FINANCING ACTIVITIES Proceeds from long-term debt ....................................................... -- -- 3,532 Payments on long-term debt ......................................................... (3,940) (1,535) (6,350) Payments on capital leases ......................................................... (464) (531) (493) Proceeds from repayment of stockholder notes ....................................... 566 384 270 Proceeds from exercise of warrants ................................................. -- -- 100 Proceeds from Employee Stock Purchase Plan (exercises).............................. 1,304 1,120 700 Repurchase and cancellation of common stock ........................................ (98) -- (70) Net proceeds from initial public offering .......................................... -- -- 90,646 Net proceeds from exercises of stock options ....................................... 1,483 587 1,705 ------------ ------------ ------------ Net cash provided by (used in) financing activities ................................ (1,149) 25 90,040 ------------ ------------ ------------ Increase (Decrease) in cash and cash equivalents ................................... (8,396) 30,444 43,705 Cash and cash equivalents at beginning of period ................................... 82,346 51,902 8,197 ------------ ------------ ------------ Cash and cash equivalents at end of period ......................................... $ 73,950 $ 82,346 $ 51,902 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid ...................................................................... $ 319 $ 424 $ 827 ============ ============ ============ Income taxes paid (received), net .................................................. $ 3,248 $ (1,104) $ 11,855 ============ ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.F-5SILICON LABORATORIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 20023, 20041. ORGANIZATION
Silicon Laboratories Inc. (the Company), a Delaware corporation, develops and markets mixed-signal analog intensive integrated circuits (ICs) for
thea broad range of applications for globalcommunicationsmarkets. Within the semiconductor industry, the Company is known as a"fabless"“fabless” company meaning that the ICs are manufactured by third-party semiconductor companies.2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal year 2003 ended January 3, 2004, fiscal year 2002 ended on December 28 and fiscal year 2001 ended on December
29 and fiscal year 2000 ended on December 30. All of the periods presented have 52 weeks.29. Fiscal year 2003will havehad 53 weekswith theand fiscal years 2002 and 2001 each had 52 weeks. The extra weekoccurringin fiscal 2003 occurred in the fourth quarter of the year.PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The functional currency of the
Company'sCompany’s foreign subsidiaries is the U.S. dollar; accordingly, all translation gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in net income (loss).CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash deposits and investments with a maturity of ninety days or less when purchased.
SHORT-TERM INVESTMENTS
The
Company'sCompany’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.ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The carrying value of all available-for-sale securities approximates their fair value due to their short-term nature. Short-term investments at January 3, 2004 and December 28, 2002and December 29, 2001consist of the following (in thousands):
Carrying Value --------------------------- December 28, December 29, 2002 2001 ------------ ------------Municipal Securities ........ $ 33,237 $ 15,867 Auction Rate Securities ..... 7,979 3,035 ------------ ------------ $ 41,216 $ 18,902 ============ ============
Carrying Value
January 3,
2004
December 28,
2002
Municipal Securities
$
38,954
$
33,237
Auction Rate Securities
—
7,979
$
38,954
$
41,216
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company'sCompany’s financial instruments consist principally of cash and cash equivalents, short-term investments, receivables and accountspayable, and borrowings.payable. The Company believes all of these financial instruments are recorded at amounts that approximate their current market values.F-6
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Inventories consist of the following (in thousands):
December 28, December 29, 2002 2001 ----------------- -----------------Work in progress................... $ 7,291 $ 3,582 Finished goods..................... 6,028 1,639 ----------------- ----------------- $ 13,319 $ 5,221 ================= =================
January 3,
2004
December 28,
2002
Work in progress
$
17,702
$
7,291
Finished goods
16,362
6,028
$
34,064
$
13,319
PROPERTY, EQUIPMENT, AND SOFTWARE
Property, equipment, and software are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets (generally
fourthree 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.Leasehold improvements are depreciated over the contractual lease period or their useful life, whichever is shorter. Property, equipment and software consist of the following (in thousands):
December 28, December 29, 2002 2001 ----------------- -----------------Equipment.......................... $ 38,970 $ 24,917 Computers and purchased software... 10,249 8,633 Furniture and fixtures............. 1,079 940 Leasehold improvements............. 3,032 2,182 ----------------- ----------------- 53,330 36,672 Accumulated depreciation.......... (23,549) (16,634) ----------------- ----------------- $ 29,781 $ 20,038 ================= =================
January 3,
2004
December 28,
2002
Equipment
$
33,261
$
38,970
Computers and purchased software
23,855
10,249
Furniture and fixtures
1,551
1,079
Leasehold improvements
3,837
3,032
62,504
53,330
Accumulated depreciation
(28,128
)
(23,549
)
$
34,376
$
29,781
LONG-LIVED ASSETS
The Company evaluates its long-lived assets in accordance with FASB SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets
held“held andusedused” by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives, against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. Long-lived assets held for sale by the Company are adjusted to fair value less cost to sell in the period the “held for sale” criteria are met and reclassified to a current asset. The fair value less cost to sell amount is evaluated each period to determine if it has changed. Changes are recognized as gains or losses in the period in which they occur.During fiscal 2003, the Company was in final negotiations to sell certain test equipment capitalized in fixed assets with a net book value of approximately $2.4 million. As a result of this negotiation, the Company determined that the equipment was impaired and recorded a $0.8 million charge to cost of goods sold to write the assets down to their expected sales price. These assets were reclassified to prepaid expenses and other. The Company expects the sale of such assets to be completed by the end of their first fiscal quarter of 2004.
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed annually by the Company for possible impairment in accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was adopted on December 30,2001. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, SFAS No. 142 allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the
F-7
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The Company tests goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired.
EQUITY METHOD INVESTMENTS
Where the Company has investments in affiliated companies in which it has the ability to exercise significant influence over operating and financial policies, but not control, these investments are accounted for using the equity method. When special conditions warrant, for example when the Company is the sole funding source for an affiliated company and the affiliated company has not generated sufficient cash flows to sustain its operations, the Company determines equity income measurement by using the Hypothetical Liquidation at Book Value (HLBV) method. The HLBV method is a balance-sheet oriented approach to equity method accounting and is calculated as the amount that the Company would receive if the affiliated company were to liquidate all of its assets at recorded amounts and distribute the cash to creditors and investors in accordance with their respective liquidation preferences.
F-72. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)The Company records investment
lossincome (loss) under the caption other income (expense) in its consolidated statement of operations.USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to inventories, accounts receivables, long-lived assets, goodwill and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements.
RISKS AND UNCERTAINTIES
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short-term investments primarily in market rate accounts. The Company performs ongoing credit evaluations of its
customers'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 1, 2000........................................... $ 569 Balance acquired from Krypton Isolation, Inc. (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 Additions charged to costs and expenses.............................. 455 Write-off of uncollectible accounts.................................. -- ------ Balance at December 28, 2002......................................... $ 945 ======Substantially all
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
Additions charged to costs and expenses
455
Write-off of uncollectible accounts
—
Balance at December 28, 2002
945
Balance acquired from Cygnal Integrated Products, Inc. purchase
39
Additions charged to costs and expenses
117
Write-off of uncollectible accounts
(22
)
Balance at January 3, 2004
$
1,079
A significant portion of the
Company'sCompany’s products are fabricated by Taiwan Semiconductor Manufacturing Co. (TSMC). The inability of TSMC to deliver wafers to the company on a timely basis could impact the production of theCompany'sCompany’s products for a substantial period of time, which could have a material adverse effect on theCompany'sCompany’s business, financial condition and results of operations.F-8
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During fiscal 2003, one of our distributors, Edom Technology, accounted for 12.9% of our revenues. During fiscal 2002, two of our distributors, Uniquest and Edom Technology, represented 20% and 16% of our revenues, respectively. During fiscal 2001, no distributor accounted for more than 10% of our total revenues.
In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. The following is a detail of the
Company'sCompany’s end customers that accounted for greater than 10% of revenue in the respective fiscal years:
Year Ended ------------------------------------------------------------ December 28, December 29, December 30, 2002 2001 2000 ----------------- ----------------- -----------------Customer A............... 16% 12% --% Customer B............... -- 15 46 Customer C............... -- 13 --Two
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Samsung
21
%
16
%
12
%
PC-Tel
*
*
15
Agere Systems
*
*
13
* Revenue% is less than 10%.
REVENUE RECOGNITION
The Company recognizes revenue when all of
our distributors, Uniquestthe following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, andEdom Technology, each selling products to several end customers in Asia, represented 20% and 16% of our fiscal 2002 revenues, respectively. No other distributor accounted for more than 10% of our revenues in fiscal years 2002, 2001 or 2000. F-82. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) As of December 28, 2002, two distributors and one end customer accounted for 29%, 26% and 12% of gross accounts receivable, respectively. As of December 29, 2001, two distributors and one end customer accounted for 21%, 21% and 10% of gross accounts receivable, respectively. As of December 30, 2000, two end customers accounted for 58% and 11% of gross accounts receivable, respectively. REVENUE RECOGNITION4) collectibility is reasonably assured. Revenue from product sales direct to customers and contract manufacturers isrecognized upon title transfer, whichgenerallyoccursrecognized upon shipment. Certain of theCompany'sCompany’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 theproduct is sold bydistributors sell thedistributorsproduct to the end customer.ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
$527,000, $472,000$0.8 million, $0.5 million and$717,000$0.5 million in the fiscal years ended January 3, 2004, December 28, 2002 and December 29, 2001,and December 30, 2000,respectively.STOCK-BASED COMPENSATION
FASB SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, the Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method in accordance with
APBAccounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. TheCompany'sCompany’s basis for electing accounting treatment under APB Opinion No. 25 is principally due to the satisfactory incorporation of the dilutive effect of these shares in the reported earnings per share calculation and the presence of pro forma supplemental disclosure of the estimated fair value methodology prescribed by SFAS No. 123 and SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-– TRANSITION AND DISCLOSURE.F-9
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the effect on net income (loss) and earnings per share if the
companyCompany had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):
Year Ended -------------------------------------------- December 28, December 29, December 30, 2002 2001 2000 ------------ ------------ ------------Net income (loss) - as reported.......... $ 20,717 $ (45,573) $ 14,017 Total stock-based compensation cost, net of related tax effects included in the determination of net income as reported............................... 5,173 5,276 3,761 The stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards............................. (25,137) (18,482) (8,658) ------------ ----------- ----------- Pro forma net income (loss).............. $ 753 $ (58,779) $ 9,120 Earnings per share Basic - as reported.................... $ 0.44 $ (0.99) $ 0.37 Basic - pro forma...................... $ 0.02 $ (1.28) $ 0.24 Diluted - as reported.................. $ 0.41 $ (0.99) $ 0.29 Diluted - pro forma.................... $ 0.02 $ (1.28) $ 0.19
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Net income (loss) - as reported
$
44,716
$
20,717
$
(45,573
)
Total stock-based compensation cost, net of related tax effects included in the determination of net income as reported
3,345
5,173
5,276
The stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards
(23,027
)
(25,137
)
(18,482
)
Pro forma net income (loss)
$
25,034
$
753
$
(58,779
)
Earnings per share
Basic - as reported
$
0.92
$
0.44
$
(0.99
)
Basic - pro forma
$
0.51
$
0.02
$
(1.28
)
Diluted - as reported
$
0.86
$
0.41
$
(0.99
)
Diluted - pro forma
$
0.49
$
0.02
$
(1.28
)
OTHER COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issuedSFAS No. 130,
Reporting Comprehensive Income, whichREPORTING COMPREHENSIVE INCOME establishes standards for reporting and display of comprehensive income and its components in the financial statements. There were no material differences between net income (loss) and comprehensive income (loss) during any of the periods presented.F-92. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
SEGMENT
INFORMATIONREPORTINGThe Company has one operating segment, mixed-signal
communicationanalog intensive integrated circuits (ICs), consisting ofeighteleven productareas.lines. TheCompany'sCompany’s chief operating decision maker is considered to be the Chief Executive Officer andChairman of the Board.President. The chief operating decision maker allocates resources and assesses performance of the business and other activities at theconsolidatedoperating segment level.Approximately $260.2 million, $144.7 million
$48.7 millionand$22.1$48.7 million of theCompany'sCompany’s revenues were from export sales for the fiscal years ended January 3, 2004, December 28, 2002 and December 29, 2001,and December 30, 2000,respectively. The operations and assets of theCompany'sCompany’s wholly owned foreign subsidiaries were immaterial in all periods presented.RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements to conform with current year presentation.
F-10
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
Year Ended -------------------------------------------- December 28, December 29, December 30, 2002 2001 2000 ------------ ------------ ------------Net income (loss).......................... $ 20,717 $ (45,573) $ 14,017 Basic: Weighted-average shares of common stock outstanding........................... 48,780 48,431 43,628 Weighted-average shares of common stock subject to repurchase................. (1,361) (2,517) (5,302) ------------ ----------- ------------ Shares used in computing basic net income (loss) per share............... 47,419 45,914 38,326 ------------ ----------- ------------ Effect of dilutive securities: Weighted-average shares of common stock subject to repurchase................. 1,130 -- 5,131 Convertible preferred stock and warrants -- -- 3,235 Stock options........................... 2,262 -- 2,096 ------------ ----------- ------------ Shares used in computing diluted net income (loss) per share............... 50,811 45,914 48,788 ============ =========== ============ Basic net income (loss) per share.......... $ 0.44 $ (0.99) $ 0.37 Diluted net income (loss) per share........ $ 0.41 $ (0.99) $ 0.29
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Net income (loss)
$
44,716
$
20,717
$
(45,573
)
Basic:
Weighted-average shares of common stock outstanding
49,484
48,780
48,431
Weighted-average shares of common stock subject to repurchase
(634
)
(1,361
)
(2,517
)
Shares used in computing basic net income (loss) per share
48,850
47,419
45,914
Effect of dilutive securities:
Weighted-average shares of common stock subject to repurchase
511
1,130
—
Stock options
2,927
2,262
—
Shares used in computing diluted net income (loss) per share
52,288
50,811
45,914
Basic net income (loss) per share
$
0.92
$
0.44
$
(0.99
)
Diluted net income (loss) per share
$
0.86
$
0.41
$
(0.99
)
Approximately 971,000, 2,156,000
4,199,000and462,0004,199,000 weighted-average dilutive potential shares of common stock have been excluded from the diluted net income (loss) per share calculation for the years ended January 3, 2004, December 28, 2002 and December 29, 2001,and December 30, 2000,respectively, astheir impact would have been anti-dilutive. F-102. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)the exercise price of the underlying stock options exceeded the average market price of the stock during the respective periods.RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2001,January 2003, theFinancial Accounting Standards Board (FASB)FASB issued FASB Interpretation No. 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. There has been no material impact to the Company’s financial statements from potential VIEs entered into after January 31, 2003 and there is no expected impact from the adoption of the deferred provisions in the first quarter of fiscal year 2004.In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS)
Nos. 141No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150 establishes standards on the classification and142, BUSINESS COMBINATIONSmeasurement of certain financial instruments with characteristics of both liabilities andGOODWILL AND OTHER INTANGIBLE ASSETS.equity. The provisions of SFASNo. 141 replaces Accounting Principles Board Opinion (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. 142150 are effective for financial instruments entered into or modified after May 31, 2003 and to allbusiness combinations completed after June 30, 2001. Upon a company's adoptionother instruments that exist as ofSFAS No. 142, a company ceases to amortize goodwill recorded for business combinations consummated prior to July 1, 2001, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141 are reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 on December 30, 2001,the beginning offiscal 2002. In connection withtheadoption of SFAS No. 142, the Company has performed a transitional goodwill impairment assessment.first interim financial reporting periodF-11
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
beginning after June 15, 2003. The adoption of SFAS
No. 141 and SFAS No. 142150 did not have a material impact on theCompany'sCompany’s results of operations or financial position.In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, REVENUE RECOGNITION (SAB No. 104), which codifies, revises and
financial position since the Company's existing balancesrescinds certain sections ofgoodwillSAB No. 101, REVENUE RECOGNITION, in order to make this interpretive guidance consistent with current authoritative accounting andother intangible assets wereauditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did notsignificant. In June 2002 the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of SFAS No. 146 willhave a material effect on the Company’s consolidated results of operations, consolidated financial position or consolidated cash flows.3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC.
On December 10, 2003, the Company completed its acquisition of Cygnal Integrated Products, Inc., a Delaware corporation (Cygnal) pursuant to the Agreement and Plan of Reorganization whereby the Company acquired all of the outstanding capital stock of Cygnal for initial consideration of $59.2 million, consisting of 1,190,034 shares of Silicon Laboratories’ common stock valued at $58.1 million, and direct acquisition costs estimated at $1.1 million. The direct acquisition costs consist primarily of legal, investment banking, accounting, and appraisal fees to be incurred by the two companies that are directly related to the merger. In addition, Silicon Laboratories is obligated to potentially issue up to an additional 1,290,963 shares of common stock to shareholders of Cygnal based on the achievement of certain revenue milestones during the twelve-month earn out period commencing on April 4, 2004 and ending on April 2, 2005. The additional shares will become issuable as follows: (1) up to 297,915 shares on a pro rata basis for every dollar of Cygnal product revenues during the earn out period in excess of $10.0 million up to $15.0 million; plus (2) up to 496,524 shares on a pro rata basis for every dollar of Cygnal product revenues during the earn out period in excess of $15.0 million up to $20.0 million; plus (3) up to 496,524 shares on a pro rata basis for every dollar of Cygnal product revenues during the earn out period in excess of $20.0 million up to $24.0 million. The distribution of the additional shares may occur at either or both an interim date occurring six months after the beginning of the earn out period and/or upon completion of the earn out period. The number of additional shares issuable at the interim date would be equal to 40% of the shares that would be issuable at the end of the earn out period if the revenues for the full earn out period were equal to twice the revenues through the interim date.
In accordance with Emerging Issues Task Force Issue No. 99-12 DETERMINATION OF THE MEASUREMENT DATE FOR THE MARKET PRICE OF ACQUIRER SECURITIES ISSUED IN A PURCHASE BUSINESS COMBINATION, the Company has used $48.80 per share (representing the average of the closing prices of Silicon Laboratories common stock for the three days before and after the merger agreement date of September 25, 2003) to value the initial consideration to be paid to Cygnal shareholders. The value of any additional consideration to be issued upon achievement of the revenue milestones will be determined based on the then current value of the stock issued, and will be recorded as additional purchase price which will change the amount of the purchase price allocable to goodwill.
F-12
3. ACQUISITION OF CYGNAL INTEGRATED PRODUCTS, INC. (CONTINUED)
The acquisition of Cygnal was accounted for as a purchase business combination. The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed based on independent appraisals and management estimates as follows (in thousands):
Amortization
Period
Intangibles:
Core and developed product technology
$
9,250
9 years
Internal use software
1,300
4 - 7 years
Non-compete agreements
305
1 - 4 years
Customer relationships
2,100
6 years
Goodwill
38,515
51,470
Net fair value of tangible assets acquired and liabilities assumed
9,029
Net deferred tax liabilities assumed
(2,245
)
Liability for facility exit costs
(643
)
In-process research and development
1,600
Total purchase price
$
59,211
Since the acquisition was accounted for using the purchase method, the results of operations of Cygnal have been included with those of the Company subsequent to the acquisition date, December 10, 2003.
The following presents the unaudited pro forma combined results of operations of the Company with Cygnal, after giving effect to certain pro forma adjustments (amortization of acquired intangibles and deferred stock compensation, accrued retention bonuses, and income tax benefit), as if Cygnal had been acquired as of the beginning of the respective fiscal years. The unaudited pro forma financial information for the fiscal year ended January 3, 2004 gives effect to the merger as if it had occurred at the beginning of the period presented, and combines the audited historical statements of operations of the Company for the fiscal year ended January 3, 2004 and the unaudited historical statement of operations of Cygnal for the year ended December 31, 2003. The unaudited pro forma financial information for the fiscal year ended December 28, 2002 gives effect to the merger as if it had occurred at the beginning of the period presented, and combines the audited historical statements of operations of the Company for the fiscal year ended December 28, 2002 and the audited historical statement of operations of Cygnal for the year ended December 31, 2002 (in thousands, except per share data):
Fiscal Year Ended
January 3, 2004
Fiscal Year Ended
December 28, 2002
Revenues
$
331,997
$
187,214
Net Income
39,098
14,483
Diluted net income per share
$
0.73
$
0.28
The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the merger and the acquisition had been consummated as of the dates indicated, nor is it necessarily indicative of future operating results or financial position.
Approximately $1.6 million of the Cygnal purchase price was allocated to in-process research and development based upon an independent third-party appraisal and expensed upon the closing of the transaction. The pro forma results do not include the impact of this write-off as it does not have a continuing impact on
itsthe operations of the Company. Further, the unaudited pro forma combined financialstatements. In December 2002,information does not include theFASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methodsrealization oftransitionpotential cost savings from operating efficiencies, synergies or other restructurings that may result from the merger.None of the goodwill is deductible for
an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about those effects in interim financial information. Since the Company is continuing to account for stock-based compensation according to APB 25, adoption of SFAS No. 148 requires the Company to provide prominent disclosures about the affects of FAS 123 on reported income (loss) and will require the Company to disclose these affects in the interim financial statements as well. F-113.tax purposes.F-13
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The
componentsfollowing information details the gross carrying amount and accumulated amortization of other intangible assetsare as follows(in thousands):
Customer Acquired Workforce Base Technology Patents Goodwill Total --------- -------- ---------- ------- ---------- ---------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) --------- -------- ---------- ------- ---------- --------- Balance at December 29, 2001.............. 135 -- -- 64 -- 199 Adjustments............................... (135) -- -- -- 135 -- Acquisition of assets..................... -- -- -- 350 -- 350 Amortization.............................. -- -- -- (62) -- (62) Write-down of assets...................... -- -- -- -- (37) (37) --------- -------- ---------- ------- ---------- --------- Net balance at December 28, 2002.......... $ -- $ -- $ -- $ 352 $ 98 $ 450 ========= ======== ========== ======= ========== =========
January 3, 2004
December 28, 2002
Amortization
Period
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
Amortized intangible assets:
Core & developed technology
9 years
$
9,250
$
(56
)
$
0
$
0
Customer relationships
6 years
2,100
(19
)
0
0
Internal use software
4-7 years
1,300
(13
)
0
0
Patents
4-7 years
2,310
(427
)
470
(118
)
Non-compete agreements
1-4 years
305
(5
)
0
0
$
15,265
$
(521
)
$
470
$
(118
)
Unamortized intangible assets:
Goodwill
$
38,613
$
0
$
98
$
0
During fiscal 2001, the Company performed an assessment of the carrying value of the
Company'sCompany’s long-lived assets recorded in connection with theCompany'sCompany’s acquisitions of Krypton and SNR. This assessment was performed pursuant to Statement of FASB SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company performed this assessment because it became aware of the following factors and circumstances:- -• The revenue streams associated with those assets had decreased significantly since their acquisition and the Company did not expect to have any significant or identifiable future cash flows related to those assets;
- -• The Company determined that further development or alternative uses of the acquired technologies were remote; and
- -• The Krypton office was closed in August of 2001 and the related workforce had since either ceased to work for the Company or been reassigned to new projects which were unrelated to the projects on which they previously worked.
The Company compared the carrying value for those assets that had separately identifiable cash flows to the projected undiscounted future cash flows to be derived from those assets over their remaining estimated useful lives. The Company placed no value on those assets that did not have separately identifiable cash flows as the factors normally judged to constitute future value, such as the expectation of future business, revenues and/or cash flows, the expectation of ongoing development of new products, the good name and reputation of the acquired company, etc. appeared to be absent.
As a result of this assessment, the Company concluded that the value of those assets had become permanently impaired and recorded charges for $33.3 million and $37,000 to write-down related goodwill in fiscal 2001 and 2002, respectively, and $1.6 million to reduce the carrying value of related intangible assets to their fair value in fiscal 2001.
4. EQUITY INVESTMENT IN A NON-PUBLICLY TRADED COMPANY On June 14, 2002, the Company made an equity investment in a start-up venture, ASIC Design Services, Inc. (ADS), with an initial investment of $1.3 million in the form of convertible-preferred stock. ADS is engaged in the design and development of proprietary integrated circuits (ICs) used in networking devices. The Company has a contingent obligationAmortization expense related to
make two additional convertible-preferred stock investments in ADS totaling $2.7 million based on ADS' achievement of certain milestones and the satisfaction ofotherconditions. Additionally, the Company has an exclusive right, but not the obligation, to purchase ADSintangible assets for$15 million in cash or common stock in connection with the occurrence of certain events. At December 28, 2002, the Company's voting interest in ADS was less than 20% of the total ownership of ADS. However, the Company determined, based F-124. EQUITY INVESTMENT IN A NON-PUBLICLY TRADED COMPANY (CONTINUED) on APB Opinion No. 18 THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK and other relevant guidance that it has the ability to exercise significant influence, but not control, over the management of ADS as a result of its contractual rights, rights as an equity stockholder, ability to designate a member of ADS' Board of Directors, which the Company has done, and its position as their primary funding source for future operations. Therefore, the Company has accounted for its investment in ADS using the Hypothetical Liquidation at Book Value (HLBV) method under the equity method of accounting. The Company is using the HLBV method to determine its equity investment loss because the Company believes that it is unlikely that the other stockholders could bear their proportionate share of ADS' loss. Under this method, the Company's loss is equivalent to ADS' cash expenditures for the period. For thefiscalyear ended December 28, 2002, the Company recorded an equity investment loss of $0.7 million from its investment in ADS, included in other expense. 5. 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 (4.25% as of December 28, 2002). The bank facility is secured by the Company's accounts receivable, inventory, capital equipment and other unsecured assets (excluding intellectual property). At December 28,years 2003, 2002, andDecember 29,2001a letter of credit forwas $0.4 million,relating to a building lease was outstanding under the facility. As a result, available borrowings under this facility were$0.1 million and $4.6 million,at December 28, 2002 and December 29, 2001. There are covenants related to net worth and liquidity associated with this line of credit, with whichrespectively. The following table details theCompany is in compliance as of December 28, 2002. Long-term debt and leases consist of the following:
December 28, December 29, 2002 2001 ------------ ------------ (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 Note payable, at 9.77%, payable in monthly installments of $4,100 through June 1, 2003........................................................ -- 68 Note payable, at 9.91%, payable in monthly installments of $14,000 through September 1, 2003................................................... -- 270 Note payable, at 10.22%, payable in monthly installments of $5,800 through December 1, 2003.................................................... -- 126 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 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 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 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 Capital lease obligations..................................................... -- 353 ------------ ----------- -- 3,402 Current portion............................................................... -- (2,039) ------------ ----------- Long-term portion............................................................. $ -- $ 1,363 ============ ===========The notes payable and capital lease obligations represent borrowings from three institutional financing providersestimated aggregate amortization expense forequipment financing. In fiscal 2002, the Company made prepayments of $2.4 million to extinguish all of its outstanding obligations to these financing providers. F-136. STOCKHOLDERS' EQUITY PREFERRED STOCK As of December 28, 2002 and December 29, 2001, no shares of preferred stock were outstanding. 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 ofother intangible assets for each of theseries.5 succeeding fiscal years (in thousands):
For fiscal year 2004
$
2,069
For fiscal year 2005
2,063
For fiscal year 2006
2,010
For fiscal year 2007
1,941
For fiscal year 2008
1,799
5. STOCKHOLDERS’ EQUITY
COMMON STOCK
The Company had
48,903,73151,237,410 shares of common stock outstanding as ofDecember 28, 2002.January 3, 2004. Of these shares,814,932473,637 shares were unvested andaresubject to rights of repurchase that lapse according to a time based vesting schedule.F-14
5. STOCKHOLDERS’ EQUITY (CONTINUED)
As of
December 28, 2002,January 3, 2004, the Company had reserved shares of common stock for future issuance as follows:
Employee Stock Option
Plans......... 9,281,491Plans13,230,564
Employee Stock Purchase
Plan........ 709,005 ---------Plan1,117,863
Contingent consideration (Note 3)
1,290,963
Total shares
reserved............... 9,990,496reserved15,639,390
On January 2, 2003 the amount ofThe shares
reserved forissuable under the 2000 Stock Incentive Plan andtheEmployee Stock Purchase Plan automatically increase on the first stock market trading day of each calendar year. During fiscal 2003, the shares increasedby 2,445,187 and 244,519, respectively.as follows:
Number of shares
2000 Stock
Incentive Plan
Employee Stock
Purchase Plan
January 2, 2003
2,445,187
244,519
January 2, 2004
2,561,870
250,000
5,007,057
494,519
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the Purchase Plan) was adopted by the
Company'sCompany’s board of directors on January 5, 2000. Eligible employees may purchase a limited number of shares of theCompany'sCompany’s common stock at 85% of the market value at semi-annual intervals. As ofDecember 28, 2002,January 3, 2004, a total of883,7871,378,306 shares of theCompany'sCompany’s common stock were authorized for issuance under the Purchase Plan. There were77,46085,661 and67,98177,460 shares issued under the Purchase Plan in fiscal20022003 and fiscal2001,2002, respectively.STOCK OPTION/STOCK ISSUANCE PLANS
In fiscal 2000, the
Company'sCompany’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 theCompany'sCompany’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 usingearningspayroll deductions and (iv) the automatic issuance of stock options to non-employee board members. Upon theCompany'sCompany’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 theCompany'sCompany’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 theCompany'sCompany’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
F-146. STOCKHOLDERS' EQUITY (CONTINUED)option is no more than ten years from the date of grant. AtDecember 28, 2002, 15,456,160January 3, 2004, 20,463,217 shares were authorized for issuance under the 2000 Plan. No further options or direct issuances may be granted under the 1997 Plan.F-15
5. STOCKHOLDERS’ EQUITY (CONTINUED)
The
Company recorded nofollowing table summarizes information about deferred stock compensationin fiscal 2002.and amortization of deferred stock compensation:
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Stock options or direct issuance shares
40,000
—
160,000
Deferred stock compensation recorded
$
1,752,000
—
$
3,294,000
Amortization of deferred stock compensation
$
4,986,000
$
5,173,000
$
5,276,000
The
Company recordeddeferred stock compensationof $3,294,000 and $9,492,000 in connection with stock options granted or assumed for 160,000 shares and 297,697 shares of common stock during fiscal 2001 and 2000, respectively. These amounts representrepresents the difference between the exercise price of thestock optionoptions or the purchase price of the direct issuance shares, and the market priceoron thesubsequently deemed fair valuedate ofthe Company's common stock.grant. The deferred stock compensation is amortized over the vesting periods of theapplicablerelated optionsresulting in amortization expense of $5,173,000, $5,276,000 and $3,761,000 for fiscal years 2002, 2001 and 2000, respectively.or shares using the straight-line method.During fiscal 1999 and 1998, the Company made full recourse loans to employees of $1,267,500 and $147,500, respectively, in connection with the
employees'employees’ purchase of shares through exercises of options. These full recourse notesarewere secured by the shares of stock,arewere interest bearing at rates ranging from 1.8% to 5.9%,havehad terms of five years, andmustwere to be repaid upon the sale of the underlying shares of stock. The Company has collected principal payments on these notes for $228,000, $566,000,$384,000and$270,000$384,000 in fiscal years 2003, 20022001and2000,2001, respectively. The remaining balance of shareholder notes as ofDecember 28, 2002January 3, 2004 is$228,000.zero. No loans were issued during fiscal 2003, 20022001or2000.2001.A summary of the
Company'sCompany’s stock option and direct issuance activity and related information follows:
Outstanding Weighted- Shares Options Average Available And Direct Exercise Exercise For Grant Issuances Prices Price ----------- ----------- ------------------ ----------Balance at January 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 Additional shares reserved.. 2,432,003 -- -- -- Granted..................... (2,136,850) 2,136,850 18.33 - 37.90 24.11 Exercised................... 0 (237,567) 0.00 - 31.00 6.28 Cancelled................... 194,224 (194,224) 2.00 - 66.00 26.46 Repurchase and cancellation of unvested shares........ 50,041 -- 1.25 - 5.00 1.90 ----------- ----------- ------------------ ---------- Balance at December 28, 2002 930,957 8,350,534 $ 0.00 - $ 74.75 $ 19.91 =========== =========== ================== ==========F-156. STOCKHOLDERS'
Shares
Available
For Grant
Outstanding
Options
And Direct
Issuances
Exercise
Prices
Weighted-
Average
Exercise
Price
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
Additional shares reserved
2,432,003
—
—
—
Granted
(2,136,850
)
2,136,850
18.33 – 37.90
24.11
Exercised
0
(237,567
)
0.00 – 31.00
6.28
Cancelled
194,224
(194,224
)
2.00 – 66.00
26.46
Repurchase and cancellation of unvested shares
50,041
—
1.25 – 5.00
1.90
Balance at December 28, 2002
930,957
8,350,534
0.00 – 74.75
19.91
Additional shares reserved
5,007,057
—
—
—
Granted
(2,090,550
)
2,090,550
0.00 – 52.18
35.46
Exercised
0
(1,063,218
)
0.00 – 38.50
13.87
Cancelled
387,452
(387,452
)
0.00 – 62.50
30.92
Repurchase and cancellation of unvested shares
5,234
—
0.00 – 10.00
4.08
Balance at January 3, 2004
4,240,150
8,990,414
$0.00 – $74.75
$
23.77
F-16
5. STOCKHOLDERS’ EQUITY (CONTINUED)
In addition, the following table summarizes information about stock options that were outstanding and exercisable at
December 28, 2002.January 3, 2004.
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 - $ 1.25 825,269 5.64 $ 0.59 782,769 $ 0.62 $ 1.75 - $ 5.00 633,963 6.68 $ 2.59 633,963 $ 2.59 $ 10.00 - $ 15.00 558,641 7.57 $ 12.67 350,997 $ 11.62 $ 15.10 - $ 20.24 2,804,181 8.70 $ 16.66 666,491 $ 16.29 $ 20.45 - $ 31.00 2,683,300 8.81 $ 25.77 399,135 $ 28.42 $ 31.69 - $ 48.88 438,955 8.34 $ 41.41 60,210 $ 40.67 $ 52.69 - $ 74.75 406,225 7.53 $ 56.61 195,737 $ 56.74 - --------------------- --------- ------------- -------------- --------- ---------- $ 0.00 - $ 74.75 8,350,534 8.13 $ 19.91 3,089,302 $ 13.58
Outstanding
Exercisable
Range of
Exercise Prices
Number of
Options
Weighted-
Average
Remaining
Contractual
Life in Years
Weighted-
Average
Exercise Price
Number of
Options
Weighted-
Average
Exercise
Price
$
0.00
-
$
15.00
1,499,822
5.41
$
3.93
1,351,636
$
3.04
15.10
-
15.44
1,654,982
7.55
15.21
682,356
15.22
16.00
-
24.04
1,426,923
8.20
20.89
293,755
20.69
24.06
-
26.63
1,353,337
8.60
24.84
54,900
25.52
26.76
-
38.50
2,023,750
8.30
33.56
431,657
31.50
43.81
-
66.00
1,029,600
8.25
49.63
289,307
53.94
74.75
-
74.75
2,000
6.27
74.75
1,500
74.75
$
0.00
-
$
74.75
8,990,414
7.70
$
23.77
3,105,111
$
16.74
Pro forma information regarding net income (loss) is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock-based awards to employees under the fair value method of that Statement. The fair value of these stock-based awards was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
Year Ended -------------------------------------------------- December 28, December 29, December 30, 2002 2001 2000 ------------ ------------ ------------Employee Stock Option Plans: Expected stock price volatility 85% 85% 88% Risk-free interest rate......... 3.9% 4.6% 6.2% Expected life (in years)........ 4.9 5.1 5.6 Dividend yield................... -- -- -- Employee Stock Purchase Plan: Expected stock price volatility 85% 85% 88% Risk-free interest rate......... 3.2% 3.5% 5.0% Expected life (in months)....... 16 14 14 Dividend yield................... -- -- --
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Employee Stock Option Plans:
Expected stock price volatility
70
%
85
%
85
%
Risk-free interest rate
2.9
%
3.9
%
4.6
%
Expected life (in years)
5.2
4.9
5.1
Dividend yield
—
—
—
Employee Stock Purchase Plan:
Expected stock price volatility
77
%
85
%
85
%
Risk-free interest rate
1.1
%
3.2
%
3.5
%
Expected life (in months)
16
16
14
Dividend yield
—
—
—
The weighted-average grant-date exercise price and fair value for options granted and direct issuance shares during fiscal 2003 is as follows:
Number of
Options/Shares
Weighted-Average
Exercise Price
Weighted-Average
Fair Value
Exercise price equal to price of stock on date of grant
2,050,550
$
36.15
$
22.19
Exercise price less than price of stock on date of grant
40,000
$
—
$
43.81
The weighted-average fair
values of options granted during fiscal 2002, 2001 and 2000 were $16.40, $12.09 and $26.80, respectively. The weighted-average fair valuesvalue for purchase rights granted under the Purchase Plan for fiscal2002, 2001 and 2000 were $10.74, $10.05 and $11.94 respectively. F-162003 was $13.21. For purposes of pro forma disclosure, the estimated fair value of the
Company'sCompany’s stock-based awards to employees is amortized to expense over the vesting period of the underlying instruments. TheCompany'sCompany’s pro forma information is as follows (in thousands, except per share data):
Year Ended -------------------------------------------------- December 28, December 29, December 30, 2002 2001 2000 ------------ ------------ ------------Pro forma net income (loss)............... $ 753 $ (58,779) $ 9,120 Pro forma basic net income (loss) per share............................... 0.02 (1.28) 0.24 Pro forma diluted net income (loss) per share............................... 0.02 (1.28) 0.19
Year Ended
January 3,
2004
December 28,
2002
December 29,
2001
Pro forma net income (loss)
$
25,034
$
753
$
(58,779
)
Pro forma basic net income (loss) per share
$
0.51
$
0.02
$
(1.28
)
Pro forma diluted net income (loss) per share
$
0.49
$
0.02
$
(1.28
)
Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of the
Company'sCompany’s stock-based awards to employees.7.F-17
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating lease agreements that expire at various dates through 2007. Some of these arrangements contain renewal options, and require the Company to pay taxes, insurance and maintenance costs.
Rent expense under operating leases was $2,528,000, $2,002,000
$1,724,000and$1,065,000$1,724,000 for fiscal 2003, 2002 and 2001,and 2000,respectively.The minimum annual future rentals under the terms of these leases at
December 28, 2002January 3, 2004 are as follows (in thousands):
FISCAL YEAR2003.................................... $ 2,093 2004.................................... 2,088 2005.................................... 2,144 2006.................................... 1,691 2007.................................... 1,022 Thereafter.............................. -- ------- Total minimum lease payments............ 9,038 Minimum Sublease Rental Income.......... (22) ------- Total net minimum lease payments........ $ 9,016 =======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 its direct access arrangement (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. On March 27, 2002, the Company filed an amended answer and counterclaims in which the Company claimed that the TDK-held patent is unenforceable due to inequitable conduct and asserted counterclaims seeking a declaration that the TDK-held patent is invalid, not infringed and unenforceable. On November 6, 2002, a motion for summary judgment for non-infringement was brought by the Company before the U.S. District Court, Central District of California. The court refused to grant the Company's request for a summary judgment that it did not infringe TDK's patent as a F-177. COMMITMENTS AND CONTINGENCIES (CONTINUED) matter of law. On January 6, 2003, the court extended discovery through July 3, 2003, set a final date for all summary judgment motions of August 4, 2003, and extended the trial date to November 2003. The Company is currently in the discovery phase of this litigation. This lawsuit has involved, and may continue to involve, significant expense and may also divert management's time and attention from other aspects of the Company's business. The Company intends to vigorously contest this case, however, the Company is unable at this time to determine whether the outcome of the litigation will have a material impact on its results of operations, cash flows or financial condition in any future period.
FISCAL YEAR
2004
$
2,558
2005
2,719
2006
2,384
2007
1,451
2008
316
Thereafter
393
Total minimum lease payments
9,821
Minimum Sublease Rental Income
(14
)
Total net minimum lease payments
9,807
On December 6, 2001, a class action complaint for violations of U.S. federal securities laws was filed in the United States District Court for the Southern District of New York against the Company, four
of itsofficers individually and the three investment banking firms who served as representatives of the underwriters in connection with theCompany'sCompany’s initial public offering of common stock which became effective on March 23, 2000. On April 19, 2002, aconsolidated amended complaint,Consolidated Amended Complaint, which is now the operative complaint, was filed in the same court. Theaction is being coordinated with over 300 other nearly identical actions filed against other companies. These claims are premised on allegationscomplaint alleges that the registration statement and prospectus for theCompany'sCompany’s initial public offering did not disclose that (1) the underwriters solicited and received additional, excessive and undisclosed commissions from certain investors, and (2) the underwriters had agreed to allocate shares of the offering in exchange for a commitment from the customers to purchase additional shares in the aftermarket at pre-determined higher prices. The action seeks damages in an unspecifiedamount.amount and is being coordinated with approximately 300 other nearly identical actions filed against other companies. On July 15, 2002, the Company moved to dismiss all claims against the Company and the individual defendants. A court order dated October 9, 2002 dismissed without prejudice numerous individual defendants, including the four officers of ourCompanycompany who had been named individually. OnJuly 15, 2002,February 19, 2003, the Court denied the motion to dismiss the complaint against the Company. The Company has approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a proposed settlement between the plaintiff class and the Companymoved to dismiss all claims against itand theindividual defendants. The court has not ruled on this motion. Manyvast majority of theparties in these actions,other approximately 300 issuer defendants. It is anticipated that any potential financial obligation of the Company to plaintiffs due pursuant to the terms of the MOU and related agreements would be covered by existing insurance. Therefore, the Company does not expect that the proposed settlement would involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including theCompany, are participating in mediation discussions. Although these discussions are underway, there is no assurance that such discussions will result in any meaningful progress for an acceptable settlement.negotiation of a settlement agreement and approval by the Court. The Companyintendscannot be certain as tovigorously contest this case,whether or when a settlement will occur or be finalized and is unable at this time to determine whether the outcome of the litigation will have a material impact on its results of operationscash flowsor financial condition in any future period.8.On January 14, 2004, Digcom, Inc., commenced a lawsuit in the United States District Court for the Southern District of California against the Company and other major companies in the GSM/GPRS wireless market, for alleged infringement of Digcom’s U.S. Patent No. 4,567,602, which was issued on January 28, 1986 and expired on June 13, 2003. Digcom’s complaint asserts that the Company and the other major companies have infringed their ‘602 patent by manufacturing, using and selling products and equipment for operation in GSM/GPRS wireless networks, including the Company’s Aero/Aero+ GSM Transceiver Chipsets as a whole and the Si4200 and Si4201 Chips individually. The Company does not believe that an injunction can be sought since the alleged patent has expired. Accordingly, the Company does not expect any impact on the sale of its products as a result of this lawsuit.
F-18
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently investigating Digcom’s allegations, and will respond with appropriate defenses. Due to the early stage of this litigation, the Company cannot estimate the outcome of this matter or resulting financial impact, if any.
The Company is involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the consolidated financial position or results of operations.
7. INCOME TAXES
As of
December 28, 2002,January 3, 2004, the Company had federal net operating loss and research and development credit of approximately $25,867,000 and $532,000 respectively, as a result of the Cygnal acquisition. These carryforwards expire in fiscal years 2019 through 2023. The Company also had state research and development credit carryforwards of approximately$671,000.$1,634,000 which do not expire.The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credit carryforwards
do not expire.in the event of an “ownership change” of a corporation. Federal net operating loss carryforwards of approximately $26,054,000 and tax credit carryforwards of $532,000 at December 10, 2003 were incurred by Cygnal prior to being acquired by us and will be subject to an annual utilization limit of $3.3 million. The annual limit may result in the expiration of net operating losses and tax credits before utilization.Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the values used for income tax purposes. Upon the acquisition of Cygnal on December 10, 2003, the company recorded a net deferred tax liability of approximately $2,245,000 due to differences between book and tax basis of acquired assets and assumed liabilities. Significant components of the
Company'sCompany’s deferred taxes as of January 3, 2004 and December 28, 2002and December 29, 2001are as follows (in thousands):
December 28, December 29, 2002 2001 ------------ ------------Deferred tax liabilities: Depreciable assets.................................... $ 1,597 $ 1,242 Prepaid expenses...................................... 486 182 ------------ ------------ 2,083 1,424 ------------ ------------ Deferred tax assets: Research and development tax credit carryforward...... 671 464 Reserves and allowances............................... 1,164 1,083 Deferred income on shipments to distributors.......... 3,653 1,088 Accrued liabilities & other........................... 808 389 ------------ ------------ 6,296 3,024 ------------ ------------ Net deferred taxes.................................... $ 4,213 $ 1,600 ============ ============F-188.
January 3,
2004
December 28,
2002
Deferred tax liabilities:
Acquired intangibles
$
4,625
$
—
Depreciable assets
3,752
1,597
Prepaid expenses
927
486
9,304
2,083
Deferred tax assets:
Net operating loss carryforward
9,561
—
Research and development tax credit carryforward
2,166
671
Reserves and allowances
1,575
1,164
Deferred income on shipments to distributors
4,008
3,653
Accrued liabilities & other
1,620
808
18,930
6,296
Less: Valuation allowance
(8,062
)
—
10,868
6,296
Net deferred taxes
$
1,564
$
4,213
The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets related to net operating loss carryforwards acquired in connection with the Cygnal purchase. The subsequent recognition of these acquired deferred tax asset items will reduce goodwill.
F-19
7. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
December 28, December 29, December 30, 2002 2001 2000 -------------- ------------ ------------Current: Federal.............. $ 13,811 $ (1,436) $ 10,695 State................ 396 (215) 917 ------------- ----------- ------------ Total Current........ 14,207 (1,651) 11,612 Deferred: Federal.............. (3,517) (1,031) 202 State................ (100) (121) 18 ------------- ----------- ------------ Total Deferred....... (3,617) (1,152) 220 ------------- ----------- ------------ $ 10,590 $ (2,803) $ 11,832 ============= =========== ============
January 3,
2004
December 28,
2002
December 29,
2001
Current:
Federal
$
19,255
$
13,811
$
(1,436
)
State
550
396
(215
)
Total Current
19,805
14,207
(1,651
)
Deferred:
Federal
1,629
(3,517
)
(1,031
)
State
46
(100
)
(121
)
Total Deferred
1,675
(3,617
)
(1,152
)
$
21,480
$
10,590
$
(2,803
)
The
Company'sCompany’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 28, December 29, December 30, 2002 2001 2000 ------------ ------------ ------------Pre-tax book income (loss) at statutory rate 35.0% (35.0)% 35.0% State taxes, net of federal benefit......... 1.1 (0.2) 4.0 Non-deductible intangible amortization and impairment charges........................ -- 27.1 -- Non-deductible deferred compensation expense 5.9 3.8 5.1 Other permanent items....................... (4.6) (0.5) 2.5 Tax credits................................. (3.6) (1.0) (0.8) ------------ ------------ ------------ 33.8% (5.8)% 45.8%The exercise of certain
January 3,
2004
December 28,
2002
December 29,
2001
Pre-tax book income (loss) at statutory rate
35.0
%
35.0
%
(35.0
)%
State taxes, net of federal benefit
1.0
1.1
(0.2
)
Research and development tax credits
(3.6
)
(3.6
)
(1.0
)
Non-deductible intangible amortization and impairment charges
—
—
27.1
Other
—
1.3
3.3
32.4
%
33.8
%
(5.8
)%
Employee-based stock
options which have beenawards granted under the 2000 Planresultsmay result in compensation which is includable in the taxable income of theexercising option holderemployee and deductible by the Company for federal and state income tax purposes. Such compensation results from increases in the fair marketF-198. INCOME TAXES (CONTINUED)value of theCompany'sCompany’s common stock subsequent to the date of grantof the exercisedand from stockoptions and, inawards granted at prices below market value. In accordance with APB No. 25, such compensation is not recognized as an expense for financial accountingpurposes; however,purposes. Prior to fiscal 2003, the related tax benefitsarewere recorded as an increase to additional paid-in capital. In fiscal 2003, the employee income from stock-based awards that relates to the amortization of deferred stock compensation was recorded as a reduction to the tax provision, with the remaining amount recorded as an increase in additional paid in capital. The impact of not reflecting the deductions in the tax provision (benefit) in prior years is not material.Substantially all of the
Company'sCompany’s operating income was generated from domestic operations during fiscal2002.2002 and 2003. Undistributed earnings of theCompany'sCompany’s foreign subsidiaries are considered to be permanently reinvested and, accordingly, no provision for U.S. federal and/or state income taxes has been provided thereon.The U.S. Internal Revenue Service has selected the
Company'sCompany’s 1999, 2000, and20002001 federal income tax returns for examination. Management believes that the results of the examination will not materially affect the financial position or results of operations of the Company.8. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution or 401(k) Plan for
the benefit of substantially allits qualified U.S. employees.To be eligible for the 401(k) Plan, employees must have reached the age of 21.Participants mayelect tocontributeup to 15%a percentage of their compensation on a pre-tax basis, subject to a maximum annual contribution imposed by the401(k) Plan.Internal Revenue Code. The Company may make discretionary matching contributionsof up to 10% of a participant's compensationas well as discretionary profit-sharing contributions to the 401(k) Plan. TheCompany'sCompany’s contributions to the 401(k) Plan vest over four years at a rate of 25% per year. The Company contributed $424,000, $320,000$269,000and$219,000$269,000 to the 401(k) Plan during fiscal 2003, 2002 and 2001,and 2000,respectively.F-20
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The fourth quarter of fiscal 2003 had fourteen weeks. All
of theother quarterly periods reported here had thirteen weeks. Quarterly financial information for fiscal20022003 and20012002 (in thousands of dollars except per share amounts):
Fiscal 2002 Fiscal 2001 ----------------------------------------------- --------------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- -------- --------Revenues............ $ 60,196 $ 51,786 $ 41,185 $ 28,849 $ 23,583 $ 19,925 $ 16,120 $ 14,437 Cost of revenues.. 25,794 22,747 19,304 12,094 9,583 8,544 7,375 6,428 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........ 34,402 29,039 21,881 16,755 14,000 11,381 8,745 8,009 Operating expenses: Research and development..... 8,364 7,379 8,211 8,047 7,728 7,672 7,070 6,508 Selling, general & administrative.. 10,249 8,653 8,299 6,676 5,858 5,362 4,746 4,090 Goodwill amortization.... -- -- -- -- -- -- 2,084 2,103 Impairment of goodwill and other intangible assets.......... 37 -- -- -- -- 34,885 -- -- Amortization of deferred stock compensation.... 1,267 1,293 1,308 1,305 1,295 1,319 1,331 1,331 -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses.. 19,917 17,325 17,818 16,028 14,881 49,238 15,231 14,032 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)............ 14,485 11,714 4,063 727 (881) (37,857) (6,486) (6,023) Other income (expense): Interest income... 406 351 367 458 684 856 1,047 1,037 Interest expense.. (168) (150) (148) (151) (173) (179) (201) (198) Other income (expense)....... (352) (286) (9) -- (2) 1 (3) 2 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes..... 14,371 11,629 4,273 1,034 (372) (37,179) (5,643) (5,182) Provision (benefit) for income taxes.. 4,547 3,747 1,618 678 (801) (651) (757) (594) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)... $ 9,824 $ 7,882 $ 2,655 $ 356 $ 429 $(36,528) $(4,886) $ (4,588) ======== ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share: Basic............. $ .20 $ .17 $ .06 $ .01 $ .01 $ (.79) $ (.11) $ (.10) Diluted........... $ .19 $ .16 $ .05 $ .01 $ .01 $ (.79) $ (.11) $ (.10) Weighted-average common shares outstanding: Basic............. 47,956 47,703 47,482 47,129 46,659 46,210 45,840 45,367 Diluted........... 50,542 50,519 50,901 51,283 50,890 46,210 45,840 45,367AS OF A PERCENTAGE OF REVENUES
Fiscal 2002 Fiscal 2001 ----------------------------------------------- --------------------------------------------------- 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.... 42.9 43.9 46.9 41.9 40.6 42.9 45.8 44.5 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........ 57.1 56.1 53.1 58.1 59.4 57.1 54.2 55.5 Operating expenses: Research and development..... 13.9 14.2 19.9 27.9 32.8 38.5 43.9 45.1 Selling, general & administrative.. 17.0 16.7 20.2 23.1 24.8 26.9 29.4 28.3 Goodwill amortization.... -- -- -- -- -- -- 12.9 14.6 Impairment of goodwill and other intangible assets.......... 0.1 -- -- -- -- 175.1 -- -- Amortization of deferred stock compensation.... 2.1 2.5 3.2 4.5 5.5 6.6 8.3 9.2 -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses.. 33.1 33.4 43.3 55.5 63.1 247.1 94.5 97.2 -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)............ 24.0 22.7 9.8 2.6 (3.7) (190.0) (40.3) (41.7) Other income (expense): Interest income... 0.7 0.7 0.9 1.5 2.9 4.3 6.5 7.2 Interest expense.. (0.3) (0.3) (0.4) (0.5) (0.7) (0.9) (1.2) (1.4) Other income (expense)....... (0.5) (0.7) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes...... 23.9 22.4 10.3 3.6 (1.5) (186.6) (35.0) (35.9) Provision (benefit) for income taxes.. 7.6 7.2 3.9 2.4 (3.4) (3.3) (4.7) (4.1) -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)... 16.3% 15.2% 6.4% 1.2% 1.9% (183.3)% (30.3)% (31.8)% ======== ======== ======== ======== ======== ======== ======== ========
Fiscal 2003
Fiscal 2002
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Revenues
$
109,559
$
82,907
$
69,086
$
63,753
$
60,196
$
51,786
$
41,185
$
28,849
Cost of revenues
50,267
38,061
30,267
43,578
*
25,794
22,747
19,304
12,094
Gross profit
59,292
44,846
38,819
20,175
34,402
29,039
21,881
16,755
Operating expenses:
Research and development
14,864
12,267
11,635
9,530
8,364
7,379
8,211
8,047
Selling, general & administrative
12,611
10,688
9,539
9,998
10,249
8,653
8,299
6,676
Write off of in- process research and development
1,600
—
—
—
—
—
—
—
Impairment of goodwill and other intangible assets
—
—
—
—
37
—
—
—
Amortization of deferred stock compensation
1,301
1,196
1,223
1,266
1,267
1,293
1,308
1,305
Operating expenses
30,376
24,151
22,397
20,794
19,917
17,325
17,818
16,028
Operating income (loss)
28,916
20,695
16,422
(619
)
14,485
11,714
4,063
727
Other income (expense):
Interest income
435
281
308
344
406
351
367
458
Interest expense
(49
)
—
—
—
(168
)
(150
)
(148
)
(151
)
Other income (expense)
170
75
(119
)
(663
)
(352
)
(286
)
(9
)
—
Income (loss) before income taxes
29,472
21,051
16,611
(938
)
14,371
11,629
4,273
1,034
Provision for income taxes
8,549
7,119
5,707
105
4,547
3,747
1,618
678
Net income (loss)
$
20,923
$
13,932
$
10,904
$
(1,043
)
$
9,824
$
7,882
$
2,655
$
356
Net income (loss) per share:
Basic
$
.42
$
.28
$
.22
$
(.02
)
$
.20
$
.17
$
.06
$
.01
Diluted
$
.39
$
.26
$
.21
$
(.02
)
$
.19
$
.16
$
.05
$
.01
Weighted-average common shares outstanding:
Basic
49,711
48,939
48,480
48,215
47,956
47,703
47,482
47,129
Diluted
53,969
52,816
51,392
48,215
50,542
50,519
50,901
51,283
* Includes a $15.3 million charge for patent infringement litigation settlement
AS OF A PERCENTAGE OF REVENUES
Fiscal 2003
Fiscal 2002
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Revenues
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Cost of revenues
45.9
45.9
43.8
68.4
42.9
43.9
46.9
41.9
Gross profit
54.1
54.1
56.2
31.6
57.1
56.1
53.1
58.1
Operating expenses:
Research and development
13.6
14.8
16.8
14.9
13.9
14.2
19.9
27.9
Selling, general & administrative
11.5
12.9
13.8
15.7
17.0
16.7
20.2
23.1
Write off of in- process research and development
1.5
—
—
—
—
—
—
—
Impairment of goodwill and other intangible assets
—
—
—
—
0.1
—
—
—
Amortization of deferred stock compensation
1.2
1.4
1.8
2.0
2.1
2.5
3.2
4.5
Operating expenses
27.8
29.1
32.4
32.6
33.1
33.4
43.3
55.5
Operating income (loss)
26.3
25.0
23.8
(1.0
)
24.0
22.7
9.8
2.6
Other income (expense):
Interest income
0.4
0.3
0.5
0.6
0.7
0.7
0.9
1.5
Interest expense
—
—
—
—
(0.3
)
(0.3
)
(0.4
)
(0.5
)
Other income (expense)
0.2
0.1
(0.2
)
(1.0
)
(0.5
)
(0.7
)
—
—
Income (loss) before income taxes
26.9
25.4
24.1
(1.4
)
23.9
22.4
10.3
3.6
Provision for income taxes
7.8
8.6
8.3
0.2
7.6
7.2
3.9
2.4
Net income (loss)
19.1
%
16.8
%
15.8
%
(1.6
)%
16.3
%
15.2
%
6.4
%
1.2
%