<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 2000
REGISTRATION NO. 333--94853
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
SILICON LABORATORIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 74-2793174
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
4635 BOSTON LANE
AUSTIN, TX 78735
TELEPHONE: (512) 416-8500
FACSIMILE: (512) 464-9404
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
NAVDEEP S. SOOCH
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
4635 BOSTON LANE
AUSTIN, TX 78735
TELEPHONE: (512) 416-8500
FACSIMILE: (512) 464-9404
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
S. MICHAEL DUNN, P.C. ALAN DEAN
THOMAS R. NELSON DAVIS POLK & WARDWELL
PHILIP W. RUSSELL 450 LEXINGTON AVENUE
BROBECK, PHLEGER & HARRISON LLP NEW YORK, NEW YORK 10017
301 CONGRESS AVENUE, SUITE 1200 TELEPHONE: (212) 450-4000
AUSTIN, TEXAS 78701 FACSIMILE: (212) 450-4800
TELEPHONE: (512) 477-5495
FACSIMILE: (512) 477-5813
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.0001 par value....... 3,680,000(a) $23.00 $84,640,000 $22,345(b)
</TABLE>
(a) Includes 480,000 shares as to which the Registrant has granted the
Underwriters an option to cover over-allotments.
(b) $26,400 was previously paid on January 18, 2000.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 2000
3,200,000 SHARES
[LOGO]
SILICON LABORATORIES INC.
COMMON STOCK
--------------
SILICON LABORATORIES INC. IS OFFERING 2,720,000 SHARES OF ITS COMMON STOCK AND
THE SELLING STOCKHOLDERS ARE SELLING 480,000 SHARES OF COMMON STOCK. SILICON
LABORATORIES WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES OF COMMON
STOCK BY THE SELLING STOCKHOLDERS. THIS IS OUR INITIAL PUBLIC OFFERING AND NO
PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $21.00 AND $23.00 PER SHARE.
-------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "SLAB."
-------------------
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO PROCEEDS TO
PRICE TO DISCOUNTS AND SILICON SELLING
PUBLIC COMMISSIONS LABORATORIES STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
PER SHARE...................... $ $ $ $
TOTAL.......................... $ $ $ $
</TABLE>
SILICON LABORATORIES INC. HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP
TO AN ADDITIONAL 480,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES OF COMMON STOCK
TO PURCHASERS ON , 2000.
-------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 2000
<PAGE>
[The graphics background is a silicon chip wafer with the heading Silicon
Laboratories and its logo. The phrase "Mixed Signal Innovation for the
Communications Industry" is under the logo and company name. The rest of the
page consists of two columns, the left column titled "Silicon Laboratories
Products" and the right column titled "Typical Applications". Under the Silicon
Laboratories Products column, there are four graphics of the Company's chips.
Under the Typical Applications column, there are four graphics of applications
that the various chips are used in with text descriptions of each graphic
consisting, from top to bottom, of "V.90 Modems" and "Cellular Phones, Pagers,
PDAs, Wireless Data Communications" and "Point of Sale Terminals, Set-Top Boxes,
Security Systems" and "PBX Systems, Voice Over Internet Protocol Applications,
Cable Telephony, Voice Over DSL Applications." In between the left and right
columns is text describing the Company's products consisting, from top to
bottom, of "Silicon DAA Products, Globally-programmable Silicon DAAs" and "RF
Synthesizer Products, Integrated Radio Frequency Synthesizers" and "ISOmodem
Products, Low-speed Embedded Modems" and "ProSLIC Products, Integrated SLIC and
Codec ICs."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Special Note Regarding Forward-Looking
Statements........................... 18
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
Selected Consolidated Financial
Information.......................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business............................... 33
Management............................. 45
Certain Transactions................... 54
Principal and Selling Stockholders..... 55
Description of Capital Stock........... 57
Shares Eligible for Future Sale........ 61
Underwriters........................... 63
Legal Matters.......................... 65
Experts................................ 65
Where You Can Find Additional
Information About Silicon
Laboratories......................... 65
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We and
the selling stockholders have not authorized anyone to provide you with
information that is different from that contained in this prospectus. We and the
selling stockholders are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock.
Until , 2000, all dealers that buy, sell or trade shares,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER
THE CAPTION "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS.
SILICON LABORATORIES
We are a leader in the design and development of proprietary,
analog-intensive, mixed-signal integrated circuits, or ICs, for the rapidly
growing communications industry. Mixed-signal ICs are electronic components that
convert real-world analog signals, such as sound and radio waves, into digital
signals that electronic products can process. Mixed-signal ICs are critical
components of numerous communications products, including cellular telephones,
cable and satellite set-top boxes, modems and fax machines. Our ICs can
dramatically reduce the cost, size and system power requirements of these
communications products. To develop our business rapidly, we initially focused
our efforts on developing ICs for the personal computer modem market. We are now
applying our mixed-signal and communications expertise to the development of
innovative ICs for other communications markets with high growth potential, such
as cellular telephones and network access applications. Our five largest
customers in 1999 were Intel, Motorola, PC-Tel, SmartLink and 3Com. We have no
long-term purchase commitments from any of our customers.
Within the semiconductor industry, we are known as a "fabless" company,
meaning that we do not fabricate the semiconductors that we design and develop,
but instead rely on third parties to manufacture our products. We design our ICs
to be manufactured using standard complementary metal oxide semiconductor, or
CMOS, technology, which involves less cost and complexity in the manufacturing
process than competing technologies. As a result, our ICs can be reliably
manufactured at a reduced cost and in high volume at semiconductor foundries
around the world.
Demand for communications services has increased at a rapid rate in recent
years due to a number of factors, including the growth of Internet usage,
development of new communications technologies, availability of improved
communications services at lower costs and remote access requirements for
corporate networks. This demand has fueled tremendous growth in the number of
wireline and wireless communications devices used to access these services.
Digital communications devices typically require mixed-signal circuits to
access the communications networks to which they are connected. In order to
improve their competitive position, communications device manufacturers need
advanced mixed-signal ICs to create smaller products with improved price/
performance characteristics. Manufacturers of communications devices must
rapidly introduce new and advanced products and must adapt to evolving industry
standards and new technologies to remain competitive. Because analog-intensive,
mixed-signal IC design expertise is difficult to find, these manufacturers
increasingly are turning to third parties, such as Silicon Laboratories with its
world-class design talent, to provide advanced mixed-signal ICs. This expertise
is even more important when designing within the limitations of standard CMOS
manufacturing processes rather than alternative semiconductor processes, which
are typically more expensive and not as widely available.
Our mixed-signal ICs provide our customers with the following benefits:
- DRAMATICALLY IMPROVED SIZE AND PRICE/PERFORMANCE CHARACTERISTICS. By
significantly reducing the number of discrete components used in
communications devices, our ICs enable our customers to offer products
with smaller sizes, lower costs, reduced power consumption and with
increased performance and reliability.
- REDUCED TIME REQUIRED TO BRING A PRODUCT TO MARKET. We design our
mixed-signal ICs to be integrated with the products of multiple
manufacturers and conduct extensive research and development to ensure
that they conform to our customers' evolving technical standards. As a
result, our customers are able to rapidly integrate our ICs into their
designs and reduce the time it takes to begin marketing their products.
- ATTRACTIVE NEW PRODUCT OPPORTUNITIES. Our space-saving and cost-efficient
ICs allow our customers to create smaller and more cost-effective products
for use in many evolving markets for communications devices.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
Silicon Laboratories..................................... 2,720,000 shares
Selling stockholders..................................... 480,000 shares
Total.................................................. 3,200,000 shares
Common stock to be outstanding after this offering......... 46,578,118 shares
Use of proceeds............................................ For working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..................... SLAB
</TABLE>
------------------------
The number of shares of common stock to be outstanding after this offering
is based on the pro forma number of shares outstanding as of January 1, 2000 and
reflects the conversion of all shares of our outstanding convertible preferred
stock into common stock. This information excludes:
- 2,380,226 shares subject to outstanding options with a weighted average
exercise price of $2.52 per share; and
- 143,182 shares subject to outstanding warrants with a weighted average
exercise price of $1.17 per share.
In addition, the underwriters have a 30-day option to purchase up to 480,000
additional shares from us to cover over-allotments. Some of the disclosures in
this prospectus would be different if the underwriters exercise the
over-allotment option. Unless we tell you otherwise, the information in this
prospectus:
- assumes that the underwriters will not exercise the over-allotment option;
- reflects a 2-for-1 split of our common stock effected as of November 3,
1999; and
- reflects the conversion of each share of our outstanding convertible
preferred stock into two shares of common stock upon the closing of this
offering.
You should note that our fiscal year ends on the Saturday closest to
December 31st. A reference to "fiscal 1997" is to our fiscal year ended
January 3, 1998; a reference to "fiscal 1998" is to our fiscal year ended
January 2, 1999; and a reference to "fiscal 1999" is to our fiscal year ended
January 1, 2000.
------------------------
Our principal executive offices are located at 4635 Boston Lane, Austin,
Texas 78735. Our telephone number is (512) 416-8500. Our Web site address is
WWW.SILABS.COM. THE INFORMATION CONTAINED ON OUR WEB SITE IS NOT INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 19, 1996) FISCAL YEAR
THROUGH ------------------------------
DECEMBER 31, 1996 1997 1998 1999
------------------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales............................................ $ -- $ -- $ 5,609 $46,911
Cost of goods sold............................... -- -- 2,371 15,770
------- ------- ------- -------
Gross profit..................................... -- -- 3,238 31,141
Operating expenses............................... 20 1,991 6,690 16,480
------- ------- ------- -------
Operating income (loss).......................... (20) (1,991) (3,452) 14,661
------- ------- ------- -------
Net income (loss)................................ $ (20) $(1,835) $(3,397) $11,040
======= ======= ======= =======
Basic net income (loss) per share................ $ -- $ (1.04) $ (.37) $ .73
Diluted net income (loss) per share.............. $ -- $ (1.04) $ (.37) $ .25
Shares used in calculating basic net income
(loss) per share............................... -- 1,760 9,129 15,152
Shares used in calculating diluted net income
(loss) per share............................... -- 1,760 9,129 43,657
Pro forma basic net income per share............. $ .30
Pro forma diluted net income per share........... $ .25
Shares used in calculating pro forma basic net
income per share............................... 36,461
Shares used in calculating pro forma diluted net
income (loss) per share........................ 43,657
</TABLE>
The following table contains a summary of our balance sheet:
- on an actual basis at January 1, 2000;
- on a pro forma basis to reflect the conversion of all outstanding shares
of convertible preferred stock into 13,842,174 shares of common stock; and
- on a pro forma as adjusted basis to additionally reflect the sale of
2,720,000 shares of common stock by us in this offering at an assumed
initial public offering price of $22.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
AS OF JANUARY 1, 2000
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $14,706 $14,706 $69,357
Working capital............................................. 14,281 14,281 68,933
Total assets................................................ 41,958 41,958 96,609
Long-term obligations, net of current maturities............ 6,223 6,223 6,223
Redeemable convertible preferred stock...................... 12,750 -- --
Total stockholders' equity.................................. 8,003 20,753 75,404
</TABLE>
5
<PAGE>
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS INCLUDING INCREASED LOGISTICAL
COMPLEXITY, POLITICAL INSTABILITY AND CURRENCY FLUCTUATIONS
We intend to open sales offices in international markets to expand our
international sales activities in Europe and the Pacific Rim region. Our planned
international sales growth will be limited if we are unable to hire additional
personnel and develop relationships with international distributors. We may not
be able to maintain or increase international market demand for our products.
Our international operations are subject to a number of risks, including:
- increased complexity and costs of managing international operations;
- protectionist laws and business practices that favor local competition in
some countries;
- multiple, conflicting and changing laws, regulations and tax schemes;
- longer sales cycles;
- greater difficulty in accounts receivable collection and longer collection
periods; and
- political and economic instability.
To date, all of our sales to international customers and purchases of
components from international suppliers, have been denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive for our international
customers to purchase, thus rendering them less competitive.
OUR INABILITY TO MANAGE GROWTH COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS
During the past year, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
148 employees at January 1, 2000. This growth has placed, and any future growth
of our operations will continue to place, a significant strain on our management
personnel, systems and resources. We anticipate that we will need to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including the improvement of our accounting and other internal
management systems. We also expect that we will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors will require
substantial management effort. If we are unable to effectively manage our
expanding operations, our business could be materially and adversely affected.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
Our products rely on our proprietary technology, and we expect that future
technological advances made by us will be critical to sustain market acceptance
of our products. Therefore, we believe that the protection of our intellectual
property rights is and will continue to be important to the success of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and business partners, and control access to and
distribution of our documentation and other proprietary information. Despite
these efforts, unauthorized parties may attempt to copy or otherwise obtain and
use our proprietary technology. Monitoring unauthorized use of our technology is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. We
cannot be certain that patents will be issued as a result of our pending
applications nor can we be certain that any issued patents would protect or
benefit us or give us adequate protection from competing products. For example,
issued patents may be circumvented or challenged and declared invalid or
unenforceable. We also cannot be certain that others will not develop our
unpatented proprietary technology or effective competing technologies on their
own.
13
<PAGE>
SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time, we
receive letters from various industry participants alleging infringement of
patents or trade secrets. The exploratory nature of these inquiries has become
relatively common in the semiconductor industry. We typically respond when
appropriate and as advised by legal counsel. We may become involved in
litigation to protect our intellectual property rights or to defend allegations
of infringement asserted by others. Legal proceedings could subject us to
significant liability for damages or invalidate our proprietary rights. Legal
proceedings initiated by us to protect our intellectual property rights could
also result in counterclaims or countersuits against us. Any litigation,
regardless of its outcome, would likely be time consuming and expensive to
resolve and would divert our management's time and attention. Any potential
intellectual property litigation also could force us to take specific actions,
including:
- cease selling products that use the challenged intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- redesign those products that use infringing intellectual property.
On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com
claiming that Analog Devices has infringed, and is continuing to infringe, our
issued U.S. patent with respect to our DAA technology and that Analog Devices
and 3Com have misappropriated our confidential information, know-how and trade
secrets. On January 25, 2000, Analog Devices filed an answer denying that it has
misappropriated our confidential information, know-how and trade secrets and
brought a counterclaim against us seeking a declaratory judgment that our issued
U.S. patent is invalid and unenforceable and that Analog Devices has not
infringed our issued U.S. patent. We filed an answer to Analog Devices'
counterclaim asserting that our issued U.S. patent is valid and enforceable and
that Analog Devices has infringed our issued U.S. patent. 3Com has not yet filed
a response to our lawsuit. Our lawsuit will involve significant expense and
divert our management's time and attention from other aspects of our business.
The lawsuit may also damage our business relationship with 3Com which accounted
for 10% of our sales in fiscal 1999 and 20% of our sales in fiscal 1998. Due to
the inherent uncertainties of litigation, we cannot be certain of the outcome of
this lawsuit.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
As part of our growth strategy, we may consider opportunities to acquire
other businesses or technologies that would complement our current offerings,
expand the breadth of our markets or enhance our technical capabilities. To
date, we have not made any acquisitions and we are currently not subject to any
agreement or letter of intent with respect to potential acquisitions.
Acquisitions entail a number of risks that could materially and adversely affect
our business and operating results, including:
- problems integrating the acquired operations, technologies or products
with our existing business and products;
- diversion of management's time and attention from our core business;
- difficulties in retaining business relationships with suppliers and
customers of the acquired company;
- risks associated with entering markets in which we lack prior experience;
and
- potential loss of key employees of the acquired company.
14
<PAGE>
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH
The future growth of our business will depend in part on our ability to
expand our existing relationships with distributors and sales representatives,
develop additional channels for the distribution and sale of our products and
manage these relationships. As part of our channel sales strategy, we intend to
expand our relationships with distributors and sales representatives. As we
develop our indirect sales capabilities, we will need to manage the potential
conflicts that may arise with our direct sales efforts. The inability to
successfully execute or manage a multi-channel sales strategy could impede our
future growth.
RISKS RELATED TO OUR INDUSTRY
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, including wireline, wireless and other communications markets, we
face competition from a relatively large number of competitors. Across all of
our product areas, we compete with Advanced Micro Devices, Analog Devices,
Conexant, Delta Integration, Fujitsu, Infineon Technologies, Krypton Isolation,
National Semiconductor, Philips and Texas Instruments, among others. We expect
to face competition in the future from our current competitors, other
manufacturers and designers of semiconductors, and innovative start-up
semiconductor design companies. Some of our customers, such as Intel, Lucent and
Motorola, are also large, established semiconductor suppliers. Our sales to and
support of these customers may enable them to become a source of competition to
us, despite our efforts to protect our intellectual property rights. As the
markets for communications products grow, we also may face competition from
traditional communication device companies. These companies may enter the
mixed-signal semiconductor market by introducing their own ICs or by entering
into strategic relationships with or acquiring other existing providers of
semiconductor products.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND SALES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. We have
reduced the average unit price of our products in anticipation of future
competitive pricing pressures, new product introductions by us or our
competitors and other factors. We expect that we will have to do so again in the
future. If we are unable to offset any such reductions in our average selling
prices by increasing our sales volumes, our gross profits and sales will suffer.
To maintain gross margins, we will need to develop and introduce new products
and product enhancements on a timely basis and continually reduce our costs. Our
failure to do so would cause our sales and gross margins to decline.
OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES
Prior to purchasing our products, our customers require that our products
undergo an extensive qualification process, which involves testing of the
product in the customer's system as well as rigorous reliability testing. This
qualification process may continue for six months or longer. However,
qualification of a product by a customer does not assure any sales of the
product to that customer. Even after successful qualification and sales of a
product to a customer, a subsequent revision to the IC, changes in its
manufacturing process or the selection of a new supplier by us may require a new
qualification process, which may result in delays and in us holding excess or
obsolete inventory. After our products are qualified, it can take an additional
six months or more before the customer commences volume production of products
that incorporate our products. Despite these uncertainties, we devote
substantial resources,
15
<PAGE>
including identification, design, engineering, sales, marketing and management
efforts, toward qualifying our products with customers in anticipation of sales.
If we are unsuccessful or delayed in qualifying any of our products with a
customer, such failure or delay would preclude or delay sales of such product to
the customer, which may impede our growth and cause our business to suffer.
WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. The industry has experienced significant downturns,
often connected with, or in anticipation of, maturing product cycles of both
semiconductor companies' and their customers' products and declines in general
economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Any future downturns could have a material
adverse effect on our business and operating results. Furthermore, any upturn in
the semiconductor industry could result in increased competition for access to
third-party foundry and assembly capacity. We are dependent on the availability
of such capacity to manufacture and assemble our ICs. None of our third-party
foundry or assembly contractors have provided assurances that adequate capacity
will be available to us.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY END
USERS IN OUR MARKETS
Generally, our products comprise only a part of a communications device. All
components of such devices must uniformly comply with industry standards in
order to operate efficiently together. We depend on companies that provide other
components of the devices to support prevailing industry standards. Many of
these companies are significantly larger and more influential in effecting
industry standards than we are. Some industry standards may not be widely
adopted or implemented uniformly, and competing standards may emerge that may be
preferred by our customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, market
acceptance of our products could be adversely affected which would harm our
business.
Products for communications applications are based on industry standards
that are continually evolving. Our ability to compete in the future will depend
on our ability to identify and ensure compliance with these evolving industry
standards. The emergence of new industry standards could render our products
incompatible with products developed by other suppliers. As a result, we could
be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards.
If our products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies or
in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.
RISKS RELATED TO THIS OFFERING
OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT OUR
STOCKHOLDERS MAY NOT AGREE WITH AND IN WAYS THAT DO NOT INCREASE OUR PROFITS OR
INCREASE OUR STOCK PRICE
Our management will have considerable discretion in the application of the
net proceeds received by us from this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. You must rely on the judgment of our management
regarding the application of the proceeds of this offering. The net proceeds may
be used for corporate purposes that do not increase our profitability or
increase our stock price. Pending application of the net proceeds of this
offering, such proceeds may be placed in investments that fail to produce income
or that could lose value.
16
<PAGE>
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL
Upon completion of this offering, our executive officers and directors, and
their respective affiliates, will beneficially own, in the aggregate,
approximately 60.0% of our outstanding common stock. As a result, these
stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This voting power could delay or prevent
an acquisition of our company on terms that other stockholders may desire.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK
Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of Delaware which may discourage, delay or prevent someone from acquiring
or merging with us, which may adversely affect the market price of our common
stock. Please see "Description of Capital Stock-Anti-Takeover Effects" for more
information concerning these anti-takeover provisions.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
There has been no public market for our common stock prior to this offering.
The initial public offering price for our common stock will be determined
through negotiations among the underwriters, the selling stockholders and us.
This initial public offering price may vary from the market price of our common
stock after the offering. If you purchase shares of common stock, you may not be
able to resell those shares at or above the initial public offering price. The
market price of our common stock may fluctuate significantly in response to
numerous factors, many of which are beyond our control, including the following:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts or our failure to
perform in line with such estimates;
- changes in market valuations of other technology companies, particularly
those that design, manufacture and/or sell semiconductors;
- announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
- introduction of technologies or product enhancements that reduce the need
for our products;
- the loss of one or more key customers;
- departures of key personnel; and
- sales of our common stock in the future.
The stock market has experienced extreme volatility that often has been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.
OF OUR TOTAL OUTSTANDING SHARES AFTER THIS OFFERING, 43,378,118, OR 93%, WILL BE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL
After this offering, we will have outstanding 46,578,118 shares of common
stock, based on the number of shares outstanding at January 1, 2000. This
includes the 2,720,000 shares we are selling, and the 480,000 shares the
stockholders are selling, in this offering, all of which shares may be resold in
the public market
17
<PAGE>
immediately. The remaining 43,378,118 shares will become available for resale in
the public market as shown in the chart below:
<TABLE>
<CAPTION>
% OF TOTAL SHARES
NUMBER OF SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
- - --------------------- ----------------- ------------------------------------------------------------
<C> <C> <S>
0 -- Immediately.
12,954,470 27.8% 120 days after the date of this prospectus due to a release
of 30% of the shares, and shares underlying the options,
held by each stockholder from lock-up agreements with the
underwriters, if the last reported sale price of our common
stock is at least two times the initial public offering
price per share for each of the 20 consecutive trading days
preceding the 120th day after the date of this prospectus
and other conditions are met.
27,508,907 59.1% 181 days after the date of this prospectus upon the
expiration of the lock-up agreements with the underwriters
(plus any shares not already released from the lock-up
agreements).
2,914,741 6.3% At various times after 181 days following the date of this
prospectus, subject to compliance with federal securities
laws and upon the lapse of any applicable vesting
restrictions.
</TABLE>
The underwriters can waive the restrictions of the lock-up agreements at an
earlier time without prior notice or announcement and allow stockholders to sell
their shares. As restrictions on resale end, the market price of our stock could
drop significantly if the holders of restricted shares sell them or are
perceived by the market as intending to sell them. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional stock. For more detailed information, see "Shares Eligible for Future
Sale."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "intend," "anticipate," "believe,"
"estimate" and "continue" and other similar words. You should read statements
that contain these words carefully because they discuss our future expectations,
make projections of our future results of operations or of our financial
condition or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors listed in the sections captioned "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections and elsewhere in this prospectus could have a material adverse effect
on our business, operating results and financial condition.
18
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $22.00 per share, we will
receive $54.7 million from our sale of 2,720,000 shares of common stock and the
selling stockholders in this offering will receive $9.8 million from their sale
of 480,000 shares of common stock, net of estimated offering expenses payable by
us and estimated underwriting discounts and commissions. We will not receive any
portion of the net proceeds received by the selling stockholders from the sale
of their shares. If the underwriters exercise their over-allotment option in
full, we will receive an additional $9.8 million in net proceeds. See "Principal
and Selling Stockholders."
The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock, facilitate future access by us to
public capital markets and provide us with increased visibility in our markets.
We intend to use the net proceeds for this offering for working capital and
other general corporate purposes, including capital expenditures and research
and development. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our current or
future business and product lines, we currently have no specific acquisitions
planned. Our management will have significant flexibility in applying the net
proceeds of this offering. Pending such uses, we will invest the net proceeds of
this offering in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and we
do not intend to pay cash dividends in the foreseeable future. We currently
expect to retain any future earnings to fund the operation and expansion of our
business. In addition, our credit agreements with our bank lender prohibit us
from paying cash dividends on our capital stock without the prior consent of the
lender.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of January 1, 2000:
- On an actual basis;
- On a pro forma basis to reflect the conversion of all shares of our
outstanding convertible preferred stock into 13,842,174 shares of common
stock; and
- On a pro forma as adjusted basis to additionally reflect our sale of
2,720,000 shares of common stock in this offering at an assumed initial
public offering price of $22.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
You should read the following table in conjunction with the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operation" of this prospectus and our consolidated financial
statements and the notes to those statements included at the end of this
prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 1, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current maturities........... 6,223 6,223 6,223
Redeemable convertible preferred stock:
Series A convertible preferred stock, $0.0001 par value;
5,391,267 shares designated, 5,345,449 shares issued
and outstanding actual; none designated, issued and
outstanding pro forma and pro forma as adjusted........ 5,250 -- --
Series B convertible preferred stock, $0.0001 par value;
1,610,638 shares designated, 1,575,638 shares issued
and outstanding actual; none designated, issued and
outstanding pro forma and pro forma as adjusted........ 7,500 -- --
Stockholders' equity:
Common stock, $0.0001 par value, 52,000,000 shares
authorized, 30,015,944 shares issued and outstanding,
actual; 250,000,000 shares authorized, 43,858,118
shares issued and outstanding, pro forma; 250,000,000
shares authorized, 46,578,118 shares issued and
outstanding, pro forma as adjusted................... 3 4 5
Preferred stock, $0.0001 par value, 8,000,000 shares
authorized, none issued and outstanding actual;
8,000,000 shares authorized, none issued and
outstanding, pro forma; and 10,000,000 shares
authorized, none issued and outstanding pro forma as
adjusted............................................. -- -- --
Additional paid-in capital............................. 19,014 31,763 86,413
Notes receivable from stockholders..................... (1,472) (1,472) (1,472)
Deferred stock compensation............................ (15,330) (15,330) (15,330)
Retained earnings...................................... 5,788 5,788 5,788
------- ------- -------
Total stockholders' equity........................... 8,003 20,753 75,404
------- ------- -------
Total capitalization............................... $26,976 $26,976 $81,627
======= ======= =======
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the pro forma number of shares outstanding as of January 1, 2000.
This information excludes:
- 2,380,226 shares subject to outstanding options; and
- 143,182 shares subject to outstanding warrants.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of January 1, 2000 was
approximately $20.8 million, or $.47 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities, divided by 43,858,118 shares of
common stock outstanding on a pro forma basis as of January 1, 2000. These pro
forma numbers reflect the conversion of all shares of our outstanding
convertible preferred stock into common stock.
Dilution in pro forma net tangible book value per share to new investors
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. After giving effect to our sale of 2,720,000 shares of common stock in
this offering at an assumed initial public offering price of $22.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our adjusted pro forma net tangible
book value as of January 1, 2000 would have been $75.4 million, or $1.62 per
share. This amount represents an immediate increase in pro forma net tangible
book value to our existing stockholders of $1.15 per share and an immediate
dilution to new investors of $20.38 per share. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 22.00
Pro forma net tangible book value per share at January 1,
2000.................................................... $ .47
Increase in pro forma net tangible book value per share
attributable to new investors........................... 1.15
-------
Pro forma net tangible book value per share after this
offering.................................................. 1.62
-------
Dilution per share to new investors......................... 20.38
=======
</TABLE>
If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at January 1, 2000 would have been
$85.2 million, or $1.81 per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $1.34 per share
and an immediate dilution to new investors of $20.19 per share.
The following table summarizes, on a pro forma basis as of January 1, 2000,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share paid
by our existing stockholders and by new investors purchasing shares of common
stock in this offering. These pro forma numbers reflect the conversion of all of
our outstanding convertible preferred stock into common stock. The calculation
below is based on an assumed initial public offering price of $22.00 per share,
before deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 43,858,118 94.2% $15,096,695 20.1% $ .34
New investors............................... 2,720,000 5.8 59,840,000 79.9 22.00
---------- ----- ----------- -----
Total............................... 46,578,118 100.0% $74,936,695 100.0%
========== ===== =========== =====
</TABLE>
This discussion and table assume no exercise of any stock options or
warrants outstanding as of January 1, 2000. As of January 1, 2000, there were
options outstanding to purchase a total of 2,380,226 shares of common stock with
a weighted average exercise price of $2.52 per share and warrants outstanding to
purchase a total of 143,182 shares of common stock with a weighted average
exercise price of $1.17 per share. To the extent that any of these options or
warrants are exercised, there will be further dilution to new investors. If the
underwriters' over-allotment option is exercised in full, the number of shares
held by new investors will increase to 3,200,000 shares, or 6.8% of the total
number of shares of common stock outstanding after this offering.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated balance sheet data as of fiscal year end 1998 and
1999 and the selected consolidated statement of operations data for fiscal 1997,
1998 and 1999 have been derived from audited consolidated financial statements
included in this prospectus. The selected consolidated balance sheet data as of
December 31, 1996 and fiscal year end 1997 and the selected consolidated
statement of operations data for the period from inception (August 19, 1996) to
December 31, 1996 have been derived from audited consolidated financial
statements not included in this prospectus. You should read this selected
consolidated financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and the notes to those statements included in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 19,
1996)
THROUGH FISCAL YEAR
DECEMBER 31, ------------------------------
1996 1997 1998 1999
------------ -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales....................................................... $ -- $ -- $ 5,609 $46,911
Cost of goods sold.......................................... -- -- 2,371 15,770
------- ------- ------- -------
Gross profit................................................ -- -- 3,238 31,141
Operating expenses:
Research and development.................................. 10 1,364 4,587 8,297
Selling, general and administrative....................... 10 627 2,095 7,207
Amortization of deferred stock compensation............... -- -- 8 976
------- ------- ------- -------
Total operating expenses................................ (20) 1,991 6,690 16,480
------- ------- ------- -------
Operating income (loss)..................................... (20) (1,991) (3,452) 14,661
Interest income............................................. -- (178) (261) (402)
Interest expense............................................ -- 22 206 699
------- ------- ------- -------
Income (loss) before tax expense............................ (20) (1,835) (3,397) 14,364
Income tax expense.......................................... -- -- -- 3,324
------- ------- ------- -------
Net income (loss)........................................... $ (20) $(1,835) $(3,397) $11,040
======= ======= ======= =======
Basic net income (loss) per share........................... $ -- $ (1.04) $ (.37) $ .73
Diluted net income (loss) per share......................... $ -- $ (1.04) $ (.37) $ .25
Shares used in computing basic net income (loss) per
share..................................................... -- 1,760 9,129 15,152
Shares used in computing diluted net income (loss) per
share..................................................... -- 1,760 9,129 43,657
Pro forma basic net income (loss) per share................. $ .30
Pro forma diluted net income per share...................... $ .25
Shares used in computing pro forma basic net income per
share..................................................... 36,461
Shares used in computing pro forma diluted net income per
share..................................................... 43,657
</TABLE>
<TABLE>
<CAPTION>
AS OF FISCAL YEAR END
DECEMBER 31, ------------------------------
1996 1997 1998 1999
------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $ 132 $ 3,778 $ 5,824 $14,706
Working capital........................................... (62) 2,045 5,209 14,281
Total assets.............................................. 181 6,023 14,014 41,958
Long-term obligations, net of current maturities.......... -- 747 2,153 6,223
Redeemable convertible preferred stock.................... -- 5,250 12,750 12,750
Total stockholders' equity (deficit)...................... (19) (1,776) (5,149) 8,003
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES WHICH APPEAR ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS,
PARTICULARLY UNDER THE HEADING "RISK FACTORS." PLEASE ALSO SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS." OUR FISCAL YEAR-END FINANCIAL REPORTING
PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO
DECEMBER 31ST. FISCAL 1997 HAD 53 WEEKS AND ENDED ON JANUARY 3, 1998. FISCAL
1998 HAD 52 WEEKS AND ENDED ON JANUARY 2, 1999. FISCAL 1999 HAD 52 WEEKS AND
ENDED ON JANUARY 1, 2000. ALL OF THE QUARTERLY PERIODS REPORTED IN THIS
PROSPECTUS HAD THIRTEEN WEEKS.
OVERVIEW
We design and develop proprietary, analog-intensive, mixed-signal ICs for
the rapidly growing communications industry. Our innovative ICs can dramatically
reduce the cost, size and system power requirements of the products that our
customers sell to their end-user customers. We currently offer ICs that can be
incorporated into communications devices, such as modems and cellular phones, as
well as cable and satellite set-top boxes, credit card verification machines,
automated teller machines, network access equipment and remote gaming devices.
Our five largest customers in fiscal 1999 were Intel, Motorola, PC-Tel,
SmartLink and 3Com.
Our company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 148 at the
end of fiscal 1999, from 42 at the end of fiscal 1998 and 17 at the end of
fiscal 1997. As a "fabless" semiconductor company, we rely on third-party
semiconductor fabricators to manufacture the silicon wafers that reflect our IC
designs. Each wafer contains numerous die, which are cut from the wafer to
create a chip for an IC. We also rely on third-party assemblers to assemble and
package these die prior to final product testing and shipping.
Our company is organized into two principal divisions, the Wireline Products
Division and the Wireless Products Division. Our Wireline Products Division
commenced research and development for our first IC product, the direct access
arrangement, or DAA, in October 1996. We introduced our DAA product in the first
quarter of fiscal 1998, and first received acceptance of this product for
inclusion in a customer's device, which we refer to as a "design win", in
March 1998. The first commercial shipment of our DAA product was made in
April 1998. In September 1998, we introduced an international version of our
first DAA product. Based on the success of our DAA products, we became
profitable in the fourth quarter of fiscal 1998 and have been profitable in each
succeeding quarter through the quarter ended January 1, 2000. Substantially all
of our sales to date have been derived from sales of our various DAA products
and we expect to remain dependent on continued sales of DAA products for a
majority of our sales until we are able to diversify sales with new products. In
fiscal 1999, our Wireline Products Division introduced two additional ICs, a
voice codec product, which encodes analog signals within the voice frequency
range into digital signals and decodes digital voice signals back into analog
signals, and our ISO modem product. In addition, our Wireless Products Division
introduced our RF synthesizer product in fiscal 1999. In January 2000, our
Wireline Products Division introduced our ProSLIC product. We will be less
dependent on our DAA products for future sales to the extent that these
products, or other products that we may introduce, are incorporated into devices
sold by our customers. For a further description of our products, please see
"Business--Products."
Since our inception, a few customers have accounted for a substantial
portion of our sales. During fiscal 1999, our three largest customers accounted
for 84% of our sales, including 62% for PC-Tel, 12% for SmartLink and 10% for
3Com. In fiscal 1998, PC-Tel accounted for 78% and 3Com accounted for 20% of our
sales. No other customer accounted for more than 10% of our sales in either of
these years. To date, substantially all of our sales have been generated through
our direct sales force. In fiscal 1998, we began to
23
<PAGE>
establish a network of independent sales representatives and distributors
worldwide to support our sales and marketing activities. We anticipate that
sales to these representatives and distributors will increase as a percentage of
our sales in future periods. However, we expect to continue to experience
significant customer concentration in direct sales to key customer accounts
until we are able to diversify sales with new customers.
The percentage of our sales to customers located outside of the United
States was 7% in fiscal 1999 and insignificant in fiscal 1998. All of our sales
to date have been denominated in U.S. dollars. We believe that a greater
percentage of our sales will be made to customers outside of the United States
as our products receive greater acceptance in international markets.
The sales cycle for the test and evaluation of our ICs can range from 1 to
12 months or more. An additional 3 to 6 months or more may be required before a
customer ships a significant volume of devices that incorporate our ICs. Due to
this lengthy sales cycle, we may experience a significant delay between
incurring expenses for research and development and selling, general and
administrative efforts, and the generation of corresponding sales, if any. We
intend to continue to increase our investment in research and development,
selling, general and administrative functions and inventory as we expand our
operations in the future. Consequently, if sales in any quarter do not occur
when expected, expenses and inventory levels could be disproportionately high,
and our operating results for that quarter and, potentially, future quarters
would be adversely affected.
Our limited operating history and rapid growth makes it difficult for us to
assess the impact of seasonal factors on our business. Because many of our ICs
are designed for use in consumer products such as PCs and cellular telephones,
we expect that the demand for our products will be subject to seasonal demand
resulting in increased sales in the third and fourth quarters of each year when
customers place orders to meet holiday demand. We expect to experience seasonal
fluctuations in the demand for our products as customer demand increases in
greater volume across our product offerings.
The following describes the line items set forth in our consolidated
statements of income:
SALES. Sales consists of revenue generated principally by sales of our ICs.
Generally, we recognize sales at the time of shipment to our customers. Sales
are deferred on shipments to distributors until they are resold by such
distributors. Our products typically carry a one-year warranty. Since our
inception, product returns and warranty costs have been immaterial. Our sales
are subject to variation from period to period due to the volume of shipments
made within a period and the prices we charge for our products. The vast
majority of our sales were conducted at prices that reflect a discount from the
list prices for our products. These discounts are made for a variety of reasons,
including to establish a relationship with a new customer, as an incentive for
customers to purchase products in larger volumes or in response to competition.
In addition, as a product matures, we expect that the average selling price for
that product will decline. Therefore, our ability to increase sales in the
future is dependent on increased demand for our established products and our
ability to ship larger volumes of products in response to such demand, as well
as customer acceptance of newly introduced products.
COST OF GOODS SOLD. Cost of goods sold includes the cost of purchasing
finished silicon wafers processed by independent foundries; costs associated
with assembly, test and shipping of those products; costs of personnel and
equipment associated with manufacturing support, logistics and quality
assurance; an allocated portion of our occupancy costs; and allocable
depreciation of testing equipment. Generally, we depreciate equipment over four
years on a straight line basis. We also depreciate our leasehold improvements
over the applicable lease term. Recently introduced products tend to have higher
cost of goods sold per unit due to initially low production volumes required by
our customers and higher costs associated with new package variations.
Generally, as production volumes for a product increase, unit production costs
tend to decrease as our semiconductor fabricators and assemblers achieve greater
economies of scale for that product. Additionally, the cost of wafer
procurement, which is a significant component of cost of goods sold, varies
cyclically with overall demand for semiconductors. The
24
<PAGE>
semiconductor industry has recently experienced a period of high demand,
resulting in higher wafer procurement costs.
RESEARCH AND DEVELOPMENT. Research and development expense consists
primarily of compensation and related costs of employees engaged in research and
development activities, as well as an allocated portion of our occupancy costs
for such operations. We depreciate our research and development equipment over
four years and amortize our purchased software from computer-aided design tool
vendors over four years. Development activities include the creation of test
methodologies to assure compliance with required specifications. We have granted
stock options or directly issued stock to patent attorneys and outside technical
consultants for services previously rendered. We recognize stock-based
compensation expense for these non-employees based on the deemed fair value of
the options or stock at the date of grant.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of personnel-related expenses, related allocable
portion of our occupancy costs, sales commissions to independent sales
representatives, professional fees, other promotional and marketing expenses and
reserves for bad debt. Write-offs of bad debt have been insignificant to date.
We awarded non-employee sales persons with stock in connection with a sales
incentive program that ended on January 1, 2000. We recognize stock-based
compensation expense based on the deemed fair value of the stock at the date of
grant.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with the grant
of stock options and direct issuances of stock to our employees, we recorded
deferred stock compensation of approximately $16.3 million, representing, for
accounting purposes, the difference between the deemed fair value of the common
stock and the respective exercise prices at the date of grant in the case of
stock options and the fair market value of the stock at the date of grant in the
case of direct issuances of stock. The difference is amortized over the vesting
period of the applicable option or share, generally five to eight years,
resulting in amortization expense of $975,000 and $8,000 for fiscal 1999 and
1998, respectively. The amortization of deferred stock compensation is recorded
as an operating expense.
INTEREST INCOME. Interest income reflects interest earned on average cash
and cash equivalents and investment balances.
INTEREST EXPENSE. Interest expense consists of interest on our long-term
debt and capital lease obligations.
INCOME TAX EXPENSE. We accrue a provision for federal and state income tax
at the applicable statutory rates.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our statement of income data as a percentage
of sales for fiscal 1998 and 1999. We have not presented percentage data for
fiscal 1997 since we had no sales in fiscal 1997.
<TABLE>
<CAPTION>
FISCAL FISCAL
1998 1999
-------- --------
<S> <C> <C>
Sales...................................................... 100.0 % 100.0%
Cost of goods sold......................................... 42.3 33.6
----- -----
Gross profit............................................... 57.7 66.4
Operating expenses:
Research and development................................. 81.8 17.7
Selling, general and administrative...................... 37.4 15.4
Amortization of deferred stock compensation.............. .1 2.1
----- -----
Total operating expenses............................... 119.3 35.2
----- -----
Operating income (loss).................................... (61.5) 31.2
Interest income............................................ 4.7 .9
Interest expense........................................... 3.7 1.5
----- -----
Income (loss) before tax expense........................... (60.6) 30.6
Income tax expense......................................... -- 7.1
----- -----
Net income (loss).......................................... (60.6)% 23.5%
===== =====
</TABLE>
COMPARISON OF FISCAL 1999 TO FISCAL 1998
SALES. Sales increased $41.3 million, or 736.4%, to $46.9 million in fiscal
1999 from $5.6 million in fiscal 1998. The increase was attributable to the
strong acceptance of our DAA family of products, including our international DAA
and MC-97 DAA products. This increase reflected an increase in the number of
customers that purchased our IC products and an increase in the volume that
those customers bought.
GROSS PROFIT. Cost of goods sold increased $13.4 million, or 565.1%, to
$15.8 million in fiscal 1999 from $2.4 million in fiscal 1998, and represented
33.6% of sales in fiscal 1999 and 42.3% of sales in fiscal 1998, respectively.
Gross profit increased $27.9 million, or 861.7%, to $31.1 million in fiscal 1999
from $3.2 million in fiscal 1998. Gross margins improved to 66.4% in fiscal 1999
from 57.7% in fiscal 1998. The increase in gross profit was primarily due to the
substantial increase in sales volume. The improvement in gross margin from
fiscal 1998 to 1999 was due to volume discounts on wafer purchases that resulted
from substantial increases in our production and attractive pricing conditions
for silicon wafers due to the availability of capacity within the semiconductor
manufacturing industry during the period. Our gross margins may decline due to
the expected introduction of products competitive to our products and increased
demand for silicon wafer capacity within the semiconductor industry generally.
However, the impact of these factors on our gross margins may be offset by
increased sales of newly introduced products, which we expect will have larger
gross margins than products which have been in the market for longer periods of
time and that face greater competition as a result.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$3.7 million or 80.9%, to $8.3 million in fiscal 1999 from $4.6 million in
fiscal 1998, and represented 17.7% of sales in fiscal 1999 and 81.8% of sales in
fiscal 1998. The increased research and development expense was principally due
to continued product development activities in the Wireline Division, as well as
significant increases in product development activity in the Wireless Division.
Both divisions increased spending to develop test methodologies for new
products. The substantial decrease in research and development expense as a
percentage of sales reflected our emergence from the development stage with
modest fiscal 1998 sales
26
<PAGE>
compared to substantial sales growth in fiscal 1999. We expect that research and
development expense will increase in absolute dollars in future periods as we
develop new ICs, and may fluctuate as a percentage of sales due to significant
changes in our sales volume and new product development initiatives. During
fiscal 1999, we recorded approximately $196,000 of stock-based compensation
expense in connection with grants of stock options and direct issuances to
outside patent attorneys and technical consultants.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased $5.1 million or 244.0%, to $7.2 million in fiscal 1999 from
$2.1 million in fiscal 1998, and represented 15.4% of sales in fiscal 1999 and
37.4% of sales in fiscal 1998. The increase in the dollar amount of selling,
general and administrative expense was principally attributable to increased
staffing. The decrease in selling, general and administrative expense as a
percentage of sales was due to substantially higher sales levels in fiscal 1999.
We expect that selling, general and administrative expense will increase in
absolute dollars in future periods as we expand our sales channels, marketing
efforts and administrative infrastructure. We also expect our legal expenses to
increase as a result of the infringement lawsuit we filed against Analog Devices
and 3Com in January 2000. This lawsuit may also cause our sales to 3Com to
decline. In addition, we expect selling, general and administrative expenses to
fluctuate as a percentage of sales because of (1) the likelihood that indirect
distribution channels, which entail the payment of commissions, will account for
a larger portion of our sales in future periods and, therefore, increase our
selling, general and administrative expense relative to a direct sales force
performing at satisfactory levels of productivity; (2) fluctuating usage of
advertising to promote our products and, in particular, our newly introduced
products; and (3) potential significant variability in our future sales volume.
During fiscal 1999, we recorded approximately $70,000 of stock-based
compensation expense for awards of stock to non-employee sales persons in
connection with a sales incentive program that ended January 1, 2000.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred
stock compensation for the difference between the exercise price of option
grants, or the issuance price of direct issuances of stock, and the deemed fair
value of our common stock at the time of such grants or issuances. We are
amortizing this amount over the vesting periods of the applicable options or
restricted stock, which resulted in amortization expense of $975,000 for fiscal
1999 and $8,000 for fiscal 1998. Our amortization expense increased in fiscal
1999 due to an increase in deferred stock compensation recorded in fiscal 1999
for options and restricted stock issued in fiscal 1999.
INTEREST INCOME. Interest income was $402,000 in fiscal 1999 as compared to
$261,000 in fiscal 1998. The increase in interest income was primarily due to
higher cash balances invested in short-term investments.
INTEREST EXPENSE. Interest expense was $699,000 in fiscal 1999 as compared
to $206,000 in fiscal 1998. The increase in interest expense was primarily due
to higher levels of debt and lease financing used to finance capital
expenditures, relating to the acquisition of IC testing equipment and leasehold
improvements.
INCOME TAX EXPENSE. Our effective tax rate was 23.1% for fiscal 1999. We
had sufficient net operating loss tax carryforwards available from our
development stage operations to offset any tax liability during fiscal 1998. For
fiscal 1999, utilization of the remaining net operating loss carryforward and,
to a lesser extent, full utilization of prior and current year research and
development tax credits reduced our effective tax rates from full corporate
rates. We expect to pay a full corporate income tax rate of approximately 38%
during future periods.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
SALES. Sales were $5.6 million in fiscal 1998. We did not have any sales in
fiscal 1997. Sales in fiscal 1998 were attributable to the introduction of our
first DAA product in March 1998.
27
<PAGE>
GROSS PROFIT. Cost of goods sold was $2.4 million in fiscal 1998 and gross
profit was $3.2 million in 1998. Gross margins were 57.7% in fiscal 1998.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$3.2 million, or 236.3%, to $4.6 million in fiscal 1998 from $1.4 million in
fiscal 1997, and represented 81.8% of sales in fiscal 1998. The increase in the
dollar amount of research and development expense was primarily due to increased
engineering staffing from 10 to 20 people, in addition to product development
expenses related to the release of our first product.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased $1.5 million, or 234.1%, to $2.1 million in fiscal 1998 from
$627,000 in fiscal 1997, and represented 37.4% of sales in fiscal 1998. The
increase in the dollar amount of selling, general and administrative expense was
principally attributable to increased staffing, moving and relocation expenses
and provisions for bad debt reserves on initial product shipments.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation expense was $8,000 in fiscal 1998. No deferred stock compensation
expense was recorded in fiscal 1997.
INTEREST INCOME. Interest income was $261,000 in fiscal 1998 as compared to
$178,000 in fiscal 1997. The increase in interest income was primarily due to
higher invested cash balances on average during the period.
INTEREST EXPENSE. Interest expense was $206,000 in fiscal 1998, compared to
$22,000 in fiscal 1997. The increase in interest expense was primarily due to
higher levels of debt and lease financing related to the various financing
lines. The proceeds of such lines were used to finance capital expenditures,
consisting principally of acquisitions of IC testing equipment, computer-aided
design software tools and leasehold improvements.
INCOME TAX EXPENSE. We did not incur liabilities for income taxes in fiscal
1997 or fiscal 1998 due primarily to operating losses incurred in each of those
years.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our unaudited statement of operations data
for each of the eight quarters in the period ended January 1, 2000, as well as
such data expressed as a percentage of our sales for the quarters presented.
This unaudited quarterly information has been prepared on the same basis as our
audited financial statements and, in the opinion of our management, reflects all
normal recurring adjustments that we consider necessary for a fair presentation
of the information for the periods presented. Operating results for any quarter
are not necessarily indicative of results for any future period. Because our
sales during the first and second quarters of fiscal 1998 were immaterial, data
regarding quarterly operations for such periods as a percentage of sales has
been excluded from the table below.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales.............................. $ -- $ 161 $ 1,099 $4,349 $6,320 $7,543 $14,574 $18,474
Cost of goods sold................. -- 127 581 1,663 2,415 2,866 4,582 5,907
------- ------- ------- ------ ------ ------ ------- -------
Gross profit....................... -- 34 518 2,686 3,905 4,677 9,992 12,567
Operating expenses:
Research and development......... 788 1,270 1,276 1,253 1,293 1,597 2,109 3,298
Selling, general and
administrative................. 286 490 551 768 1,132 1,500 2,105 2,470
Amortization of deferred stock
compensation................... -- -- 1 7 33 116 254 573
------- ------- ------- ------ ------ ------ ------- -------
Total operating expenses....... 1,074 1,760 1,828 2,028 2,458 3,213 4,468 6,341
------- ------- ------- ------ ------ ------ ------- -------
Operating income (loss)............ (1,074) (1,726) (1,310) 658 1,447 1,464 5,524 6,226
Interest income.................... (41) (52) (93) (75) (63) (75) (98) (166)
Interest expense................... 33 49 55 69 120 140 217 222
------- ------- ------- ------ ------ ------ ------- -------
Income (loss) before tax expense... (1,066) (1,723) (1,272) 664 1,390 1,399 5,405 6,170
Income tax expense................. -- -- -- -- 322 323 1,251 1,428
------- ------- ------- ------ ------ ------ ------- -------
Net income (loss).................. $(1,066) $(1,723) $(1,272) $ 664 $1,068 $1,076 $ 4,154 $ 4,742
======= ======= ======= ====== ====== ====== ======= =======
</TABLE>
AS A PERCENTAGE OF SALES:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
------------------- -----------------------------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 52.9 38.2 38.2 38.0 31.4 32.0
------ ----- ----- ----- ----- -----
Gross profit......................................... 47.1 61.8 61.8 62.0 68.6 68.0
Operating expenses:
Research and development........................... 116.1 28.8 20.5 21.2 14.5 17.9
Selling, general and administrative................ 50.1 17.7 17.9 19.9 14.5 13.4
Amortization of deferred stock compensation........ .1 .1 .5 1.5 1.7 3.0
------ ----- ----- ----- ----- -----
Total operating expenses......................... 166.3 46.6 38.9 42.6 30.7 34.3
------ ----- ----- ----- ----- -----
Operating income (loss).............................. (119.2) 15.2 22.9 19.4 37.9 33.7
Interest income...................................... 8.5 1.7 1.0 1.0 .7 .9
Interest expense..................................... 5.0 1.6 1.9 1.9 1.5 1.2
------ ----- ----- ----- ----- -----
Income (loss) before tax expense..................... (115.7) 15.3 22.0 18.5 37.1 33.4
Income tax expense................................... -- -- 5.1 4.2 8.6 7.7
------ ----- ----- ----- ----- -----
Net income (loss).................................... (115.7)% 15.3% 16.9% 14.3% 28.5% 25.7%
====== ===== ===== ===== ===== =====
</TABLE>
29
<PAGE>
Our quarterly results of operations have varied from quarter-to-quarter in
the past and we expect them to vary from quarter-to-quarter in future periods.
These changes are principally due to (1) the timing and volume of orders from
our customers, (2) the timing of volume production of the products into which
our ICs are incorporated and (3) the capacity and cost environment in the
semiconductor industry applicable to our procurement of services from
third-party foundries and assembly contractors. We have experienced declining
average selling prices for our products while the costs of third-party foundries
and assembly contractors have increased or decreased based on relative market
demand for capacity in the semiconductor manufacturing industry.
Beginning in the fourth quarter of fiscal 1998, and continuing through the
first and second quarter of fiscal 1999, our sales have increased due to greater
market acceptance of our DAA ICs. In the third quarter of fiscal 1999, our sales
increased significantly due to an increase in demand for our international DAA
product. Additionally, personal computer manufacturers began to adopt the Modem
Codec 97, or MC-97, standard developed by Intel for connecting modem interface
circuitry to microprocessors during this time frame. We experienced rapid sales
increase in our MC-97 modem product during the third quarter of fiscal 1999 due
to the adoption of this emerging standard. Such market technical standards
rarely are introduced with any quarter-to-quarter regularity and can contribute
to significant changes in operating results.
Research and development expenses increased by $1.2 million, or 56.4%, to
$3.3 million in the fourth quarter of fiscal 1999 from $2.1 million in the third
quarter of fiscal 1999. This increase was principally due to new product
development activity in the Wireless Division, and, to a lesser extent,
continued product development in the Wireline Division. The number of employees
involved in research and development increased from 41 employees at the end of
the third quarter of fiscal 1999 to 62 employees at the end of the fourth
quarter, representing a 51.2% increase in staffing. An active recruiting effort
was underway during the quarter to increase staffing for new product development
activities. This increase in research and development spending also increased as
a percent of sales to 17.9% in the fourth quarter of fiscal 1999 from 14.5% of
sales in the third quarter of fiscal 1999. We believe that this rapid increase
in research and development staffing may not be sustainable in future quarterly
periods due to the limited availability of qualified mixed-signal circuit design
engineers and test development engineers.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of January 1, 2000 consisted of
$14.7 million in cash, cash equivalents and short-term investments, our bank
credit facilities and equipment financing facilities with three institutional
lenders.
Our bank credit facilities include a revolving line of credit available for
borrowings and letters of credit of up to the lesser of $3.0 million or 80% of
eligible accounts receivable, a separate letter of credit facility for $454,000
related to a building lease, equipment loans which provided for initial
equipment financing of up to $2.5 million and new loan facilities totaling
$4.0 million for new equipment, leasehold improvements and computer-aided design
software. At January 1, 2000, a letter of credit for $500,000 related to a
building lease was outstanding under the revolving line of credit, with no other
amounts outstanding thereunder, and $1.5 million was outstanding under the
equipment loans. At January 31, 2000, $6.5 million was available under our
credit facilities.
Borrowings under the revolving line of credit bear interest at the bank's
prime rate, which was 8.5% at January 1, 2000, and are payable at annual renewal
of the line. Borrowings under the equipment loan agreement bear interest at the
bank's prime rate, and are payable through January 2002. The new $4.0 million
loan facilities have no amount outstanding as of January 1, 2000. We intend to
use these facilities for financing principally during the first quarter of
fiscal 2000. All bank facilities are secured by our accounts receivable,
inventories, capital equipment and all other unsecured assets (excluding
intellectual property). The line of credit, the separate letter of credit
facility and equipment loans contain
30
<PAGE>
provisions that prohibit the payment of cash dividends and require the
maintenance of tangible net worth and compliance with financial ratios measured
on a monthly basis. Any default on one of the bank facilities will cause all of
the bank facilities to be in default under these agreements. The bank has
received warrants as consideration for providing portions of this financing.
We also have entered into agreements with three institutional lenders for
equipment financing. Under these agreements, we may borrow up to an aggregate of
$8.5 million to purchase or lease equipment, leasehold improvements and
software. At January 1, 2000, borrowings under these agreements were
$8.2 million. This indebtedness bears effective interest rates (including end of
term interest payments of $1.1 million) ranging from 12.5% to 14.6% per annum
and is secured by a security interest in specific items, principally comprised
of test equipment, and is repayable over approximately the next four years. See
Note 4 of the notes to our consolidated financial statements.
We have funded our operations to date primarily through sales of preferred
stock which have resulted in gross aggregate proceeds to us of approximately
$12.8 million, and debt financing under the credit and lease obligations
described above and cash from operations. During fiscal 1999, cash provided by
operating activities was $12.3 million reflecting the first year of profitable
operations. This compares to cash used in operating activities of $4.5 million
in fiscal 1998 and $219,000 in fiscal 1997 as our company incurred operating
losses, primarily as a result of our product development activities.
Capital expenditures were $9.9 million in fiscal 1999, $3.1 million in
fiscal 1998 and $2.3 million in fiscal 1997. These expenditures were incurred to
purchase semiconductor test equipment, design software and engineering tools,
and other computer equipment and software to support our business expansion. In
addition, we relocated our operations to a new facility in Austin, Texas in 1999
and incurred approximately $1.0 million in capital expenditures and leasehold
improvement expenses in connection with the build-out of this new location. We
anticipate further capital expenditures in fiscal 2000 of approximately
$14.0 million to fund test floor operations and expanded engineering product
development activities.
We believe the net proceeds of this offering, together with our existing
cash balances, credit facilities and cash generated by our operations, will be
sufficient to meet our capital requirements through at least the next
12 months, although we could be required, or could elect, to seek additional
funding prior to that time. Our future capital requirements will depend on many
factors, including the rate of sales growth, market acceptance of our products,
the timing and extent of research and development projects and the expansion of
our sales and marketing activities. Although we are currently not a party to any
agreement or letter of intent with respect to a potential acquisition or
strategic arrangement, we may enter into acquisitions or strategic arrangements
in the future which also could require us to seek additional equity or debt
financing. There can be no assurances that additional equity or debt financing,
if required, will be available to us on acceptable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income. We do not expect that the
adoption of SFAS No. 133 will have a material impact on our financial statements
because we do not currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The application of SAB No. 101 did not have a
material impact on our financial statements.
31
<PAGE>
On March 31, 1999, the FASB issued an exposure draft entitled "Accounting
for Certain Transactions Involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25 which has an effective date for certain
transactions of December 15, 1998. However, the exposure draft has not been
finalized. Once finalized and issued, the current accounting practices for
transactions involving stock compensation may need to change and such changes
could affect our future earnings.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
32
<PAGE>
BUSINESS
We are a leader in the design and development of proprietary,
analog-intensive, mixed-signal integrated circuits, or ICs, for the rapidly
growing global communications industry. Mixed-signal ICs are electronic
components that convert real-world analog signals, such as sound and radio
waves, into digital signals that electronic products can process. Therefore,
mixed-signal ICs are critical components of numerous communications products,
including cellular phones, cable and satellite set-top boxes, modems and fax
machines. To develop our business rapidly, we initially focused our efforts on
developing ICs for the personal computer modem market. We are now applying our
mixed-signal and communications expertise to the development of ICs for other
high growth communications devices such as cellular telephones and network
access applications. Our world-class, mixed-signal design engineers use standard
complementary metal oxide semiconductor, or CMOS, technology to create
innovative ICs that can dramatically reduce the cost, size and system power
requirements of devices that our customers sell to their end-user customers. Our
expertise in analog CMOS and mixed-signal IC design allows us to develop new and
innovative products rapidly, which enables our customers to improve their
time-to-market with end products that respond to consumer demand in the
communications industry. Our five largest customers in fiscal 1999 were Intel,
Motorola, PC-Tel, SmartLink and 3Com.
INDUSTRY BACKGROUND
According to Dataquest, the overall worldwide analog and mixed-signal IC
market, which includes as a subset the mixed-signal communications IC markets
that we target, surpassed $21.2 billion in 1998 and is expected to grow to more
than $39.1 billion by 2003. This growth is being driven in part by the demand
for communications services, which has increased at a rapid rate in recent years
due to a number of factors, including the growth of Internet usage, development
of new communications technologies, availability of improved communications
services at lower costs and remote access requirements for corporate networks.
This demand has fueled tremendous growth in the number of wireless and wireline
communications devices used to access these services. For example, in wireless
markets, the demand for cellular phones and other wireless devices, such as
pagers and personal digital assistants, has grown rapidly as digital wireless
services have become increasingly popular and affordable. In wireline markets,
demand has increased for communications capabilities in a wide range of
products, including personal computers, cable set-top boxes, fax machines,
credit card verification machines, automated teller machines and remote gaming
systems.
Digital communications devices typically require mixed-signal circuits that
provide analog-to-digital functionality to access the communications networks to
which they are connected. Traditional designs for communications devices have
used mixed-signal circuits built with numerous discrete analog and digital
components. While these traditional designs provide the required functionality,
they can be inefficient and inadequate for use in markets where size, price and
performance are increasingly important product differentiators. In order to
improve their competitive position, communications device manufacturers need
advanced mixed-signal ICs that reduce the number of discrete components and
required board space to create smaller products with improved price/performance
characteristics. Additionally, these manufacturers require programmable ICs that
can be reconfigured to comply with numerous and constantly evolving
international communications standards without altering the fundamental design
of a product.
Manufacturers of communications devices face accelerating time-to-market
demands and must adapt to evolving industry standards and new technologies.
Because analog-intensive, mixed-signal IC design expertise is difficult to find,
these manufacturers increasingly are turning to third parties to provide
advanced mixed-signal ICs. Designing the analog component of a mixed-signal IC
involves great complexity and difficulty, because the performance of an analog
IC depends on the creative analog expertise of engineers to maximize speed,
power, amplitude and resolution within the constraints of standard manufacturing
processes. The development of analog design expertise typically requires years
of
33
<PAGE>
practical analog design experience under the guidance of a senior engineer, and
engineers with the required level of skill and expertise are in short supply.
Many third-party IC providers lack sufficient analog expertise to develop
compelling mixed-signal ICs. As a result, manufacturers of communications
devices are often faced with inadequate mixed-signal ICs and are challenged to
find third-party providers that can supply them with mixed-signal ICs with
greater functionality, smaller size and lower power requirements all at a
reduced cost and time-to-market.
THE SILICON LABORATORIES SOLUTION
Our engineers apply their expertise in analog and mixed-signal IC design to
create analog-intensive, mixed-signal ICs that communications device
manufacturers use in numerous leading-edge applications. We combine this analog
and mixed-signal expertise with standard CMOS manufacturing process technology
to develop innovative mixed-signal ICs for our customers. We are a fabless
semiconductor company and rely on leading semiconductor foundries to produce our
ICs, which allows us to focus our resources on enhancing and extending our core
design capabilities.
Our ICs provide our customers with the following benefits:
DRAMATICALLY IMPROVED SIZE AND PRICE/PERFORMANCE CHARACTERISTICS. Our
products are highly integrated, typically replacing existing alternatives that
use multiple costly discrete components, and use standard CMOS manufacturing
process technology, which typically is less expensive than other competing
technologies. As a result, we can offer competitively priced products that allow
our customers to reduce the number of discrete components used in their products
while offering increased reliability, lower power consumption, and smaller
sizes. Additionally, some of our ICs can be programmed to accommodate emerging
and differing global standards.
REDUCED TIME REQUIRED TO BRING A PRODUCT TO MARKET. We enable our customers
to rapidly meet the demand for their end-user communications devices by
providing them with outsourced mixed-signal ICs that incorporate our
industry-leading designs. Because we design our ICs to be integrated into the
products of multiple manufacturers and we conduct extensive research and
development to ensure that our products conform to evolving technical standards,
our customers are able to rapidly integrate our products into their designs. By
reducing the number of discrete components, our customers can also reduce the
number of outside suppliers required for their products. As a result, our
customers can reduce the time required to bring a communication device to
market. Furthermore, our ICs are tested prior to customer delivery to ensure
their compliance with applicable specifications of the Federal Communications
Commission, or FCC, and international regulators, minimizing complications and
delays for our customers throughout their internal testing process.
ATTRACTIVE NEW PRODUCT OPPORTUNITIES. Our space-saving and cost-efficient
ICs allow our customers to create smaller and more cost-effective products for
use in numerous emerging communications markets. Our ICs provide enhanced
communication capabilities at lower costs and with smaller form factors for
numerous evolving applications, including cellular communications, Internet
telephony and remote monitoring systems. For example, due to the dramatically
reduced size and cost of our silicon DAA products, our customers are able to
cost-effectively incorporate modems into multiple new applications such as
remote gaming systems, smart vending machines and set-top boxes.
STRATEGY
Our objective is to be a leading supplier of proprietary analog-intensive
mixed-signal ICs for the communications industry. To achieve this goal, we are
pursuing the following strategies:
TARGET MULTIPLE HIGH-GROWTH COMMUNICATIONS MARKETS. We intend to continue
to identify large and sustainable opportunities in emerging high-growth
communications markets and develop mixed-signal ICs that address the needs of
suppliers of communications devices in those markets. We strive to develop
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creative IC that require complex analog design in order to address opportunities
with high revenue and profit potential and relatively long life-cycles. Our core
technological capabilities were initially focused on the PC modem market and we
are currently applying these capabilities to expand into other high growth
communications markets such as cellular phones, set-top boxes, central office
lines, interactive gaming systems and personal digital assistants.
LEVERAGE OUR EXISTING DESIGNS TO OFFER COMPELLING PRODUCTS. We consider our
ability to leverage our proprietary IC designs a competitive advantage. Many of
our designs are reusable in the development of new mixed-signal. By leveraging
these designs and our extensive experience, we are able to rapidly introduce new
analog-intensive, mixed-signal ICs that are smaller in size and require less
power in the final device than traditional products. We enable our customers to
reduce production costs, board space and the number of processes required for
the manufacture of their devices while improving yields, performance and
reliability. For example, our silicon direct access arrangement product was
introduced in 1998, and has already been modified for use in our ISOmodems and
adapted for use with our voice codec products. We intend to continue to use our
existing IC designs and methodologies as building blocks for new ICs to rapidly
address new and emerging market opportunities.
ATTRACT AND RETAIN TOP MIXED-SIGNAL TECHNICAL TALENT. We are committed to
recruiting and retaining technical personnel who possess the expertise necessary
to identify compelling market opportunities for highly innovative mixed-signal
ICs and to design, develop and market these ICs to capitalize on those
opportunities. We believe we have assembled a world-class team of engineers with
the exceptional analog design expertise required to provide our customers with
products that offer superior price/performance characteristics. We believe our
senior engineer expertise, combined with our focus on leading-edge technology
and innovative products to complex problems, enhances our attractive and highly
stimulating collaborative work environment. We believe this appealing work
environment provides us with a competitive advantage in recruiting. We intend to
continue to promote this attractive work environment and to offer competitive
compensation to attract and retain the best mixed-signal IC technical talent
available.
CAPITALIZE ON STANDARD MANUFACTURING PROCESSES AND FABLESS SEMICONDUCTOR
MODEL. High volume CMOS manufacturing process technology is widely available at
semiconductor foundries around the world. We intend to continue to utilize
standard CMOS manufacturing process technology to develop advanced mixed-signal
ICs that can be reliably manufactured in volume and decrease the time-to-market
of our new products at a significant cost advantage. Our fabless model allows us
to focus our resources on the development of proprietary and innovative
mixed-signal designs, while minimizing capital and operating infrastructure
requirements.
EXTEND TECHNOLOGICAL LEADERSHIP. We believe that we have established a
reputation as a technological leader in the design and development of
analog-intensive mixed-signal ICs. We are actively extending our intellectual
property position by aggressively investing in research and development and
utilizing our mixed-signal expertise to create innovative ICs. We currently hold
one U.S. patent, with 56 U.S. patent applications pending, and we continue to
actively pursue the filing of additional patent applications to cover our
intellectual property advancements. We intend to leverage our talent pool of
engineers, and continue to invest significant resources in recruiting and
developing expertise in mixed-signal IC design to extend our proprietary
intellectual property portfolio.
EXPAND GLOBAL SALES EFFORTS. We plan to aggressively pursue a global
multi-channel distribution strategy. We believe there are significant
international opportunities for both our wireline and wireless ICs and we intend
to continue to expand our global marketing and distribution efforts to address
the range of markets and applications for our innovative mixed-signal ICs. While
substantially all of our sales in fiscal 1999 were made to customers based in
the United States, we intend to increase our international sales through our
international direct sales office and our network of independent sales
representatives and distributors.
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PRODUCTS
We provide mixed-signal ICs for use in both wireline and wireless
communications devices and applications. Our products integrate the numerous
discrete components required by most existing mixed-signal circuits for
communications devices into single chips or chipsets. By doing so, we are able
to create products that:
- require less board space;
- can offer superior performance;
- provide increased reliability;
- reduce system power requirements; and
- reduce costs.
WIRELINE PRODUCTS
Many of our wireline products are designed for use in analog modems, which
enable the transmission of digital data signals over wireline telephone networks
and are used in the vast majority of Internet connections. Three fundamental
components of the modem provide the requisite functionality: software
algorithms; a direct access arrangement, or DAA; and an analog/digital
converter, or codec. Complex software algorithms mitigate the impairments found
in the telephone network, such as noise interference and echoes. Since the
telephone lines fundamentally transmit analog signals, and computers use digital
transmissions, modems require analog-to-digital and digital-to-analog
converters, or coders/decoders, that are referred to as codecs. A modem
transmits analog signals from a codec to the telephone line through a DAA. We
offer a variety of modem products which include the DAA and codec functions and
which are software programmable to meet international regulatory specifications.
- DAA FUNCTIONS. Government regulation requires electrical isolation between
the telephone line and the local electrical power system. Isolation is
required for safety, superior sound quality, and to prevent harm to the
telephone network from electrical surges. With the introduction of
telecommunications deregulation, consumers were allowed to connect
directly to the telephone network. However, they were required to use a
device that met FCC part 68 specifications, which govern all electronic
products sold in the United States intended for connection to the
telephone network. Traditional DAA products met FCC requirements, but were
designed inefficiently and contained a variety of discrete components. Our
silicon DAA is the first to integrate the bulky transformer, relays, and
opto-isolators traditionally found in a modem's isolation circuitry, and
achieve FCC part 68 compliance. Our silicon DAA may be used with digital
signal processors, or DSPs, currently used in traditional analog modems.
We were able to design our product in CMOS, creating a silicon DAA with
attractive process characteristics for our customers. Our DAA products are
lower in cost, use substantially less board space than alternative
products, and are programmable to meet international standards.
- CODEC FUNCTIONS. Traditionally, analog modems included specialized
hardware chips known as a digital signal processor, or DSP, which
contained a modem's software algorithms. The DSP is typically the most
expensive hardware component in traditional analog modems. In an effort to
reduce costs and as a result of capabilities offered by more powerful
microprocessors introduced during the mid-1990's, a new generation of
modems, known as soft modems, has evolved. When soft modems are used, the
main microprocessor in a personal computer runs the software algorithms
required to run a modem, thus eliminating the need for a DSP chip. The
software modem's digital interface between the codec and the personal
computer in a soft modem can take one of two forms. The first and most
popular is the PCI interface standard. Soft modems using a PCI interface
typically require an additional chip to make the digital codec interface
compatible with a PCI
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interface. Alternatively, the MC-97, a new modem interface standard
promoted by Intel, eliminates the need for this additional chip. With an
MC-97 compliant codec, soft modem hardware can interface directly with a
microprocessor, further reducing costs. Our DAA products, which include
codecs, can be used with either the PCI or MC-97 interface standards.
We also design innovative products for network access applications. In
January 2000, we announced the ProSLIC, our first product targeting this market.
- SUBSCRIBER LINE INTERFACE CIRCUIT, OR SLIC. SLICs provide the analog
telephone interface on the source end of the telephone line. The primary
functions of a SLIC are to ring and provide power and signaling (such as
caller ID, dial tone and busy tone) to the telephone. Traditionally, SLICs
have been produced with an expensive high voltage IC accompanied by a CMOS
codec IC and requiring as many as five voltage sources. Our ProSLIC has
been designed as one integrated CMOS chip, eliminating the need for a high
voltage IC and requiring only two voltage sources. The result is a
smaller, more reliable and less expensive product.
The following table summarizes the ICs for the wireline market that we
currently offer to customers:
<TABLE>
<CAPTION>
WIRELINE PRODUCTS
(INTRODUCTION
DATE) DESCRIPTION APPLICATIONS
<S> <C> <C>
Direct Access Provides both the functionality of a DAA and - personal computer modems
Arrangement (DAA) a codec. A DAA provides electrical isolation - fax machines
between a wireline device, such as a modem, - host modems
(First Quarter 1998) and the telephone line to guard against - handheld organizers
power surges in the telephone line, while a - set-top boxes
codec provides analog-to-digital and
digital-to-analog conversion. Traditional
DAA products contain as many as 35 discrete
components to provide functionality
comparable to that which we provide in a
single chipset.
International DAA Provides the same functionality as our DAA, - same as DAA
but is programmable for differing
(Third Quarter 1998) international telephone standards, which
enables manufacturers to distribute their
products globally without costly
country-specific design modifications.
MC-97 International Provides the same functionality as our - personal computer modems
DAA International DAA, but features a MC-97 - embedded modems
(Modem Codec 97) interface.
(First Quarter 1999)
Voice Codec Encodes analog signals within the voice - data/fax/voice modems
frequency range into digital signals and - speaker phones
(Second Quarter 1999) decodes digital voice signals back into - fax machines
analog signals. When combined with the DAA - voice recognition systems
chipset, the Voice Codec permits voice - Web telephony products
communications to be digitized and carried - video conferencing systems
simultaneously with data traffic.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
WIRELINE PRODUCTS
(INTRODUCTION
DESCRIPTIONTE) APPLICATIONS
<S> <C> <C>
ISOmodem The ISOmodem is a miniaturized modem that - credit card verification
uses our DAA technology and operates at a systems
(Third Quarter 1999) speed of up to 2400 bits per second. The - set-top boxes
ISOmodem is designed to provide quick - smart vending machines
network access for devices with limited data - pay-per-view systems
transmission requirements. For such devices, - postage meters
a low access transmission speed of 2400 bits - pay phones
per second is generally sufficient to - industrial power meters
sustain performance while also providing - security systems
more rapid connect times. The ISOmodem
contains a programmable line interface that
meets global telephone line requirements.
ProSLIC The ProSLIC provides the analog telephone - telephone switchboard systems
interface on the source end of the telephone - cable telephony
(1st Quarter which provides dial tone, busy tone, caller - wireless local loop providing
2000) ID and ring signal. It is programmable to remote access for a wireline
meet international telephone standards, system
which enables manufacturers to distribute - voice over Internet protocol
their products globally without costly - digital broadband to analog
country-specific design modifications. Our telephone adapters
ProSLIC product is currently designed for - voice over digital subscriber
short-haul applications. lines
</TABLE>
WIRELESS PRODUCTS
A variety of cellular communications standards are employed around the
world. The most popular standard used today is the Global System for Mobile
Communications, or GSM, standard, which was first deployed in Europe and is now
available in several countries throughout the world. Manufacturers continue to
introduce new cellular phone models that offer smaller form factors and longer
battery life at lower costs. These market dynamics drive a need for new highly
integrated electronics that reduce component count and consume less power. Our
products are designed to serve this need.
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The following table summarizes the ICs for the wireless market that we
currently offer to customers:
<TABLE>
<CAPTION>
WIRELESS PRODUCTS
(INTRODUCTION
DATE) DESCRIPTION APPLICATIONS
<S> <C> <C>
RF Synthesizer for A frequency synthesizer generates high - wireless local area networking
General Application frequency signals that are used in wireless - wireless modems
communications systems to select a - wireless meter readers
(Fourth Quarter 1999) particular radio channel. Existing frequency - handheld point-of-sale
synthesizers contain discrete voltage terminals
control modules and as many as 30 discrete
electronic components to provide
functionality comparable to what we provide
in a monolithic IC. Our general purpose
synthesizer can be programmed to address
multiple wireless communications
applications.
RF Synthesizer for GSM Provides the same functionality as the RF - GSM cellular phones
Synthesizer for General Application but has - GPRS data communications
(Fourth Quarter 1999) been optimized for cellular phones operating devices
on the GSM standard. This synthesizer is
capable of providing dual-band synthesis to
use one or both of the separate radio bands
available to GSM phones. Additionally, this
synthesizer has very fast settling times,
allowing the phone to quickly lock to a
desired channel. This RF synthesizer is
compatible with General Packet Radio
Service, or GPRS standard, which is the data
communications protocol employed by the GSM
standard. GPRS brings wireless Internet
access to GSM users through data transfer
and signaling over GSM radio networks.
</TABLE>
CUSTOMERS, SALES AND MARKETING
We market our products to original equipment manufacturers and other
providers of applications in both the wireline and wireless communications
markets. The following is a list of customers that have purchased our products
and incorporated them into products or devices offered to their customers:
<TABLE>
<S> <C> <C>
Ambient Motorola 3Com
Intel PC-Tel Topic
Lucent SmartLink Zyxel
</TABLE>
To date, we have sold substantially all of our ICs through our direct sales
force. We maintain three sales offices in North America and conduct European
direct sales through our United Kingdom subsidiary. Our direct sales force
includes regional sales managers in the field and area business managers at our
headquarters to further support customer communications. Many of these managers
have engineering degrees. Our password-protected field sales organization Web
site, which includes technical documentation, backlog information, order status,
product availability and new product introduction information, supports
communications with our field sales organization. Additionally, we provide
direct communication to all field sales personnel as part of a structured sales
communications program.
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We also utilize independent sales representatives and distributors to
generate sales of our products. We have relationships with many independent
sales representatives and distributors worldwide whom we have selected based on
their understanding of the mixed-signal IC marketplace and their ability to
provide effective field sales support for our products. To date, sales to these
representatives and distributors have accounted for a small portion of our
sales.
Our marketing efforts are targeted at both identified industry leaders and
emerging market participants. Marketing activities are supported by a focused
communications effort that targets editorial coverage in leading trade and
business publications. Our external Web site includes data sheets and supporting
product information, press releases and a company overview. These activities, in
conjunction with customer contacts, help prompt requests for evaluation boards
and sample products, which are fulfilled through our corporate headquarters as
an integrated part of our sales efforts.
Due to the complex and innovative nature of our ICs, we employ experienced
applications engineers who work closely with each customer to support the
design-win process, and can significantly accelerate the customer's time
required to bring a product to market. A design-win occurs when a customer has
designed our ICs into its product architecture. A considerable amount of effort
to assist the customer in incorporating our ICs into its products typically is
required prior to any sale. In many cases, our innovative ICs require
significantly different implementations than existing approaches and, therefore,
successful implementations may require extensive communication with potential
customers. The amount of time required to achieve a design-win can vary
substantially depending on a customer's development cycle, which can be
relatively short (such as three months) or very long (such as two years) based
on a wide variety of customer factors. Due to this extensive design-win process,
once a completed design architecture has been implemented and produced in high
volumes, our customers are reluctant to significantly alter their designs. We
believe this promotes relatively long product life cycles for our ICs and high
barriers to entry for competitive products, even at lower price levels for such
competing products. Finally, our close collaboration with our customers provides
us with knowledge of derivative product ideas or completely new product line
offerings that may not otherwise arise in other new product discussions.
RESEARCH AND DEVELOPMENT
Through our research and development efforts, we apply our world-class
analog and mixed-signal engineering talent and expertise to create new ICs that
integrate functions typically performed inefficiently by multiple discrete
components. This integration generally results in lower costs, smaller die
sizes, lower power demands and enhanced price/performance characteristics. We
attempt to reuse successful techniques for integration in new applications where
similar benefits can be realized. Reliable and precise analog and mixed-signal
ICs can only be developed by teams of engineers under the direction of senior
engineers with significant analog experience who are familiar with the
intricacies of designing these ICs for commercial volume production. The
development of test methodologies is a critical activity in releasing a new
product for commercial success. We believe that we have attracted some of the
best engineers in our industry. As of January 1, 2000, we had 62 employees
involved in research and development.
TECHNOLOGY
Our product development process facilitates the design of highly innovative
mixed-signal ICs . Our senior engineers start the product development process by
forming an understanding of our customers' products and then design alternatives
for decreasing power, size and cost requirements. Our engineers' deep knowledge
of existing and emerging communications standards and performance requirements
help us to assess the technical feasibility of a particular IC. We target areas
where Silicon Laboratories can provide compelling product improvements. Once we
have solved the primary challenges, our field engineers continue to work closely
with our customers' design teams to maintain and develop an understanding of our
customers' needs, allowing us to formulate derivative products and features.
In providing mixed-signal ICs for our customers, we believe our key
competitive advantages are: (1) analog CMOS design expertise; (2) digital signal
processing design expertise; and (3) our broad understanding of communication
systems technology and trends. To fully capitalize on these advantages,
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we have assembled a world-class development team with exceptional analog and
mixed-signal design expertise led by accomplished senior engineers.
ANALOG CMOS DESIGN EXPERTISE
We believe that our most significant core competency is our world-class
analog design capability. Additionally, we strive to design all of our ICs in
CMOS processes. There are several modern process technologies for manufacturing
semiconductors including CMOS, Bipolar, BiCMOS, silicon germanium and gallium
arsenide. While it is significantly more difficult to design analog ICs in CMOS,
CMOS provides multiple benefits versus existing alternatives including
significantly reduced cost, reduced technology risk and greater worldwide
foundry capacity. CMOS is the most commonly used process technology for
manufacturing digital ICs and as a result is most likely to be used for the
manufacturing of ICs with finer line geometries, which enable smaller and faster
ICs. By designing our ICs in CMOS, we enable our products to benefit from this
trend towards finer line geometries, which lowers the cost of the digital
circuitry in our products.
Designing analog ICs is significantly more complicated than designing
digital ICs. While advanced software tools exist to help automate digital IC
design, there are far fewer tools for advanced analog IC design. In many cases,
our pioneering efforts in analog circuit design begin at the fundamental
transistor level. We believe that we have a demonstrated ability to design the
most difficult analog and RF circuits using standard CMOS technologies. For
example, our DAA product family replaces expensive, discrete modem components,
such as transformers, relays and opto-isolators, with highly integrated CMOS
mixed-signal ICs. Similarly, expensive cellular phone components such as
oscillators are replaced by our integrated CMOS frequency synthesizer products.
DIGITAL SIGNAL PROCESSING DESIGN EXPERTISE
We consider the partitioning of a circuit's functionality to be a
proprietary and creative design technique. Our digital signal processing design
expertise maximizes the price/performance characteristics of both the analog and
digital functions and allows our ICs to work in an optimized manner to
accomplish particular tasks. Generally, we surround core analog circuitry with
inexpensive digital CMOS transistors, which allows our ICs to perform the
required analog functions with increased digital capabilities. For example, our
ProSLIC product is designed to function more efficiently than traditional
products for the source end of the telephone line which involve a two chip
combination requiring more board space and numerous external components. The
ProSLIC product is partitioned by combining a core analog design that provides
analog-to-digital conversion and digital-to-analog conversion with optimized
digital signal processing functions such as data compression, data expansion,
filtering and tone generation. In this manner, we can isolate the higher voltage
required to ring a telephone in low-cost, off-chip high voltage transistors,
thereby enabling us to fulfill the remaining core functions with a single chip.
UNDERSTANDING OF COMMUNICATION SYSTEMS TECHNOLOGY AND TRENDS
Our expertise and focus on communications ICs is rooted in our founders'
previous experience at AT&T Bell Labs working in CMOS design for communications
applications. This expertise, which we consider a competitive advantage, is the
foundation of our in-depth understanding of the technology and trends that
impact communications systems and markets. Therefore, we believe we have a
unique ability to predict product evolution and design compelling ICs for
communications manufacturers. Our understanding of the role of analog/digital
interfaces within communications systems and the key domestic and international
telecommunications standards that must be supported are particular areas of
expertise.
MANUFACTURING
As a fabless IC manufacturer, we conduct IC design and development in our
facilities in the United States and electronically transfer our proprietary IC
designs to third-party semiconductor fabricators who process silicon wafers to
produce the ICs that we design. Our IC designs use industry-standard
complementary metal oxide semiconductor, or CMOS, manufacturing process
technology to achieve a level of performance normally associated with more
expensive special purpose IC fabrication technology. We believe the use of CMOS
technology facilitates the rapid production of our ICs within a lower cost
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<PAGE>
framework. Our IC production employs submicron process geometries which are
readily available from leading foundry suppliers worldwide, thus ensuring the
availability of manufacturing capability over our products' life cycles. We
currently rely solely on Taiwan Semiconductor Manufacturing Co. to manufacture
all of our semiconductor wafers. We are in the process of qualifying Vanguard
International Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing
Co., as an additional semiconductor fabricator and such qualification is not
complete. In anticipation of successfully qualifying Vanguard, Vanguard is
currently producing a majority of our current work in progress.
Once the silicon wafers have been produced, they are shipped directly to our
third-party assembly subcontractors. The assembled ICs are then forwarded for
final testing, either at our facilities or through outsourced testing vendors,
prior to shipping to our customers. We believe that our fabless manufacturing
model significantly reduces our capital requirements and allows us to focus our
resources on the design, development and marketing of our ICs.
COMPETITION
The markets for semiconductors generally, and for analog and mixed-signal
ICs in particular, are intensely competitive. We believe the principal
competitive factors in our industry are:
<TABLE>
<S> <C>
- - - level of integration; - intellectual property;
- - - product capabilities; - customer support;
- - - reliability; - reputation; and
- - - price; - ability to rapidly introduce new
products
to market.
</TABLE>
We believe that we are competitive with respect to these factors,
particularly because our ICs typically are smaller in size, are highly
integrated, achieve high performance specifications at lower price points than
competitive products and are manufactured in standard CMOS which generally
enables us to supply them on a relatively rapid basis to customers to meet their
product introduction schedules. Our DAA product is an example of our competitive
positioning. Traditional DAA isolation techniques rely on relays, optical
isolators and transformers, transfer analog signals across the isolation
barrier, and/or require numerous external components to achieve their
functionality. Our silicon DAA reduces costs by eliminating the need for these
bulky and/or numerous discrete components. Our DAA ICs also reduce board area
and power consumption, while improving performance. However, disadvantages we
face in our markets include our short operating history and the need for
customers to redesign their products and modify their software to implement our
ICs in their products.
We anticipate that the market for our products will continually evolve and
will be subject to rapid technological change. In addition, as we target and
supply products to numerous wireline and wireless communications markets and
applications, we face competition from a relatively large number of competitors.
Across our product offerings, we compete with Advanced Micro Devices, Analog
Devices, Conexant, Delta Integration, Fujitsu, Infineon Technologies, Krypton
Isolation, National Semiconductor, Philips and Texas Instruments, among others.
We expect to face competition in the future from our current competitors, other
manufacturers and designers of semiconductors, and innovative start-up
semiconductor design companies. In addition, our customers could develop
products or technologies internally that would replace their need for our
products and would become a source of competition. As the markets for
communications products grow, we also may face competition from traditional
communication 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 entering
into strategic relationships with or acquiring other existing IC providers.
Many of our competitors and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than us. Current and potential
competitors have established or may establish financial and strategic
relationships between themselves or with existing or
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potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share.
INTELLECTUAL PROPERTY
Our future success depends in part upon our proprietary technology. We seek
to protect our technology through a combination of patents, copyrights, trade
secrets, trademarks and confidentiality procedures. As of January 1, 2000, we
had been granted one United States patent in the IC field, which is entitled
"Analog Isolation System With Digital Communication Across A Capacitive Barrier"
and expires in 2016. The patent covers a silicon DAA chipset which provides a
digital, low-cost interface to telephone lines. We also have filed 56 additional
U.S. patent applications. There can be no assurance that patents will ever be
issued for these applications. Furthermore, it is possible that any patents held
by us may be invalidated, circumvented, challenged or licensed to others. In
addition, there can be no assurance that such patents will provide us with
competitive advantages or adequately safeguard our proprietary rights.
In addition, we claim copyright protection for proprietary documentation
used in our products. We register the visual image of each IC that we
manufacture in commercial quantities with the United States Copyright Office. We
have registered the Silicon Laboratories logo as a trademark in the United
States. All other trademarks, service marks or trade names appearing in this
prospectus are the property of their respective owners. We also attempt to
protect our trade secrets and other proprietary information through agreements
with our customers, suppliers, employees and consultants, and through other
security measures. We intend to protect our rights vigorously, but there can be
no assurance that our efforts will be successful. In addition, the laws of other
countries in which our products are sold may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
While our ability to effectively compete depends in large part on our
ability to protect our intellectual property, we believe that our technical
expertise and ability to introduce new products in a timely manner will be an
important factor in maintaining our competitive position.
Many participants in the semiconductor and communications industries have a
significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. From time to time, third parties may assert infringement
claims against us. We may not prevail in any such litigation or may not be able
to license any valid and infringed patents from third parties on commercially
reasonable terms, if at all. Litigation, regardless of the outcome, is likely to
result in substantial cost and diversion of our resources, including our
management's time. Any such litigation could materially adversely affect us.
Other than industry standard licenses with our vendors, such as wafer
fabrication tool libraries, computer-aided design applications and business
software applications, we do not have material licenses.
EMPLOYEES
As of January 1, 2000, we employed 148 people, including 34 in
manufacturing, 62 in engineering development, 30 in marketing, 12 in sales and
10 in administration. Our success depends on the continued service of our key
technical and senior management personnel and on our ability to continue to
attract, retain and motivate highly skilled analog and mixed-signal engineers.
The competition for such personnel is intense. We have never had a work stoppage
and none of our employees are represented by a labor organization. We consider
our employee relations to be good.
FACILITIES
Our main executive, administrative and technical offices occupy
approximately 37,800 square feet in Austin, Texas under a lease that expires in
April 2006, with one five year renewal option. We have an additional lease
commitment in Austin, Texas for supplemental office space for approximately
34,000 square feet with expected occupancy to commence in February 2000. This
lease's term is for 76 months after initial occupancy with one five year renewal
option. We believe that these facilities are sufficient to
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<PAGE>
meet our needs through December 2000. We also lease sales offices in Atlanta,
Georgia and San Jose, California.
LEGAL PROCEEDINGS
On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com in
the United States District Court for the Western District of Texas (Austin
Division). The complaint asserts that Analog Devices has infringed, and is
continuing to infringe, our U.S. Patent 5,870,046, entitled "Analog Isolation
System With Digital Communication Across A Capacitive Barrier," by making,
using, selling, offering to sell and/or importing silicon DAAs that embody or
use inventions claimed by our patent. The complaint also asserts, among other
things, that Analog Devices and 3Com have misappropriated our confidential
information, know-how and trade secrets relating to our DAA technology,
tortiously interfered with our business relations with our existing and
prospective customers, and been unjustly enriched by this misappropriation. The
suit seeks unspecified damages from Analog Devices, including damages for
willful infringement of our patent, and an injunction prohibiting Analog Devices
from infringing our patent. In addition, the suit seeks unspecified damages,
including punitive damages and attorneys' fees arising, among other things, out
of the misappropriation, tortious interference and unjust enrichment, and an
injunction prohibiting designing, manufacturing, reproducing, using or selling
any ICs, modems or other products the conception, design or development of which
was based on our confidential information, know-how and trade secrets.
On January 25, 2000, Analog Devices filed an answer denying that it has
misappropriated our confidential information, know-how and trade secrets and
brought a counterclaim against us seeking a declaratory judgment that our issued
U.S. patent is invalid and unenforceable and that Analog Devices has not
infringed our issued U.S. patent. The counterclaim further alleges that we
improperly failed to disclose a relevant pre-existing patent to the U.S. Patent
and Trademark Office during the course of our patent application process, and
that we therefore are unable to enforce our patent. We filed an answer to Analog
Devices' counterclaim asserting that our issued U.S. patent is valid and
enforceable and that Analog Devices has infringed our issued U.S. patent. We
also denied that we improperly excluded any relevant information in the course
of our patent application process.
3Com has not yet filed a response to our lawsuit. However, we expect that
3Com will file an answer during the next ten days.
For a description of risks associated with this pending lawsuit, please see
"Risk Factors--We depend on a limited number of customers for the vast majority
of our sales, and the loss of, or a significant reduction in orders from, any
key customer could significantly reduce our sales" and "--Significant litigation
over intellectual property in our industry may cause us to become involved in
costly and lengthy litigation which could seriously harm our business."
We are not currently involved in any other material legal proceedings.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information regarding the executive officers and
directors of Silicon Laboratories as of January 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- -------- ------------------------------------------
<S> <C> <C>
Navdeep S. Sooch.......................... 37 Chief Executive Officer and Chairman of
the Board
Jeffrey W. Scott.......................... 38 Vice President of Engineering and Director
David R. Welland.......................... 44 Vice President of Technology and Director
John W. McGovern.......................... 44 Vice President and Chief Financial Officer
Bradley J. Fluke.......................... 38 Vice President/General Manager Wireline
Products Division
Edmund G. Healy........................... 45 Vice President/General Manager Wireless
Products Division
Gary R. Gay............................... 49 Vice President of Sales
Jonathan D. Ivester....................... 44 Vice President of Operations
William P. Wood........................... 44 Director
H. Berry Cash............................. 61 Director
</TABLE>
NAVDEEP S. SOOCH co-founded Silicon Laboratories in August 1996 and has
served as our Chief Executive Officer and Chairman of the Board since its
inception. From March 1985 until founding Silicon Laboratories, Mr. Sooch held
various positions at Crystal Semiconductor/Cirrus Logic, a designer and
manufacturer of integrated circuits, including Vice President of Engineering, as
well as Product Planning Manager of Strategic Marketing and Design Engineer.
From May 1982 to March 1985, Mr. Sooch was a Design Engineer with AT&T Bell
Labs, a communications company. Mr. Sooch holds a B.S. in electrical engineering
from the University of Michigan and a M.S. in electrical engineering from
Stanford University.
JEFFREY W. SCOTT co-founded Silicon Laboratories in August 1996 and has
served as our Vice President of Engineering and as a director since its
inception. From October 1989 until founding Silicon Laboratories, Mr. Scott held
various positions at Crystal Semiconductor/Cirrus Logic, including Vice
President of Engineering (Computer Products), Design Manager and Design
Engineer. From 1985 until 1989, Mr. Scott served as a Design Engineer with AT&T
Bell Labs. Mr. Scott holds a B.S. in electrical engineering from Lehigh
University and a M.S. in electrical engineering from the Massachusetts Institute
of Technology.
DAVID R. WELLAND co-founded Silicon Laboratories in August 1996 and has
served as our Vice President of Technology and as a director since its
inception. From November 1991 until founding Silicon Laboratories, Mr. Welland
held various positions at Crystal Semiconductor/Cirrus Logic, including Senior
Design Engineer. Mr. Welland holds a B.S. in electrical engineering from the
Massachusetts Institute of Technology.
JOHN W. MCGOVERN joined Silicon Laboratories in December 1996 as our Vice
President and Chief Financial Officer. From February 1985 to September 1996,
Mr. McGovern held various positions at Crystal Semiconductor/Cirrus Logic
including Vice President of Finance and Division Controller. Mr. McGovern holds
a B.B.A. in accounting from the University of Texas and is a licensed Certified
Public Accountant.
BRADLEY J. FLUKE has served as our Vice President and General Manager of our
Wireline Products Division since January 1999 and as our Vice President of
Marketing from April 1997 to December 1998. Previously, he served as the
Director of Marketing of the Computer Products Division of Crystal
Semiconductor/Cirrus Logic from June 1990 to April 1997. From 1984 to 1990,
Mr. Fluke held various marketing positions in the Data Converter Group for
Analog Devices, a designer and manufacturer of
45
<PAGE>
integrated circuits. Mr. Fluke holds a B.S. in electrical engineering from the
Rochester Institute of Technology.
EDMUND G. HEALY has served as Vice President and General Manager of our
Wireless Products Division since June 1998. From September 1992 to June 1998,
Mr. Healy worked as General Manager of the Magnetic Storage Division at Crystal
Semiconductor/Cirrus Logic. Mr. Healy held various Senior Marketing and Product
Planning positions for Zilog, a designer and manufacturer of application
specific standard products, and GEC Plessey Semiconductor, from 1987 to 1992.
From 1983 to 1987, Mr. Healy was an Assistant Professor of Electrical
Engineering at the United States Military Academy after serving as an Infantry
Officer from 1976 to 1981. Mr. Healy holds a B.S. in electrical engineering from
the United States Military Academy, a M.S. in electrical engineering from
Georgia Institute of Technology and a M.S. in management from Stanford
University.
GARY R. GAY joined Silicon Laboratories in October 1997 as our Vice
President of Sales. Previously, Mr. Gay was with Crystal Semiconductor/Cirrus
Logic from 1985 to September 1997 where he most recently served as Vice
President of North American Sales. From 1979 to 1985, Mr. Gay was International
Sales Manager and Asia Pacific Sales Manager with Burr-Brown Corporation, a
designer and manufacturer of semiconductor components. Mr. Gay holds a B.S. in
electrical engineering from the Rochester Institute of Technology.
JONATHAN D. IVESTER joined Silicon Laboratories in September 1997 as Vice
President of Manufacturing. From May 1984 to September 1997, Mr. Ivester was
with Applied Materials and served as Director of Manufacturing and Director of
U.S. Procurement in addition to various engineering management positions.
Mr. Ivester was a scientist at Bechtel Corporation, an engineering and
construction company, from 1980 to 1982 and at Abcor, Inc., an ultrafiltration
company and subsidiary of Koch Industries, from 1978 to 1980. Mr. Ivester holds
a B.S. in chemistry from the Massachusetts Institute of Technology and a M.B.A.
from Stanford University.
WILLIAM P. WOOD has served as a director of Silicon Laboratories since
March 1997. Since 1984, Mr. Wood has been a general partner, and for funds
created since 1996, a special limited partner, of various funds associated with
Austin Ventures, a venture capital firm located in Austin, Texas. Mr. Wood
serves on the board of directors of Crossroads Systems, a provider of storage
routers for storage area networks, and several private companies. Mr. Wood holds
an A.B. in history from Brown University and a M.B.A. from Harvard University.
H. BERRY CASH has served as a director of Silicon Laboratories since
June 1997. Mr. Cash has served as general partner of InterWest Partners, a
venture capital firm, since 1986. Mr. Cash currently serves on the board of
directors of the following public companies: AMX Corporation, a manufacturer of
remote control systems; Ciena Corporation, a designer and manufacturer of
multiplexing systems for fiber optic networks; and Liberte Investors Inc., an
investment company. In addition, Mr. Cash is a director of several privately
held companies. Mr. Cash holds a B.S. in electrical engineering from Texas A&M
University and a M.B.A. from Western Michigan University.
CLASSIFIED BOARD OF DIRECTORS
At the first annual meeting of stockholders following the closing of our
initial public offering, our board of directors will be divided into three
classes of directors, as nearly equal in size as is practicable, to serve
staggered three-year terms:
- Class I, whose term will expire at the annual meeting of stockholders to
be held in 2002;
- Class II, whose term will expire at the annual meeting of stockholders to
be held in 2003; and
- Class III, whose term will expire at the annual meeting of stockholders to
be held in 2004.
46
<PAGE>
Upon expiration of the term of a class of directors, directors for that
class will be elected for three-year terms at the annual meeting of stockholders
in the year in which such term expires. Each director's term is subject to the
election and qualification of his successor, or his earlier death, resignation
or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors established an audit committee in March 1999. The
members of the audit committee are Messrs. Wood and Cash. The audit committee
reports to the board of directors with regard to the selection of our
independent auditors, the scope and methods of our annual audits, the fees to be
paid to the independent auditors, the performance of our independent auditors,
compliance with our accounting and financial policies, and management's
procedures and policies relative to the adequacy of our internal accounting
controls.
Our board of directors established a compensation committee in
December 1998. The members of the compensation committee are Messrs. Sooch, Wood
and Cash. The compensation committee reviews and makes recommendations to the
board regarding our compensation policies and all forms of compensation to be
provided to our executive officers and other employees. In addition, the
compensation committee has authority to administer our stock option and stock
purchase plans. Prior to this offering, the entire board of directors
administered our stock option plan.
DIRECTOR COMPENSATION
Non-employee directors will receive option grants at periodic intervals
under the automatic option grant program of our 2000 Stock Incentive Plan, and
non-employee directors will be eligible to receive option grants under the
discretionary option grant program of that plan. We reimburse directors for all
reasonable out-of-pocket expenses incurred in attending meetings of the board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee. Of the members of the compensation committee, Mr. Sooch has served as
our Chief Executive Officer and Chairman of the Board since August 1996 and
neither Mr. Wood nor Mr. Cash serves or has previously served as an officer or
employee of Silicon Laboratories. For a description of investments in our
company made by Mr. Wood and Mr. Cash, and their respective affiliates, see
"Certain Transactions" below.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the personal liability of our board
members for breaches by the directors of their fiduciary duties. Our bylaws
require us to indemnify our directors and executive officers to the fullest
extent permitted by Delaware law. We have entered into indemnification
agreements with all of our directors and executive officers and have purchased
directors' and officers' liability insurance.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table provides the total compensation paid to our chief
executive officer and our next four most highly-compensated executive officers
in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS
- - --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Navdeep S. Sooch................................ $170,000 $43,932 $175 --
Chief Executive Officer and
Chairman of the Board
Jeffrey W. Scott................................ 140,000 29,000 148 --
Vice President of Engineering
David R. Welland................................ 140,000 29,000 148 --
Vice President of Technology
Bradley J. Fluke................................ 140,000 29,000 148 18,000
Vice President/General Manager
Wireline Products Division
Gary R. Gay..................................... 150,000 46,019 157 20,000
Vice President of Sales
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during fiscal 1999 to each of our executive officers named in
the Summary Compensation Table. The percentage of total options granted to our
employees in the last fiscal year is based on options granted to purchase an
aggregate of 2,484,200 shares of common stock during fiscal 1999. We have never
granted any stock appreciation rights.
The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including our financial condition and operating
results, transactions involving the issuances of shares of our preferred stock,
the senior rights and preferences accorded issued shares of preferred stock, and
the market for comparable stocks.
We granted these options under our 1997 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. Except as otherwise noted, these options
are immediately exercisable, but we have the right to repurchase at the exercise
price any shares that have not vested. If we are acquired in a
stockholder-approved transaction by merger, consolidation or asset sale, the
option shares will accelerate in full unless the option is assumed by the
successor corporation and our repurchase rights with respect to the unvested
option shares are assigned to such corporation. In the event that the option is
so assumed by, and our repurchase rights with respect to unvested shares are
assigned to, the successor corporation and, within 18 months following the
acquisition, the optionee's position is reduced to a lesser position or the
optionee's employment is involuntarily terminated, the option shares will
accelerate and become fully vested.
The amounts shown as potential realizable value represent hypothetical gains
that could be achieved for the respective options if exercised at the end of the
option term. These amounts represent assumed rates of appreciation in the value
of our common stock from the fair market value on the date of grant.
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<PAGE>
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not represent
our estimate or projection of the future price of our common stock. Actual
gains, if any, on stock option exercises depend on the future performance of the
trading price of our common stock. The amounts reflected in the table may not
necessarily be achieved.
The following table sets forth information concerning the individual grants
of stock options to each of our named executive officers in fiscal 1999.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------------------------------------------- -----------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
GRANTED(1) FISCAL 1999 PER SHARE DATE 5% 10%
------------ ---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Navdeep S. Sooch.............. -- --% $ -- -- $ -- $ --
Jeffrey W. Scott.............. -- -- -- -- -- --
David R. Welland.............. -- -- -- -- -- --
Bradley J. Fluke.............. 18,000 0.73 1.75 7/19/09 19,811 50,203
Gary R. Gay................... 20,000 0.81 1.75 7/19/09 22,012 55,781
</TABLE>
- - ------------------------
(1) These options are fully exercisable on the date of grant but if the employee
leaves us before he has vested in his option shares, we have the right to
repurchase, at the exercise price, any shares that have not vested. These
options vest as to 20% on the first anniversary of the date of grant and
vest as to the remaining 80% in equal monthly installments over the
following 48 months.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of
January 1, 2000 by each of our executive officers named in the Summary
Compensation Table. The value realized by Mr. Gay is based on the difference
between the fair market value of the shares on the date of purchase, as
determined by our board of directors, and the price paid for such shares. There
was no public trading market for our common stock as of January 1, 2000.
Accordingly, we have based the value of unexercised in-the-money options at
January 1, 2000 on an assumed initial public offering price of $22.00 per share,
less the applicable exercise price per share, multiplied by the number of shares
underlying the options. Actual gains on exercise, if any, will depend on the
value of our common stock on the date on which the shares are sold.
FISCAL 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT JANUARY 1, 2000 JANUARY 1, 2000
ON VALUE ---------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Navdeep S. Sooch.................. -- $ -- -- -- $ -- --
Jeffrey W. Scott.................. -- -- -- -- -- --
David R. Welland.................. -- -- -- -- -- --
Bradley J. Fluke.................. -- -- 60,000 -- 1,278,000 --
Gary R. Gay....................... 52,000 59,000 28,000 -- 581,000 --
</TABLE>
49
<PAGE>
2000 STOCK INCENTIVE PLAN
The 2000 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1997 Stock Option/Stock Issuance Plan. The 2000 Stock
Incentive Plan became effective upon its adoption by the board of directors on
January 5, 2000; it will be approved by the stockholders prior to the date of
this offering.
We have reserved 5,389,498 shares of our common stock for issuance under the
2000 Stock Incentive Plan. This share reserve consists of the shares which were
available for issuance under the predecessor plan on the effective date of the
2000 Stock Incentive Plan plus an additional increase of 2,000,000 shares. The
share reserve will automatically be increased on the first trading day of
January each calendar year, beginning in January 2001, by a number of shares
equal to 2% of the total number of shares of our common stock outstanding on the
last trading day of the immediately preceding calendar year, but no such annual
increase will exceed 1,000,000 shares. The share reserve will also increase by
the number of shares repurchased by the Company, at the original exercise or
issue price, pursuant to its repurchase rights under the predecessor plan but
such increase will not exceed 3,357,204 shares. In no event may any one
participant in the 2000 Stock Incentive Plan receive option grants or direct
stock issuances for more than 1,000,000 shares in the aggregate per calendar
year.
Outstanding options under the predecessor plan will be incorporated into the
2000 Stock Incentive Plan upon the date of this offering, and no further option
grants will be made under that plan. The incorporated options will continue to
be governed by their existing terms, unless the compensation committee extends
one or more features of the 2000 Stock Incentive Plan to those options. However,
except as otherwise noted below, the outstanding options under the predecessor
plan contain substantially the same terms and conditions summarized below for
the discretionary option grant program under the 2000 Stock Incentive Plan.
The 2000 Stock Incentive Plan has four separate programs:
- the discretionary option grant program under which eligible individuals in
our employ or service (including officers, non-employee board members and
consultants) may be granted options to purchase shares of our common
stock;
- the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares or as
a bonus tied to the performance of services;
- the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants; and
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase price
for each such grant or issuance (which may be less than, equal to or greater
than the fair market value of the shares), the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may participate in the salary investment option
grant program in the event that program is activated for one or more calendar
years. Neither the compensation committee nor the board will exercise any
administrative discretion with respect to option grants made
50
<PAGE>
under the salary investment option grant program or under the automatic option
grant program for the non-employee board members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option also
may be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the compensation committee may allow a participant to pay
the option exercise price or direct issue price (and any associated withholding
taxes incurred in connection with the acquisition of shares) with a
full-recourse, interest-bearing promissory note.
In the event that the company is acquired, whether by merger or asset sale
or board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent the repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
compensation committee may grant options and issue shares which will accelerate
(1) in the acquisition even if the options are assumed and repurchase rights
assigned, (2) in connection with a hostile change in control (effected through a
successful tender offer for more than 50% of our outstanding voting stock or by
proxy contest for the election of board members), or (3) upon a termination of
the individual's service following a change in control or hostile take-over.
In the event of an acquisition of the company (by merger or asset sale),
options currently outstanding under the 1997 plan will accelerate unless assumed
by the successor corporation; and all assumed options will accelerate upon the
optionee's involuntary termination (including a forced resignation) within
18 months following the acquisition. Such options are not by their terms subject
to acceleration in connection with any other change in control or hostile
take-over.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the election to surrender their
outstanding options for an appreciation distribution from the company equal to
the fair market value of the vested shares subject to the surrendered option
less the aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of common stock. There are
currently no outstanding stock appreciation rights under the predecessor plan.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plan) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each executive
officer and each other highly compensated employee selected for participation
may elect to reduce his or her base salary for that calendar year by a specified
dollar amount not less than $5,000 nor more than $50,000. In return, the
individual will automatically be granted, on the first trading day in the
calendar year for which the salary reduction is to be in effect, a non-statutory
option to purchase that number of shares of common stock determined by dividing
the salary reduction amount by two-thirds of the fair market value per share of
our common stock on the grant date. The option exercise price will be equal to
one-third of the fair market value of the option shares on the grant date. As a
result, the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the salary reduction
amount. The option will become exercisable in a series of 12 equal monthly
installments over the calendar year for which the salary reduction is to be in
effect and will be subject to full and immediate vesting in the event of an
acquisition or change in control of the company.
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<PAGE>
Under the automatic option grant program, each individual who is serving as
a non-employee member of our board of directors on the date the underwriting
agreement for this offering is executed will receive an option for 30,000 shares
of our common stock with an exercise price equal to the price at which shares
are sold in this offering, provided such individual has not been in our prior
employ. Each individual who first joins the board after the effective date of
this offering as a non-employee board member will automatically be granted an
option for 30,000 shares of our common stock at the time of his or her
commencement of board service; provided such individual has not been in our
prior employ. In addition, on the date of each annual stockholders meeting,
beginning with the 2001 meeting, each individual who has served as a
non-employee board member for at least six months and is to continue to do so
will receive an option grant to purchase 5,000 shares of common stock. Each
automatic grant will have an exercise price equal to the fair market value per
share of our common stock on the grant date and will have a maximum term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each option will be immediately exercisable, subject to our right
to repurchase any unvested shares, at the original exercise price, at the time
of the board member's cessation of service. Each 30,000-share option grant will
vest, and the repurchase right will lapse, in a series of four equal successive
annual installments upon the optionee's completion of each year of board service
over the four-year period measured from the grant date. Each 5,000-share option
grant will vest, and the repurchase right will lapse, upon the optionee's
completion of one year of board service measured from the grant date. However,
each such outstanding option will immediately vest upon a change in control, a
hostile take-over or the death or disability of the optionee while serving as a
board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant and salary investment option
grant programs and may be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with such a
limited stock appreciation right may be surrendered to us upon the successful
completion of a hostile tender offer for more than 50% of our outstanding voting
stock. In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share equal to the
highest price per share of common stock paid in connection with the tender offer
less the exercise price payable for such share.
The board may amend of modify the 2000 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 2000 Stock Incentive Plan will
terminate no later than January 4, 2010.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by the board on January 5, 2000
and will be approved by the stockholders prior to the date of this offering. The
plan will become effective immediately upon the execution of the underwriting
agreement for this offering. The plan is designed to allow eligible employees to
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions. A total of 400,000 shares of our common stock will
initially be issued under the plan. The share reserve will automatically
increase on the first trading day of January each year beginning in
January 2001, by 0.5% of the total shares of common stock outstanding on the
last trading day of the immediately preceding calendar year, but no such annual
increase will exceed 250,000 shares. In no event, however, may any participant
purchase more than 200 shares, nor may all participants in the aggregate
purchase more than 75,000 shares on any one semi-annual purchase date.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in April 2002. The next offering
period will begin on the first business day in May 2002, and subsequent offering
periods will be set by the compensation committee. Shares will be purchased for
the participants semi-annually (the last business day of April and October each
year) during the offering period. The first purchase date will occur on
October 31, 2000. Should the fair market value of the common stock on any
semi-annual purchase date
52
<PAGE>
be less than the fair market value on the first day of the offering period, then
the current offering period will automatically end and a new offering period
will begin, based on the lower fair market value.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 15% of his or her base salary through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase
date. The purchase price per share will be 85% of the lower of the fair market
value of our common stock on the participant's entry date into the offering
period or the fair market value on the semi-annual purchase date.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in April 2010.
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<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENTS OF EQUITY
5% STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS. Since our inception in
August 1996, we have raised capital primarily through the sale of our preferred
stock, including the following sales to holders of more than 5% of our
outstanding common stock, directors and executive officers:
In March and June 1997, we sold shares of our Series A preferred stock at a
price of $0.98214425 per share to the following:
- 3,818,177 shares to funds affiliated with Austin Ventures
- 254,545 shares to Silverton Partners
- 254,545 shares to H. Berry Cash
Concurrently with the closing of the financing, investment funds affiliated
with Austin Ventures became a 5% stockholder. In addition, William P. Wood, a
general partner of Silverton Partners and some investment funds affiliated with
Austin Ventures, and a special limited partner of other funds associated with
Austin Ventures, and H. Berry Cash became members of our board of directors.
In June 1998, we sold shares of our Series B preferred stock at a price of
$4.76 per share to the following.
- 423,451 shares to funds affiliated with Austin Ventures
- 28,230 shares to Silverton Partners
- 21,009 shares to H. Berry Cash
- 42,017 shares to Berry and Dianne Cash Grandchildrens' Trust
- 52,522 shares to Jonathan D. Ivester, our Vice President of Manufacturing
Although the number of shares of Series A and Series B preferred stock
outstanding was not affected by the 2-for-1 split of our common stock, as a
result of this stock split, each share of Series A and Series B preferred stock
automatically adjusted and became convertible into two shares of our common
stock.
OTHER TRANSACTIONS
REGISTRATION RIGHTS. For more information on registration rights we have
granted to our 5% stockholders and other stockholders, please see "Description
of Capital Stock--Registration Rights."
LOANS TO EXECUTIVE OFFICERS. In June 1998, we loaned $56,500 to Edmund G.
Healy, our Vice President/General Manager Wireless Products Division, to allow
him to purchase shares of our common stock. Mr. Healy delivered a full-recourse
promissory note to us with respect to his loan and the promissory note is
secured by the purchased shares and accrues interest at a rate of 5.69% per
annum, compounded semi-annually. As of January 1, 2000, the outstanding
indebtedness on such note was $61,406, which was the largest aggregate amount of
indebtedness outstanding during fiscal 1999. This promissory note becomes due in
June 2003.
STOCK OPTIONS GRANTED TO DIRECTORS AND EXECUTIVE OFFICERS. For more
information regarding the grant of stock options to directors and executive
officers, please see "Management--Director Compensation" and "--Executive
Compensation."
INDEMNIFICATION AND INSURANCE. Our bylaws require us to indemnify our
directors and executive officers to the fullest extent permitted by Delaware
law. We have entered into indemnification agreements with all of our directors
and executive officers and have purchased directors' and officers' liability
insurance. In addition, our certificate of incorporation limits the personal
liability of our board members for breaches by the directors of their fiduciary
duties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 1, 2000, and as adjusted to reflect
the sale of common stock offered by us and by selling stockholders in this
offering, for:
- each person known by us to beneficially own more than 5% of our
outstanding shares of common stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors;
- all of our executive officers and directors as a group; and
- each selling stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to the securities. Unless otherwise indicated below and except to the
extent authority is shared by spouses under applicable law, to our knowledge,
the persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them. The
number of shares of common stock used to calculate the percentage ownership of
each listed person includes the shares of common stock underlying options or
warrants held by such persons that are exercisable within 60 days of this
offering. The percentage of beneficial ownership before the offering is based on
43,858,118 shares, consisting of 30,015,944 shares of common stock outstanding
as of January 1, 2000, and 13,842,174 shares issuable upon the conversion of our
outstanding convertible preferred stock. The percentage of beneficial ownership
after the offering is based on 46,578,118 shares, including 2,720,000 shares
sold by us in this offering.
Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of common stock is c/o Silicon Laboratories Inc., 4635
Boston Lane, Austin, Texas 78735:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING SHARES OWNED AFTER OFFERING
--------------------- BEING ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- - ------------------------ ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Navdeep S. Sooch(1)........................ 9,013,028 20.6% 160,000 8,853,028 19.0%
Jeffrey W. Scott........................... 5,766,664 13.1 160,000 5,606,664 12.0
David R. Welland........................... 6,966,664 15.9 160,000 6,806,664 14.6
Bradley J. Fluke(2)........................ 446,000 1.0 446,000 1.0
Gary R. Gay(3)............................. 280,000 * 280,000 *
William P. Wood(4)......................... 4,007,878 9.1 4,007,878 8.6
H. Berry Cash(5)........................... 903,106 2.1 903,106 1.9
OTHER 5% STOCKHOLDERS:
Funds affiliated with Austin Ventures(6)... 10,083,204 23.0 10,083,204 21.6
All directors and executive officers as a
group (10 persons)(7).................... 28,590,790 64.8 480,000 28,110,790 60.0
</TABLE>
- - ------------------------
* Represents beneficial ownership of less than one percent.
(1) Includes 300,000 shares held in trust for the benefit of Mr. Sooch's
children. Mr. Sooch disclaims beneficial ownership of the 300,000 shares
held in trust for the benefit of his children.
(2) Includes 60,000 shares issuable upon exercise of stock options.
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<PAGE>
(3) Includes 28,000 shares issuable upon exercise of stock options.
(4) Includes 614,576 shares held by Silverton Partners and 3,393,302 shares held
by funds affiliated with Austin Ventures. Mr. Wood is a general partner of
Silverton Partners. Mr. Wood also is a general partner of AV Partners IV,
L.P., and a general partner of Austin Ventures IV-A, L.P. and Austin
Ventures IV-B, L.P. Mr. Wood disclaims beneficial ownership of the shares
held by Austin Ventures IV-A, L.P., and Austin Ventures IV-B, L.P., except
to the extent of his pecuniary interest in such shares arising from his
general partnership interest in AV Partners IV, L.P. Mr. Wood is a special
limited partner of AV Partners V, L.P., which is a general partner of Austin
Ventures V, L.P. and Austin Ventures V Affiliates Fund, LP, and as such
Mr. Wood does not have beneficial ownership of any of the 6,689,902 shares
owned by Austin Ventures V, L.P. and Austin Ventures V Affiliates Fund, L.P.
Mr. Wood's address is c/o Austin Ventures, 114 West Seventh Street, Suite
1300, Austin, Texas 78701.
(5) Includes 99,346 shares held in trust for the benefit of Mr. Cash's
grandchildren. Mr. Cash disclaims beneficial ownership of the 99,346 shares
held in trust for the benefit of his grandchildren.
(6) Includes:
- 1,095,324 shares held by Austin Ventures IV-A, L.P.
- 2,297,978 shares held by Austin Ventures IV-B, L.P.
- 6,371,334 shares held by Austin Ventures V, L.P.
- 318,568 shares held by Austin Ventures V Affiliates Fund, L.P.
These partnerships may be deemed to beneficially own each other's shares
because the general partners of each partnership are affiliated. Each
partnership, however, disclaims beneficial ownership of the others' shares.
The address of the investment funds affiliated with Austin Ventures is 114
West Seventh Street, Suite 1300, Austin, Texas 78701.
(7) Includes 238,000 shares issuable upon exercise of stock options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 250,000,000 shares of common stock, par value $0.0001 per share, and
10,000,000 shares of preferred stock, par value $0.0001 per share, the rights
and preferences of which may be established from time to time by our board of
directors. The following summary is qualified in its entirety by reference to
our certificate of incorporation and bylaws, copies of which are filed as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
As of January 1, 2000, there were 30,015,944 shares of common stock
outstanding that were held of record by 116 stockholders. As of January 1, 2000,
there were also 2,380,226 shares of common stock subject to outstanding options,
all of which were immediately exercisable, and 143,182 shares subject to
outstanding warrants. As of January 1, 2000, 11,910,298 shares of the
outstanding common stock were unvested and subject to rights of repurchase which
lapse according to a time-based vesting schedule. Of the shares unvested and
subject to rights of repurchase, 7,467,000 shares will vest upon, and as a
result of, the completion of this offering. Holders of our common stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of common stock are not entitled to cumulative voting
rights with respect to the election of directors, and as a result, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to limitations under Delaware law and preferences that may apply
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends or other distributions, if any, as
may be declared by our board of directors out of funds legally available
therefor. In the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to the liquidation preference of any outstanding
preferred stock. The common stock has no preemptive, conversion or other rights
to subscribe for additional securities of Silicon Laboratories. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of the offering will be, validly issued, fully paid
and nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
PREFERRED STOCK
As of January 1, 2000, there were 6,921,087 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock will automatically convert into 13,842,174 shares of common
stock. Our board of directors will have the authority, without further action by
the stockholders, to issue up to 10,000,000 shares of preferred stock in one or
more series and to designate the rights, preferences, privileges and
restrictions of each such series. The issuance of preferred stock could have the
effect of restricting dividends on the common stock, diluting the voting power
of the common stock, impairing the liquidation rights of the common stock or
delaying or preventing our change in control without further action by the
stockholders. At present, we have no plans to issue any shares of preferred
stock.
REGISTRATION RIGHTS
According to the terms of an investors' rights agreement among us and some
of our stockholders, at any time after March 21, 2002, investors in our
preferred stock holding an aggregate of at least two-thirds of the shares of
common stock issued upon conversion of the preferred stock will be entitled to
demand that we file a registration statement with respect to the registration of
their shares under the Securities Act of 1933, provided that those investors
request that such registration statement register the resale of at least
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<PAGE>
half of the outstanding shares held by them. We are not required to effect more
than two such registrations or more than one such registration during any
365 day period.
In addition, the holders of up to 38,023,632 shares of common stock,
including Messrs. Sooch, Scott, Welland, McGovern, Cash, Silverton Partners and
entities affiliated with Austin Ventures and other stockholders and warrant
holders, have piggyback registration rights with respect to the future
registration of shares of our common stock under the Securities Act. If we
propose to register any shares of common stock under the Securities Act, the
holders of shares having piggyback registration rights are entitled to receive
notice of such registration and are entitled to include their shares in the
registration.
At any time after we become eligible to file a registration statement on
Form S-3, holders of registration rights may require us to file up to three
registration statements on Form S-3 under the Securities Act with respect to
their shares of common stock.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and commissions. The investors'
rights agreement also contains our commitment to indemnify the holders of
registration rights for certain losses they may incur in connection with
registrations under the agreement. Registration of any of the shares of common
stock held by security holders with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.
ANTI-TAKEOVER EFFECTS
Provisions of Delaware law, our certificate of incorporation, our bylaws and
contracts to which we are a party, could have the effect of delaying or
preventing a third party from acquiring us, even if the acquisition would
benefit our stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by the board of directors and to
discourage types of transactions that may involve an actual or threatened change
of control of Silicon Laboratories. These provisions are designed to reduce our
vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of Silicon Laboratories.
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law.
Subject to exceptions, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- Upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding, those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- On or after such date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the
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<PAGE>
affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, with an "interested stockholder" being defined as a
person who, together with affiliates and associates, owns, or within three years
prior to the date of determination whether the person is an "interested
stockholder," did own, 15% or more of the corporation's voting stock.
In addition, provisions of our certificate of incorporation and bylaws may
have an anti-takeover effect. These provisions may delay, defer or prevent a
tender offer or takeover attempt of our company that a stockholder might
consider in his or her best interest, including those attempts that might result
in a premium over the market price for the shares held by our stockholders. The
following summarizes these provisions.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
that at the first annual meeting following the closing of our initial public
offering, our board of directors will be divided into three classes of
directors, as nearly equal in size as is practicable, serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions, when coupled with the provisions of
our certificate of incorporation and bylaws authorizing our board of directors
to fill vacant directorships or increase the size of our board, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of
incorporation eliminates the ability of stockholders to act by written consent.
Our bylaws provide that special meetings of our stockholders may be called only
by a majority of our board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDERS PROPOSALS AND DIRECTORS
NOMINATIONS. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide us with timely
written notice of their proposal. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 120 days before the date in the current year that corresponds to the date
we released the notice of annual meeting to stockholders in connection with the
previous year's annual meeting. If, however, no meeting was held in the prior
year or the date of the annual meeting has been changed by more than 30 days
from the date contemplated in the notice of annual meeting, notice by the
stockholder in order to be timely must be received a reasonable time before we
release the notice of annual meeting to stockholders. Our bylaws also specify
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. Our authorized but unissued shares of
common stock and preferred stock are available for our board to issue without
stockholder approval. We may use these additional shares for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of our
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of our company by
means of a proxy context, tender offer, merger or other transaction.
SUPERMAJORITY VOTE PROVISIONS. The Delaware General Corporate Law provides
generally that the affirmative vote of a majority of the shares entitled to vote
on any matter is required to amend a corporation's certificate of incorporation
or bylaws, unless a corporation's certificate of incorporation or bylaws, as the
case may be, requires a greater percentage. Our certificate of incorporation
includes supermajority vote provisions that require the affirmative vote of the
holders of at least two-thirds of the combined voting power of all
then-outstanding shares of our voting capital stock in order to amend the
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<PAGE>
provisions of our certificate of incorporation relating to the classified board
of directors and the elimination of action by written consent of stockholders.
INDEMNIFICATION. Our bylaws require us to indemnify our directors and
officers to the fullest extent permitted by Delaware law. We have entered into
indemnification agreements with all of our directors and executive officers and
have purchased directors' and executive officers' liability insurance. In
addition, our certificate of incorporation limits the personal liability of our
board members for breaches by the directors of their fiduciary duties to the
fullest extent permitted under Delaware law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company and its address is 150 Royall Street, Canton, MA 02021.
NASDAQ NATIONAL MARKET LISTING
We have applied to list our stock on the Nasdaq National Market under the
trading symbol "SLAB."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our common
stock could decline. Furthermore, because we do not expect any shares will be
available for sale for at least 120 days after the date of this prospectus as a
result of contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
46,578,118 shares of our common stock, based upon the number of shares
outstanding at January 1, 2000 and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants and no
grant of additional options or warrants. Of these shares, all shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act unless they are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining shares will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- - ---------------- --------------------------------------------------------
<S> <C>
0............................. Immediately.
12,954,470............................ 120 days after the date of this prospectus due to a
release of 30% of the shares, and shares underlying
options, held by each stockholder from lock-up
agreements with the underwriters if the conditions
described below under "--Lock-up Agreements"
are satisfied.
27,508,907............................ 181 days after the date of this prospectus upon the
expiration of the lock-up agreements with the
underwriters (plus any shares not already released from
the lock-up agreements).
2,914,741............................ At various times after 181 days following the date of
this prospectus, subject to compliance with securities
laws and upon the lapse of any applicable vesting
restrictions.
</TABLE>
LOCK-UP AGREEMENTS. All of our directors, officers, stockholders, option
holders and warrant holders have signed lock-up agreements under which they have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock for 180 days after the date of this prospectus.
If the last reported sale price of our common stock is at least two times the
initial public offering price per share for each of the 20 trading days
preceding the 120th day after the date of this prospectus, then 30% of the
shares, and shares underlying options, held by each stockholder on the date of
this prospectus shall be released from the 180 day restrictions. This early
release shall occur: (a) on the 120th day after the date of this prospectus if
we make a public release of our quarterly or annual results during the period
beginning on the eleventh trading day after the date of this prospectus and
ending on the day prior to the 120th day after the date of this prospectus, or
(b) otherwise, on the second trading day after the first public release of our
quarterly or annual results occurring on or after the 120th day after the date
of this prospectus. Morgan Stanley & Co. Incorporated may, in its sole
discretion, at any time and without prior notice or announcement, release all or
any portion of shares subject to the lock-up agreements.
RULE 144. In general, under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of
(a) 1% of the number of shares of our common stock then outstanding, which will
equal approximately 465,782 shares immediately after the
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<PAGE>
offering, or (b) the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale. Sales under Rule 144 are also
subject to manner-of-sale provisions, notice requirements and the availability
of current public information about us.
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale and who
has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with a
compensatory stock plan or other written compensatory agreement is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144, but without compliance with restrictions, including the holding
period, contained in Rule 144.
REGISTRATION RIGHTS. After this offering, some holders of shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act. See "Description of Capital
Stock--Registration Rights." After any registration of these shares, such shares
will be freely tradeable without restriction under the Securities Act. These
sales could cause the market price of our common stock to decline.
STOCK PLANS. As of January 1, 2000, options to purchase 2,380,226 shares of
common stock were outstanding under our stock option and incentive plans. After
this offering, we intend to file a registration statement on Form S-8 under the
Securities Act of 1933 covering shares of common stock reserved for issuance
under our stock incentive plan and our employee stock purchase plan. Based on
the number of options outstanding and shares reserved for issuance under our
stock incentive plan and our employee stock purchase plan, the Form S-8
registration statement would cover 5,789,498 shares. The Form S-8 registration
statement will become effective immediately upon filing. At that point, subject
to the satisfaction of applicable exercisability periods, Rule 144 volume
limitations applicable to affiliates and the agreements with the underwriters
referred to above, shares of common stock to be issued upon exercise of
outstanding options granted pursuant to our stock incentive plan and shares of
common stock issued pursuant to our employee stock purchase plan (to the extent
that such shares are not held by affiliates) will be available for immediate
resale in the public market.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Salomon Smith
Barney Inc. are acting as representatives, have severally agreed to purchase,
and we and the selling stockholders have severally agreed to sell to them, the
respective number of shares of our common stock indicated:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- - ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Lehman Brothers Inc.........................................
Salomon Smith Barney Inc....................................
---------
Total..................................................... 3,200,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling stockholders and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered by this
prospectus are subject to the approval of certain legal matters by their counsel
and to certain other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus if any shares
are taken. However, the underwriters are not required to take or pay for the
shares covered by the over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the representatives of
the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 480,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with this offering. To the extent
such option is exercised, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of common stock as the number listed next to the underwriter's
name in the preceding table bears to the total number of shares of common stock
listed next to the names of all underwriters in the preceding table. If the
underwriter's over-allotment option is exercised in full, the total price to
public would be $ , the total underwriters' discounts and commissions
would be $ and the total proceeds to us would be $ before
deducting estimated offering expenses of $ .
Silicon Laboratories and our directors, officers and certain other
stockholders have each agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, during the period
ending 180 days after the date of this prospectus, each of us will not, directly
or indirectly:
- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or
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- Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock, whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise.
If the last reported sale price of our common stock on the Nasdaq National
Market is at least twice the initial public offering per share for the 20
consecutive trading days ending on the last trading day preceding the 120th day
after the date of this prospectus, 30% of the shares of our common stock subject
to the 180-day restriction described above will be released from these
restrictions. This early release shall occur: (a) on the 120th day after the
date of this prospectus if we make a public release of our quarterly or annual
results during the period beginning on the eleventh trading day after the date
of this prospectus and ending on the day prior to the 120th day after the date
of this prospectus, or (b) otherwise, on the second trading day after the first
public release of our quarterly or annual results occurring on or after the
120th day after the date of this prospectus.
The restrictions described in the previous paragraph do not apply to:
- The sale of shares to the underwriters;
- The issuance by Silicon Laboratories of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing; or
- Transactions by any person other than Silicon Laboratories relating to
shares of common stock or other securities acquired in open market
transactions after the completion of the offering of the shares of common
stock.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "SLAB."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to 320,000 shares of
common stock to be sold in this offering, at the public offering price, to our
customers, vendors, business associates and related persons. The number of
shares of common stock available for sale to the general public will be reduced
to the extent such individuals and entities purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares.
64
<PAGE>
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations among us, the selling stockholders and
the representatives of the underwriters. Among the factors to be considered in
determining the public offering price are our record of operations, our current
financial position and future prospects, the industry in general, the experience
of our management, our sales, earnings and other financial and operating
information in recent periods, the price-earnings ratios, price-sales ratios,
market prices of securities and financial and operating information of companies
engaged in activities similar to ours. The estimated initial public offering
range listed on the cover page of this prospectus is subject to change as a
result of market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas. Other legal matters in
connection with this offering will be passed upon for the underwriters by Davis
Polk & Wardwell, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at January 2, 1999 and January 1, 2000, and for each of the
three years in the period ending January 1, 2000, as set forth in their report.
We've included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT SILICON LABORATORIES
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments, under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement. For further information about us and the shares of our
common stock to be sold in this offering, please refer to this registration
statement. Complete exhibits have been filed with our registration statement on
Form S-1.
You may read and copy any contract, agreement or other document that we have
filed as an exhibit to our registration statement or any other portion of our
registration statement or any other information from our filings at the
Securities and Exchange Commission's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information about the public reference room. Our filings with the
Securities and Exchange Commission, including our registration statement, are
also available to you on the Securities and Exchange Commission's Web site,
HTTP://WWW.SEC.GOV.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and will file and
furnish to our stockholders annual reports containing financial statements
audited by our independent auditors, make available to our stockholders
quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year, proxy statements and other information with the
Securities and Exchange Commission.
You may read and copy any reports, statements or other information on file
at the public reference rooms. You can also request copies of these documents,
for a copying fee, by writing to the Commission.
65
<PAGE>
SILICON LABORATORIES INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of January 2, 1999 and
January 1, 2000........................................... F-3
Consolidated Statements of Operations for the three years
ended January 1, 2000..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the three years ended January 1, 2000....... F-5
Consolidated Statements of Cash Flows for the three years
ended January 1, 2000..................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Silicon Laboratories Inc.
We have audited the accompanying consolidated balance sheets of Silicon
Laboratories Inc. as of January 2, 1999 and January 1, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended January 1, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Silicon
Laboratories Inc. at January 2, 1999 and January 1, 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended January 1, 2000, in conformity with accounting principles generally
accepted in the United States.
[/S/ ERNST & YOUNG LLP]
Austin, Texas
January 11, 2000
F-2
<PAGE>
SILICON LABORATORIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK
AND
STOCKHOLDERS'
JANUARY 2, JANUARY 1, EQUITY AT
1999 2000 JANUARY 1, 2000
---------- ---------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,867 $ 8,197
Short-term investments................................... 2,957 6,509
Accounts receivable, net of allowance for doubtful
accounts of $56 and $569 at January 2, 1999 and
January 1, 2000, respectively.......................... 2,875 10,322
Inventories.............................................. 635 2,837
Deferred income taxes.................................... -- 963
Prepaid expenses and other............................... 135 435
------- ------- --------
Total current assets....................................... 9,469 29,263
Property, equipment and software, net...................... 4,418 12,350
Other assets............................................... 127 345
------- ------- --------
Total assets............................................... $14,014 $41,958
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 3,142 $ 7,374
Accrued expenses......................................... 229 1,083
Deferred revenue......................................... -- 1,006
Current portion of long-term obligations................. 889 2,697
Income taxes payable..................................... -- 2,822
------- ------- --------
Total current liabilities.................................. 4,260 14,982
Long-term debt and leases, net of current maturities....... 2,153 6,081
Other long-term obligations................................ -- 142
------- ------- --------
Total liabilities.......................................... 6,413 21,205
Redeemable convertible preferred stock..................... 12,750 12,750 --
Stockholders' equity (deficit):
Common stock--$.0001 par value; 52,000 shares authorized;
28,642 and 30,016 shares issued and outstanding in
fiscal 1998 and 1999 respectively, 43,858 shares on a
pro forma basis........................................ 3 3 4
Additional paid-in capital............................... 721 19,014 31,763
Stockholder notes receivable............................. (215) (1,472) (1,472)
Deferred stock compensation.............................. (406) (15,330) (15,330)
Retained earnings (deficit).............................. (5,252) 5,788 5,788
------- ------- --------
Total stockholders' equity (deficit)....................... (5,149) 8,003 20,753
------- ------- --------
Total liabilities and stockholders' equity (deficit)....... $14,014 $41,958 $ 41,958
======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Sales....................................................... $ -- $ 5,609 $46,911
Cost of goods sold.......................................... -- 2,371 15,770
------- ------- -------
Gross profit................................................ -- 3,238 31,141
Operating expenses:
Research and development.................................. 1,364 4,587 8,297
Selling, general and administrative....................... 627 2,095 7,207
Amortization of deferred stock compensation............... -- 8 976
------- ------- -------
Operating expenses.......................................... 1,991 6,690 16,480
------- ------- -------
Operating income (loss)..................................... (1,991) (3,452) 14,661
Other (income) and expenses:
Interest income........................................... (178) (261) (402)
Interest expense.......................................... 22 206 699
------- ------- -------
Income (loss) before tax expense............................ (1,835) (3,397) 14,364
Income tax expense.......................................... -- -- 3,324
------- ------- -------
Net income (loss)........................................... $(1,835) $(3,397) $11,040
======= ======= =======
Net income (loss) per share:
Basic..................................................... $ (1.04) $ (.37) $ .73
Diluted................................................... $ (1.04) $ (.37) $ .25
Weighted average common shares outstanding:
Basic..................................................... 1,760 9,129 15,152
Diluted................................................... 1,760 9,129 43,657
Pro forma net income per share (unaudited):
Basic $ .30
Diluted $ .25
Pro forma weighted average common shares outstanding
(unaudited):
Basic..................................................... 36,461
Diluted................................................... 43,657
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------- TOTAL
ADDITIONAL STOCKHOLDER DEFERRED RETAINED STOCKHOLDERS'
NUMBER OF PAID-IN NOTES STOCK EARNINGS EQUITY
SHARES PAR VALUE CAPITAL RECEIVABLE COMPENSATION (DEFICIT) (DEFICIT)
--------- --------- ---------- ----------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997...... 22,600 $ 2 $ -- $ -- $ -- $ (20) $ (18)
Exercises of stock options....... 5,511 1 143 (77) -- -- 67
Payments received on stockholder
notes.......................... -- -- -- 10 -- -- 10
Repurchase and cancellation of
common stock................... (407) -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (1,835) (1,835)
------ ---- ------- ------- -------- ------- -------
Balance as of January 3, 1998...... 27,704 3 143 (67) -- (1,855) (1,776)
Exercises of stock options....... 938 -- 164 (148) -- -- 16
Deferred stock compensation...... -- -- 414 -- (414) -- --
Amortization of deferred stock
compensation................... -- -- -- -- 8 -- 8
Net loss......................... -- -- -- -- -- (3,397) (3,397)
------ ---- ------- ------- -------- ------- -------
Balance as of January 2, 1999...... 28,642 3 721 (215) (406) (5,252) (5,149)
Exercises of stock options....... 1,411 -- 2,047 (1,267) -- -- 780
Income tax benefit from exercise
of stock options............... -- -- 91 -- -- -- 91
Repurchase and cancellation of
unvested shares................ (37) -- (10) 10 -- --
Compensation expense related to
stock options and direct stock
issuances to non-employees..... -- -- 266 -- -- -- 266
Deferred stock compensation...... -- -- 15,899 -- (15,899) -- --
Amortization of deferred stock
compensation................... -- -- -- -- 975 -- 975
Net income....................... -- -- -- -- -- 11,040 11,040
------ ---- ------- ------- -------- ------- -------
Balance as of January 1, 2000...... 30,016 $ 3 $19,014 $(1,472) $(15,330) $ 5,788 $ 8,003
====== ==== ======= ======= ======== ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
SILICON LABORATORIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(1,835) $(3,397) $11,040
Adjustment to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization expense..................... 133 816 1,972
Amortization of deferred stock compensation............... -- 8 975
Amortization of note/lease end-of-term interest
payments................................................ -- -- 142
Compensation expense related to stock options and direct
stock issuance to non-employees......................... -- -- 266
Income tax benefit for stock option exercise.............. -- -- 91
Changes in operating assets and liabilities:
Prepaid expenses and other.............................. (64) (65) (300)
Accounts receivable..................................... -- (2,875) (7,447)
Inventories............................................. -- (635) (2,202)
Other assets............................................ (7) (120) (218)
Accounts payable........................................ 1,499 1,643 4,232
Accrued expenses........................................ 55 175 854
Deferred revenue........................................ -- -- 1,006
Deferred income taxes................................... -- -- (963)
Income taxes payable.................................... -- -- 2,822
------- ------- -------
Net cash provided by (used in) operating activities......... (219) (4,450) 12,270
INVESTING ACTIVITIES
Purchases of short-term investments......................... (6,152) (5,616) (9,385)
Maturities of short-term investments........................ 3,083 5,728 5,833
Purchases of property and equipment......................... (2,258) (3,066) (9,904)
------- ------- -------
Net cash used in investing activities....................... (5,327) (2,954) (13,456)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 996 1,499 6,424
Payments on long-term debt.................................. -- (249) (1,274)
Repayment of note........................................... (200) -- --
Proceeds from equipment lease financing..................... -- 825 976
Payments on capital leases.................................. -- (30) (390)
Net proceeds from issuances of convertible preferred
stock..................................................... 5,250 7,500 --
Net proceeds from exercises of stock options................ 77 17 780
------- ------- -------
Net cash provided by financing activities................... 6,123 9,562 6,516
------- ------- -------
Increase in cash and cash equivalents....................... 577 2,158 5,330
Cash and cash equivalents at beginning of year.............. 132 709 2,867
------- ------- -------
Cash and cash equivalents at end of year.................... $ 709 $ 2,867 $ 8,197
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 22 $ 199 $ 593
======= ======= =======
Income taxes paid......................................... -- -- 1,489
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
1. ORGANIZATION
Silicon Laboratories Inc. (the "Company"), a Delaware corporation, develops
and markets mixed-signal analog/intensive integrated circuits or ICs. The
Company's products serve both the wireline and wireless communications markets.
Within the semiconductor industry, the Company is known as a "fabless" company
meaning that the ICs are manufactured by third-party semiconductor companies.
The Company was incorporated in 1996, and emerged from the development stage in
fiscal 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As of January 1, 1997, the Company prepares financial statements on a 52-53
week year that ends on the Saturday closest to December 31. Fiscal year 1997
ended on January 3, 1998, fiscal year 1998 ended on January 2, 1999, and fiscal
year 1999 ended on January 1, 2000.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Silicon Laboratories UK Limited.
All significant intercompany balances and accounts have been eliminated. The
functional currency of the Company's subsidiary is the U.S. dollar, accordingly,
all translation gains and losses resulting from transactions denominated in
currencies other than U.S. dollars are included in net income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash deposits and investments with a
maturity of three months or less when purchased.
SHORT-TERM INVESTMENTS
Cash investments in highly liquid financial instruments with original
maturities greater than three months that mature within one year are classified
as short-term investments. The Company's short-term investments consist of U.S.
Government backed securities, which are classified as held-to-maturity and
reported at amortized cost.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, short-term investments, receivables, accounts payable, and
borrowings. The Company believes all of the financial instruments' recorded
values approximate current market values.
F-7
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Work in progress........................................ $511 $1,902
Finished goods.......................................... 124 935
---- ------
$635 $2,837
==== ======
</TABLE>
PROPERTY, EQUIPMENT, AND SOFTWARE
Property, equipment, and software are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets (generally four to
five years). Amortization of assets recorded under capital leases is computed
using the straight-line method over the shorter of the asset's useful life or
the term of the lease and such amortization is included with depreciation
expense. See also Note 4. Leasehold improvements are depreciated over the
contractual obligation of the lease period or their useful life, whichever is
shorter. Property, equipment and software consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Equipment............................................... $3,221 $10,014
Computers and purchased software........................ 1,854 3,779
Furniture and fixtures.................................. 86 326
Leasehold improvements.................................. 209 1,155
------ -------
5,370 15,274
Accumulated depreciation and amortization............... (952) (2,924)
------ -------
$4,418 $12,350
====== =======
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.
RISKS AND UNCERTAINTIES
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts
and U.S. Treasury bills. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company provides an allowance for doubtful
F-8
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounts receivable based upon the expected collectibility of such receivables.
The following table summarizes the changes in the allowance for doubtful
accounts receivable (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997.................................. $
Additions charged to costs and expenses..................... --
Write-off of uncollectible accounts......................... --
----
Balance at January 3, 1998.................................. $ --
Additions charged to costs and expenses..................... 56
Write-off of uncollectible accounts......................... --
----
Balance at January 2, 1999.................................. $ 56
Additions charged to costs and expenses..................... 513
Write-off of uncollectible accounts......................... --
----
Balance at January 1, 2000.................................. $569
</TABLE>
All of the Company's products are currently manufactured by two companies in
Taiwan. A manufacturing disruption experienced by either of the Company's
manufacturing partners could impact the production of the Company's products for
a substantial period of time, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The following is a detail of customers that accounted for greater than 10%
of gross revenue in the respective fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Customer A.................................... --% 78% 62%
Customer B.................................... -- -- 12
Customer C.................................... -- 20 10
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. This
statement requires the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
REVENUE RECOGNITION
Revenue from product sales direct to customers is recognized upon shipment.
Certain of the Company's sales are made to distributors under agreements
allowing certain rights of return and price protection on products unsold by
distributors. Accordingly, the Company defers revenue and gross profit on such
sales until the product is sold by the distributors.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
$4,269, $66,804 and $296,692 in the fiscal years ended January 3, 1998,
January 2, 1999, and January 1, 2000, respectively.
F-9
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Financial Accounting Standards Board's ("FASB") SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
SFAS No. 123, the Company has elected to continue to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
OTHER COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. There were no differences
between net income (loss) and comprehensive income (loss) during any of the
periods presented.
SEGMENT INFORMATION
Effective April 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The adoption of SFAS No. 131
did not have a significant effect on the disclosure of segment information as
the Company continues to consider its business activities as a single segment.
The Company has one operating segment with two product divisions (the Wireline
and Wireless Divisions). The chief operating decision maker allocates resources
and assesses performance of the business and other activities at the operating
segment level. The Wireline Division accounted for substantially all of the
sales in all periods.
Approximately $0, $3,994, and $3,371,722 of the Company's revenues were from
export sales for the fiscal years ended January 3, 1998, January 2, 1999, and
January 1, 2000, respectively. The operations and assets of Silicon Laboratories
UK Limited were immaterial in all periods presented.
NET INCOME PER SHARE
The Company computes net income (loss) per share in accordance with SFAS
No. 128, EARNINGS PER SHARE. Under SFAS No. 128, basic net income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of shares outstanding. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents outstanding.
F-10
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)........................................... $ (1,835) $ (3,397) $ 11,040
======== ======== ========
Basic:
Weighted-average shares of common stock outstanding....... 25,730 28,245 29,177
Weighted-average shares of common stock subject to
repurchase.............................................. (23,970) (19,116) (14,025)
-------- -------- --------
Shares used in computing basic net income (loss) per
share................................................... 1,760 9,129 15,152
-------- -------- --------
Effect of dilutive securities:
Weighted-average shares of common stock subject to
repurchase.............................................. -- -- 13,370
Convertible preferred stock and warrants.................. -- -- 13,965
Stock options............................................. -- -- 1,170
-------- -------- --------
Shares used in computing diluted net income (loss) per
share................................................... 1,760 9,129 43,657
======== ======== ========
Basic net income (loss) per share........................... $ (1.04) $ (.37) $ .73
Diluted net income (loss) per share......................... $ (1.04) $ (.37) $ .25
Pro forma (unaudited):
Basic:
Shares used above......................................... 15,152
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock............... 13,842
Pro forma adjustment to reflect weighted average effect of
shares subject to repurchase which vest upon an initial
public offering......................................... 7,467
--------
Shares used in computing pro forma basic net income per
share................................................... 36,461
========
Pro forma basic net income per share........................ $ .30
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform with current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income. The Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its financial statements
because the Company does not believe it currently holds any derivative
instruments.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the
F-11
<PAGE>
SILICON LABORATORIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognition, presentation and disclosure of revenue in financial statements. The
application of SAB No. 101 did not have a material impact on the financial
statements of the Company.
On March 31, 1999, the FASB issued an exposure draft entitled "Accounting
for Certain Transactions Involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25. However, the exposure draft has not been
finalized. Once finalized and issued, the current accounting practices for
transactions involving stock compensation may need to change and such changes
could affect the Company's future earnings.
3. SHORT-TERM INVESTMENTS
The Company's short-term investments consist of U.S. Treasury bills with
interest rates ranging from 4.72% to 5.10% which mature at varying dates through
May 25, 2000 and are considered to be held-to-maturity. Securities classified as
held-to-maturity, which consist of securities that management has both the
ability and positive intent to hold to maturity, are carried at amortized cost
which approximates fair value.
4. LONG-TERM OBLIGATIONS
Long-term debt and leases consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Bank term loans due in monthly installments of $27,669 and
$41,645 plus interest at bank prime (8.5% at January 1,
2000) through March 31, 2001 and January 31, 2002,
respectively.............................................. $2,246 $1,456
Note payable, at 9.08%, payable in monthly installments of
$24,810 through March 1, 2003 with a $200,600 interest
payment due at maturity................................... -- 835
Note payable, at 9.77%, payable in monthly installments of
$4,113 through June 1, 2003............................... -- 146
Note payable, at 9.91%, payable in monthly installments of
$14,050 through September 1, 2003......................... -- 526
Note payable, at 10.22%, payable in monthly installments of
$5,829 through December 1, 2003........................... -- 231
Note payable, at 6.71%, payable in monthly installments of
$30,635 through February 28, 2003 with a $243,000 interest
payment due at maturity................................... -- 1,046
Note payable, at 6.92%, payable in monthly installments of
$19,340 through July 31, 2003 with a $152,900 interest
payment due at maturity................................... -- 719
Note payable, at 7.13%, payable in monthly installments of
$40,017 to $46,005 through April 30, 2004 with a $399,200
interest payment due at maturity.......................... -- 1,956
Note payable, at 7.5%, payable in monthly installments of
$9,912 to $11,399 through April 30, 2004 with a $98,116
interest payment due at maturity.......................... -- 481
Capital lease obligations................................... 796 1,382
------ ------
3,042 8,778
Current portion............................................. (889) (2,697)
------ ------
Long-term portion........................................... $2,153 $6,081
====== ======
</TABLE>
F-12
<PAGE>
SILICON LABORATORIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM OBLIGATIONS (CONTINUED)
The amounts outstanding under the above term loans are in connection with a
$2.5 million loan facility (see Note 5 for discussion of warrants issued). In
addition, the Company obtained new loan facilities in December 1999 totaling
$4 million, of which no amounts were outstanding as of January 1, 2000. These
additional facilities also bear interest at bank prime (8.5% as of January 1,
2000). The collateral for these loans includes a blanket lien on all otherwise
unsecured tangible property, inventory, and accounts receivable. These loans and
the letter of credit (See Note 6) are cross-collateralized and cross-defaulted.
There are covenants related to net worth and liquidity associated with these
financing lines, with which the company is in compliance as of January 1, 2000.
The Company has a revolving line of credit agreement (the Agreement) with a
bank that is collateralized by certain assets of the company. Under the
provisions of the Agreement, the line of credit allows for borrowings of up to
$3 million or 80% of eligible accounts receivable at bank prime (8.5% as of
January 1, 2000). There were no amounts outstanding under this facility as of
January 2, 1999 and January 1, 2000.
The notes payable and capital lease obligations are borrowings with three
institutional financing providers for equipment financing. The indebtedness is
secured by a security interest in the underlying equipment.
Periodically, the Company will purchase or make advance deposits toward the
purchase of machinery and equipment; and within one to three months enter into
leasing arrangements to finance these assets. These leasing arrangements result
in the reimbursement of the amounts initially paid by the Company and do not
result in any gains or losses. Such reimbursements have been reflected in the
statement of cash flows as proceeds from equipment lease financings.
The Company has financed the acquisition of certain computers and other
equipment under capital lease transactions which are accounted for as financings
and mature through fiscal year 2003. As of January 2, 1999 and January 1, 2000,
equipment under capital lease included in property, equipment and software was
$796,000 and $1,382,000, respectively.
At January 1, 2000, contractual maturities of debt and future minimum annual
payments due under capital lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL
FISCAL YEAR DEBT LEASES TOTAL
- - ----------- -------- -------- --------
<S> <C> <C> <C>
2000.............................................. $ 2,188 $ 646 $ 2,834
2001.............................................. 2,117 637 2,754
2002.............................................. 1,740 343 2,083
2003.............................................. 1,125 12 1,137
2004.............................................. 226 -- 226
------- ------ -------
7,396 1,638 9,034
Less amount representing interest................. -- (256) (256)
------- ------ -------
7,396 1,382 8,778
Less current portion.............................. (2,188) (509) (2,697)
------- ------ -------
Long-term debt and leases......................... $ 5,208 $ 873 $ 6,081
======= ====== =======
</TABLE>
F-13
<PAGE>
SILICON LABORATORIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable Convertible Preferred Stock is as follows (in thousands except
per share data):
<TABLE>
<CAPTION>
SHARE ISSUED AND OUTSTANDING
------------------------------------
PAR SHARES JANUARY 3, JANUARY 2, JANUARY 1, LIQUIDATION
SERIES VALUE AUTHORIZED 1998 1999 2000 PREFERENCE
- - ------ -------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Undesignated...................... $.0001 998 -- -- -- --
A................................. $.0001 5,391 5,345 5,345 5,345 $ 5,250
B................................. $.0001 1,611 -- 1,576 1,576 7,500
----- ----- ----- ----- -------
8,000 5,345 6,921 6,921 $12,750
===== ===== ===== ===== =======
</TABLE>
Changes in Redeemable Convertible Preferred Stock are as follows (in
thousands):
<TABLE>
<CAPTION>
TOTAL
REDEEMABLE
ADDITIONAL CONVERTIBLE
NUMBER OF PAR PAID-IN PREFERRED
SHARES VALUE CAPITAL STOCK
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance as of January 1, 1997.......... -- $ -- $ -- $ --
Issuance of Series A Redeemable
Convertible Preferred Stock........ 5,345 535 4,715 5,250
----- ---- ------- -------
Balance as of January 3, 1998.......... 5,345 535 4,715 5,250
Issuance of Series B Redeemable
Convertible Preferred Stock........ 1,576 158 7,342 7,500
----- ---- ------- -------
Balance as of January 2, 1999 and
January 1, 2000...................... 6,921 $693 $12,057 $12,750
===== ==== ======= =======
</TABLE>
The Certificate of Incorporation authorizes the issuance of up to 8,000,000
shares of Convertible Preferred Stock with par value of $0.0001 per share. Each
share is convertible at the option of the stockholder into two shares of common
stock, subject to certain anti-dilution adjustments. The Convertible Preferred
Stockholders are entitled to the number of votes equal to the number of shares
of common stock into which each share of Convertible Preferred Stock could be
converted on the record date. Conversion is automatic upon the closing of an
underwritten public offering of the Company's common stock meeting certain
criteria; or if less than one-third of the Convertible Preferred Stock remain
outstanding for that series. Additional contractual obligations by and between
the holders of Convertible Preferred Stockholders and the holders of common
stock exist with regards to registration rights, indemnification, rights of
first offer, rights of first refusal and voting of shares.
The stockholders of Series A and Series B Convertible Preferred Stock are
entitled to cumulative dividends of $0.0589286 and $0.2856 per share,
respectively, beginning January 1, 2002 and continuing thereafter whether or not
earned or declared. In the event of conversion to common stock, the preferred
stockholders shall receive, when applicable after January 1, 2002, consideration
at conversion for all accrued and unpaid dividends. In the event of a
liquidation or winding up of the Company, stockholders of Series A and Series B
Convertible Preferred Stock shall have a liquidation preference of $0.982144225
and $4.76 per share, respectively, plus declared and unpaid dividends, over
holders of common stock. After
F-14
<PAGE>
SILICON LABORATORIES INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
distributions pursuant to the liquidation preference, holders of Series A and
Series B Convertible Preferred Stock shall participate in additional
distributions pro rata with other classes of stock until such holders shall have
received $2.946432675 and $14.28 per share, respectively.
Series A and Series B Convertible Preferred Stock are convertible at the
option of each holder into common stock on a one-for-two basis, subject to
certain anti-dilution adjustments.
A majority of the holders of Series A and Series B Convertible Preferred
Stock, voting as one group, may elect to require the Company, for an amount per
share equal to the liquidation price, to redeem on or after the dates specified
below up to a cumulative total of that percentage of the shares on Series A and
B Convertible Preferred Stock, net of any shares previously redeemed:
<TABLE>
<CAPTION>
CUMULATIVE PERCENTAGE OF SHARES
REDEMPTION DATE WHICH MAY BE REDEEMED
- - --------------- -------------------------------
<S> <C>
March 21, 2005.................................... 33 1/3%
March 21, 2006.................................... 66 2/3%
March 21, 2007.................................... 100 %
</TABLE>
WARRANTS
A warrant to purchase 45,818 shares of Series A Convertible Preferred Stock
at $0.982144225 per share was outstanding at January 1, 2000. The warrant is
exercisable at any time before November 20, 2002. The warrant was issued in 1997
to a commercial bank in connection with the extension of debt financing (see
Note 4).
A warrant to purchase 21,008 shares of Series B Convertible Preferred Stock
at $4.76 per share was outstanding at January 1, 2000. The warrant is
exercisable at any time before September 22, 2008, or the earlier consummation
of an initial public offering. The warrant was issued in 1998 to an equipment
lessor in connection with the extension of lease and debt financing (see Notes 4
and 6).
A warrant to purchase 4,765 shares of Series B Convertible Preferred Stock
at $4.76 per share was outstanding at January 1, 2000. The warrant is
exercisable at any time before September 4, 2003. The warrant was issued in 1998
to a commercial bank in connection with the issuance of a letter of credit
facility for leasehold improvements (see Note 6).
No amount was allocated to the value of the above warrants as such amounts
were not significant.
COMMON STOCK
The Company had 30,015,944 shares of common stock outstanding as of
January 1, 2000. Of these shares, 11,910,298 shares were unvested and are
subject to rights of repurchase that lapse according to a time based vesting
schedule. Of the shares unvested and subject to rights of repurchase, 7,467,000
shares vest upon an initial public offering of common stock that meet certain
criteria.
F-15
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Common stock reserved at January 1, 2000 consists of the following:
<TABLE>
<S> <C>
For exercise of Convertible Preferred Stock................. 13,842,174
For exercise of Convertible Preferred Stock Warrants........ 143,182
For issuance under the Company's 1997 Stock Option/Stock
Issuance Plan............................................. 3,389,498
----------
17,374,854
==========
</TABLE>
STOCK SPLIT
On November 3, 1999, the Company effected a two-for-one stock split through
a stock dividend of common stock. All references to common stock share and per
share amounts including options to purchase common stock have been retroactively
restated to reflect the stock split as if such split had taken place at the
inception of the Company. Also, the conversion ratio of the redeemable
convertible preferred stock has been adjusted from one-for-one to one-for-two.
STOCK OPTION/STOCK ISSUANCE PLAN
The Company has a 1997 Stock Option/Stock Issuance Plan (the "Plan") whereby
employees, members of the Board of Directors and independent advisors may be
granted options to purchase shares of the Company's common stock or may be
issued shares of the Company's common stock ("direct issuance shares") as a
direct purchase or as a bonus for services rendered to the Company. These direct
issuances of common stock are usually subject to rights of repurchase. At
January 1, 2000, 8,561,808 shares were authorized for issuance under the Plan.
The term of each option is no more than ten years from the date of grant. The
options generally vest over a five to eight year period, and are immediately
exercisable subject to a repurchase agreement which generally lapses in
accordance with the vesting schedule. The direct issuance shares are also
subject to repurchase rights which generally lapse over a five to eight year
period. The repurchase rights provide that upon certain defined events, the
Company can repurchase unvested shares at the price paid per share and gives the
Company the right of first refusal for any proposed disposition of shares issued
under the Plan.
The Company recorded deferred stock compensation expense of $414,000 and
$15,899,000 in connection with stock options granted for 355,500 shares and
2,464,200 shares of common stock during fiscal 1998 and 1999, respectively.
These amounts represent the difference between the exercise price of the stock
option and the subsequently deemed fair value of the Company's common stock. The
deferred stock compensation is amortized over the vesting periods of the
applicable options, resulting in amortization of $8,000 and $975,000 for the
year ended January 2, 1999 and the year ended January 1, 2000, respectively.
During fiscal 1997, 1998 and 1999, the Company made full recourse loans to
employees of $77,000, $147,500 and $1,267,500, respectively, in connection with
the employees' purchase of shares through exercises of options. These full
recourse notes are secured by the shares of stock, are interest bearing at rates
ranging from 4.8% to 6.7%, have terms of five years, and must be repaid upon the
sale of the underlying shares of stock.
F-16
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option and direct issuance activity and
related information follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES OPTIONS AVERAGE
AVAILABLE AND DIRECT EXERCISE EXERCISE
FOR GRANT ISSUANCES PRICES PRICE
---------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
Plan adopted, March 1997...................... 5,294,536
Granted....................................... (3,630,000) 3,630,000 $0.05 $0.05
Exercised..................................... -- (2,860,000) .05 .05
---------- ---------- -------------- -----
Balance at January 3, 1998.................... 1,664,536 770,000 0.05 0.05
Additional shares reserved.................... 1,067,272
Granted....................................... (1,542,500) 1,542,500 0.05 - 1.25 0.35
Exercised..................................... -- (938,168) 0.05 - .25 0.18
Cancelled..................................... 61,832 (61,832) 0.05 0.05
---------- ---------- -------------- -----
Balance at January 2, 1999.................... 1,251,140 1,312,500 0.05 - 1.25 0.31
Additional shares reserved.................... 2,200,000
Granted....................................... (2,484,200) 2,484,200 1.25 - 16.00 3.08
Exercised..................................... -- (1,411,474) 0.05 - 5.00 1.45
Cancelled..................................... 5,000 (5,000) 0.25 - 1.75 .77
Repurchase and cancellation of unvested
shares...................................... 37,332 -- .25 .25
---------- ---------- -------------- -----
Outstanding at January 1, 2000................ 1,009,272 2,380,226 $0.05 - $16.00 $2.52
========== ========== ============== =====
</TABLE>
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at January 1, 2000.
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING AVERAGE
AND REMAINING WEIGHTED
RANGE OF EXERCISABLE AT CONTRACTUAL AVERAGE
EXERCISE PRICES JANUARY 1, 2000 LIFE IN YEARS EXERCISE PRICE
- - ----------------- --------------- ------------- --------------
<S> <C> <C> <C>
$.050 to $.050 457,000 4.85 $ 0.050
.250 to .375 301,626 8.50 0.253
1.250 to 1.250 422,200 9.12 1.250
1.750 to 1.750 401,100 9.53 1.750
2.000 to 2.500 284,800 9.74 2.207
5.000 to 5.000 243,000 9.89 5.000
10.000 to 10.000 250,500 9.95 10.000
16.000 to 16.000 20,000 9.89 16.000
---------
$0.050 to $16.000 2,380,226 8.54 $ 2.520
</TABLE>
Pro forma information regarding net income (loss) is required by Statement
No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
6%; no expected dividends; an expected life of one year; and no volatility.
F-17
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value of options granted during fiscal 1998 and
1999 was $.61 and $9.55, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)................... $(1,835) $(3,400) $11,014
Pro forma basic net income (loss) per share... (1.04) (.37) .73
Pro forma diluted net income (loss) per
share....................................... (1.04) (.37) .25
</TABLE>
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options. Because the
determination of fair value of all employee stock options granted after such
time as the Company becomes a public entity will include an expected volatility
factor and because, for pro forma disclosure purposes, the estimated fair value
of the Company's employee stock options is treated as if amortized to expense
over the options' vesting period, the effects of applying SFAS No 123 for pro
forma disclosures are not necessarily indicative of future amounts.
6. COMMITMENTS AND CONTINGENCIES
The Company's main executive, administrative and technical offices occupy
approximately 37,800 square feet in Austin, Texas under a lease that expires in
April 2006, with one five year renewal option. Monthly rental payments increase
by $1,575 per month in April 2002 and again in April 2004.
The Company has an additional lease commitment for approximately 34,000
square feet in Austin, Texas for supplemental office space under a 76 month
lease with one five year renewal option. The Company expects occupancy to
commence in February 2000. Monthly rental payment increase from $22,301 to
$48,919 per month at various intervals throughout the term of the lease.
To provide security for the landlord on the main offices, the Company
provided a long-term cash deposit of $113,400 and a letter of credit for
$453,600. At January 1, 2000, there were no outstanding amounts under the letter
of credit. Based on certain financial performance criteria, the letter of credit
requirements could be reduced to $255,600. (see also Note 4).
To provide security to the landlord on the additional lease commitment for
February 2000 occupancy, the Company provided a long-term cash deposit of
$64,800 and a letter of credit for $500,000. At January 1, 2000, no amounts were
outstanding under the letter of credit. The letter of credit requirements could
be reduced in even annual installments based upon satisfactory performance under
the lease or eliminated entirely based on certain financial performance
criteria. This letter of credit is provided under the revolving line of credit
from a commercial bank (see Note 4).
F-18
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The minimum annual future rentals under the terms of these leases at
January 1, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- - -----------
<S> <C>
2000........................................................ $ 832
2001........................................................ 988
2002........................................................ 1,033
2003........................................................ 1,042
2004........................................................ 1,071
Thereafter.................................................. 1,487
------
Total minimum lease payments................................ $6,453
======
</TABLE>
Rent expense for operating leases was approximately $45,740, $144,784 and
$373,983 for the years ended January 3, 1998, January 2, 1999, and January 1,
2000, respectively.
The Company is involved in various legal proceedings that have arisen in the
normal course of business. While the ultimate results of these matters cannot be
predicted with certainty, management does not expect them to have a material
adverse effect on the consolidated financial position and results of operations.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components of
the Company's deferred taxes as of January 2, 1999 and January 1, 2000 are as
follows:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciable assets.................................... $ (209) $ --
Deferred tax assets:
Depreciable assets.................................... -- $ 28
Reserves and allowances............................... 113 568
Net operating loss and tax credit carryforwards....... 2,231 --
Deferred revenue...................................... -- 381
Deferred compensation................................. -- 46
Accrued liabilities & other........................... 29 55
------- ------
2,164 1,078
------- ------
Net deferred tax assets before valuation allowance.... 2,164 1,078
------- ------
Valuation allowance for net deferred tax asset........ (2,164) --
------- ------
Net deferred taxes.................................... $ -- $1,078
======= ======
</TABLE>
F-19
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company established a valuation allowance of $2,164,000 for the year
ended January 2, 1999, due to uncertainties regarding the realization of net
deferred tax assets because of the Company's lack of earnings history. The
valuation allowance decreased by $2,164,000 for the year ended January 1, 2000,
as a result of the increased earnings of the Company during the current year.
Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2, JANUARY 1,
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal..................................... $-- $-- $ 4,009
State....................................... -- -- 393
--- --- -------
Total Current............................... -- -- 4,402
Deferred:
Federal..................................... -- -- (993)
State....................................... -- -- (85)
--- --- -------
Total Deferred.............................. -- -- (1,078)
--- --- -------
$ 0 $ 0 $ 3,324
=== === =======
</TABLE>
The Company's provision (benefit) for income taxes differs from the expected
tax expense (benefit) amount computed by applying the statutory federal income
tax rate to income (loss) before income taxes as a result of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 JANUARY 2, 1999 JANUARY 1, 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Pre-tax book income (loss) at statutory rate....... (34.0)% (34.0)% 35.0%
State taxes, net of federal benefit................ (2.9) (3.0) 3.0
Permanent items.................................... 1.0 0.3 .1
Deferred compensation expense...................... -- -- 2.6
Tax credits........................................ -- -- (2.4)
Change in valuation allowance...................... 35.9 36.7 (15.2)
----- ----- -----
0.0% 0.0% 23.1%
===== ===== =====
</TABLE>
The exercise of certain stock options which have been granted under the
Company's stock option plan result in compensation which is includable in the
taxable income of the exercising option holder and deductible by the Company for
federal and state income tax purposes. Such compensation results from increases
in the fair market value of the Company's common stock subsequent to the date of
grant of the exercised stock options and, in accordance with APB 25, such
compensation is not recognized as an expense for financial accounting purposes;
however, the related tax benefits are recorded as an addition to Additional
Paid-in-Capital.
8. EMPLOYEE BENEFIT PLAN
During fiscal 1997, the Company established the Silicon Laboratories Inc.
401(k) Plan ("the 401(k) Plan") for the benefit of substantially all employees.
The Company is the administrator of the 401(k) Plan.
F-20
<PAGE>
SILICON LABORATORIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN (CONTINUED)
To be eligible for the 401(k) Plan, employees must have reached the age of 21.
Participants may elect to contribute up to 15% of their compensation to the
401(k) Plan. The Company may make discretionary matching contributions of up to
10% of a participant's compensation as well as discretionary profit-sharing
contributions to the 401(k) Plan. The Company's contributions to the 401(k) Plan
vest over four years at a rate of 25% per year. The Company has not contributed
to the Plan to date.
9. SUBSEQUENT EVENTS
On January 5, 2000 the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public. In
connection with this authorization, the Board approved increasing the authorized
shares of common stock to 250,000,000.
On January 5, 2000 the Company's Board of Directors approved The 2000 Stock
Incentive Plan ("Plan"). The Plan has been approved by the Company's
stockholders. The Company has reserved 5,389,498 shares of common stock for
issuance under this plan (consisting of the shares available under the
predecessor plan on the effective date plus an additional 2,000,000 shares).
Also on January 5, 2000 the Board adopted the Employee Stock Purchase Plan.
The plan has been approved by the Company's stockholders and will become
effective upon the execution of the underwriting agreement for the Company's
currently proposed initial public offering.
F-21
<PAGE>
[INSIDE BACK COVER GRAPHIC]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $22,345
-------
NASD filing fee............................................. 8,964
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total..................................................... $
=======
</TABLE>
- - ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of Silicon Laboratories may
and, in some cases, must be indemnified by Silicon Laboratories against, in the
case of a non-derivative action, judgments, fines, amounts paid in settlement
and reasonable expenses (including attorneys' fees) incurred by him as a result
of such action, and in the case of a derivative action, against expenses
(including attorneys' fees), if in either type of action he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of Silicon Laboratories. This indemnification does not apply, in a
derivative action, to matters as to which it is adjudged that the director,
officer, employee or agent is liable to Silicon Laboratories, unless upon court
order it is determined that, despite such adjudication of liability, but in view
of all the circumstances of the case, he is fairly and reasonably entitled to
indemnity for expenses, and, in a non-derivative action, to any criminal
proceeding in which such person had no reasonable cause to believe his conduct
was unlawful.
Our certificate of incorporation, provides that no director shall be liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director to the fullest extent permitted by the DGCL.
Our bylaws require us to indemnify our directors and executive officers to
the fullest extent permitted by Delaware law. We have entered into
indemnification agreements with all of our directors and executive officers and
have purchased directors' and officers' liability insurance.
Reference is made to the underwriting agreement to be filed as Exhibit 1.1
hereto, pursuant to which the underwriters have agreed to indemnify our officers
and directors against certain liabilities under the Securities Act.
Silicon Laboratories has entered into Indemnification Agreements with each
director and executive officer, a form of which is filed as Exhibit 10.1 to this
Registration Statement. Pursuant to such agreements, we will be obligated, to
the extent permitted by applicable law, to indemnify such directors and
executive officers against all expenses, judgments, fines and penalties incurred
in connection with the defense or settlement of any actions brought against them
by reason of the fact that they were directors or executive
II-1
<PAGE>
officers of Silicon Laboratories or assumed responsibilities at the direction of
Silicon Laboratories. Silicon Laboratories also intends to purchase directors
and officers liability insurance in order to limit its exposure to liability for
indemnification of directors and executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Between August 1996 and January 1, 2000, we issued unregistered securities
to a limited number of people as described below.
1. In August and December 1996 and May 1997, we issued an aggregate of
24,843,634 shares to Navdeep S. Sooch, David R. Welland, Jeffrey W. Scott and
John W. McGovern at purchase prices ranging from $0.00005 to $0.0005 per share
in compliance with Rule 506.
2. In March, April and June 1997, Silicon Laboratories issued shares of
Series A Preferred Stock for $0.98214425 per share, for an aggregate purchase
price of $5,250,002. The following stockholders purchased our Series A Preferred
Stock: Austin Ventures IV-A, L.P.; Austin Ventures IV-B, L.P.; Austin Ventures
V, L.P.; Silverton Partners; Donald Brooks; Dietrich R. Erdmann; and H. Berry
Cash. Although the number of shares of Series A preferred stock outstanding was
not affected by the 2-for-1 split of our common stock, as a result of this stock
split, each share of Series A preferred stock automatically adjusted and became
convertible into two shares of our common stock. These shares were issued to
accredited investors in compliance with Rule 506.
3. In June 1998, Silicon Laboratories issued shares of Series B Preferred
Stock for $4.76 per share, for an aggregate purchase price of $7,500,037. The
following stockholders purchased our Series B Preferred Stock: Austin Ventures
IV-A, L.P.; Austin Ventures IV-B, L.P.; Austin Ventures V, L.P.; Austin Ventures
V Affiliates Fund, L.P.; Silverton Partners; Donald W. and Theresa Brooks;
Drutan Investments, Ltd.; Brooks + Brooks Investments, Ltd.; Current Ventures
Group, Ltd.; CenterPoint Venture Partners, L.P.; Thomas M. Brooks; Dietrich R.
Erdmann; Berry and Dianne Cash Grandchildren's Trust; Charles H. Cash; H. Berry
Cash; KLM Capital Partners Fund; L.J. Sevin; and Jonathan D. Ivester. Although
the number of shares of Series B preferred stock outstanding was not affected by
the 2-for-1 split of our common stock, as a result of this stock split, each
share of Series B preferred stock automatically adjusted and became convertible
into two shares of our common stock. These shares were issued to accredited
investors in compliance with Rule 506.
4. Through January 1, 2000, Silicon Laboratories has issued
5,172,310 shares of its common stock to directors, employees and consultants
upon the exercise of options granted or directly issued under its 1997 Stock
Option/Stock Issuance Plan at a weighted average purchase price of $.45 per
share. These shares were issued to employees and consultants in compliance with
Rule 701.
II-2
<PAGE>
5. From time to time Silicon Laboratories has granted stock options to
employees, directors and consultants in compliance with Rule 701. The following
table sets forth information regarding these grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
DATE OF GRANT OR ISSUANCE SHARES PER SHARE
- - ------------------------- --------- --------------
<S> <C> <C>
May 1997--April 1998................................. 3,946,000 $0.05
June 1998--July 1998................................. 933,000 $0.25
September 1998....................................... 27,500 $0.275
October 1998......................................... 32,000 $0.325
November 1998........................................ 31,000 $0.375
December 1998--April 1999............................ 968,000 $1.25
June 1999--July 1999................................. 526,700 $1.75
September 1999....................................... 348,000 $2.00
October 1999......................................... 274,000 $2.50
November 1999........................................ 288,000 $5.00
November 1999........................................ 20,000 $16.00
December 1999........................................ 262,500 $10.00
</TABLE>
6. In connection with bank financings and equipment leasing arrangements,
we issued warrants exercisable for an aggregate of 143,182 shares of common
stock to Imperial Bank and Comdisco in compliance with Rule 506.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement by and among Silicon
Laboratories Inc. and the Underwriters
3.1 Form of Fourth Amended and Restated Certificate of
Incorporation of Silicon Laboratories Inc.
3.2+ Form of Amended and Restated Bylaws of Silicon Laboratories
Inc.
4.1* Specimen certificate for shares of common stock
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1+ Form of Indemnification Agreement between Silicon
Laboratories Inc. and each of its directors and executive
officers
10.2+ Silicon Laboratories Inc. 2000 Stock Incentive Plan
10.3+ Silicon Laboratories Inc. Employee Stock Purchase Plan
10.4+ Amended and Restated Investors' Rights Agreement dated June
2, 1998 by and among the Silicon Laboratories Inc. and
certain holders of preferred stock or common stock
10.5+ Lease Agreement dated June 26, 1998 by and between Silicon
Laboratories Inc. and S.W. Austin Office Building Ltd.
10.6+ Lease Agreement dated October 27, 1999 by and between
Silicon Laboratories Inc. and Stratus 7000 West Joint
Venture
10.7+ Master Loan and Security Agreement dated April 22, 1999 by
and between Silicon Laboratories Inc. and FINOVA Capital
Corporation
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.8+ Commitment Letter dated April 19, 1999 by and between
Silicon Laboratories and Imperial Bank
10.9+ Security and Loan Agreement dated June 25, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.10+ Letter of Credit Agreement dated July 30, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.11+ Letter of Credit Agreement dated November 19, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.12+ Commitment Letter dated December 9, 1999 by and between
Silicon Laboratories and Imperial Bank
10.13+ First Amendment to Credit Terms and Conditions and
Attachment Thereto dated December 16, 1999 by and between
Silicon Laboratories Inc. and Imperial Bank
10.14+ Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank
10.15+ Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank
10.16+ Preferred Stock Purchase Warrant dated November 20, 1997 by
and between Silicon Laboratories and Imperial Bank
10.17 Preferred Stock Purchase Warrant dated September 4, 1998 by
and between Silicon Laboratories and Imperial Bank
10.18+ Volume Purchase Agreement dated June 1, 1998 by and between
Silicon Laboratories Inc. and PC-Tel, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- - ------------------------
* To be included by amendment.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated Financial
Statements or the related Notes.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the DGCL, our Certificate of Incorporation or our Bylaws, the underwriting
agreement or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers, or
II-4
<PAGE>
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in Austin, Texas, on February 24, 2000.
<TABLE>
<S> <C> <C>
SILICON LABORATORIES INC.
By: /s/ NAVDEEP S. SOOCH
-----------------------------------------
Navdeep S. Sooch
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chief Executive Officer and
/s/ NAVDEEP S. SOOCH Chairman of the Board
------------------------------------------- (principal executive February 24, 2000
Navdeep S. Sooch officer)
Vice President and Chief
/s/ JOHN W. MCGOVERN* Financial Officer
------------------------------------------- (principal financial and February 24, 2000
John W. McGovern accounting officer)
/s/ JEFFREY W. SCOTT*
------------------------------------------- Vice President of February 24, 2000
Jeffrey W. Scott Engineering and Director
/s/ DAVID R. WELLAND*
------------------------------------------- Vice President of February 24, 2000
David R. Welland Technology and Director
/s/ WILLIAM P. WOOD*
------------------------------------------- Director February 24, 2000
William P. Wood
/s/ H. BERRY CASH*
------------------------------------------- Director February 24, 2000
H. Berry Cash
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ NAVDEEP S. SOOCH
--------------------------------------
Navdeep S. Sooch
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement by and among Silicon
Laboratories Inc. and the Underwriters
3.1 Form of Fourth Amended and Restated Certificate of
Incorporation of Silicon Laboratories Inc.
3.2+ Form of Amended and Restated Bylaws of Silicon Laboratories
Inc.
4.1* Specimen certificate for shares of common stock
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1+ Form of Indemnification Agreement between Silicon
Laboratories Inc. and each of its directors and executive
officers
10.2+ Silicon Laboratories Inc. 2000 Stock Incentive Plan
10.3+ Silicon Laboratories Inc. Employee Stock Purchase Plan
10.4+ Amended and Restated Investors' Rights Agreement dated June
2, 1998 by and among Silicon Laboratories Inc. and certain
holders of preferred stock or common stock
10.5+ Lease Agreement dated June 26, 1998 by and between Silicon
Laboratories Inc. and S.W. Austin Office Building Ltd.
10.6+ Lease Agreement dated October 27, 1999 by and between
Silicon Laboratories Inc. and Stratus 7000 West Joint
Venture
10.7+ Master Loan and Security Agreement dated April 22, 1999 by
and between Silicon Laboratories Inc. and FINOVA Capital
Corporation
10.8+ Commitment Letter dated April 19, 1999 by and between
Silicon Laboratories and Imperial Bank
10.9+ Security and Loan Agreement dated June 25, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.10+ Letter of Credit Agreement dated July 30, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.11+ Letter of Credit Agreement dated November 19, 1999 by and
between Silicon Laboratories Inc. and Imperial Bank
10.12+ Commitment Letter dated December 9, 1999 by and between
Silicon Laboratories and Imperial Bank
10.13+ First Amendment to Credit Terms and Conditions and
Attachment Thereto dated December 16, 1999 by and between
Silicon Laboratories Inc. and Imperial Bank
10.14+ Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank
10.15+ Promissory Note dated December 16, 1999 by and between
Silicon Laboratories and Imperial Bank
10.16+ Preferred Stock Purchase Warrant dated November 20, 1997 by
and between Silicon Laboratories and Imperial Bank
10.17 Preferred Stock Purchase Warrant dated September 4, 1998 by
and between Silicon Laboratories and Imperial Bank
10.18+ Volume Purchase Agreement dated June 1, 1998 by and between
Silicon Laboratories Inc. and PC-Tel, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1+ Power of Attorney
27.1+ Financial Data Schedule
</TABLE>
- - ------------------------
* To be included by amendment.
+ Previously filed.
<PAGE>
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SILICON LABORATORIES INC.
Silicon Laboratories Inc., a corporation organized and existing under
the Delaware General Corporation Law (the "DGCL") DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of this corporation
was filed with the Secretary of State of Delaware on August 19, 1996 under the
name "Silicon Laboratories Inc."
SECOND: The Fourth Amended and Restated Certificate of Incorporation
of Silicon Laboratories Inc. in the form attached hereto as ANNEX A has been
duly adopted in accordance with the provisions of Sections 245 and 242 of the
DGCL by the directors and stockholders of the Corporation.
THIRD: The Fourth Amended and Restated Certificate of Incorporation so
adopted reads in full as set forth in ANNEX A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, Silicon Laboratories Inc. has caused this Fourth
Amended and Restated Certificate to be signed by its duly authorized and elected
Chairman and Chief Executive Officer this ___ day of January, 2000.
SILICON LABORATORIES INC.
By:
-------------------------------------
Navdeep S. Sooch
Chairman and Chief Executive Officer
<PAGE>
ANNEX A
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SILICON LABORATORIES INC.
ARTICLE I
The name of this Corporation shall be Silicon Laboratories Inc. (the
"CORPORATION").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent at that address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
4.1 Prior to a Qualified Public Offering (as defined in Section B.4(b)
of this Section 4.1 of this Article IV hereof), the Corporation's capital
stock shall be comprised as follows:
A. CLASSES OF STOCK. The Corporation is authorized to issue two
classes of capital stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of capital stock authorized to
be issued is 60,000,000 shares. 52,000,000 shares shall be Common Stock, par
value $0.0001 per share. 8,000,000 shares shall be Preferred Stock, par
value $0.0001 per share, of which 5,391,267 shares shall be designated as
"Series A Convertible Preferred Stock" (the "Series A Preferred Stock") and
1,610,638 shares shall be designated as "Series B Convertible Preferred
Stock" (the "Series B Preferred Stock").
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK.
Undesignated Preferred Stock may be issued from time to time in one or more
series. The Corporation's Board of Directors (the "Board of Directors") is
hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights which may be granted to the Preferred Stock or series thereof
in Certificates of Designation or the Corporation's Certificate of
Incorporation, as amended and as hereafter may be amended ("Protective
Provisions"), but notwithstanding any other rights of the Preferred Stock or
any series thereof, the rights, privileges, preferences and restrictions of
any such additional series may be subordinated to, pari passu with
(including, without limitation, inclusion in provisions with respect to
liquidation and
1
<PAGE>
acquisition preferences, redemption and/or approval of matters by vote or
written consent), or senior to any of those of any present or future class or
series of Preferred Stock or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized
to increase or decrease the number of shares of any series, prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series. The rights, preferences,
privileges and restrictions granted to and imposed on the Series A Preferred
Stock and the Series B Preferred Stock are as set forth below in this Article
IV(B).
1. DIVIDEND PROVISIONS.
(a) Subject to the rights of Preferred Stock which may
hereafter come into existence, prior to January 1, 2002, the holders of shares
of Series A Preferred Stock and Series B Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, when, as and if
declared by the Board of Directors.
(b) Subject to the rights of Preferred Stock which may
hereafter come into existence, beginning January 1, 2002 and continuing
thereafter, the holders of shares of Series A Preferred Stock shall be entitled
to receive dividends, out of any assets legally available therefor, at the rate
of $0.0589286 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like with respect to such series after
March 21, 1997 (the "Initial Series A Issue Date")) per share of Series A
Preferred Stock per annum, payable when, as and if declared by the Board of
Directors, and such dividends shall be cumulative and shall accrue on each share
from January 1, 2002, from day to day thereafter, whether or not earned or
declared. Subject to the rights of Preferred Stock which may hereafter come
into existence, beginning January 1, 2002 and continuing thereafter, the holders
of shares of Series B Preferred Stock shall be entitled to receive dividends,
out of any assets legally available therefor, at the rate of $0.2856 (as
adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like with respect to such series after the date upon
which shares of Series B Preferred Stock were first issued (the "Initial Series
B Issue Date")) per share of Series B Preferred Stock per annum, payable when,
as and if declared by the Board of Directors, and such dividends shall be
cumulative and shall accrue on each share from January 1, 2002, from day to day
thereafter, whether or not earned or declared. Any accumulation of dividends on
the Series A Preferred Stock or Series B Preferred Stock shall not bear
interest. Cumulative dividends with respect to shares of Series A Preferred
Stock or Series B Preferred Stock which are accrued, payable and/or in arrears
shall, upon conversion of such shares to Common Stock, at the option of the
Corporation either: (i) subject to the rights of series of Preferred Stock which
may from time to time come into existence, be paid in cash to the extent assets
are legally available therefor or (ii) be convertible into such additional
shares of Common Stock determined by dividing the amount of such dividends by
the fair market value of the Common Stock (as determined by the Corporation's
Board of Directors) on the date of such conversion (with any fractional share
rounded to the nearest whole share, with 0.5 being rounded upward).
(c) Each share of Series A Preferred Stock and Series B
Preferred Stock shall rank equally in all respects with respect to dividends;
provided, however, that the
2
<PAGE>
Corporation shall not declare or pay dividends which are insufficient to pay
all accrued dividends on each series of Preferred Stock outstanding unless
such dividends are declared and paid to each series of Preferred Stock pro
rata based on the accrued dividends with respect to such series as a
percentage of accrued dividends for all series of Preferred Stock.
(d) Until such time as neither shares of Series A Preferred
Stock nor Series B Preferred Stock are outstanding, no dividend whatsoever shall
be paid or declared, and no distribution shall be made, on Common Stock (other
than a dividend payable solely in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock).
(e) Any dividend or distribution which is declared by the
Corporation and payable with assets of the Corporation, other than cash, shall
be deemed to have such value as determined by the Board of Directors.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, (A)
each holder of Series A Preferred Stock shall be entitled to receive, prior and
in preference to any distribution of any of the assets of the Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share (the "Series A Liquidation Amount") equal to the sum of: (i) $0.982144225
(the "Original Series A Issue Price") (as adjusted to reflect stock dividends,
stock splits, combinations, recapitalizations or the like with respect to such
series after the Initial Series A Issue Date) for each outstanding share of
Series A Preferred Stock held by such holder and (ii) an amount equal to all
accrued but unpaid dividends on the shares of Series A Preferred Stock held by
such holder and (B) each holder of Series B Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Common Stock by reason of their ownership thereof,
an amount per share (the "Series B Liquidation Amount") equal to the sum of: (i)
$4.76 (the "Original Series B Issue Price") (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like with
respect to such series after the Initial Series B Issue Date) for each
outstanding share of Series B Preferred Stock held by such holder and (ii) an
amount equal to all accrued but unpaid dividends on the shares of Series B
Preferred Stock held by such holder. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock and Series B Preferred Stock shall be insufficient to permit the payment
to such holders of the full aforesaid preferential amounts, then, subject to the
rights of series of Preferred Stock that may from time to time come into
existence, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Series A
Preferred Stock and Series B Preferred Stock in proportion to the relative
liquidation preference of the shares of Series A Preferred Stock and Series B
Preferred Stock then held by them.
(b) After the distribution described in Subsection 2(a)
above and any other distribution that may be required with respect to series of
Preferred Stock that may from time to time come into existence, the remaining
assets of the Corporation available for distribution to stockholders shall be
distributed among the holders of the Series A Preferred
3
<PAGE>
Stock, Series B Preferred Stock and Common Stock pro rata based on the number
of shares of Common Stock held by each (determined on an as-converted basis
with respect to outstanding shares of Series A Preferred Stock and Series B
Preferred Stock); provided that the amount which the holders of Series A
Preferred Stock and Series B Preferred Stock shall be entitled to receive
pursuant to Subsection 2(a) and this Subsection 2(b), if any, in the
aggregate shall not exceed (i) $2.946432675 (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like with
respect to such series after the Initial Series A Issue Date) for each
outstanding share of Series A Preferred Stock held by such holder and (ii)
$14.28 (as adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like with respect to such series after the Initial
Series B Issue Date) for each outstanding share of Series B Preferred Stock
held by such holder.
(c) After the distributions described in Subsections (a)
and (b) above have been paid, subject to the rights of series of Preferred Stock
that may from time to time come into existence, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each.
(d) (i) For purposes of this Section 2, upon the
affirmative vote of the holders of at least sixty-seven percent (67%) of the
shares of Series A Preferred Stock and Series B Preferred Stock then
outstanding, voting together as a single class, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to
include: (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) or (B) a sale of all or
substantially all of the assets of the Corporation; unless the Corporation's
stockholders of record as constituted immediately prior to such acquisition or
sale will, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the Corporation's acquisition or sale or otherwise)
hold at least fifty percent (50%) of the voting power of the surviving or
acquiring entity; provided, however, that shares of the surviving entity held by
holders of the capital stock of the Corporation acquired by means other than the
exchange or conversion of the capital stock of the Corporation for shares of the
surviving entity shall not be used in determining if the stockholders of the
Corporation own more than fifty percent (50%) of the voting power of the
surviving or acquiring entity, but shall be used for determining the total
outstanding voting power of such entity.
(ii) In any of such events, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. Any securities to be delivered to the holders of the Series
A Preferred Stock, Series B Preferred Stock or Common Stock, as the case may be,
shall be valued as follows:
(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
4
<PAGE>
(C) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock and Series B Preferred Stock, voting together
as a single class.
(iii) In the event the requirements of this Subsection
2(d) are not complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
respective rights, preferences and privileges of the holders of the Series A
Preferred Stock and Series B Preferred Stock shall revert to and be the same as
such rights, preferences and privileges existing immediately prior to the date
of the first notice referred to in Subsection 2(d)(iv) below.
(iv) The Corporation shall give each holder of record
of Series A Preferred Stock and Series B Preferred Stock written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than ten
(10) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the Corporation's receipt of written consent of the holders of at least a
majority of the Series A Preferred Stock and Series B Preferred Stock (voting
together as a single class) entitled to such notice rights or similar notice
rights.
3. REDEMPTION.
(a) Subject to the rights of series of Preferred Stock that
may from time to time come into existence, the holders of not less than a
majority of the then outstanding Series A Preferred Stock and Series B Preferred
Stock, voting together as a single class, may elect to require the Corporation
to redeem (a "Redemption Request") on or after the dates specified below up to a
cumulative total of that percentage of the shares of Series A Preferred Stock
and Series B Preferred Stock held by each such requesting holder as set forth
below opposite such Redemption Date, less the number of shares of Series A
Preferred Stock and Series B Preferred Stock redeemed by the Company pursuant to
this Subsection 3(a) from such holder (or its predecessors) prior to the date of
such election:
5
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Percentage of
Shares
Redemption Which May be
Date Redeemed
--------------- -------------
<S> <C>
March 21, 2005 33 1/3%
March 21, 2006 66 2/3%
March 21, 2007 100%.
</TABLE>
In each such event, the Corporation shall, to the extent it may
lawfully do so, redeem the shares specified in such Redemption Request within
thirty (30) days following the later of the date of receipt of such Redemption
Notice or the applicable Redemption Date, upon surrender by the requesting
holders of the certificates representing such shares by paying a sum per share
of Series A Preferred Stock equal to the Series A Liquidation Amount and a sum
per share of Series B Preferred Stock equal to the Series B Liquidation Amount
(such sums being the respective "Redemption Price" for the Series A Preferred
Stock and Series B Preferred Stock). Any redemption effected pursuant to this
Subsection (3)(a) shall be made on a pro rata basis among the requesting holders
of the Series A Preferred Stock and Series B Preferred Stock in proportion to
the number of shares of Series A Preferred Stock and Series B Preferred Stock
then held by such holders. If any date fixed for redemption of shares pursuant
to this Subsection 3(a) is a Saturday, Sunday or legal holiday, then such
redemption shall occur on the first business day thereafter.
(b) As used herein and in Subsections (3)(a) above and
(3)(c) and (3)(d) below, the term "Redemption Date" shall refer to each date on
which shares of Series A Preferred Stock or Series B Preferred Stock are
requested to be redeemed as provided in Subsection 3(a). Subject to the rights
of series of Preferred Stock that may from time to time come into existence, at
least fifteen (15) but no more than thirty (30) days prior to each Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next preceding
the day on which notice is given) of the Series A Preferred Stock and Series B
Preferred Stock requested to be redeemed, at the address last shown on the
records of the Corporation for such holder, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the applicable Redemption Price, the place at
which payment may be obtained and calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares of Series A Preferred Stock
and Series B Preferred Stock to be redeemed (the "Redemption Notice"). Except
as provided in Subsection (3)(c), on or after the Redemption Date, each holder
of Series A Preferred Stock and Series B Preferred Stock to be redeemed shall
surrender to the Corporation the certificate or certificates representing such
shares, in the manner and at the place designated in the Redemption Notice, and
thereupon the applicable Redemption Price of such shares shall be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof and each surrendered certificate shall be canceled. In the
event
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<PAGE>
less than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
(c) From and after each Redemption Date, unless there shall
have been a default in payment of the applicable Redemption Price, all rights of
the holders of shares of Series A Preferred Stock and Series B Preferred Stock
designated for redemption in the Redemption Notice as holders of such shares of
Series A Preferred Stock and Series B Preferred Stock (except the right to
receive the applicable Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. Subject to the rights of
Preferred Stock that may from time to time come into existence, if the funds of
the Corporation legally available for redemption of shares of Series A Preferred
Stock and Series B Preferred Stock on any Redemption Date are insufficient to
redeem the total number of shares of Series A Preferred Stock and Series B
Preferred Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed on the basis of the
relative Redemption Prices of the shares of Series A Preferred Stock and Series
B Preferred Stock to be redeemed. The shares of Series A Preferred Stock and
Series B Preferred Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein. Subject to the rights of
Preferred Stock that may from time to time come into existence, at any time
thereafter when additional funds of the Corporation are legally available for
the redemption of shares of Series A Preferred Stock and Series B Preferred
Stock, such funds will immediately be used to redeem the balance of the shares
which the Corporation has become obliged to redeem on any Redemption Date but
which it has not redeemed.
(d) On or prior to each Redemption Date, the Corporation
may deposit the applicable Redemption Price of all shares of Series A Preferred
Stock and Series B Preferred Stock designated for redemption in the Redemption
Notice, and not yet redeemed or converted, with a bank or trust corporation
having aggregate capital and surplus in excess of $100,000,000 as a trust fund
for the benefit of the respective holders of the shares designated for
redemption and not yet redeemed, with irrevocable instructions and authority to
the bank or trust corporation to publish the notice of redemption thereof and
pay the applicable Redemption Price for such shares to their respective holders
on or after the Redemption Date, upon receipt of notification from the
Corporation that such holder has surrendered his, her or its share certificate
to the Corporation pursuant to Subsection (3)(b) above. As of the date of such
deposit (even if prior to the Redemption Date), the deposit shall constitute
full payment of the shares to their holders. From and after the date of such
deposit the shares so called for redemption shall be redeemed and shall be
deemed to be no longer outstanding, and the holders thereof shall cease to be
stockholders with respect to such shares and shall have no rights with respect
thereto, except the rights to receive from the bank or trust corporation payment
of the applicable Redemption Price of the shares, without interest, upon
surrender of their certificates therefor and the right to convert such shares as
provided in Article IV(B)(4) below. Such instructions shall also provide that
any monies deposited by the Corporation pursuant to this Subsection (3)(d) for
the redemption of shares thereafter converted into shares of Common Stock
pursuant to Article IV(B)(4) below prior to the Redemption Date shall be
returned to the Corporation forthwith upon such conversion. The balance of any
monies deposited by the Corporation pursuant to this
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<PAGE>
Subsection (3)(d) remaining unclaimed at the expiration of two (2) years
followingthe final Redemption Date shall thereafter be returned to the
Corporation upon its request expressed in a resolution of its Board of
Directors.
4. CONVERSION. The holders of the Series A Preferred Stock and
Series B Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred
Stock and Series B Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share, at the
office of the Corporation or any transfer agent for such stock, into such number
of fully paid and nonassessable shares of Common Stock as is determined, (i)
with respect to each share of Series A Preferred Stock, by dividing the Original
Series A Issue Price plus any accrued but unpaid dividends by the "Series A
Conversion Price" in effect on the date the certificate therefor is surrendered
for conversion and (ii) with respect to each share of Series B Preferred Stock,
by dividing the Original Series B Issue Price plus any accrued but unpaid
dividends by the "Series B Conversion Price" in effect on the date the
certificate therefor is surrendered for conversion. The initial Series A
Conversion Price shall be equal to the Original Series A Issue Price and the
initial Series B Conversion Price shall be equal to the Original Series B Issue
Price; provided, however, that such Series A Conversion Price and Series B
Conversion Price shall be subject to adjustment as set forth in Subsections
4(d), (e) and (f) below.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock shall automatically be converted into shares of Common Stock at the Series
A Conversion Price at the time in effect immediately upon the earlier of: (i)
except as provided below in Subsection 4(c), the sale of Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), the public
offering price per share of which is not less than $9.52 (as adjusted to reflect
stock dividends, stock splits, combinations, recapitalizations or the like with
respect to the Common Stock after the Initial Series A Issue Date) and with
gross proceeds to the Corporation and selling stockholders therein of at least
$10,000,000 in the aggregate (a "Qualified Public Offering") or (ii) the date
that, through the conversion or redemption of the Series A Preferred Stock,
fewer than 1,781,816 shares (as adjusted to reflect stock dividends, stock
splits, combinations, recapitalizations or the like with respect to such series
after the Initial Series A Issue Date) of the Series A Preferred Stock remain
outstanding. Each share of Series B Preferred Stock shall automatically be
converted into shares of Common Stock at the Series B Conversion Price at the
time in effect immediately upon the earlier of: (i) except as provided below in
Subsection 4(c), the sale of Common Stock in a firm commitment underwritten
public offering pursuant to a registration statement under the Securities Act
the public offering price per share of which is not less than $9.52 (as adjusted
to reflect stock dividends, stock splits, combinations, recapitalizations or the
like with respect to the Common Stock after the Initial Series B Issue Date) and
with gross proceeds to the Corporation and selling stockholders therein of at
least $10,000,000 in the aggregate or (ii) the date that, through the conversion
or redemption of the Series B Preferred Stock, fewer than 525,213 shares (as
adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like with respect to such series after the Initial
Series B Issue Date) of Series B Preferred Stock remain outstanding.
8
<PAGE>
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock or Series B Preferred Stock shall be entitled to convert the
same into shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Preferred Stock or Series B Preferred Stock, as
the case may be, and shall give written notice to the Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock or Series B Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act,
the conversion shall be conditioned upon the closing with the underwriters of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock upon conversion of such Preferred Stock
shall not be deemed to have converted such Preferred Stock until immediately
prior to the closing of such sale of securities.
(d) SERIES A AND SERIES B CONVERSION PRICE ADJUSTMENTS.
The Series A Conversion Price and Series B Conversion Price shall be subject to
adjustment from time to time as follows:
(i) (A) If the Corporation shall issue, after the
Initial Series A Issue Date, any Additional Stock (as defined below) without
consideration or for a consideration per share less than the Series A Conversion
Price in effect immediately prior to the issuance of such Additional Stock, the
Series A Conversion Price in effect immediately prior to each such issuance
shall forthwith (except as otherwise provided in this clause (i)) be adjusted to
a price determined by multiplying such Series A Conversion Price by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
that the aggregate consideration received by the Corporation for such issuance
would purchase at such Series A Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issuance plus the number of shares of such Additional Stock. If the
Corporation shall issue, after the Initial Series B Issue Date, any Additional
Stock without consideration or for a consideration per share less than the
Series B Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Series B Conversion Price in effect immediately prior to
each such issuance shall forthwith (except as otherwise provided in this clause
(i)) be adjusted to a price determined by multiplying such Series B Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issuance plus the number of
shares of Common Stock that the aggregate consideration received by the
Corporation for such issuance would purchase at such Series B Conversion Price;
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of such
Additional
9
<PAGE>
Stock. For the purposes of this subsection, the number of shares of Common
Stock outstanding immediately prior to suh issuance shall be calculated on a
fully diluted basis, as if all shares of Series A Preferred Stock and Series
B Preferred Stock and all Convertible Securities (as defined below) had been
fully converted into shares of Common Stock immediately prior to such
issuance and any outstanding Options (as defined below) had been fully
exercised immediately prior to such issuance (and the resulting securities
fully converted into shares of Common Stock, if so convertible) as of such
date, but not including in such calculation any additional shares of Common
Stock issuable with respect to shares of Series A Preferred Stock, Series B
Preferred Stock and Convertible Securities or Options, solely as a result of
the adjustment of the Series A Conversion Price or Series B Conversion Price
resulting from the issuance of Additional Stock causing such adjustment.
"Options" shall mean rights, options or warrants to subscribe for, purchase
or otherwise acquire either Common Stock or Convertible Securities.
"Convertible Securities" shall mean any evidences of indebtedness, shares
(other than Common Stock, Series A Preferred Stock and Series B Preferred
Stock) or other securities convertible into or exchangeable for Common Stock.
(B) No adjustment of the Series A Conversion Price or
Series B Conversion Price shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
Subsections 4(d)(i)(E)(3) and 4(d)(i)(E)(4) below, no adjustment of such Series
A Conversion Price or Series B Conversion Price pursuant to this Subsection
4(d)(i) shall have the effect of increasing the Series A Conversion Price above
the Series A Conversion Price in effect immediately prior to such adjustment and
no adjustment of such Series B Conversion Price pursuant to this subsection
4(d)(i) shall have the effect of increasing the Series B Conversion Price above
the Series B Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the Initial Series A Issue Date or the Initial Series B Issue Date) of
options to purchase or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock or options to purchase
or rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Subsection 4(d)(i):
10
<PAGE>
(1) The aggregate maximum number of shares
of Common Stock deliverable upon exercise (assuming the
satisfaction of any conditions to exercisability, including
without limitation, the passage of time, but without taking into
account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration
(determined in the manner provided in Subsections 4(d)(i)(C) and
4(d)(i)(D)), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum exercise
price provided in such options or rights (without taking into
account potential antidilution adjustments) for the Common Stock
covered thereby.
(2) The aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange
(assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of
time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any
such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends),
plus the minimum additional consideration, if any, to be received
by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such
securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner
provided in Subsections 4(d)(i)(C) and 4(d)(i)(D)).
(3) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration
payable to the Corporation upon exercise of such options or
rights or upon conversion of or in exchange for such convertible
or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the
Series A Conversion Price and the Series B Conversion Price, to
the extent in any way affected by or computed using such options,
rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance
of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or
exchange of such securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights related to
such convertible or
11
<PAGE>
exchangeable securities, the Series A Conversion Price and the
Series B Conversion Price, to the extent in any way affected
by or computed using such options, rights or securities or
options or rights related to such securities, shall be
recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the
options or rights related to such securities.
(5) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor pursuant
to Subsections 4(d)(i)(E)(1) and (2) shall be appropriately
adjusted to reflect any change, termination or expiration of the
type described in either Subsection 4(d)(i)(E)(3) or (4).
(F) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Subsection 4(d)(i)(E))
by the Corporation after the Initial Series A Issue Date with respect to the
Series A Conversion Price or after the Initial Series B Issue Date with respect
to the Series B Conversion Price other than:
(1) Common Stock issued pursuant to a
transaction described in Subsection 4(d)(iii) hereof,
(2) Common Stock issuable or issued to
employees, consultants, directors or vendors (if in transactions
with primarily non-financing purposes) of the Corporation
directly or pursuant to a stock option plan or restricted stock
plan approved by the Board of Directors,
(3) Common Stock issuable in connection with
lease lines, bank financings, acquisitions of companies or
product lines or other similar transactions with a non-cash
raising purpose approved by the Board of Directors (including,
without limitation, the warrants to purchase 45,818 shares of
Series A Preferred Stock issued to Imperial Bancorp in November
1997),
(4) Common Stock issued upon conversion of
the Preferred Stock, and
(5) Common Stock issued or issuable: (i) in
a public offering before or in connection with which all
outstanding shares of Series A Preferred Stock and Series B
Preferred Stock will be converted to Common Stock or (ii) upon
exercise of warrants or rights granted to underwriters in
connection with such a public offering.
(ii) If the Corporation does not attain gross product
revenues (on a full accrual basis) of at least $10,000,000 for its fiscal year
1999 ("1999 Gross Product Revenues") and upon publication by the Corporation of
audited financial statements indicating
12
<PAGE>
that such minimum 1999 Gross Product Revenues were not attained, the Series A
Conversion Price (but not the Series B Conversion Price) shall forthwith be
adjusted to a price equal to 70.83325% of the Series A Conversion Price in
effect immediately preceding such publication.
(iii) In the event the Corporation should at any time or
from time to time, after the Initial Series B Issue Date, fix a record date for
the effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Series A Conversion Price and Series B Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series A Preferred Stock and Series B Preferred
Stock shall be increased in proportion to such increase of the aggregate of
shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents.
(iv) If the number of shares of Common Stock
outstanding at any time, after the Initial Series B Issue Date, is decreased by
a reverse split or combination of the outstanding shares of Common Stock, then,
following the record date of such reverse split or combination, the Series A
Conversion Price and Series B Conversion Price shall be appropriately increased
so that the number of shares of Common Stock issuable on conversion of each
share of each such series shall be decreased in proportion to such decrease in
outstanding shares.
(e) OTHER DISTRIBUTIONS. In the event the Corporation
shall declare a dividend or distribution payable in securities of other persons,
evidences of indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or Common Stock Equivalents, then, in each such case,
the holders of the Series A Preferred Stock and Series B Preferred Stock shall
be entitled to a proportionate share of any such distribution as though they
were the holders of the number of shares of Common Stock of the Corporation into
which their respective shares of Series A Preferred Stock and Series B Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such dividend or
distribution.
(f) RECAPITALIZATIONS. If at any time or from time to time
after the Initial Series B Issue Date, there shall be a recapitalization of the
Corporation (other than a subdivision, combination or merger or sale of assets
transaction provided for elsewhere in this Section 4 or in Section 2 above),
provision shall be made so that the holders of the Series A Preferred Stock and
Series B Preferred Stock shall thereafter be entitled to receive, upon
conversion of their respective shares of Series A Preferred Stock and Series B
Preferred Stock, the number of shares of stock or other securities or property
of the Corporation or otherwise, to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 4 with respect to the rights of the holders of the Series A
Preferred
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<PAGE>
Stock and Series B Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Series A
Conversion Price and Series B Conversion Price then in effect and the number
of shares issuable to such holders upon conversion of the Series A Preferred
Stock and Series B Preferred Stock) shall be applicable after that event as
nearly equivalent as may be practicable.
(g) NO IMPAIRMENT. The Corporation will not, by amendment
of its Certificate of Incorporation, as amended, or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock and Series B
Preferred Stock against impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock or Series B
Preferred Stock, and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Whether or not fractional shares are
issuable upon such conversion shall be determined on the basis of the total
number of shares of Series A Preferred Stock and Series B Preferred Stock which
the holder is at the time converting into Common Stock and the number of shares
of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Series A Conversion Price or Series B Conversion Price
pursuant to this Section 4, the Corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such series of Preferred Stock for which
the Conversion Price has been so adjusted a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock or Series B
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth: (A) such adjustment and readjustment, (B) the
Conversion Price for such series at the time in effect and (C) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of such series of
Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by
the Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock and Series B Preferred
Stock, at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
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<PAGE>
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock and Series B Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock and
Series B Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock and Series B Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to its Certificate of
Incorporation, as amended.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock or
Series B Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at such holder's
address appearing on the books of the Corporation.
5. VOTING RIGHTS. Each holder of shares of Series A Preferred
Stock and Series B Preferred Stock shall have the right to one (1) vote for each
share of Common Stock into which such holder's respective shares of Series A
Preferred Stock and Series B Preferred Stock could then be converted, with full
voting rights and powers equal to the voting rights and powers of the holders of
Common Stock, except as required by law or as expressly provided herein,
including the Protective Provisions in Section 6 below; shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation; and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote, except as expressly provided
herein. Fractional votes shall not, however, be permitted and any fractional
voting rights available on an as-converted basis (after aggregating all shares
into which shares of Series A Preferred Stock and Series B Preferred Stock held
by each holder could be converted) shall be rounded to the nearest whole number
(with 0.5 being rounded upward).
6. PROTECTIVE PROVISIONS. So long as any shares of Series A
Preferred Stock or Series B Preferred Stock are outstanding, the Corporation
shall not, without first obtaining the approval (by vote or written consent, as
permitted by law) of the holders of at least sixty-seven percent (67%) of the
then outstanding shares of Series A Preferred Stock and Series B Preferred
Stock, voting or acting, as the case may be, as a single class:
(a) sell, convey or otherwise dispose of all or
substantially all of its property or business; liquidate, dissolve or wind up
the Corporation's business; or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation); or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Corporation is disposed of (a "Corporate
Transaction"), unless the Corporation's stockholders of record as constituted
immediately prior to such Corporate Transaction will, immediately after such
Corporate Transaction, hold at least fifty percent (50%)
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of the voting power of the surviving or acquiring entity; provided, however,
that shares of the surviving entity held by holders of the capital stock of
the Corporation acquired by means other than the exchange or conversion of
the capital stock of the Corporation for shares of the surviving entity shall
not be used in determining if the stockholders of the Corporation own more
than fifty percent (50%) of the voting power of the surviving or acquiring
entity, but shall be used for determining the total outstanding voting power
of such entity;
(b) purchase, redeem or acquire any shares of Common Stock
or options to purchase Common Stock or pay funds into or set aside or make
available a sinking fund for the purchase, redemption or acquisition of shares
of Common Stock or options to purchase Common Stock; provided, however, the
foregoing restrictions shall not apply to the repurchase of shares of Common
Stock held by employees, officers, directors, consultants or other persons
performing services for the Corporation or any wholly owned subsidiary of the
Corporation (including, but not by way of limitation, distributors and sales
representatives) that are subject to restrictive agreements under which the
Corporation has the option to repurchase such shares upon the occurrence of
certain events, such as the proposed sale of such shares;
(c) amend or modify any provision of the Corporation's
Certificate of Incorporation, as amended, or Bylaws so as to affect adversely
the rights, preferences or privileges of the Series A Preferred Stock or the
Series B Preferred Stock;
(d) amend the Bylaws of the Corporation to increase, or
otherwise take any action that would have the effect of increasing, the
authorized number of directors of the Corporation to more than five (5);
(e) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock or
Series B Preferred Stock;
(f) authorize or issue, or authorize or effect any
reclassification of, or obligate itself to issue, any equity security (other
than the Series A Preferred Stock or Series B Preferred Stock), including any
other security convertible into or exercisable for any equity security, so as to
cause such security to have a preference over, or be on a parity with, the
Series A Preferred Stock or the Series B Preferred Stock with respect to
dividends or upon liquidation;
(g) authorize or issue, or obligate itself to issue, any
equity security, including any other security convertible into or exercisable
for any equity security, of the Corporation to any employee of the Corporation,
other than up to 10,561,808 shares of Common Stock (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like after the
date hereof) that may be reserved for issuance or otherwise issued under any
stock option or other plan or agreement of the Corporation, together with
options granted thereunder to purchase such shares; or
(h) amend any of the provisions set forth in this
Subsection 6.
7. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any
shares of Series A Preferred Stock or Series B Preferred Stock shall be
converted pursuant to Section 4 above, or in the event any shares of Series A
Preferred Stock or Series B Preferred Stock shall be redeemed pursuant to
Section 3 above, the shares so converted or redeemed shall be canceled
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and shall not be issuable by the Corporation. The Certificate of
Incorporation, as amended, of the Corporation shall be amended at such time
or times as the Corporation deems it reasonably practicable to effect the
corresponding reduction in the Corporation's authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the provisions of Section 1 of
Division (B) of this Article IV, the holders of the Common Stock shall be
entitled to receive, when and as declared by the Board of Directors, out of any
assets of the Corporation legally available therefor, such dividends as may be
declared from time to time by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation shall be
distributed as provided in Section 2 of Division (B) of this Article IV.
3. REDEMPTION. The Common Stock is not redeemable hereunder.
4. VOTING RIGHTS. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
4.2 Effective as of a Qualified Public Offering (as defined in
Section B.8 of Section 4.1 above), the Corporation's capital stock shall be
comprised as follows:
A. AUTHORIZED SHARES. The aggregate number of shares that the
Corporation shall have authority to issue is 260,000,000, (a) 250,000,000 shares
of which shall be Common Stock, par value $0.0001 per share, and (b) 10,000,000
of which shall be Preferred Stock, par value $0.0001 per share.
B. COMMON STOCK. Each share of Common Stock shall have one vote on
each matter submitted to a vote of the stockholders of the Corporation. Subject
to the provisions of applicable law and the rights of the holders of the
outstanding shares of Preferred Stock, if any, the holders of shares of Common
Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends or other distributions, whether payable in cash,
property or securities of the Corporation. The holders of shares of Common
Stock shall be entitled to receive, in proportion to the number of shares of
Common Stock held, the net assets of the Corporation upon dissolution after any
preferential amounts required to be paid or distributed to holders of
outstanding shares of Preferred Stock, if any, are so paid or distributed.
C. PREFERRED STOCK.
1. SERIES. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more series. The description of
shares of each additional series of Preferred Stock, including any designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption shall be as set forth in resolutions adopted by the Board of
Directors.
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2. RIGHTS AND PREFERENCES. The Board of Directors is expressly
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of, shares of any particular series of
Preferred Stock and, if and to the extent from time to time required by law, by
filing certificates of amendment or designation which are effective without
stockholder action, to increase or decrease the number of shares included in
each series of Preferred Stock, but not below the number of shares then issued,
and to set in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting or
changing the following:
(a) the dividend rate, if any, on shares of such series,
the times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
(b) whether the shares of such series shall be redeemable
and, if so, the redemption price and the terms and conditions of such
redemption;
(c) the obligation, if any, of the Corporation to redeem
shares of such series pursuant to a sinking fund;
(d) whether shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class of classes and, if
so, the terms and conditions of such conversion or exchange, including the price
or prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and, if so, the extent
of such voting rights;
(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and
(g) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such series.
ARTICLE V
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General Corporation Law
or (d) for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after approval by
the stockholders of this Article to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law as so amended.
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ARTICLE VI
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws of the Corporation.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE VIII
Election of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall so
provide.
ARTICLE IX
A. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified. At the first annual meeting of stockholders following the closing of
the initial public offering (the "FIRST PUBLIC COMPANY ANNUAL MEETING") of the
Corporation's capital stock pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "INITIAL PUBLIC
OFFERING"), the directors of the Corporation shall be divided into three classes
as nearly equal in size as is practicable, hereby designated as Class I, Class
II and Class III. The term of office of the initial Class I directors shall
expire at the next succeeding annual meeting of stockholders, the term of office
of the initial Class II directors shall expire at the second succeeding annual
meeting of stockholders and the term of office of the initial Class III
directors shall expire at the third succeeding annual meeting of stockholders.
For the purposes hereof, the initial Class I, Class II and Class III directors
shall be those directors designated and elected at the First Public Company
Annual Meeting. At each annual meeting after the First Public Company Annual
Meeting, directors to replace those of a Class whose terms expire at such annual
meeting shall be elected to hold office until the third succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable.
B. Vacancies occurring on the Board of Directors for any reason may
be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at a meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.
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ARTICLE X
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
ARTICLE XI
Effective upon the closing of the Initial Public Offering,
stockholders of the Corporation may not take action by written consent in lieu
of a meeting but must take any actions at a duly called annual or special
meeting.
ARTICLE XII
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles IX, XI or XII, or
any provisions thereof.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
* * *
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Exhibit 10.17
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THIS WARRANT OR
OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE
UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE
SECURITIES LAW, OR (B) THE HOLDER SHALL DELIVER TO THE COMPANY AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND OF ANY APPLICABLE STATE SECURITIES LAW.
WARRANT NO. B-001 SEPTEMBER ____, 1998
SILICON LABORATORIES INC.
PREFERRED STOCK PURCHASE WARRANT
Silicon Laboratories Inc., a Delaware corporation (the "COMPANY"),
hereby grants to Imperial Bank ("PURCHASER"), or its registered assigns or
transferees (Purchaser and each such assign or transferee being referred to
herein as a "HOLDER" and collectively as the "HOLDERS") the right to purchase,
at any time and from time to time on and after the date hereof until the fifth
(5th) anniversary of the date hereof (the "EXPIRATION DATE"), up to 4,765
fully paid and non-assessable shares of Series B Convertible Preferred Stock
of the Company, par value $0.0001 per share (the "SERIES B PREFERRED STOCK"),
on the terms and subject to the conditions set forth below.
1. EXERCISE AND VESTING OF WARRANT.
1.1. EXERCISE PRICE. Subject to adjustment as hereinafter
provided, the rights represented by this Preferred Stock Purchase Warrant
(this "WARRANT") are exercisable on and after the date hereof (the "EXERCISE
DATE") until the Expiration Date, at a price (the "EXERCISE PRICE") of $4.76
per share of the Series B Preferred Stock issuable hereunder (hereinafter, the
"WARRANT SHARES"). The Exercise Price shall be payable in cash, or by
certified or official bank check.
1.2. METHOD OF EXERCISE. Upon surrender of this Warrant with
a duly executed Notice of Exercise in the form of ANNEX A attached hereto,
together with payment of the Exercise Price for the Warrant Shares purchased
(except to the extent of conversion pursuant to Section 1.3 herein), at the
Company's principal executive offices (presently located at 2024 East St. Elmo
Road, Austin, Texas 78744-1018) or at such other address as the Company shall
have advised the Holder in writing (the "DESIGNATED OFFICE"), the Holder shall
be entitled to receive a
<PAGE>
certificate or certificates for the Warrant Shares so purchased. The Company
agrees that the Warrant Shares shall be deemed to have been issued to the
Holder as of the close of business on the date on which this Warrant shall
have been surrendered together with the Notice of Exercise and payment for
such Warrant Shares.
1.3. CONVERSION RIGHT. In lieu of exercising this Warrant as
specified in Section 1.2, Holder may from time to time convert this Warrant,
in whole or in part, into a number of Warrant Shares determined by dividing
(a) the aggregate fair market value of the Warrant Shares or other securities
otherwise issuable upon exercise of this Warrant minus the aggregate Exercise
Price of such Warrant Shares by (b) the fair market value of one Warrant
Share. The fair market value of the Warrant Shares shall be determined
pursuant to Section 1.4.
1.4. VALUATION. If the Warrant Shares are traded regularly in
a public market, the fair market value of the Warrant Shares shall be the
closing price of the Warrant Shares (or the closing price of the Company's
stock into which the Warrant Shares are convertible) reported for the business
day immediately before Holder delivers its Notice of Exercise to the Company.
If the Warrant Shares are not regularly traded in a public market, the Board
of Directors of the Company shall determine fair market value in its
reasonable good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors of the Company in writing that Holder disagrees
with such determination, then the Company and Holder shall promptly agree upon
a reputable investment banking firm to undertake such valuation. If the
valuation of such investment banking firm is greater than that determined by
the Board of Directors of the Company, then all fees and expenses of such
investment banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be paid by Holder.
2. TRANSFER; ISSUANCE OF STOCK CERTIFICATES; RESTRICTIVE
LEGENDS.
2.1. TRANSFER. Subject to compliance with the restrictions on
transfer set forth in this Section 2, each transfer of this Warrant and all
rights hereunder, in whole or in part, shall be registered on the books of the
Company to be maintained for such purpose, upon surrender of this Warrant at
the Designated Office, together with a written assignment of this Warrant in
the form of ANNEX B attached hereto duly executed by the Holder or its agent
or attorney. Upon such surrender and delivery, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denominations specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, if any. A Warrant, if properly assigned in compliance with the
provisions hereof, may be exercised by the new Holder for the purchase of
Warrant Shares without having a new Warrant issued. Prior to due presentment
for registration of transfer thereof, the Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof (notwithstanding
any notations of ownership or writing thereon made by anyone other than a duly
authorized officer of the Company) for all purposes and shall not be affected
by any notice to the contrary. All Warrants issued upon any assignment of
Warrants shall be the valid obligations of the Company, evidencing the same
rights, and entitled to the
2
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same benefits as the Warrants surrendered upon such registration of transfer
or exchange.
2.2. STOCK CERTIFICATES. Certificates for the Warrant Shares
shall be delivered to the Holder within a reasonable time after the rights
represented by this Warrant shall have been exercised pursuant to Section 1,
and a new Warrant representing the shares of Series B Preferred Stock, if any,
with respect to which this Warrant shall not then have been exercised shall
also be issued to the Holder within such time. The issuance of certificates
for Warrant Shares upon the exercise of this Warrant shall be made without
charge to the Holder hereof including, without limitation, any documentary,
stamp or similar tax that may be payable in respect thereof, PROVIDED,
HOWEVER, that the Company shall not be required to pay any income tax to which
the Holder hereof may be subject in connection with the issuance of this
Warrant or the Warrant Shares; AND PROVIDED FURTHER, that if Warrant Shares
are to be delivered in a name other than the name of the Holder hereof
representing any Warrant being exercised, then no such delivery shall be made
unless the person requiring the same has paid to the Company the amount of
transfer taxes or charges incident thereto, if any.
2.3. RESTRICTIVE LEGENDS. (a) Except as otherwise provided in
this Section 2, each certificate for Warrant Shares initially issued upon the
exercise of this Warrant, and each certificate for Warrant Shares issued to
any subsequent transferee of any such certificate, shall be stamped or
otherwise imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL SUCH SECURITIES ARE REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED.
(b) Except as otherwise provided in this Section 2, each
Warrant shall be stamped or other-wise imprinted with a legend in
substantially the following form:
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW, NO TRANSFER OF THIS WARRANT OR
OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE
UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE
SECURITIES LAW, OR (B) THE HOLDER SHALL DELIVER TO THE COMPANY AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND OF ANY APPLICABLE STATE
3
<PAGE>
SECURITIES LAW.
Notwithstanding the foregoing, the legend requirements of this Section 2.3
shall terminate as to any particular Warrant or Warrant Share when the Company
shall have received from the Holder thereof an opinion of counsel in form and
substance reasonably acceptable to the Company that such legend is not
required in order to ensure compliance with the Securities Act. Whenever the
restrictions imposed by this Section 2.3 shall terminate, the Holder hereof or
of Warrant Shares, as the case may be, shall be entitled to receive from the
Company without cost to such Holder a new Warrant or certificate for Warrant
Shares of like tenor, as the case may be, without such restrictive legend.
3. ADJUSTMENT OF NUMBER OF SHARES; EXERCISE PRICE; NATURE OF
SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS.
3.1. EXERCISE PRICE; ADJUSTMENT OF NUMBER OF SHARES. The
Exercise Price set forth in Section 1 hereof and the number of shares
purchasable hereunder shall be subject to adjustment from time to time as
hereinafter provided.
3.2. CONVERSION OF SERIES B SHARES. If all of the Company's
Series B Preferred Stock shall be, or if outstanding would be, at any time
prior to the Expiration Date, converted into shares of the Company's Common
Stock, then the unexercised portion of this Warrant shall be converted into
the right to purchase that number of shares of the Company's Common Stock
equal to the number of shares of the Common Stock that would have been
received if this Warrant had been exercised in full and the Series B Preferred
Stock received thereupon had been simultaneously converted immediately prior
to such event, and the Exercise Price shall be immediately adjusted to equal
the quotient obtained by dividing (x) the aggregate Exercise Price of the
maximum number of shares of Series B Preferred Stock for which this Warrant
was exercisable immediately prior to such conversion, by (y) the number of
shares of Common Stock for which this Warrant is exercisable immediately after
such conversion; provided, however, that in no event shall the Exercise Price
as so adjusted be less than the par value of the Common Stock.
3.3. MERGER, SALE OF ASSETS, ETC. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired there shall be a
reorganization (other than a combination, reclassification, exchange, or
subdivision of shares as provided in Sections 3.4 and 3.5), merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a merger in which the Company is the
surviving entity but the shares of the Company's capital stock outstanding
immediately prior to the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, or a
sale or transfer of the Company's properties and assets as, or substantially
as, an entirety to any other person, then, as a part of such reorganization,
merger, consolidation, sale or transfer, lawful provision shall be made so
that the Holder of this Warrant shall thereafter be entitled to receive upon
exercise of this Warrant, during the period specified herein and upon
4
<PAGE>
payment of the Exercise Price then in effect, the number of shares of stock or
other securities or cash or property of the successor corporation resulting
from such reorganization, merger, consolidation, sale or transfer that a
Holder of the shares deliverable upon exercise of this Warrant would have been
entitled to receive in such reorganization, consolidation, merger, sale or
transfer if this Warrant had been exercised immediately before such
reorganization, consolidation, merger, sale or transfer, all subject to
further adjustment as provided in this Section 3. The foregoing provisions of
this Section 3.3 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock and securities
of any other corporation that are at the time receivable upon the exercise of
this Warrant. If the per-share consideration payable to the Holder hereof for
shares in connection with any such transaction is in a form other than cash or
securities, then the value of such consideration shall be determined in good
faith by the Company's Board of Directors. In all events, appropriate
adjustment shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder hereof after the
transaction, to the end that the provisions of this Warrant shall be
applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable after that event upon exercise of this
Warrant.
3.4. RECLASSIFICATION, ETC. If the Company, at any time while
this Warrant, or any portion thereof, remains outstanding and unexpired,
shall, by the reclassification or exchange of securities or otherwise, change
any of the securities as to which purchase rights under this Warrant exist
into the same or a different number of securities of any other class or
classes, this Warrant shall thereafter represent the right to acquire such
number and kind of securities as would have been issuable as the result of
such change with respect to the securities that were subject to the purchase
rights under this Warrant immediately prior to such reclassification, exchange
or other change and the Exercise Price therefor shall be appropriately
adjusted, all subject to further adjustment as provided in this Section 3. No
adjustment shall be made pursuant to this Section 3.4, upon any conversion of
the Series B Preferred Stock which is the subject of Section 3.2.
3.5. STOCK SPLITS, STOCK DIVIDENDS AND REVERSE STOCK SPLITS.
In case at any time the Company shall split or subdivide the outstanding
shares of Series B Preferred Stock into a greater number of shares, or shall
declare and pay any stock dividend with respect to its outstanding stock that
has the effect of increasing the number of outstanding shares of Series B
Preferred Stock, the Exercise Price in effect immediately prior to such
subdivision or stock dividend shall be proportionately reduced (but not below
the par value of the Series B Preferred Stock) and the number of Warrant
Shares purchasable pursuant to this Warrant immediately prior to such
subdivision or stock dividend shall be proportionately increased, and
conversely, in case at any time the Company shall combine its outstanding
shares of Series B Preferred Stock into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.
4. REGISTRATION; EXCHANGE AND REPLACEMENT OF WARRANT; RESERVATION
OF SHARES.
5
<PAGE>
The Company shall keep at the Designated Office a register in which
the Company shall provide for the registration, transfer and exchange of this
Warrant. The Company shall not at any time, except upon the dissolution,
liquidation or winding-up of the Company, close such register so as to result
in preventing or delaying the exercise or transfer of this Warrant.
The Company may deem and treat the person in whose name this Warrant
is registered as the Holder and owner hereof for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Warrant for
registration or transfer as provided in this Section 4.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant and (in case of
loss, theft or destruction) of indemnity satisfactory to it, and (in the case
of mutilation) upon surrender and cancellation of this Warrant, the Company
will (in the absence of notice to the Company that the Warrant has been
acquired by a BONA FIDE purchaser) make and deliver a new Warrant of like
tenor, in lieu of this Warrant without requiring the posting of any bond or
the giving of any security.
The Company shall at all times reserve and keep available out of its
authorized shares of Series B Preferred Stock, solely for the purpose of
issuance upon the exercise of this Warrant, such number of shares of Series B
Preferred Stock as shall be issuable upon the exercise hereof. The Company
covenants and agrees that, upon exercise of this Warrant and payment of the
Exercise Price therefor, all Warrant Shares issuable upon such exercise shall
be duly and validly issued, fully paid and non-assessable.
5. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
If the number of Warrant Shares purchasable upon the exercise of this
Warrant is adjusted pursuant to Section 3 hereof, the Company shall
nevertheless not be required to issue fractions of shares, upon exercise of
this Warrant or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder an amount in cash equal
to such fraction multiplied by the current market value of such fractional
share as may be prescribed by the Board of Directors of the Company.
6. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS.
No Holder of this Warrant shall, as such, be entitled to vote or to
receive dividends or be deemed the Holder of Warrant Shares that may at any
time be issuable upon exercise of this Warrant for any purpose whatsoever, nor
shall anything contained herein be construed to confer upon the Holder of this
Warrant, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any
6
<PAGE>
recapitalization, issue or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such Holder shall have exercised this Warrant and
been issued Warrant Shares in accordance with the provisions hereof.
7. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered
personally, or mailed by registered or certified mail, return receipt
requested, or telecopied or telexed and confirmed in writing and delivered
personally or mailed by registered or certified mail, return receipt requested
(a) if to the Holder of this Warrant, to the address of such Holder as shown
on the books of the Company, or (b) if to the Company, to the address set
forth in Section 1.2 of this Warrant; or at such other address as the Holder
or the Company may hereafter have advised the other.
8. SUCCESSORS.
All the covenants, agreements, representations and warranties
contained in this Warrant shall bind the parties hereto and their respective
heirs, executors, administrators, distributees, successors, assigns and
transferees.
9. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas (not including the choice of law
rules thereof) regardless of the jurisdiction of creation or domicile of the
Company or its successors or of the Holder at any time hereof.
10. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS.
This Warrant sets forth the entire understanding of the parties with
respect to the transactions contemplated hereby. The failure of any party to
seek redress for the violation or to insist upon the strict performance of any
term of this Warrant shall not constitute a waiver of such term and such party
shall be entitled to enforce such term without regard to such forbearance.
This Warrant may be amended, and any breach of or compliance with any covenant,
agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or written waiver of the Holder, and then such
consent or waiver shall be effective only in the specific instance and for the
specific purpose for which given.
7
<PAGE>
11. SEVERABILITY; HEADINGS.
If any term of this Warrant as applied to any person or to any
circumstance is prohibited, void, invalid or unenforceable in any
jurisdiction, such term shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or invalidity without in any way affecting any
other term of this Warrant or affecting the validity or enforceability of this
Warrant or of such provision in any other jurisdiction. The Section headings
in this Warrant have been inserted for purposes of convenience only and shall
have no substantive effect.
[The balance of this page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of the date first written above.
SILICON LABORATORIES INC.
By:
------------------------------------
Navdeep S. Sooch
President
By:
------------------------------------
John W. McGovern
Chief Financial Officer
Accepted and agreed:
IMPERIAL BANK
By:
------------------------------
Name:
Title:
9
<PAGE>
ANNEX A
-------
NOTICE OF EXERCISE
(TO BE EXECUTED UPON PARTIAL OR FULL
EXERCISE OF THE WITHIN WARRANT)
1. The undersigned hereby elects to purchase _______ shares
of Series B Convertible Preferred Stock of Silicon Laboratories Inc. pursuant
to the terms of the attached Warrant, and tenders herewith payment of the
purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached
Warrant into Warrant Shares in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________________ of the
Warrant Shares covered by the Warrant.
[STRIKE THE PARAGRAPH NUMBERED 1 ABOVE THAT DOES NOT APPLY.]
2. Please issue a certificate or certificates representing
said shares in the name of the undersigned or in such other name as is
specified below and deliver such certificate(s) to:
Ms. Christine M. McCarthy
Chief Financial Officer
Controllers Department
Imperial Bank
P.O. Box 92991
Los Angeles, CA 90009
3. The undersigned represents it is acquiring the shares
solely for its own account and not as a nominee for any other party and not
with a view toward the resale or distribution thereof except in compliance
with applicable securities laws.
IMPERIAL BANK
--------------------------------
(Signature)
--------------------------------
(Date)
A-1
<PAGE>
ANNEX B
-------
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Series B Convertible Preferred Stock set forth below:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
NO. OF SHARES OF
NAME AND ADDRESS OF ASSIGNEE SERIES B CONVERTIBLE PREFERRED STOCK
- - -------------------------------------------------------------------------------
<S> <C>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
</TABLE>
and does hereby irrevocably constitute and appoint _______________________
attorney-in-fact to register such transfer onto the books of Silicon
Laboratories Inc. maintained for the purpose, with full power of substitution
in the premises.
Dated: Print Name:
----------------------- ------------------------
Signature:
--------------------
Witness:
----------------------
NOTICE: The signature on this assignment must correspond with the name
as written upon the face of this Warrant in every particular,
without alteration or enlargement or any change whatsoever.
B-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 11, 2000, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-94853) and related Prospectus of
Silicon Laboratories Inc. filed with the Securities and Exchange Commission on
or about February 24, 2000.
/s/ ERNST & YOUNG LLP
Austin, Texas
February 23, 2000
