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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 1, 2000
--------------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- -------------------------
Commission file number:
SILICON LABORATORIES INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2793174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4635 Boston Lane, Austin, Texas 78735
(Address of principal executive offices) (Zip Code)
(512) 416-8500
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicatethe number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 1, 2000, 47,249,861
shares of common stock of Silicon Laboratories Inc. were outstanding.
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<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
ITEM 1 Financial Statements:
<S> <C> <C>
Condensed Consolidated Balance Sheets at July 1, 2000 and
January 1, 2000 .......................................................... 3
Condensed Consolidated Statements of Income for the
three and six months ended July 1, 2000 and July 3, 1999.................. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended July 1, 2000 and July 3, 1999........................ 5
Notes to Condensed Consolidated Financial Statements........................ 6
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 9
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.................. 16
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings........................................................... 29
ITEM 2 Changes in Securities and Use of Proceeds................................... 30
ITEM 3 Defaults Upon Senior Securities............................................. 30
ITEM 4 Submission of Matter to a Vote of Securities Holders........................ 30
ITEM 5 Other Information........................................................... 30
ITEM 6 Exhibits and Reports on Form 8-K............................................ 30
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY JANUARY 1,
1, 2000 2000
=========== ===========
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 83,495 $ 8,197
Short-term investments ................................................ 22,195 6,509
Accounts receivable, net of allowance for doubtful
accounts of $629 at July 1, 2000 and $569 at
January 1, 2000 ..................................................... 10,575 10,322
Inventories ........................................................... 6,792 2,837
Deferred income taxes ................................................. 461 963
Prepaid expenses and other ............................................ 1,097 435
----------- -----------
Total current assets ..................................................... 124,615 29,263
Property, equipment and software, net .................................... 18,412 12,350
Other assets ............................................................. 253 345
----------- -----------
Total assets ............................................................. $ 143,280 $ 41,958
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 6,265 $ 7,374
Accrued expenses ...................................................... 2,587 1,083
Deferred revenue ...................................................... 955 1,006
Current portion of long-term obligations .............................. 3,721 2,697
Income taxes payable .................................................. 238 2,822
----------- -----------
Total current liabilities ................................................ 13,766 14,982
Long-term debt and leases, net of current maturities ..................... 7,277 6,081
Other long-term obligations .............................................. 304 142
----------- -----------
Total liabilities ........................................................ 21,347 21,205
Redeemable convertible preferred stock ................................... -- 12,750
Stockholders' equity:
Common stock--$.0001 par value; 250,000 and 52,000 shares
authorized; 47,250 and 30,016 shares issued and outstanding at
July 1, 2000 and January 1, 2000,
respectively ........................................................ 5 3
Additional paid-in capital ............................................ 124,984 19,014
Stockholder notes receivable .......................................... (1,472) (1,472)
Deferred stock compensation ........................................... (14,558) (15,330)
Retained earnings ..................................................... 12,974 5,788
----------- -----------
Total stockholders' equity ............................................... 121,933 8,003
----------- -----------
Total liabilities and stockholders' equity ............................... $ 143,280 $ 41,958
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3
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SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
============ ============ ============ ============
<S> <C> <C> <C> <C>
Sales ........................................ $ 24,286 $ 7,543 $ 43,973 $ 13,863
Cost of goods sold ........................... 8,390 2,866 15,146 5,281
------------ ------------ ------------ ------------
Gross profit ................................. 15,896 4,677 28,827 8,582
Operating expenses:
Research and development .................. 4,444 1,597 8,024 2,890
Selling, general and administrative ....... 4,355 1,500 7,574 2,632
Amortization of deferred stock compensation 787 116 1,566 149
------------ ------------ ------------ ------------
Operating expenses ........................... 9,586 3,213 17,164 5,671
------------ ------------ ------------ ------------
Operating income ............................. 6,310 1,464 11,663 2,911
Other (income) and expenses:
Interest income ........................... (1,258) (75) (1,506) (138)
Interest expense .......................... 342 140 618 260
------------ ------------ ------------ ------------
Income before tax expense .................... 7,226 1,399 12,551 2,789
Income tax expense ........................... 3,045 323 5,365 645
------------ ------------ ------------ ------------
Net income ................................... $ 4,181 $ 1,076 $ 7,186 $ 2,144
============ ============ ============ ============
Net income per share:
Basic ..................................... $ 0.10 $ 0.07 $ 0.22 $ 0.16
Diluted ................................... $ 0.08 $ 0.02 $ 0.15 $ 0.05
Weighted average common shares outstanding:
Basic ..................................... 43,279 14,374 32,212 13,618
Diluted ................................... 49,812 43,907 47,910 43,702
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
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SILICON LABORATORIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 1, JULY 3,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................... $ 7,186 $ 2,144
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization expense ........................ 2,374 738
Amortization of deferred stock compensation .................. 1,566 149
Amortization of note/lease end-of-term interest
payments ................................................... 161 26
Compensation expense related to stock options, direct
stock issuance, and warrants to non-employees .............. 153 16
Investment interest receivable ............................... (187) 37
Changes in operating assets and liabilities:
Prepaid expenses and other ................................. (662) (389)
Accounts receivable ........................................ (253) (1,230)
Inventories ................................................ (3,956) (907)
Other assets ............................................... 92 (11)
Accounts payable ........................................... (1,109) (611)
Accrued expenses ........................................... 1,504 381
Deferred revenue ........................................... (51) --
Deferred income taxes ...................................... 502 --
Income taxes payable ....................................... (2,344) 646
------------ ------------
Net cash provided by operating activities ....................... 4,976 989
INVESTING ACTIVITIES
Purchases of short-term investments ............................. (33,025) (1,499)
Maturities of short-term investments ............................ 17,527 1,425
Purchases of property and equipment ............................. (8,436) (2,595)
------------ ------------
Net cash used in investing activities ........................... (23,934) (2,669)
FINANCING ACTIVITIES
Proceeds from long-term debt .................................... 3,537 2,383
Payments on long-term debt ...................................... (1,074) (458)
Proceeds from credit facility ................................... -- 1,100
Proceeds from equipment lease financing ......................... -- 1,026
Payments on capital leases ...................................... (243) (221)
Proceeds from exercise of warrants .............................. 100 --
Net proceeds from initial public offering of common stock ....... 90,765 --
Net proceeds from exercises of stock options .................... 1,171 48
------------ ------------
Net cash provided by financing activities ....................... 94,256 3,878
------------ ------------
Increase in cash and cash equivalents ........................... 75,298 2,198
------------ ------------
Cash and cash equivalents at beginning of period ................ 8,197 2,867
------------ ------------
Cash and cash equivalents at end of period ...................... $ 83,495 $ 5,065
============ ============
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 437 $ 237
============ ============
Income taxes paid ............................................... $ 7,002 $ 123
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
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SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 1, 2000
1. Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements included herein are
unaudited; however, they contain all normal recurring accruals and adjustments
which, in the opinion of management, are necessary to present fairly the
consolidated financial position of Silicon Laboratories Inc. and its subsidiary
(collectively, the "Company") at July 1, 2000 and the consolidated results of
its operations and cash flows for the three and six months ended July 1, 2000
and July 3, 1999. All intercompany accounts and transactions have been
eliminated. The results of operations for the three and six months ended July 1,
2000 are not necessarily indicative of the results to be expected for the full
year.
The accompanying unaudited condensed consolidated financial statements
do not include footnotes and certain financial presentations normally required
under accounting principles generally accepted in the United States. Therefore,
these financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended January
1, 2000, included in the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission.
Short-Term Investments
The Company's short-term investments have been classified as
available-for-sale securities in accordance with Statement of Financial
Accounting Standard (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. The carrying value of available-for-sale securities
approximates fair value.
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>
JULY 1, JANUARY 1,
2000 2000
============ ============
<S> <C> <C>
Work in progress ........................................... $ 4,002 $ 1,902
Finished goods ............................................. 2,790 935
------------ ------------
$ 6,792 $ 2,837
============ ============
</TABLE>
Stock Based Compensation
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, an interpretation of APB Opinion No. 25. The Interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The interpretation
will be applied prospectively to new awards, modifications to outstanding
awards, and changes in employee status on or after July 1, 2000, except as
follows: (i) requirements
6
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SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
related to the definition of an employee apply to new awards granted after
December 15, 1998; (ii) modifications that directly or indirectly reduce the
exercise price of an award apply to modifications made after December 15, 1998;
and (iii) modifications to add a reload feature to an award apply to
modifications made after January 12, 2000. The Company is evaluating the effect
the application of the Interpretation will have on the financial statements.
Other Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. There were no material
differences between net income and comprehensive income during any of the
periods presented.
Earnings Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 4,181 $ 1,076 $ 7,186 $ 2,144
Basic:
Weighted-average shares of common stock outstanding 47,250 29,068 39,494 28,877
Weighted-average shares of common stock subject to
repurchase (3,971) (14,694) (7,282) (15,259)
-------- -------- -------- --------
Shares used in computing basic net income per share 43,279 14,374 32,212 13,618
Effect of dilutive securities:
Weighted-average shares of common stock subject to
repurchase 3,899 14,548 7,179 15,091
Convertible preferred stock and warrants 121 13,950 6,363 13,945
Stock options 2,513 1,035 2,156 1,048
-------- -------- -------- --------
Shares used in computing diluted net income per share 49,812 43,907 47,910 43,702
-------- -------- -------- --------
Basic net income per share $ 0.10 $ 0.07 $ 0.22 $ 0.16
Diluted net income per share $ 0.08 $ 0.02 $ 0.15 $ 0.05
</TABLE>
7
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SILICON LABORATORIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. Stockholders' Equity
During the quarter ended July 1, 2000, the Company recorded deferred
stock compensation of $833,000 in connection with nonqualified stock options
granted during the quarter at an exercise price lower than the fair market
value of the common stock on the date of grant. The deferred stock
compensation is being amortized over the vesting periods of the applicable
options. Amortization of deferred compensation recorded in the quarter ended
July 1, 2000 from deferred stock compensation relating to options granted in
such quarter and in prior periods resulted in $787,000 of expense in the
quarter ended July 1, 2000.
3. Commitments and Contingencies
The Company entered into a new lease commitment on June 29, 2000 for
approximately 34,000 square feet of supplemental office space in Austin, Texas
with occupancy scheduled for October 1, 2000, pending completion of construction
of the facility. The lease term is for 76 months after initial occupancy with
one 5 year renewal option. Monthly rental payments are scheduled to increase
from $48,000 to $56,000 per month at various intervals throughout the term of
the lease.
On June 22, 2000, the Company entered into an agreement to acquire
Krypton Isolation, Inc. pursuant to which the Company has agreed to pay $42
million in cash and common stock (estimated using the value of the Company's
common stock on such date and subject to further adjustment). This
transaction is expected to close in the third calendar quarter of 2000.
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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE
IN THIS QUARTERLY REPORT ON FORM 10-Q, THE PRIOR QUARTERLY REPORT ON FORM 10-Q
FILED APRIL 26,2000 AND THE SILICON LABORATORIES' PROSPECTUS DATED MARCH 23,
2000. EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF SILICON LABORATORIES AND ITS MANAGEMENT AND MAY BE
SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES" OR
SIMILAR LANGUAGE. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED IN SILICON LABORATORIES' PROSPECTUS DATED MARCH 23, 2000 AND THE PRIOR
QUARTERLY REPORT ON FORM 10-Q FILED APRIL 26,2000. OUR FISCAL YEAR-END FINANCIAL
REPORTING PERIODS ARE A 52- OR 53- WEEK YEAR ENDING ON THE SATURDAY CLOSEST TO
DECEMBER 31ST. OUR SECOND QUARTER OF FISCAL YEAR 2000 ENDED JULY 1, 2000. OUR
SECOND QUARTER OF FISCAL YEAR 1999 ENDED JULY 3, 1999. ALL OF THE QUARTERLY
PERIODS REPORTED IN THIS QUARTERLY REPORT ON FORM 10-Q HAD THIRTEEN WEEKS.
OVERVIEW
Silicon Laboratories designs and develops proprietary, analog-intensive,
mixed-signal integrated circuits, or 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 company was founded in 1996. Our business has grown rapidly since our
inception, as reflected by our employee headcount, which increased to 211
employees at July 1, 2000 from 148 at the end of fiscal 1999, 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 first IC product, the direct access arrangement, or DAA, had its first
commercial shipment in April 1998. 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 July 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.
To date, substantially all of our sales have been generated through our
direct sales force. In fiscal 1998, we began to establish a network of
independent sales representatives and distributors worldwide to support our
sales and marketing activities. We anticipate that sales 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.
9
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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 make 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 by sales of our ICs. Generally, we
recognize sales upon title transfer 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 not been significant. 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 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
10
<PAGE>
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. We have issued a warrant to a
university's Electrical Engineering Department to support mixed signal analog
intensive integrated circuit design activities. We recognized expense for this
warrant based on the deemed fair value of the warrant 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 stock
to non-employee sales persons in connection with a sales incentive program that
ended on January 1, 2000. We recognize stock-based compensation expense for
these non-employees 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 prior to our
initial public offerring, 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. Since the initial public offering, we have
recorded additional deferred stock compensation of $833,000 on the same
basis. The deferred stock compensation is amortized over the vesting period
of the applicable options or shares, generally five to eight years. The
amortization of deferred stock compensation is recorded as an operating
expense.
INTEREST INCOME. Interest income reflects interest earned on average cash 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 Company's estimated effective tax rate.
11
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RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 34.5 38.0 34.4 38.1
------------------------- ---------------------------
Gross profit ........................ 65.5 62.0 65.6 61.9
Operating expenses:
Research and development .......... 18.3 21.2 18.2 20.8
Selling, general and administrative 17.9 19.9 17.2 19.0
Amortization of deferred stock
compensation....................... 3.2 1.5 3.6 1.1
------------------------- ---------------------------
Total operating expenses .......... 39.4 42.6 39.0 40.9
Operating income .................... 26.1 19.4 26.6 21.0
Interest income ..................... 5.2 1.0 3.4 1.0
Interest expense .................... 1.4 1.9 1.4 1.9
------------------------- ---------------------------
Income before tax expense ........... 29.9 18.5 28.6 20.1
Income tax expense .................. 12.5 4.3 12.2 4.7
------------------------- ---------------------------
Net income .......................... 17.4% 14.2% 16.4% 15.4%
========================= ===========================
</TABLE>
COMPARISON OF THE THREE AND SIX MONTHS ENDED JULY 1, 2000 TO THE THREE
AND SIX MONTHS ENDED JULY 3, 2000
SALES. Sales for the three months ended July 1, 2000 were $24.3 million, an
increase of $16.8 million or 224% from sales of $7.5 million in the three months
ended July 3, 1999. Sales for the six months ended July 1, 2000 were $44.0
million, an increase of $30.1 million or 217% from sales of $13.9 million in the
six months ended July 3, 1999. The increases were principally attributable to
the continued strong acceptance of our DAA family of products, including our
international DAA products. The increases reflected both an increase in the
number of customers that purchased our IC products and an increase in the volume
that those customers bought.
GROSS PROFIT. Gross profit for the three months ended July 1, 2000 was $15.9
million or 65.5% of sales, an increase of $11.2 million as compared with gross
profit of $4.7 million or 62.0% of sales in the three months ended July 3, 1999.
Gross profit for the six months ended July 1, 2000 was $28.8 million or 65.6% of
sales, an increase of $20.2 million as compared with gross profit of $8.6
million or 61.9% of sales in the six months ended July 3, 1999. The increases in
gross profit in both cases was primarily due to the substantial increase in
sales volume and the increased utilization of less expensive internal testing of
product. These factors were partially offset by higher depreciation expense
related to significantly higher internal test floor capacity. Our gross margins
may decline due to the expected introduction of competitive products to the
market 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. We expect many of
our new products 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.
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RESEARCH AND DEVELOPMENT. Research and development expense for the three
months ended July 1, 2000 was $4.4 million or 18.3% of sales, an increase of
$2.8 million or 175% as compared with research and development expense of
$1.6 million or 21.2% of sales for the three months ended July 3, 1999.
Research and development expense for the six months ended July 1, 2000 was
$8.0 million or 18.2% of sales, an increase of $5.1 million or 176% as
compared with research and development expense of $2.9 million or 20.8% of
sales for the six months ended July 3, 1999. The increase in the dollar
amount of research and development expense was principally due to continued
product development activities, significant increases in new product
development initiatives, and increased spending to develop test methodologies
for new products. The decrease in research and development expense as a
percentage of sales reflected our modest sales in the three and six months
ended July 3, 1999 as compared to substantial sales growth in the three and
six months ended July 1, 2000. 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.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased $2.9 million or 193%, to $4.4 million in the quarter ended
July 1, 2000 from $1.5 million in the quarter ended July 3, 1999, and
represented 17.9% of sales in the quarter ended July 1, 2000 and 19.9% of
sales in the quarter ended July 3, 1999. Selling, general and administrative
expense for the six months ended July 1, 2000 was $7.5 million or 17.2% of
sales, an increase of $4.9 million or 189% as compared with selling, general
and administrative expense of $2.6 million or 19.0% of sales for the six
months ended July 3, 1999. The increase in the dollar amount of selling,
general and administrative expense was principally attributable to increased
staffing. Additionally, we incurred $740,000 in patent litigation expenses in
the three months ended July 1, 2000 related to a lawsuit we filed against
Analog Devices and 3Com on January 12, 2000 (See "Part II, Other Information,
Item 1. Legal Proceedings"). The decrease in selling, general and
administrative expense as a percentage of sales was due to substantially
higher sales levels in the three and six months ended July 1, 2000. 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
continue as a result of the pending lawsuit against Analog Devices and 3Com.
This lawsuit may also cause our sales to 3Com to decline. 3Com accounted for
5% of our sales in the six months ended July 1, 2000. In addition, we expect
selling, general and administrative expense 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.
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 $787,000 and $1.6 million for the
three and six months ended July 1, 2000 as compared to $116,000 and $149,000 for
the three and six months ended July 3, 1999.
INTEREST INCOME. Interest income for the three and six months ended July 1, 2000
was $1.3 million and $1.5 million as compared to $75,000 and $138,000 for the
three and six months ended July 3,
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1999. The net proceeds from our initial public offering of our common stock,
which were received on March 29, 2000, contributed to the increase in interest
income.
INTEREST EXPENSE. Interest expense for the three and six months ended July 1,
2000 was $342,000 and $618,000 as compared to $140,000 and $260,000 for the
three and six months ended July 3, 1999. The increase in interest expense was
primarily due to higher levels of debt and lease financing used to finance
capital expenditures, particularly relating to the acquisition of IC testing
equipment and leasehold improvements.
INCOME TAX EXPENSE. Our effective tax rate was 42.1% and 42.7% for the three and
six months ended July 1, 2000 as compared to 23.1% in both the three months and
six months ended July 3, 1999. Our pro forma tax rate after excluding the
amortization of deferred stock compensation, which is not tax deductible, would
be 38% for the three and six months ended July 1, 2000. The lower effective tax
rate in 1999 also reflected net operating loss tax carryforwards that were
available from our development stage operations which were used to offset a
portion of our tax liability during the three and six months ended July 3, 1999.
These net operating loss tax carryforwards were fully utilized during fiscal
1999. We anticipate that our effective tax rate may decline in the near term due
to the investment of a substantial portion of the proceeds of our initial public
offering in tax favored securities and the potential availability of research
and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity as of July 1, 2000 consisted of $105.7
million in cash, cash equivalents and short-term investments and our bank credit
facilities.
Our bank credit facilities include a revolving line of credit available for
borrowings and letters of credit of up to the lesser of $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 for initial equipment financing and
new loan facilities totaling $4.0 million for new equipment, leasehold
improvements and computer-aided design software. At July 1, 2000, (1) a letter
of credit for $500,000 related to a building lease was outstanding under the
revolving line of credit, (2) the separate letter of credit for $454,000 was
outstanding, (3) $1.0 million was outstanding under the equipment loans and (4)
$3.5 million was outstanding under the new loan facilities. At July 1, 2000,
$2.5 million was available under the revolving line of credit.
Borrowings under the revolving line of credit bear interest at the bank's
prime rate, which was 9.5% at July 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. Borrowings under the
new loan facilities in (3) above bear interest at the bank's prime rate and are
payable through September 2003. 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 provisions that prohibit the payment
of cash dividends and require the maintenance of tangible net worth and
compliance with financial ratios, which measure our immediate liquidity and our
ongoing ability to pay back our outstanding obligations. Any default on one of
the bank facilities will cause all of the bank facilities to be in default under
these agreements. The bank has received warrants as consideration for providing
portions of this financing.
We also have entered into agreements with three institutional lenders for
equipment financing to purchase or lease equipment, leasehold improvements and
software. We borrowed $8.2 million under these agreements. At July 1, 2000, the
amount outstanding under these agreements was $5.3 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.
Prior to receiving the net proceeds from our initial public offering, we
funded our operations primarily through sales of preferred stock which resulted
in gross aggregate proceeds to us of
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approximately $12.8 million, and debt financing under the credit and lease
obligations described above and cash from operations. We raised $90.8 million
through our initial public offering in March 2000. During the six months ended
July 1, 2000, cash provided by operating activities was $5.0 million as compared
to cash provided by operating activities of $989,000 during the six months ended
July 3, 1999.
Due to the nature of our business, we experience working capital needs
in the areas of accounts receivable and inventory. Typically, we bill our
customers on an open account basis on net 30- day terms or other specific
terms that may vary from account to account as individually negotiated with
customers. As of July 1, 2000, we had an accounts receivable balance of $10.6
million dollars. If sales levels were to increase, it is likely that the
level of receivables would also increase. In the event that customers delayed
their payments to us, the levels of accounts receivable would also increase.
In the area of inventory, we find that in order to maintain an adequate
supply of product to customers, we must carry a certain level of inventory.
This inventory level may vary based principally upon either orders received
from customers or our forecast of demand for these products. Other
considerations in determining inventory levels may include the product life
cycle stage of our products and competitive situations in the marketplace.
Such considerations are balanced against risk of obsolescence or potentially
excess inventory levels. As of July 1, 2000, we had inventory of $6.8 million
which we deemed adequate to address these considerations.
Capital expenditures were $8.4 million for the six months ended July 1,
2000 and $2.6 million in the six months ended July 3, 1999. The expenditures in
the recent quarter were incurred to purchase semiconductor test equipment,
design software and engineering tools, other computer equipment, leasehold
improvements and software to support our business expansion. We anticipate
capital expenditures in the remainder of fiscal 2000 of approximately $9.6
million primarily to fund test floor operations and capital expenditures
associated with expanded engineering product development activities.
Our future capital requirements will depend on many factors, including
the rate of sales growth, market acceptance of our products, the timing and
extent of research and development projects and the expansion of our sales
and marketing activities. On June 22, 2000, we entered into an agreement to
acquire Krypton Isolation, Inc. pursuant to which we have agreed to pay $42
million in cash and common stock (estimated using the value of our common
stock on such date, and subject to further adjustment). In addition, we
expect to spend additional capital to integrate the operations of Krypton
Isolation, Inc. and this will reduce our available capital resources. We
believe the net proceeds received from our initial public offering, together
with our existing cash balances, credit facilities and cash generated by our
operations, are sufficient to meet our capital requirements through at least
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. We may enter into other 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
Stock Based Compensation
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, an interpretation of APB Opinion No. 25. The interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The interpretation
will be applied prospectively to new awards, modifications to outstanding
awards,
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and changes in employee status on or after July 1, 2000, except as follows: (i)
requirements related to the definition of an employee apply to new awards
granted after December 15, 1998; (ii) modifications that directly or indirectly
reduce the exercise price of an award apply to modifications made after December
15, 1998; and (iii) modifications to add a reload feature to an award apply to
modifications made after January 12, 2000. The Company is evaluating the effect
the application of the interpretation will have on the financial statements.
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.
RISKS RELATED TO OUR BUSINESS
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF OUR SALES,
AND THE LOSS OF, OR A SIGNIFICANT REDUCTION IN ORDERS FROM, ANY KEY CUSTOMER
COULD SIGNIFICANTLY REDUCE OUR SALES
In fiscal 1999, our four largest customers, in the aggregate, accounted for
approximately 92% of our sales. Of these customers, PC-Tel accounted for 62%,
SmartLink for 12%, 3Com for 10% and Motorola for 8% of our fiscal 1999 sales.
Our operating results in the foreseeable future will continue to depend on sales
to a relatively small number of customers, as well as the ability of these
customers to sell products that use our integrated circuit, or IC, products. In
the future, these customers may decide not to purchase our ICs at all, purchase
fewer ICs than they did in the past or alter their purchasing patterns,
particularly because:
- we do not have any material long-term purchase arrangements or
contracts with these or any of our other customers;
- substantially all of our sales to date have been made on a
purchase order basis, which permits our customers to cancel,
change or delay product purchase commitments with little or no
notice to us and without penalty; and
- some of our customers have sought or are seeking relationships
with current or potential competitors which may affect our
customers' purchasing decisions.
While we have been the sole supplier of the direct access arrangement, or
DAA, IC used in PC-Tel's products, we believe PC-Tel has qualified a second
source for its DAA IC requirements and may seek to qualify additional sources in
the future. We believe PC-Tel has qualified this second source and may qualify
additional sources in the future in order to diversify its supplier base which
would increase its negotiating leverage with us and protect its ability to
secure DAA components. With minor modifications to PC-Tel's products, our
competitors' DAA products could be incorporated in PC-Tel's products. We have a
volume purchase agreement with PC-Tel, but the agreement does not require PC-Tel
to purchase any minimum number of units from us during fiscal 2000. We believe
that any second source of DAA ICs for PC-Tel could have an adverse effect on the
prices we are able to charge PC-Tel and the volume of DAA ICs that we sell to
PC-Tel, which would negatively affect our sales and operating results.
On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com
claiming that Analog Devices has infringed, and is continuing to infringe, one
of our issued U.S. patents with
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respect to our DAA technology and that Analog Devices and 3Com have
misappropriated our confidential information, know-how and trade secrets. On
February 24, 2000, 3Com filed an answer denying it has misappropriated our
confidential information, know how and trade secrets and, without specifying,
asserted we have acted with unclean hands. Although 3Com, which is one of our
key customers, may decide to cease purchasing direct access arrangement ICs from
Analog Devices as a result of this suit, it is possible that 3Com may respond by
ceasing its purchase of our DAA products. The loss of sales to 3Com could have a
material adverse effect on our sales and operating results. 3Com accounted for
5% of our sales during the six months ended July 1, 2000.
On March 21, 2000, 3Com announced a strategic alliance with Accton
Technology and Nat Steel Electronics. The three companies will form a new
company that will be responsible for the design, marketing and sales of Internet
access products, including the 3Com products which currently incorporate our DAA
IC's. If we are unable to establish and maintain a supplier relationship with
this new company, our operating results could be adversely affected.
The loss of any of our key customers, or a significant reduction in sales
to any one of them, would significantly reduce our sales and adversely affect
our business.
WE HAVE DEPENDED ON OUR DIRECT ACCESS ARRANGEMENT, OR DAA, FAMILY OF PRODUCTS
FOR SUBSTANTIALLY ALL OF OUR SALES TO DATE, AND SIGNIFICANT REDUCTIONS IN ORDERS
FOR DAA PRODUCTS WOULD SIGNIFICANTLY REDUCE OUR SALES
Substantially all of our sales to date have been derived from sales of our
DAA family of ICs. Until we are able to diversify our sales through the
introduction of new products, we will continue to rely on sales of our DAA
products. Reduced market acceptance of our DAA products or the introduction of
products with superior price/performance characteristics by our competitors
could significantly reduce our sales. In addition, substantially all of our DAA
products that we have sold include technology related to one or more of our
issued U.S. patents. If these patents are found to be invalid or unenforceable,
our competitors could introduce competitive products that could reduce both the
volume and price per unit of our products.
WE DEPEND ON OUR CUSTOMERS TO SUPPORT OUR PRODUCTS
Our DAA products are currently used by our customers to produce modems for
the personal computer market. We rely on our customers to provide software and
other technical support for the modems that use our DAA products. If our
customers' software does not provide the required functionality or if our
customers do not provide satisfactory support for their modem products, the
demand for modems that incorporate our DAA products may diminish. Any reduction
in the demand for modems would significantly reduce our sales.
IF WE ARE UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE IN A TIMELY MANNER, OUR OPERATING RESULTS AND COMPETITIVE POSITION
COULD BE HARMED
We currently sell only our DAA products in commercial quantities. Our
future success will depend on our ability to reduce our dependence on our DAA
products by developing new ICs and product enhancements that achieve market
acceptance in a timely and cost-effective manner. The development of
mixed-signal ICs is highly complex, and we occasionally have experienced delays
in completing the development and introduction of new products and product
enhancements. Successful product development and market acceptance of our
products depend on a number of factors, including:
- changing requirements of customers within the wireline and
wireless communications markets;
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- accurate prediction of market requirements;
- timely completion and introduction of new designs;
- timely qualification and certification of our ICs for use in
our customers' products;
- commercial acceptance and volume production of the products
into which our ICs will be incorporated;
- availability of foundry and assembly capacity;
- achievement of high manufacturing yields;
- quality, price, performance, power use and size of our
products;
- availability, quality, price and performance of competing
products and technologies;
- our customer service and support capabilities and
responsiveness;
- successful development of our relationships with existing and
potential customers; and
- changes in technology, industry standards or end-user
preferences.
We cannot provide any assurance that new products which we recently have
developed or may develop in the future will achieve market acceptance. We have
recently introduced to market three new ICs:
- an RF synthesizer, which is used to generate high frequency
signals that are used in wireless communications systems to
select a particular radio channel;
- an ISOmodem, which is a miniaturized modem that can be
embedded in electronic devices with low transmission
requirements, such as credit card verification devices, to
provide quick network access; and
- a ProSLIC product, which provides dial tone, busy tone, caller
ID and ring signal functions at the source end of the
telephone.
We also are actively developing other ICs. If our recently introduced or
other ICs fail to achieve market acceptance, our operating results and
competitive position could be adversely affected.
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DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY BOTH IN ACCURATELY
PREDICTING OUR FUTURE SALES AND APPROPRIATELY BUDGETING FOR OUR EXPENSES
We were incorporated in 1996 and did not begin generating sales until the
second quarter of 1998. As a result, we have only a short history from which to
predict future sales. This limited operating experience combined with the
rapidly evolving nature of the markets in which we sell our products, as well as
other factors which are beyond our control, reduce our ability to accurately
forecast quarterly or annual sales. Additionally, because most of our expenses
are fixed in the short term or incurred in advance of anticipated sales, we may
not be able to decrease our expenses in a timely manner to offset any shortfall
of sales. We are currently expanding our staffing and increasing our expense
levels in anticipation of future sales growth. If our sales do not increase as
anticipated, significant losses could result due to our higher expense levels.
WE RELY ON THIRD PARTIES TO MANUFACTURE AND ASSEMBLE OUR PRODUCTS AND THE
FAILURE TO SUCCESSFULLY MANAGE OUR RELATIONSHIPS WITH OUR MANUFACTURERS AND
ASSEMBLERS WOULD NEGATIVELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS
We do not have our own manufacturing facilities. Therefore, we must rely on
third-party vendors to manufacture the ICs we design. We also currently rely on
two third-party assembly contractors, Advanced Semiconductor Engineering and
Amkor, to assemble and package the silicon chips provided by the wafers for use
in final products. Additionally, we rely on third-party vendors for a portion of
the testing requirements of our products prior to shipping.
There are significant risks associated with relying on these third-party
contractors, including:
- failure by us, our customers or their end customers to qualify
a selected supplier;
- capacity shortages during periods of high demand;
- reduced control over delivery schedules and quality;
- limited warranties on wafers or products supplied to us; and
- potential increases in prices.
We currently do not have long-term supply contracts with any of our
third-party vendors, and therefore, they are not obligated to perform services
or supply products to us for any specific period, or in any specific quantities,
except as may be provided in a particular purchase order. Although we believe
that other semiconductor foundries or assembly contractors can adequately
address our needs, we expect that it would take approximately two to six months
to transition performance of these services from our current providers to new
providers. Such a transition may also require a qualification process by our
customers or their end customers. We generally place orders for products with
some of our suppliers approximately four months prior to the anticipated
delivery date, with order volumes based on our forecasts of demand from our
customers. Accordingly, if we inaccurately forecast demand for our products, we
may be unable to obtain adequate foundry or assembly capacity from our
third-party contractors to meet our customers' delivery requirements, or we may
accumulate excess inventories. On occasion, we have been unable to adequately
respond to unexpected increases in customer purchase orders, and therefore, were
unable to benefit from this incremental demand. None of our third-party foundry
or assembly contractors have provided assurances to us that adequate capacity
will be available to us within the time required to meet additional demand for
our products.
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From our inception through fiscal 1999, all of the silicon wafers for the
products that we shipped were manufactured by Taiwan Semiconductor Manufacturing
Co. To address capacity considerations, we have qualified Vanguard International
Semiconductor, an affiliate of Taiwan Semiconductor Manufacturing Co., as an
additional semiconductor fabricator. Our customers typically complete their own
qualification process. Our customers may not elect to spend the time and expense
necessary to put Vanguard through their qualification processes. Vanguard is
currently producing on our behalf a majority of our current work in progress. If
we fail to balance customer demand across semiconductor fabrications properly,
we might not be able to fulfill demand for our products, which would adversely
affect our operating results. Additionally, a resulting write-off of unusable
inventories would contribute to a decline in earnings.
The semiconductor manufacturing process is highly complex and, from time to
time, manufacturing yields may fall below our expectations which could result in
our inability to timely satisfy demand for our products
The manufacture of silicon wafers for our products is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries from
time to time have experienced lower than anticipated manufacturing yields.
Changes in manufacturing processes or the inadvertent use of defective or
contaminated materials by our foundries could result in lower than anticipated
manufacturing yields or unacceptable performance deficiencies. If our foundries
fail to timely deliver fabricated silicon wafers of satisfactory quality, we
will be unable to timely meet our customers' demand for our products, which
would adversely affect our operating results and damage our customer
relationships.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
As part of our growth strategy, we will continue to evaluate
opportunities to acquire other businesses or technologies that would
complement our current offerings, expand the breadth of our markets or
enhance our technical capabilities. On June 22, 2000, we entered into an
agreement to acquire Krypton Isolation, Inc. pursuant to which we have agreed
to pay $42 million in cash and common stock based on the value of our common
stock on such date (estimated using the value of our common stock on such
date and subject to further adjustment). This acquisition and any potential
future 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.
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OUR CURRENT MANUFACTURERS AND ASSEMBLERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC
REGION WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR STRIKE, WAR OR
POLITICAL UNREST COULD DISRUPT OUR OPERATIONS
Our current semiconductor manufacturers are located in the same region
within Taiwan and our assembly contractors are located in the Pacific Rim
region. The risk of earthquakes in Taiwan and the Pacific Rim region is
significant due to the proximity of major earthquake fault lines in the area. In
September 1999, our current semiconductor manufacturers' principal facilities
were affected by a significant earthquake in Taiwan. As a consequence of this
earthquake, these manufacturers suffered power outages and disruption that
impaired their production capacity. We have filed an insurance claim for $1.2
million under our contingent business interruption insurance policy for the
business disruption that we sustained as a result of this earthquake. However,
we do not know whether this claim will be paid in full or at all in order to
compensate us for this disruption. The policy under which this claim was made
has since expired, and we are not currently covered by insurance against
business disruption caused by earthquakes as such insurance is not currently
available on terms that we believe are commercially reasonable. Earthquakes,
fire, flooding or other natural disasters in Taiwan or the Pacific Rim region,
or political unrest, war, labor strikes or work stoppages in countries where our
semiconductor manufacturers' and assemblers' facilities are located, likely
would result in the disruption of our foundry or assembly capacity. Any
disruption resulting from these events could cause significant delays in
shipments of our products until we are able to shift our manufacturing or
assembling from the affected contractor to another third-party vendor. There can
be no assurance that such alternate capacity could be obtained on favorable
terms, if at all.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE BUILD OUR
PRODUCTS BASED ON FORECASTS PROVIDED BY CUSTOMERS BEFORE RECEIVING PURCHASE
ORDERS FOR THE PRODUCTS
In order to assure availability of our products for some of our largest
customers, we start the manufacturing of our products in advance of receiving
purchase orders based on forecasts provided by these customers. However, these
forecasts do not represent binding purchase commitments and we do not recognize
sales for these products until they are shipped to the customer. As a result, we
incur inventory and manufacturing costs in advance of anticipated sales. Because
demand for our products may not materialize, manufacturing based on forecasts
subjects us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.
WE MAY NOT BE ABLE TO MAINTAIN OUR EXISTING GROWTH RATE
Although we have experienced sales and earnings growth in our recent
quarterly and annual periods, we may not be able to sustain these growth rates.
In particular, we may gain significant market share in a relatively short period
of time following the introduction of a new product, resulting in sales growth.
However, incremental gains in market share for these newly introduced products
may not occur. Accordingly, you should not rely on the results of any prior
quarterly or annual periods as an indication of our future operating
performance.
WE MAY EXPERIENCE SIGNIFICANT PERIOD-TO-PERIOD QUARTERLY AND ANNUAL FLUCTUATIONS
IN OUR SALES AND OPERATING RESULTS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK
PRICE
We may experience significant period-to-period fluctuations in our sales
and operating results in the future due to a number of factors, and any such
variations may cause our stock price to fluctuate. It is likely that in some
future period our operating results will be below the expectations of public
market analysts or investors. If this occurs, our stock price may drop, perhaps
significantly.
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A number of factors, in addition to those cited in other risk factors
applicable to our business, may contribute to fluctuations in our sales and
operating results, including:
- the timing and volume of orders from our customers;
- the rate of acceptance of our products by our customers,
including the acceptance of new products we may develop for
integration in the products manufactured by such customers,
which we refer to as "design wins";
- the demand for and life cycles of the products incorporating
our ICs;
- the rate of adoption of mixed-signal ICs in the markets we
target;
- deferrals of customer orders in anticipation of new products
or product enhancements from us or our competitors or other
providers of ICs;
- changes in product mix; and
- the rate at which new markets emerge for products we are
currently developing or for which our design expertise can be
utilized to develop products for these new markets.
For example, the personal computer modem market is characterized by rapid
fluctuations in demand which results in corresponding fluctuations in the demand
for our DAA products that are incorporated in personal computer modems.
Additionally, the rate of technology acceptance by our customers results in
fluctuating demand for our products as customers are reluctant to incorporate a
new IC into their products until the new IC has achieved market acceptance.
However, once a new IC achieves market acceptance, demand for the new IC quickly
accelerates and demand quickly declines for the product that the new IC
replaces.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
AND INCREASE MARKET SHARE
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
base of customers than we have. As a result, these competitors may have greater
credibility with our existing and potential customers. They also may be able to
adopt more aggressive pricing policies and devote greater resources to the
development, promotion and sale of their products than we can to ours. In
addition, some of our current and potential competitors have already established
supplier or joint development relationships with the decision makers at our
current or potential customers. These competitors may be able to leverage their
existing relationships to discourage their customers from purchasing products
from us or persuade them to replace our products with their products. Our
competitors may also offer bundled chipset kit arrangements offering a more
complete product despite the technical merits or advantages of our products.
These competitors may elect not to support our products which could complicate
our sales efforts.
In addition, our largest competitors may restructure their operations to
create separate companies that are more focused on providing the types of
products we produce. For example, Rockwell's restructuring led to the creation
of Conexant which is a significant competitor. Additionally, Siemens spun off
its semiconductor business to create a more focused company named Infineon
Technologies. Increased competition could decrease our prices, reduce our sales,
lower our margins or decrease our market share. These and other competitive
pressures may
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prevent us from competing successfully against current or future competitors,
and may materially harm our business.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR
PRODUCTS COULD BE HARMED
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. Specifically, due to the relatively early stage of our
company's business, we believe that our future success is highly dependent on
Navdeep Sooch, our co-founder, Chief Executive Officer and Chairman of the
Board, Jeffrey Scott, our co-founder and Vice President of Engineering, and
David Welland, our co-founder and Vice President of Technology. We do not have
employment contracts with these or any other key personnel. There is currently a
shortage of qualified personnel with significant experience in the design,
development, manufacturing, marketing and sales of analog and mixed-signal
communications ICs. In particular, there is a shortage of engineers who are
familiar with the intricacies of the design and manufacturability of analog
elements, and competition for such personnel is intense. Our key technical
personnel represent a significant asset and serve as the source of our
technological and product innovations. We may not be successful in attracting
and retaining sufficient numbers of technical personnel to support our
anticipated growth. The loss of any of our key employees or the inability to
attract or retain qualified personnel, including engineers and sales and
marketing personnel, could delay the development and introduction of, and
negatively impact our ability to sell, our products.
OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON A LIMITED NUMBER OF NEW
TECHNOLOGIES AND PRODUCTS, AND ANY DELAY IN THE DEVELOPMENT, OR ABANDONMENT, OF
THESE TECHNOLOGIES OR PRODUCTS BY INDUSTRY PARTICIPANTS, OR THEIR FAILURE TO
ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR COMPETITIVE POSITION
Our ICs are used as components in communications devices in the wireline
and wireless markets. As a result, we have devoted and expect to continue to
devote a large amount of resources to develop products based on new and emerging
technologies and standards that will be commercially introduced in the future.
In the first six months of fiscal 2000, our research and development expense was
$8.0 million, which represented 18.3% of our sales compared to $2.9 million, or
20.9% of our sales for the first six months of fiscal year 1999. A number of
large companies in the wireline and wireless communications industries are
actively involved in the development of these new technologies and standards.
Should any of these companies delay or abandon their efforts to develop
commercially available products based on new technologies and standards, our
research and development efforts with respect to these technologies and
standards likely would have no appreciable value. In addition, if we do not
correctly anticipate new technologies and standards, or if the products that we
develop based on these new technologies and standards fail to achieve market
acceptance, our competitors may be better able to address market demand than
would we. Furthermore, if markets for these new technologies and standards
develop later than we anticipate, or do not develop at all, demand for our
products that are currently in development would suffer, resulting in lower
sales of these products than we currently anticipate. We have introduced to
market a RF synthesizer product for use in cellular phones operating on the
Global System for Mobile Communications, or GSM, standard. The RF synthesizer is
also compatible with General Packet Radio Service, which is the emerging data
communications protocol for GSM based cellular phones. We cannot be certain
whether manufacturers of cellular phones using these standards will incorporate
our RF synthesizer or that these standards will not change, thereby making our
products unsuitable or impractical.
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OUR PRODUCTS ARE COMPLEX AND MAY REQUIRE MODIFICATIONS TO RESOLVE UNDETECTED
ERRORS WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES
Our products are complex and may contain errors when first introduced or as
new versions are released. We rely primarily on our in-house testing personnel
to design test operations and procedures to detect any errors prior to delivery
of our products to our customers. Because our products are manufactured by third
parties, should problems occur in the operation or performance of our ICs, we
may experience delays in meeting key introduction dates or scheduled delivery
dates to our customers. These errors also could cause us to incur significant
re-engineering costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations and
business reputation problems.
THE PERFORMANCE OF OUR DIRECT ACCESS ARRANGEMENT PRODUCTS MAY BE ADVERSELY
AFFECTED BY SEVERE ENVIRONMENTAL CONDITIONS THAT MAY REQUIRE MODIFICATIONS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR SALES
Although our direct access arrangement products are compliant with
published specifications, these established specifications might not adequately
address all conditions that must be satisfied in order to operate in harsh
environments. This includes environments where there are wide variations in
electrical quality, telephone line quality, static electricity and operating
temperatures or that may be affected by lightning or improper handling by
customers and end users. Our products have had a limited period of time in the
field under operation, and these environmental factors may result in
unanticipated returns of our products. Any necessary modifications could cause
us to incur significant re-engineering costs, divert the attention of our
engineering personnel from our product development efforts and cause significant
customer relations and business reputation problems.
A SUBSTANTIAL PORTION OF THE FINAL TESTING OF OUR PRODUCTS IS PERFORMED
INTERNALLY BY US, WHICH INCREASES OUR FIXED COSTS
In 1999, approximately 74% of our final product test operations were
performed in-house. The balance of the final testing of our products is provided
by our contract manufacturers or other third parties. During the three and six
months ended July 1, 2000, substantially all of our final product test
operations were performed in-house. While we believe performing this testing
in-house provides us with advantages in terms of lower per unit cost, quality
control and shorter time required to bring a product to market, we may encounter
difficulties and delays in maintaining or expanding our internal test
capabilities. In addition, final testing of complex semiconductors requires
substantial resources to acquire state-of-the-art testing equipment and hiring
additional qualified personnel, which has increased our fixed costs. If demand
for our products does not support the effective utilization of these employees
and additional equipment, we may not realize any benefit from replacing our
outside vendors with internal final testing. Any decrease in the demand for our
products could result in the underutilization of our testing equipment and
personnel. If our internal test operations are underused or mismanaged, we may
incur significant costs that could adversely affect our operating results.
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
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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 18 months, we have significantly increased the scope of our
operations and expanded our workforce from 42 employees at January 2, 1999 to
211 employees at July 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.
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SIGNIFICANT LITIGATION OVER INTELLECTUAL PROPERTY IN OUR INDUSTRY MAY CAUSE US
TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM
OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time, we
receive letters from various industry participants alleging infringement of
patents or trade secrets. The exploratory nature of these inquiries has become
relatively common in the semiconductor industry. We typically respond when
appropriate and as advised by legal counsel. We may become involved in
litigation to protect our intellectual property rights or to defend allegations
of infringement asserted by others. Legal proceedings could subject us to
significant liability for damages or invalidate our proprietary rights. Legal
proceedings initiated by us to protect our intellectual property rights could
also result in counterclaims or countersuits against us. Any litigation,
regardless of its outcome, would likely be time consuming and expensive to
resolve and would divert our management's time and attention. Any intellectual
property litigation also could force us to take specific actions, including:
- cease selling products that use the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all;
or
- redesign those products that use infringing intellectual
property.
On January 12, 2000, we filed a lawsuit against Analog Devices and 3Com
claiming that Analog Devices has infringed, and is continuing to infringe, one
of our issued U.S. patents with respect to our DAA technology and that Analog
Devices and 3Com have misappropriated our confidential information, know-how and
trade secrets. On January 26, 2000, Analog Devices served an answer denying that
it has misappropriated our confidential information, know-how and trade secrets
and brought a counterclaim against us seeking a declaratory judgment that our
issued U.S. patent is invalid and unenforceable and that Analog Devices has not
infringed our issued U.S. patent. We filed a reply to Analog Devices'
counterclaim asserting that our issued U.S. patent is valid and enforceable and
that Analog Devices has infringed our issued U.S. patent. On February 24, 2000,
3Com served an answer denying it has misappropriated our confidential
information, know-how and trade secrets and, without specifying, asserted we
have acted with unclean hands. Our lawsuit will involve significant expense and
divert our management's time and attention from other aspects of our business.
The lawsuit may also damage our business relationship with 3Com which accounted
for 5% of our sales in the six months ended July 1, 2000, 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.
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.
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RISKS RELATED TO OUR INDUSTRY
COMPETITION WITHIN THE NUMEROUS MARKETS WE TARGET MAY REDUCE SALES OF OUR
PRODUCTS AND REDUCE MARKET SHARE
The markets for semiconductors in general, and for mixed-signal ICs in
particular, are intensely competitive. We expect that the market for our
products will continually evolve and will be subject to rapid technological
change. In addition, as we target and supply products to numerous markets and
applications, including wireline, wireless and other communications markets, we
face competition from a relatively large number of competitors. Across all of
our product areas, we compete with Advanced Micro Devices, Analog Devices,
Conexant, Delta Integration, Fujitsu, Infineon Technologies, Krypton Isolation,
National Semiconductor, Philips and Texas Instruments, among others. We expect
to face competition in the future from our current competitors, other
manufacturers and designers of semiconductors, and innovative start-up
semiconductor design companies. Some of our customers, such as Intel, Lucent and
Motorola, are also large, established semiconductor suppliers. Our sales to and
support of these customers may enable them to become a source of competition to
us, despite our efforts to protect our intellectual property rights. As the
markets for communications products grow, we also may face competition from
traditional communications device companies. These companies may enter the
mixed-signal semiconductor market by introducing their own ICs or by entering
into strategic relationships with or acquiring other existing providers of
semiconductor products.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE RAPIDLY WHICH MAY
NEGATIVELY IMPACT OUR GROSS MARGINS AND SALES
We may experience substantial period-to-period fluctuations in future
operating results due to the erosion of our average selling prices. We have
reduced the average unit price of our products in anticipation of future
competitive pricing pressures, new product introductions by us or our
competitors and other factors. We expect that we will have to do so again in the
future. If we are unable to offset any such reductions in our average selling
prices by increasing our sales volumes, our gross profits and sales will suffer.
To maintain gross margins, we will need to develop and introduce new products
and product enhancements on a timely basis and continually reduce our costs. Our
failure to do so would cause our sales and gross margins to decline.
OUR CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES
Prior to purchasing our products, our customers require that our products
undergo an extensive qualification process, which involves testing of the
products in the customer's system as well as rigorous reliability testing. This
qualification process may continue for six months or longer. However,
qualification of a product by a customer does not assure any sales of the
product to that customer. Even after successful qualification and sales of a
product to a customer, a subsequent revision to the IC, changes in its
manufacturing process or the selection of a new supplier by us may require a new
qualification process, which may result in delays and in us holding excess or
obsolete inventory. After our products are qualified, it can take an additional
six months or more before the customer commences volume production of components
or devices that incorporate our products. Despite these uncertainties, we devote
substantial resources, including design, engineering, sales, marketing and
management efforts, toward qualifying our products with customers in
anticipation of sales. If we are unsuccessful or delayed in qualifying any of
our products with a customer, such failure or delay would preclude or delay
sales of such product to the customer, which may impede our growth and cause our
business to suffer.
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information related to quantitative and qualitative disclosures
regarding market risk is set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations and the risk factors under Item 2
above. Such information is incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. 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,
tortuously interfered with our business relations with our existing and
prospective customers, and been unjustly enriched by this misappropriation. The
suit seeks unspecified damages from Analog Devices, including damages for
willful infringement of our patent, and an injunction prohibiting Analog Devices
from infringing our patent. In addition, the suit seeks unspecified damages,
including punitive damages and attorneys' fees arising, among other things, out
of the misappropriation, tortious interference and unjust enrichment, and an
injunction prohibiting Analog Devices and 3Com from designing, manufacturing,
reproducing, using or selling any ICs, modems or other products the conception,
design or development of which was based on our confidential information,
know-how and trade secrets.
On January 26, 2000, Analog Devices served an answer denying that it
has misappropriated our confidential information, know-how and trade secrets and
brought a counterclaim against us seeking a declaratory judgment that our issued
U.S. patent is invalid and unenforceable and that Analog Devices has not
infringed our issued U.S. patent. The counterclaim further alleges that we
improperly failed to disclose a relevant pre-existing patent to the U.S. Patent
and Trademark Office during the course of our patent application process, and
that we therefore are unable to enforce our patent. We filed a reply to Analog
Devices' counterclaim asserting that our issued U.S. patent is valid and
enforceable and that Analog Devices has infringed our issued U.S. patent. We
also denied that we improperly excluded any relevant information in the course
of our patent application process.
On February 24, 2000, 3Com served an answer denying it has
misappropriated our confidential information, know-how and trade secrets and,
without specifying, asserted we have acted with unclean hands. This litigation
is in the discovery phase and no trial date has been set by the trial court.
On May 22, 2000, Analog Devices filed a complaint in the United States
District Court for the District of Massachusetts asserting that we have
infringed on one of their patents. On June 26, 2000, Analog Devices withdrew
their complaint without prejudice before we were required to file a response.
For a description of risks associated with this pending lawsuit, please
see "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" in the risk
factors included in Item 2 of Part I of this Form 10-Q.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 10, 2000, we issued 1,200 shares of our common stock to an
employee pursuant to an exercise of stock options (with an exercise price of
$0.12 per share) under our 2000 Stock Incentive Plan. This issuance was exempt
from registration under Section 5 of the Securities Act of 1933 in reliance upon
Rule 701 thereunder. We filed a Registration Statement on Form S-8 with respect
to options and shares issuable under our 2000 Stock Incentive Plan and Employee
Stock Purchase Plan with the Securities and Exchange Commission on June 16,
2000.
Our registration statement (Registration No. 333-94853) under the
Securities Act of 1933, as amended, relating to our initial public offering of
our common stock became effective on March 23, 2000. A total of 3,680,000 shares
of common stock were registered. We sold a total of 3,200,000 shares of our
common stock and selling stockholders sold a total of 480,000 to an underwriting
syndicate. The managing underwriters were Morgan Stanley & Co. Incorporated,
Lehman Brothers Inc., and Salomon Smith Barney Inc. The offering commenced and
was completed on March 24, 2000, at a price to the public of $31.00 per share.
The initial public offering resulted in net proceeds to us of $90.8 million,
after deducting underwriting commissions of $6.9 million and offering expenses
of $1.5 million. As of July 1, 2000, these proceeds were invested in government
securities and other short-term, investment-grade, interest bearing instruments.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 OTHER INFORMATION
Not applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
10.19 Lease Agreement dated June 29, 2000 by and between
Silicon Laboratories Inc. and Stratus 7000 West
Joint Venture.
27.01 Financial Data Schedule (EDGAR version only)
(b) There were no reports on Form 8-K filed during the quarter
ended July 1, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICON LABORATORIES INC.
By: /s/ John W. McGovern
-----------------------------------------
John W. McGovern
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
July 17, 2000 /s/ Navdeep S. Sooch
------------------------------- --------------------------------------------
Date Navdeep S. Sooch
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
July 17, 2000 /s/ John W. McGovern
------------------------------- --------------------------------------------
Date John W. McGovern
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
31
