2010 ANNUAL REPORT ON FORM 10-K
To our Shareholders, Customers, Partners and Employees:
2010 was a year of extremes. The 2009 recession ended abruptly and the result of our aggressive strategy to buy market share came
home immediately as we entered 2010. Demand for our products outpaced supply by more than 40% and we spent most of the year
struggling to keep our customers satisfied. However, just as quickly as business ramped-up, by the end of the year, end market
demand abruptly shrunk by more than 30%. 2010 was a tumultuous year for the industry—the consumer market experienced extreme
supply and demand swings within the same year.
Despite the challenges we faced throughout the year, we grew over 32% to a record $218M revenue, earnings per share (EPS) grew
76% to $1.18, and our cash grew to $196.9M, or just over $5 per share. And, in an effort to continue to bring shareholder value, we
issued a $70M stock repurchase program. However, 2010 was also a year confronted with new challenges. During the 2009
recession, we bought market share that quickly turned into revenue in early 2010. Keep in mind that the economic conditions were
unclear at the time and it looked as if the recession would extend into 2010. As a result of our increased consumer business, our gross
margin dropped 3.7% to 55.5% year-over-year. Even though we supplied product to our customers, for most of the year we
experienced capacity constrained shortages and some customers were forced to seek alternative suppliers. In summary, 2010 was a
challenging year for MPS and we’re committed to continuous improvement.
With new corporate initiatives in place to forge a stronger MPS, 2011 will be a rebuilding year. Let me highlight these initiatives that
we set in motion in 2010:
1. Execute to 2011 growth plan and maintain gross margin in existing and new markets to make up for the lost
customer revenue from 2010.
2. Balance market segment revenue through diversification into higher end markets that value our unique, small
footprint and high output current (i.e., current density).
Servers & enterprise storage
Telecom/Datacom
Industrial
Lighting
3. Continue capacity expansion to meet our growth objective: 40% fab capacity growth in 2010 from existing two
4.
Foundries and another 50% planned by the end of 2011 with the addition of a third Foundry.
Improve on-time delivery and customer satisfaction: Install supply chain management (SCM) and CRM software
in 2011.
Technology Highlights
: MPS is in production with our proprietary Mesh ConnectTM manufacturing technology that provides
improved efficiency and reduces cost by eliminating expensive gold bond wires. We also released our next generation proprietary,
high-voltage DMOS process that reduces the Rds(on) per unit area by 40% to provide superior power-density solutions.
New Product and Market Highlights
: Despite a year of supply and capacity constraints, we were able to release more than 55 new
products and entered into two significant new markets—WLED AC-input lighting and ACDC converters. We also released our first
fully integrated, monolithic, 12V, 25A Intelli-Phase DCDC buck converter that targets high-current point-of-load applications. This is
truly a leading-edge product that is opening doors into large telecom/datacom companies and is a testament to our initiative to
diversify into new markets.
In 2011, we will focus on establishing MPS as a leader in the energy-saving market segment. There are new demands for extreme
high-efficiency power conversion products in the cloud computing, industrial, automotive, and lighting markets. MPS possesses the
enabling technologies for high-current and high-voltage applications to make a significant impact in this market. We will introduce a
few breakthrough products in 2011 that we believe will redefine the standard in the industry.
In summary, I continue to be excited about our future. We increased our served available market by more than $2.5B through new
product introductions and we continue to invest in R&D to maintain leadership technology. 2011 is a year to regroup and come out
stronger through execution of our initiatives and a focus on innovative energy saving power solutions for the future.
Michael R. Hsing
President and Chief Executive Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 000-51026
Monolithic Power Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0466789
(I.R.S. Employer
Identification Number)
6409 Guadalupe Mines Road, San Jose, CA 95120 (408) 826-0600
(Address of principal executive offices, including zip code and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 Par Value
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act of 1933. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 (the “Exchange Act”). Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act 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. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes No
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting
company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No
The number of shares of the registrant’s stock outstanding as of June 30, 2010 was 36,545,581. The closing
price of the registrant’s common stock on the Nasdaq Global Select Market as of June 30, 2010 was $17.86. The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon
the closing price of the Common Stock on the Nasdaq Global Select Market on June 30, 2010 was $373,041,070.*
There were 35,315,748 shares of the registrant’s common stock issued and outstanding as of February 22, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s 2011 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed
within 120 days of the registrant’s fiscal year ended December 31, 2010.
* Excludes 15,658,623 shares of the registrant’s common stock held by executive officers, directors and stockholders
whose ownership exceeds 5% (“affiliates”) of the Common Stock outstanding at June 30, 2010. Exclusion of such
shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant or that such person is controlled by or under
common control with the registrant.
2
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72
MONOLITHIC POWER SYSTEMS, INC.
TABLE OF CONTENTS
Item 1.
Business
Executive Officers of the Registrant
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
PART I
PART II
Item 1A
Item 1B
Item 2.
Item 3.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
Except as the context otherwise requires, the terms “Monolithic Power Systems”, “MPS”, “Registrant”,
“Company”, “we”, “us”, or “our” as used herein are references to Monolithic Power Systems, Inc. and its consolidated
subsidiaries.
3
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FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the documents incorporated herein by reference contain 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, that have been made pursuant to and in reliance on the provisions of the
Private Securities Litigation Reform Act of 1995. These statements include among other things, statements concerning:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the above-average industry growth of product and market areas that we have targeted,
our plan to introduce additional new products within our existing product families as well as in new product
categories and families,
our belief that we will continue to incur significant legal expenses that vary with the level of activity in each
of our legal proceedings,
the impact of our outstanding litigation and changing market conditions on the revenue we derive from our
CCFL product line,
the effect of auction-rate securities on our liquidity and capital resources,
the application of our products in the computer, consumer electronics, and communications markets
continuing to account for a majority of our revenue,
estimates of our future liquidity requirements,
the cyclical nature of the semiconductor industry,
protection of our proprietary technology,
near term business outlook for 2011,
the factors that we believe will impact our ability to achieve revenue growth,
the outcome of the IRS audit of our tax return for the tax years ended December 31, 2006 and 2007,
the percentage of our total revenue from various market segments, and
the factors that differentiate us from our competitors.
In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,”
“anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these
terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements.
All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans
or objectives about our business and our industry. These statements are not guarantees of future performance and are
subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in
any such forward-looking statements.
Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this annual
report on Form 10-K and, in particular, in the section entitled “Item 1A. Risk Factors”.
Except as required by law, we disclaim any duty to and undertake no obligation to update any forward-looking
statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release
publicly the results of any future revisions we may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to
place undue reliance on such statements, which speak only as of the date of this annual report on Form 10-K. Readers
should carefully review future reports and documents that we file from time to time with the Securities and Exchange
Commission, such as our quarterly reports on Form 10-Q and any current reports on Form 8-K.
ITEM 1. BUSINESS
General
PART I
Monolithic Power Systems is a fabless semiconductor company that designs, develops and markets proprietary,
advanced analog and mixed-signal semiconductors. We combine advanced process technology with our highly
experienced analog designers to produce high-performance power management integrated circuits (ICs) for DC to DC
converters, LED drivers, Cold Cathode Fluorescent Lamp (CCFL) backlight controllers, Class-D audio amplifiers, and
other Linear ICs. Our products are used extensively in computing and network communications products, flat panel TVs,
4
set top boxes and a wide variety of consumer and portable electronics products. We partner with world-class
manufacturing organizations to deliver top quality, ultra-compact, high-performance solutions through productive, cost-
efficient channels. Founded in 1997 and headquartered in San Jose, California, we have expanded our global presence
with offices in Taiwan, China, Korea, Japan, and Europe, which operate under MPS International, Ltd.
Industry Overview
Semiconductors comprise the basic building blocks of electronic systems and equipment. Within the semiconductor
industry, components can be classified either as discrete devices, such as individual transistors, or as ICs, in which a
number of transistors and other elements are combined to form a more complicated electronic circuit. ICs can be further
divided into three primary categories: digital, analog, and mixed-signal. Digital ICs, such as memory devices and
microprocessors, can store or perform arithmetic functions on data that is represented by a series of ones and zeroes.
Analog ICs, in contrast, handle real world signals such as temperature, pressure, light, sound, or speed. In addition,
analog ICs also perform power management functions, such as regulating or converting voltages, for electronic devices.
Mixed-signal ICs combine digital and analog functions onto a single chip and play an important role in bridging real
world phenomena to digital systems.
Analog and Mixed-Signal Markets. We focus on the market for ‘high performance’ analog and mixed-signal ICs. ‘High
performance’ products generally are differentiated by functionality and performance factors which include integration of
higher levels of functionality onto a single chip, greater precision, higher speed and lower heat and noise. There are
several key factors that distinguish analog and mixed-signal IC markets from digital IC markets and in particular the high
performance portion of the analog and mixed signal IC market. These factors include longer product life
cycles, numerous market segments, technology that is difficult to replicate, relative complexity of design and process
technology, importance of experienced design engineers, lower capital requirements and diversity of end markets. We
have, however, targeted product and market areas that we believe have the ability to offer above average industry growth
over the long term.
Products and Applications
We currently have three primary product families that address multiple applications within the computing, consumer
electronics, communications, and industrial/automotive markets. Our products are differentiated with respect to their
high degree of integration and strong levels of accuracy and efficiency, making them cost-effective relative to many
competing solutions. These product families include:
Direct Current (DC) to DC Converters. DC to DC converter ICs are used to convert and control voltages within a broad
range of electronic systems, such as portable electronic devices, wireless LAN access points, computers, set top boxes,
TVs and monitors, automobiles and medical equipment. We believe that our DC to DC converters are differentiated in
the market, particularly with respect to their high degree of integration, high voltage operation, high load current, and
high switching speed in a small footprint. These features are important to our customers as they result in fewer
components, a smaller form factor, more accurate regulation of voltages, and, ultimately, lower system cost and
increased reliability through the elimination of many discrete components and power devices.
Lighting Control Products and AC/DC Offline Solutions. Lighting control ICs are used in backlighting and general
illumination products. Lighting control ICs for backlighting are used in systems that provide the light source for LCD
panels typically found in notebook computers, LCD monitors, car navigational systems, and LCD televisions.
Backlighting solutions are typically either WLED lighting sources or cold cathode fluorescent lamps (CCFL). WLED
lighting control ICs step-up or step-down a DC voltage, or convert from an AC line voltage supplied by the utility
company (also called AC/DC Offline) and provide efficient precision power and protection to a LED string or to
multiple LED strings. The CCFL ICs function by converting low-voltage direct current (DC) or battery voltage to high-
voltage alternating current (AC). We believe our CCFL ICs were the first to utilize a full bridge resonant topology that
allows for high efficiency, extended lifetimes for cold cathode fluorescent lamps (CCFLs), and lower signal interference
with adjacent components. The full bridge topology is now the industry standard for these products.
In addition to AC/DC offline solutions for lighting illumination applications, MPS also offers AC/DC power conversion
solutions for a diverse number of end products that plug into a wall outlet.
Audio Amplifiers. Audio amplifier ICs are used to amplify sound produced by audio processors. We currently offer
Class-D audio amplifiers, which are well-suited for applications that require both a small form factor and high power
5
efficiency, such as plasma televisions, LCD televisions and DVD players. With today’s systems becoming smaller and
utilizing larger amounts of power, solution sizes and the management of heat dissipation are becoming increasingly
important to the overall system design. The high degree of power efficiency and small form factor provided by our
Class-D audio amplifiers allows system vendors to significantly reduce heat dissipation, eliminating the costly and
sizable fans and heat sinks traditionally required by audio amplifier ICs. These features enable our customers to achieve
their design and cost objectives without sacrificing sound quality.
We currently target our products at the consumer electronics, communications and computing markets, with the
consumer market representing the largest portion of our revenue.
The following is a brief summary of our product family solutions for various applications. For each of these applications,
we are currently shipping product or have design wins, which are decisions by original equipment manufacturers, or
OEMs, or original design manufacturers, or ODMs, to use our ICs:
WLED
Lighting
Illumination
(non-
backlight)
Application
LCD
Backlight
(Inverters
or
WLED)
DC to DC
Converters
(Buck &
Boost)
µP Reset &
Supervisory
Audio
Amplifiers
AC/DC
Offline
Chargers
(Switching
& Linear)
Current
Limit
Switches
Computing
Computers and PDA
devices
LCD Monitors
Disk Drives/ Storage
Networks
Consumer Electronics
LCD TV Displays
Plasma TV Displays
Set Top Boxes
Blu-Ray & DVD
Players
Digital Still Cameras
Commercial &
Industrial Bulb &
CFL Replacement
GPS and
Infotainment
systems
Communications
Cellular Handsets
Networking
Infrastructure
VOIP
Wireless Access
Points
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
We derive a majority of our revenue from the sales of our DC to DC converter IC product family to the computing,
consumer electronics and communications markets. In the future, we will continue to introduce additional new products
within our existing product families, such as high current, high voltage, small form factor switching voltage regulators,
as well as expand our newer product families in battery chargers, voltage references and low dropout regulators. Our
ability to achieve revenue growth will depend in part upon our ability to enter new market segments, gain market share,
grow in regions outside of Greater China, expand our customer base and successfully secure manufacturing capacity.
Please refer to the table showing our revenue by product family in the section entitled “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations”.
6
Customers, Sales, and Marketing
We sell our products through third party distributors, value-added resellers and directly to OEMs, ODMs, and electronic
manufacturing service (EMS) providers. Our third party distributors are subject to distribution agreements with us which
allow the distributor to sell our products to end customers and other resellers. Distributors may distribute our products to
end customers which include OEMs, ODMs or EMS providers. Our value-added resellers may second source our
products and provide other services to customers. ODMs typically design and manufacture electronic products on behalf
of OEMs, and EMS providers typically provide manufacturing services for OEMs and other electronic product suppliers.
The following is a summary for the years ended December 31, 2010, 2009 and 2008 of those customers that accounted
for more than 10% of our total revenue in one or more of these years:
Customer
A
B
C
D
Revenue
Year ended December 31,
2009
2008
2010
14 %
*
*
*
13 %
10 %
10 %
*
20 %
10 %
*
*
Current distribution agreements with several of our major distributors provide that each distributor shall have the non-
exclusive right to sell and use its best efforts to promote and develop a market for our products in several countries in
Asia. These agreements may be terminated by either us or the distributor on up to three months’ notice. These
agreements provide that payment for purchases from us will generally occur within 30 to 45 days from the date of
invoice. In addition, we allow for limited stock rotation in certain agreements.
We have sales offices located in the United States, Taiwan, China, Korea and Japan and have marketing representatives
in Europe. Our products typically require a highly technical sales and applications engineering effort where we assist our
customers in the design and use of our products in their application. We maintain a staff of applications engineers who
work directly with our customers’ engineers in the development of their systems electronics containing our products.
Because our sales are billed and payable in United States dollars, our sales are not directly subject to fluctuating currency
exchange rates. However, because 87% of our revenue in 2010 was attributable to direct or indirect sales to customers in
Asia, changes in the relative value of the dollar may create pricing pressures for our products.
Our sales are made primarily pursuant to standard individual purchase orders. Our manufacturing lead times are
generally 4 to 12 weeks and we often build inventory in advance of customer orders based on our forecast of future
customer orders. This subjects us to certain risks, most notably the possibility that sales will not meet our forecast, which
could lead to inventories in excess of demand. If excess inventory exists, it may be necessary for us to sell it at a
substantial discount or dispose of it altogether, either of which would negatively affect our profit margins.
We operate in the cyclical semiconductor industry where there is seasonal demand for certain of our products. While we
are not and will not be immune from current and future industry downturns, we have targeted product and market areas
that we believe have the ability to offer above average industry performance over the long term.
Research and Development
We have assembled a qualified team of engineers in the United States, China and Europe with core competencies in
analog and mixed-signal design. Through our research and development efforts, we have developed a collection of
intellectual property and know-how that we are able to leverage across our products and markets. These include the
development of high efficiency power devices, the design of precision analog circuits, expertise in mixed-signal
integration and the development of proprietary semiconductor process technologies.
Our research and development efforts are generally targeted at three areas: systems architecture, circuit design and
implementation, and process technology. In the area of systems architecture, we are exploring new ways of solving our
customers’ system design challenges and are investing in the development of systems expertise in new markets and
applications that align well with our core capabilities. In the area of circuit design and implementation, our initiatives
include expanding our portfolio of products and adding new features to our products.
7
Please refer to the discussion of the amount spent on research and development during each of the last three fiscal years
in the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
– Results of Operations – Research and Development”. In the area of process technology, we are investing research and
development resources to provide leading-edge analog power processes for our next generation of integrated circuits.
Process technology is a key strategic component to our future growth.
Patents and Intellectual Property Matters
We rely on our proprietary technologies, which include both our proprietary circuit designs for our products and our
proprietary manufacturing process technologies. Our future success and competitive position depend in part upon our
ability to obtain and maintain protection of our proprietary technologies.
In general, we have elected to pursue patent protection for aspects of our circuit designs that we believe are patentable
and to protect our manufacturing process technologies by maintaining those process technologies as trade secrets. As of
January 18, 2011 we had approximately 84 patents issued and pending, of which 68 have been issued in the United
States. Our U.S. issued patents are scheduled to expire at various times through October 2028 and our other issued
patents are scheduled to expire at various times through August 2027. Our patents are material to our business, but we do
not rely on any one particular patent for our success. We also rely on a combination of nondisclosure agreements and
other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our
technology, know-how, and processes. We have entered into a patent license agreement with another integrated circuit
company, which is a value-added reseller, pursuant to which we have granted this company a license (with certain
limited sublicense rights) under certain of our patents to make, use, and sell certain of this company’s own integrated
circuit products for a period of two years ending in 2011, and for which this company is obligated to pay us royalties
based on sales of those products. We also seek to register certain of our trademarks as we deem appropriate. We have not
registered any of our copyrights and do not believe registration of copyrights is material to our business. Despite
precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future
technology or products or to obtain and use information that we regard as proprietary. There can be no assurance that the
steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents,
that others will not develop or patent similar or superior products or technologies, or that our patents will not be
challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which our products are or
may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent
as laws in the United States. Our failure to adequately protect our proprietary technologies could harm our business.
The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other
intellectual property rights. For a more complete description of our legal matters, please read the section entitled Item 3.
Legal Proceedings and Note 10 to our consolidated financial statements. Patent infringement is an ongoing risk, in part
because other companies in our industry could have patent rights that may not be identifiable when we initiate
development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend
ourselves against infringement claims. Any such litigation could be very costly and may divert our management
resources. Further, we have agreed to indemnify certain of our customers and a supplier in some circumstances against
liability from infringement by our products. In the event any third party were to make an infringement claim against us
or our customers, we could be enjoined from selling selected products or could be required to indemnify our customers
or supplier or pay royalties or other damages to third parties. If any of our products is found to infringe and we are
unable to obtain necessary licenses or other rights on acceptable terms, we would either have to change our product so
that it does not infringe or stop making the infringing product, which could have a material adverse effect on our
operating results, financial condition, and cash flows.
Manufacturing
We utilize a fabless business model, working with third parties to manufacture and assemble our integrated circuits. This
fabless approach allows us to focus our engineering and design resources on our strengths and to reduce our fixed costs
and capital expenditures. In contrast to many fabless semiconductor companies, who utilize standard process
technologies and design rules established by their foundry partners, we have developed our own proprietary process
technology and collaborate with our foundry partners to install our technology on their equipment in their facilities for
use solely on our behalf. This close collaboration and control over the manufacturing process has historically resulted in
favorable yields and product performance for our integrated circuits.
8
We currently contract with two suppliers to manufacture our wafers in foundries located in China. Once our silicon
wafers have been produced, they are shipped to our facility in Chengdu, China for wafer sort. Our semiconductor
products are then assembled and packaged by independent subcontractors in Malaysia and China. The assembled ICs are
then sent for final testing at our Chengdu facility prior to shipping to our customers.
In September 2004, we signed an agreement with a Chinese local authority to construct a facility in Chengdu, China,
initially for the testing of our ICs. Pursuant to this agreement, we agreed to contribute capital in the form of cash, in-kind
assets, and/or intellectual property, of at least $5.0 million to our wholly-owned Chinese subsidiary as the registered
capital for the subsidiary and have exercised the option to purchase land use rights for the facility for approximately $0.2
million. We also have the option to acquire the facility after a five-year lease term for the original construction cost less
rents paid, which is currently estimated at $1.9 million and. which becomes exercisable in March 2011. We will likely
enter into a purchase agreement for this facility at a date to be determined and as the opportunity necessitates. The
facility has been fully operational since 2006 and we have benefitted from shorter manufacturing cycle times and lower
labor and overhead costs. Furthermore, we are continuing to expand our product testing capabilities in our China facility
and are able to take advantage of the rich pool of local engineering talent to expand our manufacturing support and
engineering operations.
Key Personnel and Employees
Our performance is substantially dependent on the performance of our executive officers and key employees. Due to the
relative complexity of the design of our analog and mixed-signal ICs, our engineers generally have more years of
experience and greater circuit design aptitude than the more prevalent digital circuit design engineer. Analog engineers
with advanced skills are limited in number and difficult to replace. The loss of the services of key officers, managers,
engineers and other technical personnel would harm the business. Our future success will depend, in part, on our ability
to attract, train, retain, and motivate highly qualified technical and managerial personnel. We may not be successful in
attracting and retaining such personnel. Our employees are not represented by a collective bargaining organization, and
we have never experienced a work stoppage or strike. Our management considers employee relations to be good. As of
December 31, 2010, we employed 889 employees located in the United States, Taiwan, China, Japan, Korea and Europe.
Competition
The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to
continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit
both applications engineering and design engineering personnel, our ability to introduce new products, and our ability to
maintain the rate at which we introduce these new products. Our industry is characterized by decreasing unit selling
prices over the life of a product. We compete with domestic and international semiconductor companies, many of which
have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and
distribution of their products. We are in direct and active competition, with respect to one or more of our product lines,
with at least 10 manufacturers of such products, of varying size and financial strength. The number of our competitors
has grown due to expansion of the market segments in which we participate. We consider our primary competitors to
include Fairchild Semiconductor International, Intersil Corporation, Linear Technology, Maxim Integrated Products,
Micrel Inc., Microsemi Corporation, National Semiconductor Corporation, O2Micro International, Richtek Technology
Corporation, Rohm Co., Ltd., Semtech Corporation, STMicroelectronics N.V., Texas Instruments Incorporated and
Volterra.
We expect continued competition from existing competitors as well as competition from new entrants into the
semiconductor market. We believe that we are competitive with respect to these factors, particularly because our ICs
typically are smaller in size, are highly integrated, possess higher levels of power management functionalities and
achieve high performance specifications at lower price points than most of our competition. However, we cannot assure
you that our products will continue to compete favorably or that we will be successful in the face of increasing
competition from new products and enhancements introduced by existing competitors or new companies entering this
market.
Geographical and Segment Information
Please refer to the geographical and segment information for each of the last three fiscal years in Note 13 to our
consolidated financial statements.
9
Please refer to the discussion of risks attendant to our foreign operations in the section entitled “Item 1A: Risk Factors”.
Available Information
We were incorporated in California in 1997 and reincorporated in Delaware in November 2004. Our executive offices
are located at 6409 Guadalupe Mines Road, San Jose, CA 95120. Our telephone number is (408) 826-0600. Our e-mail
address is investors@monolithicpower.com, and our website is www.monolithicpower.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those filed or furnished pursuant
to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge. These may
be obtained from our website, as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities and Exchange Commission, or at the SEC website at www.sec.gov. Information contained on our
website is not a part of this Form 10-K.
Executive Officers of the Registrant
The executive officers of the Company, and their ages as of March 4, 2011 are as follows:
Name
Michael R. Hsing
Meera P. Rao
Deming Xiao
Maurice Sciammas
Paul Ueunten
Saria Tseng
Age
51
50
48
51
56
40
Position
President, Chief Executive Officer, and Director
CFO and Principal Financial and Accounting Officer
President of MPS Asia Operations
Senior Vice President of Worldwide Sales and Marketing
Senior Vice President of Engineering
Vice President, General Counsel
Michael R. Hsing has served on our board of directors and has served as our President and Chief Executive Officer since
founding Monolithic Power Systems in August 1997. Before founding our company, Mr. Hsing held senior technical
positions at companies such as Supertex, Inc. and Micrel, Inc. Mr. Hsing is an inventor on numerous patents related to
the process development of bipolar mixed-signal semiconductor manufacturing. Mr. Hsing holds a B.S.E.E. from the
University of Florida.
Meera P. Rao has served as our Chief Financial Officer since January 2011. Ms. Rao joined us in January 2009 and
served as our Vice President of Finance and Corporate Controller. Prior to joining MPS, she was the principal in her own
consulting practice, working with various semiconductor companies, including MPS, where she set up our business
operations in Chengdu, China in 2006. Ms. Rao has more than 20 years of experience with semiconductor and high
technology companies and has held various senior executive positions, including the CFO of Integration Associates,
Vice President of Finance and Interim CFO at Atrica, Vice President of Finance at Raza Foundries, Corporate Controller
and Interim CFO at nVIDIA, as well as various positions at Advanced Micro Devices (AMD). Ms. Rao is a CPA and
holds an MBA from the University of Rochester.
Maurice Sciammas currently serves as our Senior Vice President of Worldwide Sales and Marketing, a position he has
had since 2007. Mr. Sciammas joined the Company in July 1999 and served as Vice President of Products and Vice
President of Sales (excluding greater China) until he was appointed to his current position. Before joining the Company,
he was Director of IC Products at Supertex from 1990 to 1999. He has also held positions at Micrel, Inc. He holds a
B.S.E.E. degree from San Jose State University.
Deming Xiao has served as our President of our Asia Operations since January 2008. Since joining us in May 2001, Mr.
Xiao has held several executive positions, including Foundry Manager and Senior Vice President of Operations. Before
joining us, from June 2000 to May 2001, Mr. Xiao was Engineering Account Manager at Chartered Semiconductor
Manufacturing, Inc. Prior to that, Mr. Xiao spent 6 years as the Manager of Process Integration Engineering at Fairchild
Imaging Sensors. Mr. Xiao holds a B.S. in Semiconductor Physics from Sichuan University, Chengdu, China and a
M.S.E.E. from Wayne State University.
Paul Ueunten has served as our Senior Vice President of Design Engineering since October 2007. Mr. Ueunten joined
us in May 1998 and held several senior level positions, including Vice President of Design Engineering, prior to his
appointment as our Senior Vice President of Design Engineering. Before joining us, Mr. Ueunten held positions at
National Semiconductor, Signetics Corporation and Sperry Flight Systems. Mr. Ueunten holds a MS in Electrical
10
Engineering from the University of Santa Clara, a BS in Electrical Engineering from the University of Washington and a
BS in Engineering-Physics from Pacific Lutheran University. Mr. Ueunten is credited with a number of patents and is a
Member of the Institute of Electrical and Electronics Engineers.
Saria Tseng has served as our Vice President and General Counsel since November 2004. Ms. Tseng joined the
Company from MaXXan Systems, Inc., a privately held provider of intelligent storage networking solutions, where she
was also Vice President and General Counsel from January 2001 to November 2004. Prior to her corporate experience,
Ms. Tseng was an attorney at Gray Cary Ware & Freidenrich, LLP from July 1999 to January 2001. Previously, she
practiced law at Wang & Wang and Jones Day, Reavis & Pogue. Ms. Tseng is a member of the state bar in both
California and New York and is a member of the bar association of the Republic of China (Taiwan). She holds Masters
of Law degrees from Boalt Hall, University of California at Berkeley and the Chinese Culture University in Taipei.
ITEM 1A.
RISK FACTORS
Our business involves risks and uncertainties. You should carefully consider the risks described below, together with all
of the other information in this annual report on Form 10-K and other filings with the Securities and Exchange
Commission in evaluating our business. If any of the following risks actually occur, our business, financial condition,
operating results, and growth prospects would likely be adversely affected. In such an event, the trading price of our
common stock could decline, and you could lose all or part of your investment in our common stock. Our past financial
performance should not be considered to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. These risks involve forward-looking statements and our
actual results may differ substantially from those discussed in these forward-looking statements.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of
factors.
The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in
price in response to various factors, many of which are beyond our control, including:
our results of operations and financial performance;
general economic, industry and global market conditions;
•
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• whether our forward guidance meets the expectations of our investors;
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the depth and liquidity of the market for our common stock;
developments generally affecting the semiconductor industry;
commencement of or developments relating to our involvement in litigation;
investor perceptions of us and our business strategies;
changes in securities analysts’ expectations or our failure to meet those expectations;
actions by institutional or other large stockholders;
terrorist acts or acts of war;
actual or anticipated fluctuations in our results of operations;
developments with respect to intellectual property rights;
announcements of technological innovations or significant contracts by us or our competitors;
introduction of new products by us or our competitors;
our sale of common stock or other securities in the future;
conditions and trends in technology industries;
changes in market valuation or earnings of our competitors;
our ability to develop new products, enter new market segments, gain market share, manage litigation risk,
diversify our customer base and successfully secure manufacturing capacity;
our ability to increase our gross margins; and
changes in the estimation of the future size and growth rate of our markets.
•
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In addition, the stock market in general often experiences substantial volatility that is seemingly unrelated to the
operating performance of particular companies. These broad market fluctuations may adversely affect the trading price
of our common stock.
11
We expect our operating results to fluctuate from quarter to quarter and year to year, which may make it
difficult to predict our future performance and could cause our stock price to decline and be volatile.
Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will
continue to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. We
expect fluctuations to continue for a number of reasons, including:
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a deterioration in general demand for electronic products as a result of worldwide financial crises and
associated macro-economic slowdowns;
a deterioration in business conditions at our distributors, value-added resellers and/or end-customers;
adverse general economic conditions in the countries where our products are sold or used;
the timing of developments and related expenses in our litigation matters;
the possibility of additional lost business as a result of customer and prospective customer concerns about
adverse outcomes in our litigations or about being litigation targets;
continued dependence on our turns business (orders received and shipped within the same fiscal quarter);
increases in assembly costs due to commodity price increases, such as the price of gold;
the timing of new product introductions by us and our competitors;
the acceptance of our new products in the marketplace;
our ability to develop new process technologies and achieve volume production;
our ability to meet customer product demand in a timely manner;
the scheduling, rescheduling, or cancellation of orders by our customers;
the cyclical nature of demand for our customers’ products;
an increase in stock rotation reserves;
our ability to manage our inventory levels, including the levels of inventory held by our distributors;
inventory levels and product obsolescence;
seasonality and variability in the computer, consumer electronics, and communications markets;
the availability of adequate manufacturing capacity from our outside suppliers;
increases in prices for finished wafers due to general capacity shortages;
the potential loss of future business resulting from current capacity issues;
changes in manufacturing yields; and
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• movements in exchange rates, interest rates or tax rates.
Due to the factors noted above and other risks described in this section, many of which are beyond our control, you
should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance.
Unfavorable changes in any of the above factors may seriously harm our business and cause our stock price to decline
and be volatile.
We may not be profitable on a quarterly or annual basis.
Our profitability is dependent on many factors, including:
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our sales, which because of our turns business (i.e., orders received and shipped within the same fiscal
quarter), is difficult to accurately forecast;
consumer electronic sales, which has experienced and may continue to experience a downturn as a result of the
worldwide economic crisis;
our competition, which could adversely impact our selling prices and our potential sales;
our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run
our test facility in China;
• manufacturing capacity constraints; and
•
our operating expenses, including general and administrative expenses, selling and marketing expenses, stock-
based compensation expenses, litigation expenses, which we expect to be significant due to the litigation in
which we are involved, and research and development expenses relating to products that will not be introduced
and will not generate revenue until later periods, if at all.
We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations,
including any of the factors noted above, may have a material adverse effect on our quarterly or annual profitability.
12
We may not experience growth rates comparable to past years.
In the past, our revenues increased significantly in certain years due to increased sales of certain of our products. Due to
various factors, including increased competition, loss of certain of our customer install base, unfavorable changes in our
operations, reduced global electronics demand, end-customer market downturn, market acceptance and penetration of
our current and future products and ongoing litigation, we may not experience growth rates comparable to past periods,
which could materially and adversely affect our stock price and results of operations.
Due to product shortages early in 2010, several major customers in Korea sought alternative suppliers, which impacted
our revenue in the fourth quarter of 2010 and may continue to impact our revenue in future periods. If we are unable to
fill this revenue gap, our growth rate may be impacted, which could materially and adversely affect our stock price and
results of operations.
We may be unsuccessful in developing and selling new products with margins similar to or better than what we
have experienced in the past, which would impact our overall gross margin and financial performance.
Our success depends on products that are differentiated in the market, which result in gross margins that have historically
been above the industry averages. During 2010, our gross margins decreased materially as compared to 2009. Should we
fail to improve our gross margin in future years, and accordingly develop and introduce sufficiently differentiated
products that result in higher gross margins than industry averages, our financial condition could be materially adversely
affected.
The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes
prolonged downturns, could materially adversely affect our operating results, financial condition and cash flows.
Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant
downturns and wide fluctuations in supply and demand. These conditions have caused significant variances in product
demand and production capacity, as well as rapid erosion of average selling prices. The industry may experience severe
or prolonged downturns in the future, which could result in downward pressure on the price of our products as well as
lower demand for our products. Because significant portions 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 sales
shortfall. These conditions could have a material adverse effect on our operating results, financial condition and cash
flows.
If demand for our products declines in the major end markets that we serve, our revenue will decrease and our
results of operations and financial condition would be materially and adversely affected.
We believe that the application of our products in the computer, consumer electronics and communications markets will
continue to account for the majority of our revenue. If the demand for our products declines in the major end markets
that we serve, our revenue will decrease and our results of operations and financial condition would be materially and
adversely affected. In addition, as technology evolves, the ability to integrate the functionalities of various components,
including our discrete semiconductor products, onto a single chip and/or onto other components of systems containing
our products increases. Should our customers require integrated solutions that we do not offer, demand for our products
could decrease, and our business and results of operations would be materially and adversely affected.
We derive most of our revenue from direct or indirect sales to customers in Asia and have significant operations
in Asia, which may expose us to political, cultural, regulatory, economic, foreign exchange, and operational risks.
We derive most of our revenue from customers located in Asia through direct or indirect sales through distribution
arrangements with parties located in Asia. As a result, we are subject to increased risks due to this geographic
concentration of business and operations. For the year ended December 31, 2010, approximately 87% of our revenue was
from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including:
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changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States
and in the countries in which we manufacture or sell our products;
trade restrictions, including restrictions imposed by the United States government on trading with parties in
foreign countries;
currency exchange rate fluctuations impacting intra-company transactions;
13
transportation delays;
changes in tax regulations in China that may impact our tax status in Chengdu;
international political relationships and threats of war;
terrorism and threats of terrorism;
epidemics and illnesses;
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• multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns;
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• work stoppages and infrastructure problems due to adverse weather conditions or natural disasters;
• work stoppages related to employee dissatisfaction;
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economic and political instability;
changes in import/export regulations, tariffs, and freight rates;
longer accounts receivable collection cycles and difficulties in collecting accounts receivables;
enforcing contracts generally; and
less effective protection of intellectual property and contractual arrangements.
If we fail to expand our customer base and significantly reduce the geographical concentration of our customers, we will
continue to be subject to the foregoing risks, which could materially and adversely affect our revenue and financial
condition.
We receive a significant portion of our revenue from our distribution channel, and the loss of any one of these
distributors or value-added resellers or failure to collect a receivable from them could adversely affect our
operations and financial position.
We market our products through distribution arrangements and value-added resellers and through our direct sales and
applications support organization to customers that include OEMs, ODMs and electronic manufacturing service
providers. Receivables from our customers are generally not secured by any type of collateral and are subject to the risk
of being uncollectible. For the year ended December 31, 2010, sales to our largest distributor accounted for
approximately 14% of our total revenue. Significant deterioration in the liquidity or financial condition of any of our
major customers or any group of our customers could have a material adverse impact on the collectability of our
accounts receivable and our future operating results. We primarily conduct our sales on a purchase order basis, and we
do not have any long-term supply contracts.
Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we
communicate with OEMs in an attempt to achieve “design wins,” which are decisions by OEMs and/or ODMs to
incorporate our products, we do not have purchase commitments from these end users. Therefore, there can be no
assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technical
specifications and requirements can change rapidly, and we may not have products that fit new specifications from an
end-customer for whom we have had previous design wins. We cannot be certain that we will continue to achieve design
wins from large OEMs, that our direct customers will continue to be successful in selling to the OEMs, or that the OEMs
will be successful in selling products which incorporate our ICs. The loss of any significant customer, any material
reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant
customer order, or the cancellation or delay of a customer’s or OEM’s significant program or product could reduce our
revenue and adversely affect our operations and financial condition.
Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting
our future revenue and appropriately managing our expenses.
Because we provide components for end products and systems, demand for our products is influenced by our customers’
end product demand. As a result, we may have difficulty in accurately forecasting our revenue and expenses. Our
revenue depends on the timing, size, and speed of commercial introductions of end products and systems that incorporate
our products, all of which are inherently difficult to forecast, as well as the ongoing demand for previously introduced
end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage their
inventory. Our sales to distributors are subject to higher volatility because they service demand from multiple levels of
the supply chain which, in itself, is inherently difficult to forecast. Specifically, in the fourth quarter of 2010, demand
was lower because distributors used up inventory that was shipped in the third quarter. If our customers, including
distributors, do not manage their inventory correctly or misjudge their customers’ demand, our shipments to and orders
from our customers may vary significantly on a quarterly basis.
14
Our ability to increase product sales and revenues is currently constrained by the manufacturing capacity of our
suppliers.
Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers
to us is limited by the available capacity, particularly capacity in the geometries we require, at the facilities in which they
manufacture wafers for us. As a result, this lack of capacity has constrained our product sales and revenue growth. In
addition, an increased need for capacity to meet internal demands or demands of other customers could cause our
suppliers to reduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted or
anticipated amounts for wafer deliveries or require us to make other concessions in order to acquire the wafer supply
necessary to meet our customer requirements. If our suppliers extend lead times, limit supplies or the types of capacity
we require, or increase prices due to capacity constraints or other factors, our revenue and gross margin may materially
decline. In addition, if we experience supply delays or limitations, our customers may reduce their purchase levels with
us and/or seek alternative solutions to meet their demand, which could materially and adversely impact our business and
results of operations.
Due to lack of capacity, which resulted in product shortages in early 2010, several major customers in Korea sought
alternative suppliers, which impacted our revenue in the fourth quarter of 2010 and may continue to impact our revenue
in future periods. If we are faced with capacity issues similar to what we experienced in 2010, our product sales and
revenue may be further impacted, which could materially and adversely affect our business and results of operations.
We currently depend on two third-party suppliers to provide us with wafers for our products. If any of our wafer
suppliers become insolvent or capacity constrained and are unable and/or fail to provide us sufficient wafers at
acceptable yields and at anticipated costs, our revenue and gross margin may decline or we may not be able to
fulfill our customer orders.
We have a supply arrangement with two suppliers for the production of wafers. Should any of our suppliers become
insolvent or capacity constrained, we many not be able to fulfill our customer orders, which would likely cause a decline
in our revenue.
While certain aspects of our relationship with these suppliers are contractual, many important aspects of this relationship
depend on our suppliers’ continued cooperation and our management relationships. In addition, the fabrication of ICs is a
highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to
be rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. The failure of our
suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products
and would likely cause a decline in our revenue.
Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short
notice. Under our agreement with our suppliers, we have an option to order wafers based on a committed forecast that
can cover a period of one to six months. If our customers cancel orders after we submit a committed forecast to our
suppliers for the corresponding wafers, we may be required to purchase wafers that we may not be able to resell, which
would adversely affect our operating results, financial condition, and cash flows.
We might not be able to deliver our products on a timely basis if our relationships with our assembly and test
subcontractors are disrupted or terminated.
All of our products are assembled by third-party subcontractors and a portion of our testing is currently performed by
third-party subcontractors. We do not have any long-term agreements with these subcontractors. As a result, we may not
have direct control over product delivery schedules or product quality. Also, due to the amount of time typically required
to qualify assembly and test subcontractors, we could experience delays in the shipment of our products if we were
forced to find alternate third parties to assemble or test our products. In addition, events such as the recent global
economic crisis may materially impact our assembly supplier’s ability to operate. Any future product delivery delays or
disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results,
financial condition, and cash flows.
15
There may be unanticipated costs associated with adding to or supplementing our third-party supplier’s
manufacturing capacity.
We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party
supply foundries, assembly shops, or testing facilities for our products. In order to facilitate such growth, we may need
to enter into strategic transactions, investments and other activities. Such activities are subject to a number of risks,
including:
•
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•
•
•
the costs and expense associated with such activities;
the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or
our third-party suppliers;
the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production
of our products;
delays in bringing new foundry operations online to meet increased product demand; and
unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new
foundry facilities.
These and other risks may affect the ultimate cost and timing of any expansion of our third-party supplier’s capacity.
We purchase inventory in advance based on expected demand for our products, and if demand is not as expected,
we may have insufficient or excess inventory, which could adversely impact our financial position.
As a fabless semiconductor company, we purchase our inventory from a third party manufacturer in advance of selling
our product. We place orders with our manufacturer based on existing and expected orders from our customers for
particular products. While our contracts with our customers and distributors include lead time requirements and
cancellation penalties that are designed to protect us from misalignment between customer orders and inventory levels,
we must nonetheless make some predictions when we place orders with our manufacturer. In the event that our
predictions are inaccurate due to unexpected increases in orders or unavailability of product within the time frame that is
required, we may have insufficient inventory to meet our customer demands. In the event that we order products that we
are unable to sell due to a decrease in orders, unexpected order cancellations, injunctions due to patent litigations, or
product returns, we may have excess inventory which, if not sold, may need to be disposed of or would result in a
decrease in our revenues in future periods as the excess inventory at our distributors is sold. If any of these situations
were to arise, it could have a material impact on our business and financial position.
If we are unsuccessful in any of the legal proceedings involving us and any of our competitors, we could be
prevented from selling many of our products and/or be required to pay substantial damages. An unfavorable
outcome or an additional award of damages, attorneys’ fees or an injunction could cause our revenue to decline
significantly and could severely harm our business and operating results.
If we are not successful in litigation that could be brought against us or our customers, we could be ordered to pay
monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be doubled or
tripled. We and/or our customers could also be prevented from selling some or all of our products. Moreover, our
customers and end-users could decide not to use our products or our products or our customers’ accounts payable to us
could be seized. Finally, interim developments in these proceedings could increase the volatility in our stock price as the
market assesses the impact of such developments on the likelihood that we will or will not ultimately prevail in these
proceedings.
Given our inability to control the timing and nature of significant events in our legal proceedings that either have
arisen or may arise, our legal expenses are difficult to forecast and may vary substantially from our publicly-
disclosed forecasts with respect to any given quarter, which could contribute to increased volatility in our stock
price and financial condition.
Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level
of activity in the proceeding. It is difficult for us to forecast our legal expenses for any given quarter, which adversely
affects our ability to forecast our expected results of operations in general. We may also be subject to unanticipated legal
proceedings, which would result in our incurrence of unexpected legal expenses. If we fail to meet the expectations of
securities or industry analysts as a result of unexpected changes in our legal expenses, our stock price could be impacted.
16
Our ongoing legal proceedings and the potential for additional legal proceedings have diverted, and may continue
to divert, financial and management resources.
The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other
intellectual property rights. Patent infringement is an ongoing risk, in part because other companies in our industry could
have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to
enforce our intellectual property rights, and we may have to defend ourselves against additional infringement claims.
Such litigation is very costly. In the event any third party makes a new infringement claim against us or our customers,
we could incur additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be
required to post bonds to defend our intellectual property rights in certain countries for an indefinite period of time, until
such dispute is resolved. If our legal expenses materially increase or exceed anticipated amounts, our capital resources
and financial condition could be adversely affected. Further, if we are not successful in any of our intellectual property
defenses, our financial condition cold be adversely affected and our business could be harmed. In addition, our
management team may also be required to devote a great deal of time, effort and energy to these legal proceedings,
which could distract management’s focus on our operations and adversely affect our business.
We will continue to vigorously defend and enforce our intellectual property rights around the world, especially as
it relates to patent litigation. We will take the appropriate action in various courts throughout the world and may
be required to post bonds to defend such intellectual property in certain countries for an indefinite period of time,
until such dispute is resolved. If we are not successful in defending our intellectual property, we could lose
revenue and the business could be harmed.
From time to time, we are faced with having to defend our intellectual property rights throughout the world. Should we
become engaged in such proceedings, it could divert management’s attention from focusing on and implementing the
business strategy. Further, should we not be successful in any of our intellectual property defenses, the revenue may be
affected and the business could be harmed.
Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect
our ability to compete.
We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our
ability to obtain and maintain protection of certain proprietary technologies used in our products. We pursue patents for
some of our new products and unique technologies, and we also rely on a combination of nondisclosure agreements and
other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our
technology, know-how, and processes. Despite the precautions we take, it may be possible for unauthorized third parties
to copy aspects of our current or future technology or products or to obtain and use information that we regard as
proprietary. We intend to continue to protect our proprietary technology, including through patents. However, there can
be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will
lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our
patents will not be challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which
our products are or may be developed, manufactured, or sold may not protect our products and intellectual property
rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies
could harm our business.
The market for government-backed student loan auction-rate securities has suffered a decline in liquidity which
may impact the liquidity and potential value of our investment portfolio.
The market for government-backed student loan auction-rate securities with interest rates that reset through a Dutch
auction every 7 to 35 days, became illiquid in 2008. At December 31, 2010, the Company’s investment
portfolio included $19.2 million, net of impairment charges of $1.0 million, in government-backed student loan auction-
rate securities. As of that date, $20.2 million, the face value of our auction-rate security investments, have failed to reset
through successful auctions and it is unclear as to when these investments will regain their liquidity. The underlying
maturity of these auction-rate securities is up to 37 years.
Based on certain assumptions described in Note 2, “Fair Value Measurements”, to our consolidated financial statements
and the Liquidity and Capital Resources section of “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this annual report on Form 10-K, we recorded temporary and other-than-
temporary impairment charges on these investments. The valuation is subject to fluctuations in the future, which will
17
depend on many factors, including the collateral quality, potential to be called or restructured, underlying final maturity,
insurance guaranty, liquidity and market conditions, among others. We experienced our first failed auction in mid-
February 2008.
Should there be further deterioration in the market for auction-rate securities or if the accounting rules for these securities
change, the value of our portfolio may decline, which may have an adverse impact on our cash position and our earnings.
In addition, it is unlikely that we will be able to liquidate our auction-rate securities in the short term.
We may be unsuccessful in developing and selling new products or in penetrating new markets required to
maintain or expand our business.
Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market,
and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in
any of our product markets could have a material adverse effect on our competitive position within these markets. Our
failure to timely develop new technologies or to react quickly to changes in existing technologies could materially delay
our development of new products, which could result in product obsolescence, decreased revenue, and/or a loss of
market share to competitors.
As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and
distribution channels that are different from those we have known in the past. Some of our new product lines require us
to re-equip our labs to test parameters we have not tested in the past. If we are unable to adapt rapidly to these new and
additional conditions, we may not be able to successfully penetrate new markets.
The success of a new product depends on accurate forecasts of long-term market demand and future technological
developments, as well as on a variety of specific implementation factors, including:
•
•
•
•
•
•
•
timely and efficient completion of process design and device structure improvements;
timely and efficient implementation of manufacturing, assembly, and test processes;
the ability to secure and effectively utilize fabrication capacity in different geometries;
product performance;
product availability;
the quality and reliability of the product; and
effective marketing, sales and service.
To the extent that we fail to timely introduce new products or to quickly penetrate new markets, our revenue and
financial condition could be materially adversely affected.
Certain of our CCFL products are used to drive fluorescent lighting products which contain small amount of
mercury.
Our CCFL products are used to drive fluorescent lighting products which contain small amount of mercury. This is the
subject of environmental concerns, particularly in Europe. Should environmental issues impair the widespread use of our
CCFL-based products, and should we be unable to produce replacement products based on LED lighting fast enough to
compensate for the loss of our CCFL-related business, our business and results of operations could be adversely affected.
The complexity of calculating our tax provision may result in errors that could result in restatements of our
financial statements.
Due to the complexity associated with the calculation of our tax provision, we have hired independent tax advisors to
assist us in the calculation. If we or our independent tax advisors fail to resolve or fully understand certain issues that we
may have had in the past and issues that may arise in the future, we could be subject to errors, which would result in us
having to restate our financial statements. Restatements are generally costly and could adversely impact our results of
operations and/or have a negative impact on the trading price of our common stock.
We face risks in connection with our internal control over financial reporting related to income taxes.
Because of the complexity of our tax structure, we have had errors in our financial statements in the calculation of our
tax provision that previously resulted in restatements of our prior year financial results. Although we believe that we
18
have implemented appropriate internal control over financial reporting related to the computation of our income tax
provision, we cannot be certain that any measures we have taken or may take in the future will ensure that we implement
and maintain adequate internal control over financial reporting and that we will avoid any material weakness in the
future. In addition, we cannot assure you that we will not in the future identify further material weaknesses in our
internal control over financial reporting related to the calculation of our income tax provision that we have not
discovered to date, which may impact the reliability of our financial reporting and financial statements.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could
adversely affect our results
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we
have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in
the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or
interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the
Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the
outcomes from these continuous examinations will not have an adverse effect on our operating results and financial
condition.
Our products must meet exacting specifications, and undetected defects and failures may occur, which may cause
customers to return or stop buying our products and may expose us to product liability risk.
Our customers generally establish demanding specifications for quality, performance, and reliability that our products
must meet. Integrated circuits as complex as ours often encounter development delays and may contain undetected
defects or failures when first introduced or after commencement of commercial shipments, which might require product
replacement or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used in the
manufacturing processes may cause our products to fail. We have from time to time in the past experienced product
quality, performance or reliability problems. Our standard warranty period is one year, which exposes the company to
significant risks of claims for defects and failures. If defects and failures occur in our products, we could experience lost
revenue, increased costs, including warranty expense and costs associated with customer support, delays in, cancellations
or rescheduling of orders or shipments, and product returns or discounts, any of which would harm our operating results.
In addition, product liability claims may be asserted with respect to our technology or products. Although we currently
have insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted
claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any
asserted claims.
The price and availability of commodities (e.g., gold, platinum, copper and silicon) may adversely impact our
ability to deliver our products in a timely and cost-effective manner and may affect our business and results of
operations.
Our products incorporate commodities such as gold, platinum, copper and silicon. The price and availability of these
commodities and other like commodities that we use could negatively impact our business and results of operations.
Devaluation of the U.S. Dollar relative to other foreign currencies, including the Chinese Yuan, may adversely
affect results of operations.
Our manufacturing and packaging suppliers are and will continue to be primarily located in China for the foreseeable
future. Should the value of the Chinese Yuan continue to rise against the U.S. Dollar, there could be an increase in our
manufacturing costs relative to competitors who have manufacturing facilities located in the U.S., which could adversely
affect our operations. In addition, because we collect payments from all customers in U.S. dollars, fluctuations in the
value of foreign currencies could have an adverse impact on our customers’ business, which could negatively impact our
business and results of operations.
19
We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the
benefit of various incentives from Chinese governments that we and our manufacturing partners receive may be
reduced or eliminated, which could increase our costs or limit our ability to sell products and conduct activities in
China.
Most of our manufacturing partners are located in China. In addition, we have established a facility in China, initially for
the testing of our ICs. The Chinese government has broad discretion and authority to regulate the technology industry in
China. China’s government has implemented policies from time to time to regulate economic expansion in China. It also
exercises significant control over China’s economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. New regulations or the readjustment of previously implemented regulations could require us
and our manufacturing partners to change our business plans, increase our costs, or limit our ability to sell products and
conduct activities in China, which could adversely affect our business and operating results.
In addition, the Chinese government and provincial and local governments have provided, and continue to provide,
various incentives to encourage the development of the semiconductor industry in China. Such incentives include tax
rebates, reduced tax rates, favorable lending policies, and other measures, some or all of which may be available to our
manufacturing partners and to us with respect to our facility in China. Any of these incentives could be reduced or
eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided
to our manufacturing partners could adversely affect our business and operating results.
There are inherent risks associated with the operation of our testing facility in China, which could increase
product costs or cause a delay in product shipments.
We have a testing facility in China that began operations in 2006. In addition to the risks discussed elsewhere in this
annual report on Form 10-K, we face the following risks, among others:
•
•
inability to maintain appropriate and acceptable manufacturing controls; and
higher than anticipated overhead and other costs of operation.
If we are unable to continue a fully operational status with appropriate controls, we may incur higher costs than our
current expense levels, which would affect our gross margins. In addition, if capacity restraints result in significant
delays in product shipments, our business and results of operations would be adversely affected.
The average selling prices of products in our markets have historically decreased over time and will likely do so in
the future, which could harm our revenues and gross profits.
Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our
gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by
reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or
increasing our sales volumes. Additionally, because we do not operate our own manufacturing or assembly facilities, we
may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even
increase, which could also reduce our margins.
Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses,
we may incur substantial expenses before we earn associated revenue and may not ultimately achieve our
forecasted sales for our products.
The introduction of new products presents significant business challenges because product development plans and
expenditures must be made up to two years or more in advance of any sales. It takes us up to 12 months or more to
design and manufacture a new product prototype. Only after we have a prototype do we introduce the product to the
market and begin selling efforts in an attempt to achieve design wins. This sales process, which averages six to twelve
months, requires us to expend significant sales and marketing resources without any assurance of success. Volume
production of products that use our ICs, if any, may not be achieved for an additional three to six months after an initial
sale. Sales cycles for our products are lengthy for a number of reasons:
•
our customers usually complete an in-depth technical evaluation of our products before they place a purchase
order;
20
•
•
•
the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of
their product to evaluate product performance and consumer demand;
our products must be designed into a customer’s product or system; and
the development and commercial introduction of our customers’ products incorporating new technologies
frequently are delayed.
As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a
significant portion of our operating expenses is relatively fixed and based on expected revenue. The lengthy sales cycles
of our products also make forecasting the volume and timing of orders difficult. In addition, the delays inherent in
lengthy sales cycles raise additional risks that customers may cancel or change their orders. Our sales are made by
purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice,
backlog is not always a good indicator of our future sales. If customer cancellations or product changes occur, we could
lose anticipated sales and not have sufficient time to reduce our inventory and operating expenses.
The loss of any of our key personnel or the failure to attract or retain specialized technical and management
personnel could impair our ability to grow our business.
Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We
are particularly dependent on the continued services of our key executives, including Michael Hsing, our President and
Chief Executive Officer, who founded our company and developed our proprietary process technology. In addition,
personnel with highly skilled analog and mixed-signal design engineering expertise are scarce and competition for
personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or
that we will be successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities
in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new
highly qualified employees quickly enough to meet the demands or our business, including design cycles, our business
could be harmed.
If we fail to retain key employees in sales, applications, finance and legal or to make continued improvements to
our internal systems, particularly in the accounting and finance area, our business may suffer.
If we fail to continue to adequately staff our sales, applications, financial and legal staff, maintain or upgrade our
business systems and maintain internal controls that meet the demands of our business, our ability to operate effectively
will suffer. The operation of our business also depends upon our ability to retain these employees, as these employees
hold a significant amount of institutional knowledge about us and our products, and, if they were to terminate their
employment, our sales and internal control over financial reporting could be adversely affected.
We intend to continue to expand our operations, which may strain our resources and increase our operating
expenses.
We plan to continue to expand our domestic and foreign operations through internal growth, strategic relationships,
and/or acquisitions. We expect that any such expansion will strain our systems and operational and financial controls. In
addition, we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue
to improve and expand our systems and controls, as well as hire experienced administrative and financial personnel. If
we fail to do so, our growth will be limited. If we fail to effectively manage our planned expansion of operations, our
business and operating results may be harmed.
We may engage in future acquisitions that dilute the ownership interests of our stockholders and cause us to incur
debt or to assume contingent liabilities, and we may be unable to successfully integrate these companies into our
operations, which would adversely affect our business.
As a part of our business strategy, from time to time we review acquisition prospects that would complement our current
product offerings, enhance our design capability or offer other competitive opportunities. In the event of future
acquisitions, we could use a significant portion of our available cash, cash equivalents and short-term investments, issue
equity securities which would dilute current stockholders’ percentage ownership, incur substantial debt or contingent
liabilities, and/or incur impairment charges related to goodwill or other intangibles. Such actions by us could impact our
operating results and/or the price of our common stock.
21
In addition, we may be unable to identify or complete prospective acquisition for various reasons, including competition
from other companies in the semiconductor industry, the valuation expectations of acquisition candidates and applicable
antitrust laws or related regulations. If we are unable to identify and complete acquisitions, we may not be able to
successfully expand our business and product offerings.
To the extent we are successful in completing strategic acquisitions, if we are unsuccessful in integrating any acquired
company into our operations or if integration is more difficult than anticipated, we may experience disruptions that could
harm our business and not realize the anticipated benefits of the acquisitions. Some of the risks that may adversely affect
our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those
associated with:
•
•
•
•
•
•
•
•
•
unexpected losses of key employees or customers of the acquired companies or businesses;
conforming the acquired company’s standards, processes, procedures and controls with our operations;
coordinating new product and process development;
hiring additional management and other critical personnel;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how;
other difficulties in the assimilation of acquired operations, technologies or products;
diversion of management’s attention from other business concerns; and
adverse effects on existing business relationships with customers.
We compete against many companies with substantially greater financing and other resources, and our market
share may be reduced if we are unable to respond to our competitors effectively.
The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to
continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit
applications and design talent, our ability to introduce new products, and our ability to maintain the rate at which we
introduce these new products. We compete with domestic and non-domestic semiconductor companies, many of which
have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and
distribution of their products. We are in direct and active competition, with respect to one or more of our product lines,
with at least 10 manufacturers of such products, of varying size and financial strength. The number of our competitors
has grown due to the expansion of the market segments in which we participate. We consider our competitors to include,
but not be limited to: Fairchild Semiconductor, Intersil, Linear, Maxim Integrated Products, Micrel, Microsemi, National
Semiconductor, O2Micro, RichTek, Rohm, Semtech, STMicroelectronic, Texas Instruments and Volterra. We expect
continued competition from existing competitors as well as competition from new entrants in the semiconductor market.
We cannot assure you that our products will continue to compete favorably or that we will be successful in the face of
increasing competition from new products and enhancements introduced by existing competitors or new companies
entering this market, which would materially and adversely affect our results of operations and our financial condition.
If securities or industry analysts downgrade our stock or do not continue to publish research or reports about our
business, our stock price and trading volume could decline.
The trading market for our common stock will depend on the research and reports that industry or securities analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who
cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us
or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
Because of their significant stock ownership, our officers and directors will be able to exert significant influence
over our future direction.
Executive officers, directors, and affiliated entities beneficially owned in aggregate, approximately 17% of our
outstanding common stock as of December 31, 2010. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
22
Major earthquakes or other natural disasters and resulting systems outages may cause us significant losses.
Our corporate headquarters, the production facilities of our third-party wafer supplier, our IC testing facility, a portion of
our assembly and research and development activities, and certain other critical business operations are located in or near
seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and could
be materially and adversely affected in the event of a major earthquake. Much of our revenue, as well as our
manufacturers and assemblers, are concentrated in Asia. Such concentration increases the risk that other natural disasters,
labor strikes, terrorism, war, political unrest, epidemics, and/or health advisories could disrupt our operations. In
addition, we rely heavily on our internal information and communications systems and on systems or support services
from third parties to manage our operations efficiently and effectively. Any of these are subject to failure due to a natural
disaster or other disruption. System-wide or local failures that affect our information processing could have material
adverse effects on our business, financial condition, operating results, and cash flows.
Our facilities in Chengdu, China are located in a seismically active area, as evidenced by the May 2008 earthquake that
was centered in the Sichuan Province of China. Although there was no damage to our facilities as a result of that
earthquake, should there be additional earthquakes in the area, we may incur losses and our business, financial condition
and/or operating results may suffer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our primary operating locations are currently in San Jose, California and Chengdu, Sichuan, China. We currently lease
approximately 55,110 square feet in San Jose, which serves as our corporate headquarters, sales and research and
development center. Certain test procedures and manufacturing also take place in our San Jose facility. The San Jose
facility was sold and the new landlord has exercised their right to terminate the lease, effective April 18, 2012.
We lease approximately 56,000 square feet in Chengdu which serves as our test facility and manufacturing hub and we
constructed a 150,000 square foot research and development facility in Chengdu, which was put into operation in
October 2010. We also lease sales and research and development offices in the United States, Japan, China, Taiwan and
Korea. We believe that our existing facilities are adequate for our current operations.
ITEM 3. LEGAL PROCEEDINGS
O2Micro
We have been engaged in a number of legal proceedings involving patent infringement claims with O2Micro, Inc. and its
parent corporation, O2Micro International Limited (referred to hereinafter as “O2Micro”). There are two proceedings,
both involving O2Micro’s U.S. Patent No. 7,417,382 (‘382 patent). On June 18, 2010, the U.S. International Trade
Commission issued a final determination finding of no violation of Section 337 by us or our customers in an action
brought by O2Micro International, Ltd. in 2008. An International Trade Commission (“ITC”) administrative law judge
had previously issued an initial determination on April 20, 2010 that also found no violation. The ITC's final
determination concludes that none of our accused products infringes O2Micro's U.S. Patent No. 7,417,382 (the '382
patent).
In addition to the matter before the ITC, a related case is pending before the Northern District of California Court in
Oakland, California. Subsequent to the ITC’s final determination finding of no violation, O2Micro filed a motion to
dismiss its claims for infringement of the '382 patent, with prejudice, and covenanted not to sue us or any of our
distributors or customers for infringement of the '382 patent. On June 23, 2010, the court granted this motion and
vacated the jury trial that was scheduled on July 12, 2010. We filed a motion seeking recovery of costs and attorney fees
from O2Micro. On March 3, 2011, the court issued an order granting our motion in part. It ordered O2Micro to pay
$339,315 in costs forthwith and ordered the parties to meet and confer to try to reach an agreement as to the reasonable
attorneys fees to be paid. If the parties are unable to reach an agreement, we are to submit detailed documentation to the
court in support of our fees request.
23
Linear Technology Corporation
On July 1, 2008, the United States District Court for the District of Delaware held as a matter of law that we did not
breach our October 1, 2005 Settlement and License Agreement with Linear Technology Corporation (“Linear”). Based
upon that ruling, we anticipate filing a motion to seek recovery of our attorney fees when the final judgment is entered.
The court has not issued its final judgment concerning the patent validity and enforceability issues.
PART II
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholders Matters, and Issuer
Purchases of Equity Securities.
Market Price of Our Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MPWR”. The following table sets
forth, for the periods indicated, the high and low sales price per share of our common stock on the Nasdaq Global Select
Market. These prices represent quotations among dealers without adjustments for retail mark-ups, markdowns or
commissions, and may not represent prices of actual transactions.
2010
Fourth Quarter ended December 31, 2010
Third Quarter ended September 30, 2010
Second Quarter ended June 30, 2010
First Quarter ended March 31, 2010
2009
Fourth Quarter ended December 31, 2009
Third Quarter ended September 30, 2009
Second Quarter ended June 30, 2009
First Quarter ended March 31, 2009
Holders of Our Common Stock
High
Low
$
$
$
$
$
$
$
$
18.52 $
19.90 $
25.34 $
24.50 $
24.75 $
25.26 $
23.40 $
16.90 $
14.75
15.46
17.34
18.40
18.93
20.80
14.92
10.67
As of February 22, 2011, we had approximately 22 stockholders of record and the closing price of common stock was
$21.66 per share as reported by The Nasdaq Global Select Market. Many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders. Based on several factors, including our proxy mailing from
2010, we estimate the total number of stockholders represented by these record holders to be at least 1,452.
Dividend Policy
We have not paid cash dividends on our common stock since our inception. We currently expect to retain earnings for
use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends for the next
several years.
Performance of Our Common Stock
The following graph compares the cumulative 60-month total return provided shareholders on our common stock relative
to the cumulative total returns of the Nasdaq Composite Index, the S & P 500 Index and the Philadelphia Semiconductor
Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock
on 1/1/2010 and its relative performance is tracked through 12/31/2010.
24
The information contained in the Stock Performance Graph section shall not be deemed to be “soliciting material” or
“filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the
Exchange Act, except to the extent that the Company specifically incorporates it by reference into a document filed under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the year ended December 31, 2010.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On July 27, 2010, the Company announced that its Board of Directors approved a stock repurchase program that
authorizes the Company to repurchase up to $50.0 million of its common stock between August 2, 2010 and December
31, 2011. In February 2011, the Board of Directors approved an increase from $50.0 million to $70.0 million. As of
December 31, 2010, the following shares have been repurchased through the open market and subsequently retired:
Average
Price per
Share
Value
(in thousands)
16,998
14,529
31,527
17.29 $
15.85 $
$
2010 Calendar Year
August
November
Total Shares Repurchased
Shares
Repurchased
983,189 $
916,600 $
1,899,789
25
On February 5, 2008, the Company announced that its Board of Directors approved a stock repurchase program that
authorizes the Company to repurchase up to $25.0 million of its common stock through the end of 2008. As of December
31, 2008, the following shares have been repurchased through the open market and subsequently retired:
2008 Calendar Year
February
March
April
May
June
July
August
September
October
Total Shares Repurchased
There were no shares repurchased in 2009.
ITEM 6. SELECTED FINANCIAL DATA
Shares
Repurchased
Average
Price per
Share
27,500 $
527,332 $
201,863 $
100 $
18,000 $
14,155 $
100 $
307,355 $
333,700 $
1,430,105
Value
(in thousands)
464
9,028
4,043
2
390
309
2
5,784
5,021
25,043
16.88 $
17.12 $
20.03 $
21.98 $
21.66 $
21.86 $
22.03 $
18.82 $
15.05 $
$
The following financial data is derived from our audited annual consolidated financial statements as of and for the years
ended December 31, 2010, 2009, 2008, 2007 and 2006. You should read the following table in conjunction with the
consolidated financial statements and the related notes contained elsewhere in this report on Form 10-K. Operating
results for any year are not necessarily indicative of results to be expected for any future periods.
26
Consolidated Statement of Operations Data:
2010
Year ended December 31,
2008
(in thousands, except per share amounts)
2007
2009
2006
Revenue
Cost of revenue, including stock-based
compensation*
Gross profit
Operating expenses:
Research and development, including
stock-based compensation*
Selling, general and administrative,
including stock-based compensation*
Lease abandonment
Litigation expense
Patent litigation settlement (provision
reversal)
Total operating expenses
$
218,840 $
165,008 $
160,511 $
134,004 $
105,015
97,383
121,457
67,330
97,678
61,184
99,327
48,781
85,223
38,107
66,908
44,372
38,295
34,850
27,342
22,301
41,169
-
5,418
36,752
-
9,457
35,256
-
6,714
29,537
(496 )
9,370
-
90,959
(6,356 )
78,148
-
76,820
9,800
75,553
27,594
1,218
11,560
3,000
65,673
Income from operations
30,498
19,530
22,507
9,670
1,235
Other income (expense):
Interest and other income
Other expense
Total other income, net
Income before income taxes
Income tax provision
Net income (loss)
1,156
(234 )
922
1,047
(429 )
618
3,587
(652 )
2,935
4,741
(139 )
4,602
31,420
1,857
29,563
20,148
474
19,674
25,442
1,216
24,226
14,272
2,692
11,580
2,637
(273 )
2,364
3,599
6,024
(2,425 )
Basic income (loss) per share
Diluted income (loss) per share
$
$
0.83 $
0.78 $
0.57 $
0.54 $
0.72 $
0.67 $
0.37 $
0.33 $
(0.08 )
(0.08 )
Weighted-average common shares
outstanding
Stock options, restricted stock and
warrants
Diluted weighted-average common
equivalent shares outstanding
35,830
34,310
33,509
31,703
29,502
1,996
2,324
2,611
3,387
-
37,826
36,634
36,120
35,090
29,502
* Stock-based compensation has been included in the following line
items:
Cost of revenue
Research and development
Selling, general and administrative
Total
393 $
6,742
9,675
16,810 $
$
$
246 $
6,408
7,957
14,611 $
344 $
5,821
6,993
13,158 $
539 $
4,625
6,064
11,228 $
539
5,236
5,749
11,524
27
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Long-term investments
Restricted cash
Working capital
Restricted assets
Total assets
Common stock
Total stockholders' equity
2010
2009
As of December 31,
2008
(in thousands)
2007
2006
$
48,010 $
129,709
19,180
-
195,403
-
281,603
178,269
246,895
46,717 $
118,914
19,445
-
179,577
-
241,821
175,518
212,957
83,266 $
21,922
37,425
7,360
117,365
7
195,299
147,298
164,645
83,114 $
27,765
-
7,350
119,348
8,340
172,590
143,890
137,537
50,816
27,674
-
-
77,111
8,309
117,327
113,168
95,025
ITEM 7.
RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
The following discussion should be read in conjunction with the consolidated financial statements and related notes
which appear elsewhere in this annual report on Form 10-K.
Overview
We are a fabless semiconductor company that designs, develops, and markets proprietary, advanced analog and mixed-
signal semiconductors. We currently offer products that serve multiple markets, including flat panel televisions, wireless
communications, telecommunications equipment, general consumer products, notebook computers, cellular handsets,
and set top boxes, among others. We believe that we differentiate ourselves by offering solutions that are more highly
integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and,
consequently, more cost-effective than many competing solutions. We plan to continue to introduce additional new
products within our existing product families, as well as in new product categories.
We operate in the cyclical semiconductor industry where there is seasonal demand for certain of our products. We are
not and will not be immune from current and future industry downturns, but we have targeted product and market areas
that we believe have the ability to offer above average industry performance over the long term.
We work with third parties to manufacture and assemble our integrated circuits (“ICs”). This has enabled us to limit our
capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.
Following the introduction of a product, our sales cycle generally takes six to twelve months to achieve revenue. Volume
production is usually achieved in three to six months after we receive an initial customer order for a new product.
Typical lead times for orders are fewer than 90 days. These factors, combined with the fact that orders in the
semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the
forecasting of our orders and revenue difficult.
We derive most of our revenue from sales through distribution arrangements or direct sales to customers in Asia, where
the components we produce are incorporated into an end-user product. 87% of our revenue for the year ended December
31, 2010 and 84% of our revenue for the year ended December 31, 2009 was attributable to direct or indirect sales to
customers in Asia. We derive a majority of our revenue from the sales of our DC to DC converter product family which
services the consumer electronics, communications and computing markets. We believe our ability to achieve revenue
growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share,
manage litigation risk, diversify our customer base and successfully secure manufacturing capacity.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our
28
estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, long-term
investments, short-term investments, inventories, income taxes, warranty obligations and contingencies. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making the judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our
financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many
factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates
and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.
We believe the following critical accounting policies reflect our more significant judgments used in the preparation of
our consolidated financial statements.
Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) –
Accounting Standards Codification (“ASC”) 605-10-S25 Revenue Recognition – Overall – Recognition. ASC 605-10-
S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment
regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. The application of
these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should
changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely impacted.
Approximately 85% of our distributor sales, including sales to our value-added resellers, are made through distribution
arrangements with third parties. These arrangements do not include any special payment terms (our normal payment
terms are 30-45 days for our distributors, with value-added resellers having payment terms up to 90 days), price
protection or exchange rights. Returns are limited to our standard product warranty. Certain of our large distributors have
contracts that include limited stock rotation rights that permit the return of a small percentage of the previous six months’
purchases in return for a compensating new order of equal or greater dollar value.
We maintain a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation
returns on a per distributor basis, where available, and information related to products in the distribution channel. This
reserve is recorded at the time of sale. In the future, if we are unable to estimate our stock rotation returns accurately, we
may not be able to recognize revenue from sales to our distributors based on when we sell inventory to our distributors.
Instead, we may have to recognize revenue when the distributor sells through such inventory to an end-customer.
We generally recognize revenue upon shipment of products to the distributor for the following reasons (based on ASC
605-15-25-1 Revenue Recognition – Products – Recognition – Sales of Products When Right of Return Exists):
(1) Our price is fixed and determinable at the date of sale. We do not offer special payment terms, price
protection or price adjustments to distributors where we recognize revenue upon shipment
(2) Our distributors are obligated to pay us and this obligation is not contingent on the resale of our products
The distributor’s obligation is unchanged in the event of theft or physical destruction or damage to the
(3)
products
(4) Our distributors have stand-alone economic substance apart from our relationship
(5) We do not have any obligations for future performance to directly bring about the resale of our products
(6)
by the distributor
The amount of future returns can be reasonably estimated. We have the ability and the information
necessary to track inventory sold to and held at our distributors. We maintain a history of returns and
have the ability to estimate the stock rotation returns on a quarterly basis.
If we enter into arrangements that have rights of return that are not estimable, we recognize revenue under such
arrangements only after the distributor has sold our products to an end customer.
Approximately 15% of our distributor sales are made through small distributors based on purchase orders rather than
formal distribution arrangements. These distributors do not receive any stock rotation rights and, as such, hold very little
inventory, if any. We do not have a history of accepting returns from these distributors.
29
The terms in a majority of our distribution agreements include the non-exclusive right to sell, and the agreement to use
best efforts to promote and develop a market for, our products in certain regions of the world and the ability to terminate
the distribution agreement by either party with up to three months notice. We provide a one year warranty against defects
in materials and workmanship. Under this warranty, we will repair the goods, provide replacements at no charge, or,
under certain circumstances, provide a refund to the customer for defective products. Estimated warranty returns and
warranty costs are based on historical experience and are recorded at the time product revenue is recognized.
In 2006, we signed a distribution agreement with a U.S. distributor. Revenue from this distributor is recognized upon
sale by the distributor to the end customer because the distributor has certain rights of return which management believes
are not estimable. The deferred revenue balance from this distributor as of December 31, 2010 and 2009 was $1.0
million and $0.9 million, respectively.
Inventory Valuation. We value our inventory at the lower of the standard cost (which approximates actual cost on a
first-in, first-out basis) or its current estimated market value. We write down inventory for obsolescence or lack of
demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. On the contrary, if market
conditions are more favorable, we may be able to sell inventory that was previously reserved.
Accounting for Income Taxes. ASC 740-10 Income Taxes – Overall prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. In accordance with ASC 740-10, we recognize federal, state and foreign
current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax
jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax
effects attributable to temporary differences and carryforwards. We record a valuation allowance to reduce any deferred
tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be
realized.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves
dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and
liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in
accounting or tax laws in the U.S., or foreign jurisdictions where we operate, or changes in other facts or circumstances.
In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on
our tax returns if it has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is
unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an
income tax benefit or additional income tax expense in our financial statements in the period such determination is made.
We have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily
related to transfer pricing, cost sharing and our international tax structure exposure.
As of December 31, 2010, 2009 and 2008, we had a valuation allowance of $16.8 million, $14.6 million and $14.4
million, respectively, attributable to management’s determination that none of the deferred tax assets will be realized,
except for certain deferred tax assets related to uncertain income tax positions. As a result of the cost sharing
arrangements with the Company’s international subsidiaries (cost share arrangements), relatively small changes in costs
that are not subject to sharing under the cost share arrangements can significantly impact the overall profitability of the
US entity. Historically, the US operations have shown an inconsistent earnings pattern due to litigation costs not subject
to cost sharing. The Company evaluated its US valuation allowance at December 31, 2010 by reviewing both its
earnings history and its expected earnings for the next 12 months in its US entity. Because of the US entity’s
inconsistent earnings history and uncertainty of future earnings, the Company has determined that it is more likely than
not that the US deferred tax benefits would not be realized. We have settled most of our legacy litigation matters that
resulted in litigation cost that were not subject to cost share in the past. As a result, during our next fiscal year, a
relatively small number of design wins in the US, and the absence of new litigation that may be not subject to cost share
may position the US entity for a stable earnings pattern. As such, we will continue to evaluate if our facts and
circumstances warrant a reversal of the valuation allowance against the US deferred tax benefits during fiscal year 2011.
Contingencies. We are engaged in legal proceedings regarding our intellectual property, challenges to the enforceability
or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others.
In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this occurs, we
will evaluate the appropriate accounting for the potential contingent liabilities using ASC 450-20-25-2 Contingencies –
30
Loss Contingencies - Recognition to determine whether a contingent liability should be recorded. In making this
determination, management may, depending on the nature of the matter, consult with internal and external legal counsel
and technical experts. Based on the facts and circumstances in each matter, we use our judgment to determine whether it
is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If we determine a
loss is probable and estimable, we record a contingent loss in accordance with ASC 450-20-25-2. In determining the
amount of a contingent loss, we take into account advice received from experts for each specific matter regarding the
status of legal proceedings, settlement negotiations (which may be ongoing), prior case history and other factors. Should
the judgments and estimates made by management need to be adjusted as additional information becomes available, we
may need to record additional contingent losses that could materially and adversely impact our results of operations.
Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent
loss does not occur, the contingent loss recorded would be reversed which could result in a favorable impact on our
results of operations.
Accounting for Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718-
10-30 Compensation – Stock Compensation – Overall – Initial Measurement, under the modified prospective method.
ASC 718-10-30 eliminates the alternative of applying the intrinsic value measurement to stock compensation awards
issued to employees. Rather, the standard requires us to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide services in exchange for the award, known as the requisite
service period (usually the vesting period). We currently use the Black-Scholes option-pricing model to estimate the fair
value of our share-based payments. The Black-Scholes option-pricing model is based on a number of assumptions,
including historical volatility, expected life, risk-free interest rate and expected dividends. If these assumptions change,
stock-based compensation may differ significantly from what we have recorded in the past. The amount of stock-based
compensation that we recognize is also based on an expected forfeiture rate. If there is a difference between the forfeiture
assumptions used in determining stock-based compensation costs and the actual forfeitures which become known over
time, we may change the forfeiture rate, which could have a significant impact on our stock-based compensation
expense.
Warranty Reserves. We currently provide a 12-month warranty against defects in materials and workmanship and will
either repair the goods or provide replacement products at no charge to the customer for defective products. We record
estimated warranty costs by product, which are based on historical experience over the preceding 12 months, at the time
we recognize product revenue. Reserve requirements are recorded in the period of sale and are based on an assessment of
the products sold with warranty and historical warranty costs incurred. There have been situations where we have
recognized warranty reserves for specific claims, separate from our historical run rates. As the complexity of our
products increases, we could experience higher warranty claims relative to sales than we have previously experienced,
and we may need to increase these estimated warranty reserves.
Fair Value of Financial Instruments. ASC 820-10 Fair Value Measurements and Disclosures – Overall defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States
of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of the three
categories, as follows:
•
•
•
Level 1: Quoted prices in active markets for identical assets;
Level 2: Significant other observable inputs; and
Level 3: Significant unobservable inputs.
ASC 820-10-35-51 Fair Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly provides additional guidance for estimating fair value in accordance with ASC 820-
10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or liability
have significantly decreased.
Our financial instruments include cash and cash equivalents and short-term and long-term investments. Cash equivalents
are stated at cost, which approximates fair market value based on quoted market prices. Short-term and long-term
investments are stated at their fair market value.
At December 31, 2010, the face value of our holdings in auction rate securities was $20.2 million, all of which was
classified as long-term available-for-sale investments. Investments in available-for-sale securities are recorded at fair
31
value, and unrealized gains or losses (that are deemed to be temporary) are recognized through shareholders' equity, as a
component of accumulated other comprehensive income in our consolidated balance sheet. We record an impairment
charge to earnings when an available-for-sale investment has experienced a decline in value that is deemed to be other-
than-temporary. Investments in trading securities are recorded at fair value and unrealized gains and losses are
recognized in other income (expense) in our consolidated statement of operations.
We adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent
Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective April 1,
2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary. Other-
than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely than not
be required to sell the security before anticipated recovery. During the year ended December 31, 2009, we recognized a
credit loss of $70,000, which was deemed to be other-than-temporary in other income (expense) in our Consolidated
Statement of Operations.
Based on certain assumptions described in Note 2 to our consolidated financial statements and the Liquidity and Capital
Resources section of Part II, Item 7 of this annual report on Form 10-K, we recorded impairment charges on our holdings
in auction-rate securities. The valuation of these securities is subject to fluctuations in the future, which will depend on
many factors, including the collateral quality, potential to be called or restructured, underlying final maturity, insurance
guaranty, liquidity and market conditions, among others.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU")
No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). The new standard changes the
requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation
of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for
fiscal years beginning on or after June 15, 2010. We are currently evaluating ASU 2009-13 and the impact, if any, that it
may have on our results of operations or financial position.
32
Results of Operations
The table below shows the Consolidated Statements of Operations amounts (in thousands) and shows each as a
percentage of revenue.
2010
Year ended December 31,
2009
(in thousands, except percentages)
2008
Revenue
Cost of revenue
Gross profit
$ 218,840
97,383
121,457
100.0 % $ 165,008
67,330
97,678
44.5
55.5
100.0 % $ 160,511
61,184
99,327
40.8
59.2
100.0 %
38.1
61.9
Operating expenses:
Research and development
Selling, general and administrative
Litigation expense
Patent litigation settlement (provision
reversal)
Total operating expenses
44,372
41,169
5,418
20.3
18.8
2.5
38,295
36,752
9,457
23.3
22.3
5.7
34,850
35,256
6,714
-
90,959
-
41.6
(6,356 )
78,148
(3.9 )
47.4
-
76,820
21.7
22.0
4.2
-
47.9
Income from operations
30,498
13.9
19,530
11.8
22,507
14.0
Interest and other income
Other expense
Total other income, net
1,156
(234 )
922
0.6
(0.1 )
0.5
1,047
(429 )
618
0.6
(0.2 )
0.4
3,587
(652 )
2,935
2.2
(0.4 )
1.8
Income before income taxes
Income tax provision
31,420
1,857
14.4
0.9
20,148
474
12.2
0.3
25,442
1,216
15.9
0.8
Net income
$ 29,563
13.5 % $ 19,674
11.9 % $ 24,226
15.1 %
The following table shows our revenue by product family (amounts in thousands, except percentages):
Year ended December 31,
Percent Change
2010
% of
Revenue 2009
% of
Revenue
2008
% of
Revenue
2010 to 2009
Change
2009 to 2008
Change
Product Family
DC to DC
Converters
Lighting Control
Products
Audio Amplifiers
Total
$ 183,051
83.7 % $ 123,581
74.9 % $ 115,373
71.9 %
48.1%
7.1%
28,554
7,235
13.0 % 27,836
3.3 % 13,591
$ 218,840 100.0 % $ 165,008
16.9 % 32,308
8.2 % 12,830
20.1 %
8.0 %
100.0 % $ 160,511 100.00 %
2.6%
(46.8%)
(13.8%)
5.9%
Revenue. Revenue for the year ended December 31, 2010 was $218.8 million, an increase of $53.8 million, or 32.6%,
from $165.0 million for the year ended December 31, 2009. Sales during the first three quarters of 2010 were strong for
MPS and the semiconductor industry in general. However, due to product shortages early in 2010, several major
customers in Korea sought alternative suppliers, which impacted our revenue in the fourth quarter and may continue to
impact our revenue in future periods. In addition, in the fourth quarter of 2010, sales were lower because distributors
used up inventory that was shipped in the third quarter and the general demand for consumer products declined more
than seasonally. Sales during 2009 were generally weak, primarily from the deterioration in the general demand for
electronic products as a result of a worldwide financial crises and associated macro-economic slowdowns.
In 2010, we saw an increase in demand for our DC to DC products, with sales having increased by $59.5 million or
48.1% over sales in 2009. The increase was primarily because of higher demand for electronic products in the consumer
and communications markets. Sales of our lighting control products increased slightly as a result of greater demand for
33
our WLED solution for consumer electronics products. This was partially offset by a reduction in the demand for our
CCFL products. Audio sales were down year over year due to lower demand and a decline in the average selling price
for certain of our audio products.
Revenue for the year ended December 31, 2009 was $165.0 million, an increase of $4.5 million, or 2.8%, from $160.5
million for the year ended December 31, 2008. The increase in revenue between these two periods resulted primarily
from increased sales of our DC to DC products of $8.2 million as a result of an increase in demand for electronic
products in the consumer and communications markets. This was partially offset by a decrease in the sales of our lighting
control products in the amount of $4.5 million as a result of the continuing shift of notebook backlighting from CCFL
solutions to WLED solutions. Sales for our audio products for the year ended December 31, 2009 remained relatively flat
year over year.
Gross Profit. Gross profit as a percentage of revenue, or gross margin, was 55.5% for the year ended December 31, 2010
and 59.2% for the year ended December 31, 2009. Gross margin declined year-over-year as a result of a change in the
product mix, higher product costs from increased wafer and gold costs, underutilized capacity towards the end of 2010
and an increase in inventory reserves.
Gross profit as a percentage of revenue was 59.2% for the year ended December 31, 2009 and 61.9% for the year ended
December 31, 2008. Gross margin declined year-over-year as a result of increasing price pressure and therefore declining
average selling prices, and an increase in inventory reserves resulting from a decrease in the general demand for certain
of our lighting control products.
Research and Development. Research and development (R&D) expenses consist of salary and benefit expenses for
design and product engineers, expenses related to new product development, and related facility costs.
Revenue
Research and development ("R&D"), excluding
stock-based compensation
R&D stock-based compensation
Total R&D
R&D as a percentage of net revenue
Year ended December 31,
2010
2009
(in thousands, except percentages)
$ 218,840 $ 165,008 $ 160,511
2008
37,630
6,742
44,372 $
20.3 %
31,887
6,408
38,295 $
23.2 %
29,029
5,821
34,850
21.7 %
$
Percentage Change
2009 to
2008
2010 to
2009
32.6 %
2.8 %
18.0 %
5.2 %
15.9 %
9.8 %
10.1 %
9.9 %
R&D expenses were $44.4 million, or 20.3% of revenue, for the year ended December 31, 2010 and $38.3 million, or
23.2% of revenue, for the year ended December 31, 2009. The year-over-year increase was primarily due to an increase
in variable compensation, facilities costs and costs associated with new product development.
R&D expenses were $38.3 million, or 23.2% of revenue, for year ended December 31, 2009 and $34.9 million, or 21.7%
of revenue, for the year ended December 31, 2008. The year-over-year increase was primarily due to an increase in
personnel and new product development expenses to support new product development. Stock-based compensation
expenses increased by $0.6 million, primarily due to the acceleration of certain awards.
34
Selling, General and Administrative. Selling, general and administrative (SG&A) expenses include salary and benefit
expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, related facilities costs,
outside legal and accounting fees, and fees associated with Sarbanes-Oxley compliance requirements.
Revenue
Selling, general and administrative ("SG&A"),
excluding stock-based compensation
SG&A stock-based compensation
Total SG&A
SG&A as a percentage of net revenue
Year ended December 31,
2009
2010
(in thousands, except percentages)
$ 218,840 $ 165,008 $ 160,511
2008
31,494
9,675
41,169 $
18.8 %
28,795
7,957
36,752 $
22.3 %
28,263
6,993
35,256
22.0 %
$
Percentage Change
2009 to
2008
2010 to
2009
32.6 %
2.8 %
9.4 %
21.6 %
12.0 %
1.9 %
13.8 %
4.2 %
SG&A expenses were $41.2 million, or 18.8% of revenue, for the year ended December 31, 2010 and $36.8 million, or
22.3% of revenue, for the year ended December 31, 2009. SG&A as a percentage of revenue declined compared to the
corresponding period in the prior year due to the efficiencies of greater scale from increased revenues. Total SG&A
expenses increased year over year due to higher stock-based compensation expenses and an increase in sales
commissions and other variable compensation as a result of increased revenue in 2010.
SG&A expenses were $36.8 million, or 22.3% of revenue, for the year ended December 31, 2009 and $35.3 million, or
22.0% of revenue, for the year ended December 31, 2008. For the year ended December 31, 2009, SG&A expenses
increased compared to the corresponding period in the prior year due to an increase in sales and sales-related expenses.
Stock-based compensation increased by $1.0 million, primarily related to certain severance arrangements and the
acceleration of certain awards.
Litigation Expense, excluding Patent Litigation Settlement and Provision Reversal, net.
Year ended December 31,
Revenue
Litigation expense
Litigation expense as a percentage of net
revenue
2009
2010
(in thousands, except percentages)
$ 218,840 $ 165,008 $ 160,511
6,714
5,418
9,457
2008
2.5 %
5.7 %
4.2 %
Percentage Change
2009 to
2008
2010 to
2009
32.6 %
(42.7 %)
2.8 %
40.9 %
Litigation expenses, excluding patent litigation settlements and provision reversals were $5.4 million, or 2.5% of
revenue, for the year ended December 31, 2010 as compared to $9.5 million, or 5.7% of revenue, for the year ended
December 31, 2009. As a result of settling our lawsuits involving O2Micro in the second quarter of 2010, our legal
expenses were significantly lower in 2010 compared to 2009.
Litigation expenses, excluding patent litigation settlements and provision reversals were $9.5 million, or 5.7% of
revenue, for the year ended December 31, 2009 as compared to $6.7 million, or 4.2% of revenue, for the year ended
December 31, 2008. During the year ended December 31, 2009, we incurred significant legal expenses to defend our
lawsuit against O2Micro. During the year ended December 31, 2008, we incurred significant legal expenses to defend
our lawsuit against Linear Technology.
For a more complete description of our litigation matters, please see Part I, Item 3 “Legal Proceedings” and Note 10
“Litigation” of Notes to Consolidated Financial Statements.
35
Patent Litigation Settlement (Provision Reversal, net).
Year ended December 31,
2010
(in thousands, except percentages)
2008
2009
Percentage Change
2009 to
2008
2010 to
2009
Revenue
Patent litigation settlement (provision reversal)
Patent litigation settlement (provision reversal)
as a percentage of net revenue
$ 218,840 $ 165,008
(6,356 )
-
$ 160,511
-
32.6 %
2.8 %
0.0 %
(3.9 %)
0.0 %
There were no patent litigation settlements or provision reversals in 2010. Patent litigation provision reversal, net was
$6.4 million for the year ended December 31, 2009. In 2009, we completed the litigation process with respect to the
lawsuit related to TSE, a customer. The conclusion of this lawsuit resulted in recording a reversal of a patent litigation
provision of approximately $7.4 million. This provision was recorded as a patent litigation provision in the second
quarter of 2007 and the reversal of this provision in 2009 is reflected in the Patent Litigation Settlement and Provision
Reversal, net item in the Consolidated Statement of Operations. In connection with the completion of this lawsuit, the
Company also jointly terminated an escrow agreement with TSE and retrieved the deposit of $7.4 million. This recovery
was reduced by certain litigation stipulations for other parties involved in the case in the amount of $1.0 million.
Interest and Other Income. For the years ended December 31, 2010, 2009 and 2008, interest and other income was $1.2
million, $1.0 million and $3.6 million, respectively. Interest rates remained low in 2010, resulting in a small increase in
interest income as our cash and investment balances grew year over year. For the years ended December 31, 2009 and
2008, despite year over year increases in cash, cash equivalents and investment balances, interest income decreased due
to significant declines in interest rates as a result of the economic downturn.
Other Expense. Other expense, comprised mainly of foreign exchange losses, was $0.2 million, $0.4 million and $0.7
million for the years ended December 31, 2010, 2009 and 2008, respectively.
Income Tax Provision. The income tax provision for the year ended December 31, 2010 was $1.9 million or 5.9% of our
income before income taxes. This was lower than the federal statutory rate of 34% primarily because our foreign income
was taxed at lower rates and because of the benefit that we realized as a result of stock options exercised and restricted
units released.
The income tax provision for the year ended December 31, 2009 was $0.5 million or 2.4% of the pre-tax income,
respectively. This differs from the U.S. federal statutory rate of 34% primarily because our foreign income is taxed at
lower rates and because of the benefit that we realized as a result of stock options exercised and restricted units released.
The income tax provision for the year ended December 31, 2008 was $1.2 million or 4.8% of our income before income
taxes. This was lower than the U.S. federal statutory rate of 34% due primarily to a benefit from earnings in low foreign
tax jurisdictions and a decrease in prior-year uncertain tax position reserves under ASC 740-10, which was partially
offset by an increase in current-year ASC 740-10 reserves, additional ASC 740-10 interest accruals, an increase in the
valuation allowance in the U.S. and non-deductible stock option compensation expenses.
For additional information, see Note 8 “Income Taxes” of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
As of December 31, 2010, we had working capital of $195.4 million, including cash and cash equivalents of $48.0
million and short-term investments of $129.7 million compared to working capital of $179.6 million, including cash and
cash equivalents of $46.7 million and short-term investments of $118.9 million as of December 31, 2009. Our working
capital increased year-over-year primarily due to cash generated from operating activities and the proceeds received from
the exercise of options and from the employee stock purchase program.
For the year ended December 31, 2010, net cash provided by operating activities was $48.5 million, primarily due to
strong operating results, partially offset by an increase in inventory to support the deliveries in the first quarter of 2011.
36
For the year ended December 31, 2009, net cash provided by operating activities was $31.8 million, primarily due to
strong operating results during the year. This was offset by an increase in accounts receivable as a result of increased
shipments at the end of the quarter ended December 31, 2009 for which collections had not yet been made and a decrease
in accrued and long-term liabilities. For the year ended December 31, 2008, net cash provided by operating activities was
$39.6 million, primarily due to strong operating results.
For the year ended December 31, 2010, net cash used in investing activities was $33.8 million, primarily related to the
Chengdu building construction and equipment purchases for our Chengdu facility and the net purchase of short-term
investments. For the year ended December 31, 2009, net cash used in investing activities was $82.1 million, primarily
related to the net purchase of short-term investments. For the year ended December 31, 2008, net cash used in investing
activities was $29.6 million, primarily related to the purchase of $28.1 million in auction-rate securities, which became
illiquid in February 2008, and the purchase of $5.2 million in capital equipment. This was offset by the release of $8.6
million in restricted assets as a result of an agreement between O2Micro and us relating to certain legal proceedings in
Taiwan.
We use professional investment management firms to manage the majority of our invested cash. Our fixed income
portfolio is primarily invested in municipal bonds, government securities, auction-rate securities and highly rated
corporate notes. The balance of the fixed income portfolio is managed internally and invested primarily in money market
funds for working capital purposes.
We adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent
Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective April 1,
2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary.
Temporary impairment charges are recorded in accumulated other comprehensive income (loss) within equity and have
no impact on net income. Other-than-temporary impairment charges exist when the entity has the intent to sell the
security or it will more likely than not be required to sell the security before anticipated recovery. Other-than-temporary
impairment charges are recorded in other income (expenses) in the Consolidated Statement of Operations.
At December 31, 2010, the Company’s investment portfolio included $19.2 million, net of impairment charges of $1.0
million, in government-backed student loan auction-rate securities. The underlying maturity of these auction-rate
securities is up to 37 years. Although it is unclear as to when these investments will regain their liquidity, management
has concluded that as of December 31, 2010 and 2009, the cumulative impairment of $1.0 million and $1.1 million,
respectively, was temporary based on the following analysis:
1. The decline in the fair value of these securities is not attributable to adverse conditions specifically
related to these securities or to specific conditions in an industry or in a geographic area;
2. Management possesses both the intent and ability to hold these securities for a period of time
sufficient to allow for any anticipated recovery in fair value;
3. Management believes that it is more likely than not that the Company will not have to sell these
securities before recovery of its cost basis;
4. Except for the credit loss of $70,000 recognized in year ended December 31, 2009 for the
Company’s holdings in auction rate securities described below, the Company does not believe that
there is any additional credit loss associated with other auction-rate securities because the
Company expects to recover the entire amortized cost basis;
5. The majority of the securities remain AAA rated, with $8.6 million of the auction rate securities
having been downgraded by Moody’s to A3-Baa3 during the year ended December 31, 2009, and
there have been no downgrades during the year ended December 31, 2010; and
6. All scheduled interest payments have been made pursuant to the reset terms and conditions.
Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each
of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined
that those securities that are not 100% FFELPS guaranteed are potentially subject to credit risks based on the extent to
which the underlying debt is collateralized and the security-specific student-loan default rates. The Company’s portfolio
includes three such securities, one of which has a senior parity ratio of approximately 126%, which is substantially above
the expected student-loan default rate for that security. Conversely, the senior parity ratio for the other two securities is
approximately 105%. If, therefore, the student-loan default rate and borrowing rate increases for these issuers, the
remaining balance in these trusts may not be sufficient to cover the senior debt. The Company therefore concluded that
there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the
37
amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 20 year
expected term, cash flows based on the 90-day t-bill rates for 20 year forwards and a risk premium of 5.9%, the amount
of interest that the Company was receiving on these securities when the market was last active. As of December 31, 2010
and 2009, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-
temporary and recorded in other expense in its Consolidated Statement of Operations during 2009.
Unless another rights offering or other similar offers are made to redeem at par and accepted by us, we intend to hold the
balance of these investments through successful auctions at par, which we believe could take approximately 2.0 years.
The valuation of the auction-rate securities is subject to fluctuations in the future, which will depend on many factors,
including the collateral quality, potential to be called or restructured, underlying final maturity, insurance guaranty,
liquidity and market conditions, among others. To determine the fair value of the auction-rate securities at December 31,
2009, March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, we used a discounted cash flow
model, for which there are three valuation parameters, including time-to-liquidity, discount rate and expected return. The
following are the values used in the discounted cash flow model:
Time-to-Liquidity
Expected Return (Based on the requisite
treasury rate, plus a contractual penalty
rate)
Discount Rate (Based on the requisite
LIBOR, the cost of debt and a liquidity
risk premium)
December 31,
2009
24 months
2.4%
March 31,
2010
24 months
2.4%
June 30,
2010
24 months
2.7%
September 30,
2010
24 months
2.2%
December 31,
2010
24 months
2.9%
5.2% - 10.0%,
depending on
the credit-
rating of the
security
4.6% - 9.4%,
depending on
the credit-
rating of the
security
3.8% - 8.6%,
depending on
the credit-
rating of the
security
3.2% - 8.0%,
depending on
the credit-
rating of the
security
4.1% - 8.9%,
depending on
the credit-
rating of the
security
In October 2008, the Company accepted an offer to participate in an auction-rate security rights offering from UBS to
sell up to $18.2 million in face value of eligible auction-rate securities commencing in June 2010. Between October 2008
and June 2010, $9.6 million of these auction-rate securities were called at par. On June 30, 2010, the Company exercised
the UBS put right and sold the remaining $8.6 million in auction rate securities at par, for which the sale was completed
and proceeds were received on July 1, 2010. At December 31, 2009, we had $16.9 million in eligible auction-rate
securities remaining at UBS. The impairment related to these auction-rate securities and the corresponding put right were
valued at $0.7 million. The change in the impairment and the fair value of the put right was recorded in accordance with
the provisions of ASC 320-10-35 and ASC 320-10-50 in other income (expense) in the Consolidated Statement of
Operations.
From the end of the third quarter of 2010 to the end of the fourth quarter of 2010, we sold $0.2 million in auction-rate
securities at par. However, the FFELPS-guaranteed student-loan credit default spread and the spread between the 90-day
libor and t-bill forward rates increased. The net effect of the adjustments was an increase in the overall impairment from
$0.9 million at September 30, 2010 to $1.0 million at December 31, 2010.
From the end of the second quarter of 2010 to the end of the third quarter of 2010, we kept the time-to-liquidity constant
at 2.0 years. There was a slight decrease in the spread between the 90-day libor and t-bill forward rates as well as a small
decrease in the FFELPS-guaranteed student-loan credit default spread. We also sold $8.8 million in auction-rate
securities at par, all of which was related to the exercise of the UBS put right. The net effect of the adjustments was a
reduction in the overall impairment from $1.3 million at June 30, 2010 to $0.9 million at September 30, 2010.
From the end of the first quarter of 2010 to the end of the second quarter of 2010, we kept the time-to-liquidity constant
at 2.0 years. The spread between the 90-day libor and t-bill forward rates remained relatively constant. We sold $8.1
million in auction rate securities at par, all of which were held at UBS. However, the FFELPs-guaranteed student-loan
credit default spread increased slightly. The net effect of the adjustments was a reduction in the overall impairment from
$1.5 million at March 31, 2010 to $1.3 million at June 30, 2010. The overall impairment decreased primarily because we
sold a large amount of auction-rate securities back to UBS at par. This was partially offset by a slight increase in the
FFELPS-guaranteed student-loan credit default spread.
38
From the end of the fourth quarter of 2009 to the end of the first quarter of 2010, we kept the time-to-liquidity constant at
2.0 years. We sold $0.2 million in auction-rate securities at par. The spread between the 90-day libor and t-bill forward
rate decreased and the FFELPs-guaranteed student-loan credit default spread decreased. The net effect of the adjustments
was a reduction in the overall impairment from $1.8 million at December 31, 2009 to $1.5 million at March 31, 2010.
Net cash used in financing activities for the year ended December 31, 2010 was $14.0 million, primarily related to the
repurchase of our common stock in the amount of $31.5 million, which was partially offset by the exercise of options
and proceeds from our Employee Stock Purchase Plan in the amount of $16.2 million. Net cash provided by financing
activities for the year ended December 31, 2009 was $13.6 million, primarily from the exercise of stock options and
proceeds from our Employee Stock Purchase Plan in the amount of $13.0 million.
Net cash used by financing activities for the year ended December 31, 2008 was $9.8 million, primarily from the
repurchase of $25.0 million of our common stock. This was partially offset by the proceeds related to the exercise of
options and proceeds from our Employee Stock Purchase Plan of common stock in the amount of $14.5 million and
excess tax benefits related to the exercise of options of $0.8 million.
On July 27, 2010, we announced that our Board of Directors approved a stock repurchase program that authorizes the
Company to repurchase up to $50.0 million of its common stock between August 2, 2010 and December 31, 2011. In
February 2011, the Board of Directors approved an increase from $50.0 million to $70.0 million. As of December 31,
2010, the following shares have been repurchased through the open market and subsequently retired:
2010 Calendar Year
August
November
Total Shares Repurchased
There were no repurchases in 2009.
Shares
Repurchased
983,189 $
916,600 $
1,899,789
Average
Price per
Share
Value
(in thousands)
16,998
14,529
31,527
17.29 $
15.85 $
$
Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above,
we believe that cash generated from operations, together with the liquidity provided by existing cash balances and short
term investments, will be sufficient to satisfy our liquidity requirements for the next 12 months. For further details
regarding our operating, investing and financing activities, see the Consolidated Statement of Cash Flows.
In the future, in order to strengthen our financial position, in the event of unforeseen circumstances, or in the event we
need to fund our growth in future financial periods, we may need to raise additional funds by any one or a combination
of the following: issuing equity securities, debt or convertible debt or the sale of certain product lines and/or portions of
our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.
From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines,
technologies and businesses, and we continue to consider potential acquisition candidates. Any such transactions could
involve the issuance of a significant number of new equity securities, debt, and/or cash consideration. We may also be
required to raise additional funds to complete any such acquisition, through either the issuance of equity securities or
borrowings. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities,
our existing stockholders may experience significant dilution.
Contractual Obligations
We lease our headquarters and sales offices in San Jose, California. The San Jose facility was sold and the new landlord
has exercised their right to terminate the lease, effective April 18, 2012.
In September 2004, we signed an agreement with the Chinese local authority to construct a facility in Chengdu, China.
Pursuant to this agreement, we agreed to contribute capital in the form of cash, in-kind assets, and/or intellectual
property, of at least $5.0 million to our wholly-owned Chinese subsidiary as the registered capital for the subsidiary and
exercised the option to purchase land use rights for the facility of approximately $0.2 million. We also have the option to
acquire the facility after a five-year lease term for the original construction cost less rents paid, which is currently
39
estimated at $1.9 million and which becomes exercisable in March 2011. We will likely enter into a purchase agreement
for this facility at a date to be determined and as the opportunity necessitates.
As of December 31, 2010, our total outstanding purchase commitments were $14.4 million, which includes wafer
purchases from our two foundries, the purchase of assembly services primarily from multiple contractors in Asia and
purchase commitments related to the construction of our Chengdu facility. This compares to purchase commitments of
$13.2 million as of December 31, 2009.
The following table summarizes our contractual obligations at December 31, 2010, and the effect such obligations are
expected to have on our liquidity and cash flow over the next five years (in thousands).
Operating leases
Outstanding
purchase
commitments
Total
$
2,413 $
2011
2012
Payments by Period
2013
2014
2015
1,665 $
574 $
174 $
- $
Thereafter
-
- $
$
14,379 $
14,379 $
- $
- $
$
16,792 $
16,044 $
574 $
174 $
- $
- $
- $
- $
-
-
Because of the uncertainty as to the timing of payments related to our liabilities for unrecognized tax benefits, we have
excluded estimated obligations of $5.0 million, after considering the valuation allowance, from the table above.
Off Balance Sheet Arrangements
As of December 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and
Exchange Commission’s Regulation S-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our cash equivalents and investments are subject to market risk, primarily interest rate and credit risk. Our investments
are managed by outside professional managers within investment guidelines set by us. Such guidelines include security
type, credit quality and maturity and are intended to limit market risk by restricting our investments to high quality debt
instruments with relatively short-term maturities.
We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as
available-for-sale or trading. For available-for-sale investments, no gains or losses are recognized by us in our results of
operations due to changes in interest rates unless such securities are sold prior to maturity or are determined to be other-
than-temporarily impaired. Available-for-sale investments are reported at fair value with the related unrealized gains or
losses being included in accumulated other comprehensive income, a component of stockholders’ equity. Trading
securities are reported at fair value with unrealized gains and losses included in earnings.
Fluctuations in interest rates of +/- 10% could impact our annual results of operations by approximately $0.1 million.
Foreign Currency Exchange Risk
Our sales outside the United States are transacted in U.S. dollars. Accordingly, our sales are not generally impacted by
foreign currency rate changes. In 2010, the primary functional currency of the Company’s offshore operations was the
local currency, primarily the New Taiwan Dollar and the Chinese Yuan. To date, fluctuations in foreign currency
exchange rates have not had a material impact on our results of operations. However, fluctuations of +/- 10% in such
local currencies could impact our annual results of operations by approximately $4.2 million.
Value Change to Long-Term Investments
As of December 31, 2010, all of our holdings in auction rate securities, which have a face value of $20.2 million, have
failed to reset as a result of current market conditions. Should these auctions continue to fail and if the credit rating for
40
these securities decline, a 10% decline in the fair value could impact our results of operations by approximately $2.0
million.
In valuing the auction-rate securities using the discounted cash flow model, a change in either the liquidity risk premium
or time-to-liquidity by 10% would result in a $0.1 million change in the value of our auction-rate securities portfolio.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Contents
orts of Independent Registered Public Accounting Firm
solidated Balance Sheets
solidated Statements of Operations
solidated Statements of Stockholders’ Equity
solidated Statements of Cash Flows
es to Consolidated Financial Statements
Page
37
39
40
41
42
43
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCCOUNTING FIRM
To the Board of Directors and Stockholders of
Monolithic Power Systems, Inc.
We have audited the accompanying consolidated balance sheets of Monolithic Power Systems, Inc. and subsidiaries
(collectively, the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Monolithic Power Systems, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 4, 2011 expressed an unqualified opinion on the Company’s internal
control over financial reporting.
/s/ Deloitte & Touche LLP
San Jose, California
March 4, 2011
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCCOUNTING FIRM
To the Board of Directors and Stockholders of
Monolithic Power Systems, Inc.
We have audited the internal control over financial reporting of Monolithic Power Systems, Inc. and subsidiaries
(collectively, the “Company”) as of December 31, 2010, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by
the company’s board of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2010, of the Company and our
report dated March 4, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
San Jose, California
March 4, 2011
43
MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $0 in both 2010 and 2009
Inventories
Deferred income tax assets, net - current
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term investments
Deferred income tax assets, net - long-term
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued compensation and related benefits
Accrued liabilities
Total current liabilities
Non-current income tax liability
Other long-term liabilities
Total liabilities
Stockholders' equity:
$
$
$
December 31,
2010
2009
48,010 $
129,709
18,347
25,789
204
2,314
224,373
37,262
19,180
39
749
281,603 $
8,979 $
8,792
11,199
28,970
5,015
723
34,708
46,717
118,914
15,521
19,616
5
2,726
203,499
17,968
19,445
175
734
241,821
7,787
8,454
7,681
23,922
4,915
27
28,864
Common stock, $0.001 par value, $35 and $35 in 2010 and 2009, respectively;
shares authorized: 150,000,000; shares issued and outstanding: 35,063,033
and 35,165,316 in 2010 and 2009, respectively
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
178,269
66,647
1,979
246,895
281,603 $
175,518
37,085
354
212,957
241,821
$
See accompanying notes to consolidated financial statements.
44
MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Litigation expense
Litigation provision reversal, net
Total operating expenses
Income from operations
Other income (expense):
Interest and other income
Other expense
Total other income, net
Income before income taxes
Income tax provision
Net income
Basic income per share
Diluted income per share
Year Ended December 31,
2009
2008
2010
$
218,840 $
97,383
121,457
165,008 $
67,330
97,678
160,511
61,184
99,327
44,372
41,169
5,418
-
90,959
38,295
36,752
9,457
(6,356 )
78,148
34,850
35,256
6,714
-
76,820
30,498
19,530
22,507
1,156
(234 )
922
31,420
1,857
29,563 $
1,047
(429 )
618
20,148
474
19,674 $
0.83 $
0.78 $
0.57 $
0.54 $
$
$
$
3,587
(652 )
2,935
25,442
1,216
24,226
0.72
0.67
33,509
2,611
36,120
Weighted-average common shares outstanding
Stock options and restricted stock
Diluted weighted-average common equivalent shares outstanding
35,830
1,996
37,826
34,310
2,324
36,634
See accompanying notes to consolidated financial statements.
45
MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock
Shares
Deferred
Stock
Amount Compensation Deficit)
Retained
Earnings
(Accumulated
Accumulated
Other
Comprehensive
Income (Loss) Equity
Total
Stockholders’
Balance as of December 31, 2007
Components of comprehensive loss:
Net income
Impairment of Auction Rate Securities
Unrealized gains
Foreign exchange gain
Total comprehensive income
Exercise of stock options, including net excess tax benefit
of $765
Repurchase of common shares
Shares purchased through ESPP
Stock-based compensation expense, net of forfeitures
Compensation expense for non-employee stock options
Release of restricted stock upon vesting
Balance as of December 31, 2008
Components of comprehensive income:
Net income
Impairment of Auction Rate Securities
Unrealized losses
Foreign exchange gain
Total comprehensive income
Exercise of stock options, including net excess tax benefit
of $643
Shares purchased through ESPP
Stock-based compensation expense, net of forfeitures
Compensation expense for non-employee stock options
Release of restricted stock upon vesting
Balance as of December 31, 2009
Components of comprehensive income:
Net income
Impairment of Auction Rate Securities
Unrealized losses
Foreign exchange gain
Total comprehensive income
Exercise of stock options, including net excess tax benefit
of $1,256
Repurchase of common shares
Shares purchased through ESPP
Stock-based compensation expense, net of forfeitures
Compensation expense for non-employee stock options
Release of restricted stock upon vesting
Balance as of December 31, 2010
33,454,595 $ 143,890 $
(3 ) $
(6,815 ) $
465 $
137,537
24,226
(1,400 )
(1 )
872
3
- $
17,411 $
(64 ) $
19,674
340
(109 )
187
- $
37,085 $
354 $
29,563
160
104
1,361
- $
66,647 $
1,979 $
24,226
(1,400 )
(1 )
872
23,697
13,480
(25,043 )
1,778
13,154
42
-
164,645
19,674
340
(109 )
187
20,092
11,824
1,794
14,484
118
-
212,957
29,563
160
104
1,361
31,188
15,597
(31,527 )
1,885
16,803
(7 )
-
246,895
1,417,585 13,480
(1,430,105 ) (25,043 )
1,778
125,207
13,151
42
-
33,646,821 $ 147,298 $
79,539
1,217,272 11,824
1,794
161,026
14,484
118
140,197
-
35,165,316 $ 175,518 $
1,452,245 15,597
(1,899,789 ) (31,527 )
1,885
114,387
16,803
(7 )
230,874
-
35,063,033 $ 178,269 $
See accompanying notes to consolidated financial statements
46
MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Loss on disposal of property and equipment
Amortization and realized gain (loss) on debt instruments
Deferred income tax assets
Credit loss on auction-rate securities
Tax benefit from stock option transactions
Excess tax benefit from stock option transactions
Stock-based compensation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued and long-term liabilities
Accrued income taxes payable and noncurrent tax liabilities
Accrued compensation and related benefits
Net cash provided by operating activities
Cash flows from investing activities:
Property and equipment purchases
Purchase of intangible assets
Purchase of short-term investments
Proceeds from sale of short-term investments
Proceeds from sale of long-term investments
Changes in restricted assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Proceeds from employee stock purchase plan
Repurchase of common stock
Excess tax benefits from stock option transactions
Net cash provided by (used in) financing activities
Effect of change in exchange rates
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures for cash flow information:
Cash paid (received) for taxes
Supplemental disclosures of non-cash investing and financing activities:
Liability accrued for equipment purchases
Unrealized loss on auction-rate securities
Temporary impairment of auction-rate securities
Other-than-temporary impairment of short-term investments
Value of auction-rate security put right
Year Ended December 31,
2009
2008
2010
$
29,563 $
19,674 $
24,226
8,016
1
688
(56 )
-
3,349
(1,256 )
16,810
(2,826 )
(6,184 )
378
1,155
556
(1,995 )
295
48,494
(22,779 )
-
(208,621 )
197,243
425
(19 )
(33,751 )
14,339
1,885
(31,527 )
1,256
(14,047 )
597
1,293
46,717
48,010 $
6,573
17
380
(84 )
70
2,288
(643 )
14,611
(6,406 )
(737 )
(101 )
2,699
(5,633 )
(1,492 )
548
31,764
(9,954 )
(310 )
(159,917 )
80,586
100
7,367
(82,128 )
11,181
1,794
-
643
13,618
197
(36,549 )
83,266
46,717 $
5,725
5
(36 )
710
-
2,110
(765 )
13,158
(876 )
(1,356 )
2,242
(1,382 )
(1,816 )
(1,897 )
(458 )
39,590
(5,233 )
-
(36,608 )
30,985
725
8,566
(29,615 )
12,715
1,778
(25,043 )
765
(9,785 )
(38 )
152
83,114
83,266
35 $
321 $
(2,482 )
4,264 $
(104 ) $
(160 ) $
- $
- $
663 $
(340 ) $
70 $
525 $
(525 ) $
228
1,400
(1,250 )
-
1,250
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements
47
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business — Monolithic Power Systems, Inc. (MPS or the Company) was incorporated in the State of California on
August 22, 1997. On November 17, 2004, the Company was reincorporated in the State of Delaware. MPS designs,
develops and markets proprietary, advanced analog and mixed-signal semiconductors. The Company combines advanced
process technology with its highly experienced analog designers to produce high-performance power management
integrated circuits (ICs) for DC to DC converters, LED drivers, Cold Cathode Fluorescent Lamp (CCFL) backlight
controllers, Class-D audio amplifiers, and other Linear ICs. MPS products are used extensively in computing and
network communications products, LCD monitors and TVs, and a wide variety of consumer and portable electronics
products. MPS partners with world-class manufacturing organizations to deliver top quality, ultra-compact, high-
performance solutions through productive, cost-efficient channels.
Basis of Presentation — The consolidated financial statements include the accounts of Monolithic Power Systems, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Transactions — The Company’s foreign subsidiaries operate primarily using their respective local
currencies, and therefore, the local currency has been determined to be the functional currency for each foreign
subsidiary. Accordingly, all assets and liabilities of the Company’s foreign subsidiaries are translated using exchange
rates in effect at the end of the period. Revenue and costs are translated using average exchange rates for the period. The
resulting translation adjustments are presented as a separate component of accumulated other comprehensive income
(loss) in stockholders’ equity.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Certain Significant Risks and Uncertainties — Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term investments and
accounts receivable. The Company’s cash consists of checking and savings accounts. The Company’s cash equivalents
include short-term, highly liquid investments purchased with remaining maturities at the date of purchase of three
months or less. The Company’s short-term investments consist primarily of government agencies and treasuries and the
Company’s long-term investments consist of government-backed student loan auction-rate securities. The Company
generally does not require its customers to provide collateral or other security to support accounts receivable. To manage
credit risk, management performs ongoing credit evaluations of its customers’ financial condition.
The Company participates in the dynamic high technology industry and believes that changes in any of the following
areas could have a material adverse effect on the Company’s future financial position, results of operations or cash
flows: advances and trends in new technologies and industry standards; competitive pressures in the form of new
products or price reductions on current products; changes in product mix; changes in the overall demand for products
offered by the Company; changes in third-party manufacturers; changes in key suppliers; changes in certain strategic
relationships or customer relationships; litigation or claims against the Company based on intellectual property, patent,
product, regulatory or other factors; fluctuations in foreign currency exchange rates; risk associated with changes in
domestic and international economic and/or political regulations; availability of necessary components or subassemblies;
availability of foundry capacity; and the Company’s ability to attract and retain employees necessary to support its
growth.
48
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Financial Instruments — ASC 820-10 Fair Value Measurements and Disclosures – Overall defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States
of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of the three
categories, as follows:
•
•
•
Level 1: Quoted prices in active markets for identical assets;
Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities or quoted prices in markets that are not active; and
Level 3: Significant unobservable inputs.
ASC 820-10-35-51 Fair Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly provides additional guidance for estimating fair value in accordance with ASC 820-
10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or liability
have significantly decreased.
The Company’s financial instruments include cash and cash equivalents and short-term and long-term investments. Cash
equivalents are stated at cost, which approximates fair market value based on quoted market prices. Short-term and long-
term investments are stated at their fair market value.
At December 31, 2010, the face value of the Company’s holdings in auction rate securities was $20.2 million, all of
which was classified as long-term available-for-sale investments. Investments in available-for-sale securities are
recorded at fair value, and unrealized gains or losses (that are deemed to be temporary) are recognized through
shareholders' equity, as a component of accumulated other comprehensive income in our consolidated balance sheet. The
Company records an impairment charge to earnings when an available-for-sale investment has experienced a decline in
value that is deemed to be other-than-temporary. Investments in trading securities are recorded at fair value and
unrealized gains and losses are recognized in other income (expense) in the Company’s consolidated statement of
operations.
The Company adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall –
Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective
April 1, 2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary.
Other-than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely
than not be required to sell the security before anticipated recovery. During the year ended December 31, 2009, the
Company recognized a credit loss of $70,000, which was deemed to be other-than-temporary in other income (expense)
in our Consolidated Statement of Operations. There were no such losses recognized in 2010 and 2008.
Based on certain assumptions described in Note 2, the Company recorded impairment charges on its holdings in auction-
rate securities. The valuation of these securities is subject to fluctuations in the future, which will depend on many
factors, including the collateral quality, potential to be called or restructured, underlying final maturity, insurance
guaranty, liquidity and market conditions, among others.
Inventories — Inventories are stated at the lower of the standard cost (which approximates actual cost on a first-in, first-
out basis) or current estimated market value. The Company monitors manufacturing variances and revises standard costs
if necessary. Due to continued demand changes, potential obsolescence, and product life cycle, the Company writes
down inventory to net realizable values, as needed.
Property and Equipment — Property and equipment are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized
over the shorter of the estimated useful life or the lease period. The Chengdu building, which was placed in service in
October 2010, has a depreciation life of 30 years.
49
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Lived Assets — The Company evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between
the carrying amount of the asset and its fair value based on the present value of estimated future cash flows.
Other Assets — Other assets consist primarily of intangible assets for the land use rights in Chengdu, purchased patents
and long-term lease deposits.
Revenue Recognition — The Company recognizes revenue in accordance with ASC 605-10-S25 Revenue Recognition –
Overall – Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is
fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on
management’s judgment regarding the fixed nature of the fee charged for products delivered and the collectibility of
those fees. The application of these criteria has resulted in the Company generally recognizing revenue upon shipment
(when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met
for certain future transactions, revenue recognized for any reporting period could be adversely impacted.
Approximately 85% of the Company’s distributor sales, including sales to the Company’s value-added resellers, are
made through distribution arrangements with third parties. These arrangements do not include any special payment terms
(our normal payment terms are 30-45 days for our distributors, with value-added resellers having payment terms up to 90
days), price protection or exchange rights. Returns are limited to the Company’s standard product warranty. Certain of
the Company’s large distributors have contracts that include limited stock rotation rights that permit the return of a small
percentage of the previous six months’ purchases in return for a compensating new order of equal or greater dollar value.
The Company maintains a sales reserve for stock rotation rights, which is based on historical experience of actual stock
rotation returns on a per distributor basis, where available, and information related to products in the distribution
channel. This reserve is recorded at the time of sale. In the future, if the Company is unable to estimate its stock rotation
returns accurately, the Company may not be able to recognize revenue from sales to its distributors based on when it
sells inventory to its distributors. Instead, the Company may have to recognize revenue when the distributor sells through
such inventory to an end-customer.
The Company generally recognizes revenue upon shipment of products to the distributor for the following reasons (based
on ASC 605-15-25-1 Revenue Recognition – Products – Recognition – Sales of Products When Right of Return Exists):
(1) The Company’s price is fixed and determinable at the date of sale. The Company does not offer special
payment terms, price protection or price adjustments to distributors where the Company recognizes revenue
upon shipment
(2) The Company’s distributors are obligated to pay the Company and this obligation is not contingent on the
resale of the Company’s products
(3) The distributor’s obligation is unchanged in the event of theft or physical destruction or damage to the
products
(4) The Company’s distributors have stand-alone economic substance apart from the Company’s relationship
(5) The Company does not have any obligations for future performance to directly bring about the resale of the
Company’s products by the distributor
(6) The amount of future returns can be reasonably estimated. The Company has the ability and the
information necessary to track inventory sold to and held at its distributors. The Company maintains a
history of returns and has the ability to estimate the stock rotation returns on a quarterly basis.
If the Company enters into arrangements that have rights of return that are not estimable, the Company recognizes
revenue under such arrangements only after the distributor has sold the Company’s products to an end customer.
Approximately 15% of the Company’s distributor sales are made through small distributors based on purchase orders
rather than formal distribution arrangements. These distributors do not receive any stock rotation rights.
50
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The terms in a majority of the Company’s distribution agreements include the non-exclusive right to sell, and the
agreement to use best efforts to promote and develop a market for, our products in certain regions of the world and the
ability to terminate the distribution agreement by either party with up to three months notice. The Company provides a
one year warranty against defects in materials and workmanship. Under this warranty, the Company will repair the
goods, provide replacements at no charge, or, under certain circumstances, provide a refund to the customer for defective
products. Estimated warranty returns and warranty costs are based on historical experience and are recorded at the time
product revenue is recognized.
In 2006, the Company signed a distribution agreement with a U.S. distributor. Revenue from this distributor is
recognized upon sale by the distributor to the end customer because the distributor has certain rights of return which
management believes are not estimable. For the years ended December 31, 2010 and 2009, the deferred revenue balance
from this distributor was $1.0 million and $0.9 million, respectively.
Stock-Based Compensation — The Company accounts for stock-based compensation in accordance with the provisions
of ASC 718-10-30 Compensation – Stock Compensation – Overall – Initial Measurement, under the modified
prospective method. ASC 718-10-30 eliminated the alternative of applying the intrinsic value measurement to stock
compensation awards issued to employees. Rather, the standard requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period). The Company currently use the Black-Scholes
option-pricing model to estimate the fair value of its share-based payments. The Black-Scholes option-pricing model is
based on a number of assumptions, including historical volatility, expected life, risk-free interest rate and expected
dividends.
Research and Development — Costs incurred in research and development are charged to operations as incurred.
Income Taxes — ASC 740-10 Income Taxes – Overall prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. In accordance with ASC 740-10, the Company recognizes federal, state and foreign current tax
liabilities or assets based on its estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. The
Company also recognizes federal, state and foreign deferred tax assets or liabilities for its estimate of future tax effects
attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any
deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to
be realized.
The Company’s calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments
and involves dealing with uncertainties in the application of complex tax laws. The Company’s estimates of current and
deferred tax assets and liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated
outcome, changes in accounting or tax laws in the U.S., or foreign jurisdictions where we operate, or changes in other
facts or circumstances. In addition, the Company recognizes liabilities for potential U.S. and foreign income tax for
uncertain income tax positions taken on its tax returns if it has less than a 50% likelihood of being sustained. If the
Company determines that payment of these amounts is unnecessary or if the recorded tax liability is less than the
Company’s current assessment, the Company may be required to recognize an income tax benefit or additional income
tax expense in its financial statements in the period such determination is made. The Company has calculated its
uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing,
cost sharing and the Company’s international tax structure exposure.
As of December 31, 2010, 2009 and 2008, the Company had a valuation allowance of $16.8 million, $14.6 million and
$14.4 million, respectively, attributable to management’s determination that none of the US deferred tax assets will be
realized, except for certain deferred tax assets related to uncertain income tax positions. As a result of the cost sharing
arrangements with the Company’s international subsidiaries (cost share arrangements), relatively small changes in costs
that are not subject to sharing under the cost share arrangements can significantly impact the overall profitability of the
US entity. Historically, the US operations have shown an inconsistent earnings pattern due to litigation costs not subject
51
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
to cost sharing. The Company evaluated its US valuation allowance at December 31, 2010 by reviewing both its
earnings history and its expected earnings for the next 12 months in its US entity. Because of the US entity’s
inconsistent earnings history and uncertainty of future earnings, the Company has determined that it is more likely than
not that the US deferred tax benefits would not be realized. The Company has settled most of its legacy litigation
matters that resulted in litigation cost that were not subject to cost share in the past. As a result, during the Company’s
next fiscal year, a relatively small number of design wins in the US, and the absence of new litigation that may be not
subject to cost share may position the US entity for a stable earnings pattern. As such, the Company will continue to
evaluate if its facts and circumstances warrant a reversal of the valuation allowance against the US deferred tax benefits
during fiscal year 2011.
The Company incurred significant stock-based compensation expense, some of which related to incentive stock options
for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying
dispositions result in a reduction of income tax expense in the period when the disqualifying disposition occurs in an
amount equal to the tax benefit relating to previously recognized stock compensation expense. Tax benefits related to
realized tax deductions in excess of previously expensed stock compensation are recorded as an addition to paid-in-
capital.
Patent Litigation — Costs incurred in registering and defending the Company’s patents and other proprietary rights are
charged to operations as incurred (See Note 10).
Comprehensive Income (Loss) — Comprehensive income represents the change in the Company’s net assets during the
period from non-owner sources. Comprehensive income (loss) includes unrealized gains/(losses) on investments and
foreign exchange gains/(losses) for the years ended December 31, 2010, 2009 and 2008.
Net income
Other comprehensive income (loss):
Years Ended December 31,
2009
2008
2010
$
29,563 $
19,674 $
24,226
Change in value of temporary impairment of auction-rate
securities
Unrealized gain (loss) on available-for-sale securities
Foreign currency translation adjustments
Comprehensive income
$
160
104
1,361
31,188 $
340
(109 )
187
20,092 $
(1,400 )
(1 )
872
23,697
Accumulated other comprehensive income presented in the Consolidated Balance Sheet at December 31, 2010 consisted
primarily of approximately $2.8 million related to translation gains, offset by $0.9 million related to the impairment of
the Company’s holdings in auction-rate securities. Accumulated other comprehensive income presented in the
Consolidated Balance Sheet at December 31, 2009 consisted primarily of $1.5 million related to translation gains, offset
by $1.1 million related to the impairment of the Company’s holdings in auction-rate securities.
New Accounting Standards — In October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13").
The new standard changes the requirements for establishing separate units of accounting in a multiple element
arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative
selling price. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company is currently
evaluating ASU 2009-13 and the impact, if any, that it may have on its results of operations or financial position.
52
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Fair Value Measurements
The following is a schedule of the Company’s cash and cash equivalents and short-term and long-term investments as of
December 31, 2010 and 2009 (in thousands):
Cash, Cash Equivalents and Investments
Cash in Banks
Government Agencies / Treasuries
Commercial Paper / Corporate Notes
Auction-Rate Securities backed by Student-Loan Notes
Put Right
Total Cash, Cash Equivalents and Investments
Reported as:
Cash and Cash Equivalents
Short-term Available-for-Sale Investments
Short-term Trading Investments
Long-term Available-for-Sale Investments
Total Cash, Cash Equivalents and Investments
Adjusted Cost and Estimated
Fair Market Value as of
December 31,
2010
2009
$
$
$
$
48,010 $
117,302
12,407
19,180
-
196,899 $
48,010 $
129,709
-
19,180
196,899 $
44,717
104,064
-
35,570
725
185,076
46,717
102,064
16,850
19,445
185,076
The contractual maturities of the Company’s investments classified as available-for-sale or trading securities as of
December 31, 2010 and 2009 is as follows (in thousands):
Less than 1 year
1 - 5 years
Greater than 5 years
2010
2009
$
$
100,637 $
29,072
19,180
148,889 $
73,566
20,053
44,740
138,359
The Company follows the provisions of ASC 820-10 Fair Value Measurements and Disclosures – Overall, which
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the
United States of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of
the three categories noted in the table below. The Company also adopted the provisions of ASC 820-10-35-51 Fair
Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly, effective April 1, 2009, which provides additional guidance for estimating fair value in accordance with ASC
820-10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or
liability have significantly decreased. Effective January 1, 2010, the Company adopted the provisions of ASU 2010-06,
“Disclosures About Fair Value Measurements”, which adds new requirements for disclosures about transfers into and
out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements.
53
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables detail the fair value measurements as of December 31, 2010 and 2009 within the fair value
hierarchy of the financial assets that are required to be recorded at fair value (in thousands):
Fair Value Measurements at December 31, 2010 Using
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
$
117,302 $
12,407
117,302 $
-
19,180
148,889 $
-
117,302 $
- $
12,407
-
12,407 $
-
-
19,180
19,180
Fair Value Measurements at December 31, 2009 Using
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Total
$
104,064 $
104,064 $
19,445
16,125
725
140,359 $
-
-
-
104,064 $
$
- $
-
-
-
- $
-
19,445
16,125
725
36,295
US Treasury and US Government Agency
Bonds
Commercial Paper / Corporates
Long-term available-for-sale auction-rate
securities
US Treasury and US Government Agency
Bonds
Long-term available-for-sale auction-rate
securities
Short-term trading auction-rate securities
Put right
At December 31, 2010, fixed income available-for-sales securities included $117.3 million in US government agencies
and treasuries and $12.4 million in corporate notes and commercial paper, all of which are classified as short-term
investments. From these investments, there was $18,000 in unrealized losses. The impact of gross unrealized gains and
losses was not material. At December 31, 2010, the Company also had $20.2 million in face value of auction-rate
securities, all of which are classified as long-term available-for-sale investments and $15.6 million in money market
funds.
At December 31, 2009, fixed income available-for-sale securities include securities issued by government agencies and
treasuries, $102.1 million of which are classified as short-term investments and $2.0 million which are classified as cash
equivalents on the Consolidated Balance Sheet. At December 31, 2009, the Company had $18.0 million invested in
money market funds. At December 31, 2009, there was $0.1 million in unrealized losses from these investments. The
impact of gross unrealized gains and losses was not material.
The Company adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall –
Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall – Disclosure,
effective April 1, 2009 and used the guidelines therein to determine whether the impairment on its available-for-sale
securities is temporary or other-than-temporary. Temporary impairment charges are recorded in accumulated other
comprehensive income (loss) within stockholders’ equity and have no impact on net income. Other-than-temporary
impairment exists when the entity has the intent to sell the security or it will more likely than not be required to sell the
security before anticipated recovery or it does not expect to recover the entire amortized cost basis of the security. Other-
than-temporary impairment charges are recorded in other income (expense) in the Consolidated Statement of Operations.
54
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value
using significant unobservable inputs (Level 3) (in thousands):
Beginning balances as of January 1, 2009
Sales and Settlement
Unrealized Gain
Gain (loss) from UBS auction rate securities and put right
Ending balances at December 31, 2009
Sales and Settlement
Unrealized Gain
Gain (loss) from UBS auction rate securities and put right
Ending balances at December 31, 2010
Auction-Rate
Securities
Put Right
Total
$
$
$
36,175 $
(1,400 )
270
525
35,570 $
(17,275 )
160
725
19,180 $
1,250 $
-
-
(525 )
725 $
-
-
(725 )
- $
37,425
(1,400 )
270
-
36,295
(17,275 )
160
-
19,180
During the year ended December 31, 2010, the Company sold $17.3 million in auction rate securities at par. Of this
amount, $16.9 million was classified as short-term investments and the remaining $0.4 million was classified as long-
term investments.
In October 2008, the Company accepted an offer to participate in an auction-rate security rights offering from UBS to
sell up to $18.2 million in face value of eligible auction-rate securities commencing in June 2010. Between October 2008
and June 2010, $9.6 million of these auction-rate securities were called at par. On June 30, 2010, the Company exercised
the UBS put right and sold the remaining $8.6 million in auction rate securities at par, for which the sale was completed
and proceeds were received on July 1, 2010. At December 31, 2009, the Company had $16.9 million in eligible auction-
rate securities remaining at UBS. The impairment related to these auction-rate securities and the corresponding put right
were valued at $0.7 million. The change in the impairment and the fair value of the put right was recorded in accordance
with the provisions of ASC 320-10-35 and ASC 320-10-50 in other income (expense) in the Consolidated Statement of
Operations.
The Company’s Level 3 assets consist of government-backed student loan auction-rate securities, with interest rates that
reset through a Dutch auction every 7 to 35 days and which became illiquid in 2008. At December 31, 2010, the
Company’s investment portfolio included $19.2 million, net of impairment charges of $1.0 million, in government-
backed student loan auction-rate securities. The underlying maturity of these auction-rate securities is up to 37 years.
Although it is unclear as to when these investments will regain their liquidity, management has concluded that as of
December 31, 2010 and 2009, the cumulative impairment of $1.0 million and $1.1 million, respectively, was temporary
based on the following analysis:
•
•
•
•
•
•
The decline in the fair value of these securities is not largely attributable to adverse conditions specifically
related to these securities or to specific conditions in an industry or in a geographic area;
Management possesses both the intent and ability to hold these securities for a period of time sufficient to
allow for any anticipated recovery in fair value;
Management believes that it is more likely than not that the Company will not have to sell these securities
before recovery of its cost basis;
Except for the credit loss of $70,000 recognized during the year ended December 31, 2009 for the
Company’s holdings in auction rate securities described below, the Company does not believe that there is
any additional credit loss associated with other auction-rate securities because the Company expects to
recover the entire amortized cost basis;
The majority of the securities remain AAA rated, with $8.6 million of the auction rate securities having been
downgraded by Moody’s to A3-Baa3, during the year ended December 31, 2009 and there have been no
downgrades during the year ended December 31, 2010; and
All scheduled interest payments have been made pursuant to the reset terms and conditions.
55
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each
of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined
that those securities that are not 100% FFELPS guaranteed are potentially subject to credit risks based on the extent to
which the underlying debt is collateralized and the security-specific student-loan default rates. The Company’s portfolio
includes three such securities, one of which has a senior parity ratio of approximately 126%, which is substantially above
the expected student-loan default rate for that security. Conversely, the senior parity ratio for the other two securities is
approximately 105%. If, therefore, the student-loan default rate and borrowing rate for these issuers increases, the
remaining balance in these trusts may not be sufficient to cover the senior debt. The Company therefore concluded that
there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the
amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 20 year
expected term, cash flows based on the 90-day t-bill rates for 20 year forwards and a risk premium of 5.9%, the amount
of interest that the Company was receiving on these securities when the market was last active. As of December 31, 2010
and 2009, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-
temporary and recorded in other expense in its Consolidated Statement of Operations during 2009.
Unless another rights offering or other similar offers are made to redeem at par and accepted by the Company, the
Company intends to hold the balance of these investments through successful auctions at par, which the Company
believes could take approximately 2.0 years.
The valuation of the auction-rate securities is subject to fluctuations in the future, which will depend on many factors,
including the collateral quality, potential to be called or restructured, underlying final maturity, insurance guaranty,
liquidity and market conditions, among others. To determine the fair value of the auction-rate securities at December 31,
2009, March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, the Company used a discounted cash
flow model, for which there are three valuation parameters, including time-to-liquidity, discount rate and expected
return. The following are the values used in the discounted cash flow model:
Time-to-Liquidity
Expected Return (Based on the
2-year treasury rate, plus a
contractual penalty rate)
Discount Rate (Based on the
2-year LIBOR, the cost of
debt and a liquidity risk
premium)
December 31,
2009
24 months
2.4%
March 31,
2010
24 months
2.4%
June 30,
2010
24 months
2.7%
September 30,
2010
24 months
2.2%
December 31,
2010
24 months
2.9%
5.2% - 10.0%,
depending on
the credit-
rating of the
security
4.6% - 9.4%,
depending on
the credit-
rating of the
security
3.8% - 8.6%,
depending on
the credit-
rating of the
security
3.2% - 8.0%,
depending on
the credit-
rating of the
security
4.1% - 8.9%,
depending on
the credit-
rating of the
security
The gross accumulated impairment charge was $1.0 million as of December 31, 2010, of which $0.9 million was
recorded as temporary and $0.1 million was previously recorded as other-than-temporary. The gross accumulated
impairment charge was $1.8 million as of December 31, 2009, of which $1.1 million was recorded as temporary and the
remaining $0.7 million was recorded as other-than-temporary.
If the auctions continue to fail, the liquidity of the Company’s investment portfolio may be negatively impacted and the
value of its investment portfolio could decline.
56
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Inventories
Inventories consist of the following (in thousands):
Work in progress
Finished goods
Total inventories
4. Property and Equipment, net
Property and equipment consist of the following (in thousands):
Computers, software and equipment
Leasehold improvements
Vehicles
Building
Furniture and fixtures
Total
Less accumulated depreciation and amortization
Property and equipment, net
December 31,
2010
December 31,
2009
$
$
11,559 $
14,230
25,789 $
11,082
8,534
19,616
December 31,
2010
2009
$
$
48,123 $
2,302
944
15,074
735
67,178
(29,916 )
37,262 $
33,716
4,894
657
459
355
40,081
(22,113 )
17,968
Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was $7.9 million, $6.6 million and $5.7
million, respectively.
5. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Deferred revenue and customer prepayments
Legal expenses and settlement costs
Stock rotation reserve
Warranty
Chengdu building construction cost
Other
Total accrued liabilities
December 31,
2010
December 31,
2009
$
$
3,200 $
844
811
764
3,633
1,947
11,199 $
2,109
2,940
864
294
-
1,474
7,681
57
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Stockholders’ Equity
The Company has two stock option plans and an employee stock purchase plan—the 1998 Stock Option Plan, the 2004
Equity Incentive Plan and the 2004 Employee Stock Purchase Plan. The Company recognized stock-based compensation
expenses for the years ended December 31, 2010, 2009 and 2008, as follows (in thousands):
Non-Employee
ESPP
Restricted Stock
Stock Options
TOTAL
1998 Stock Option Plan
Year ended December 31,
2009
2008
2010
$
$
(7 ) $
609
8,271
7,937
16,810 $
118 $
671
3,353
10,469
14,611 $
42
676
3,054
9,386
13,158
Under the Company’s 1998 Stock Option Plan (the 1998 Plan), the Company reserved 11,807,024 shares of common
stock for issuance to the Company’s employees, directors and consultants. Options granted under the 1998 Plan have a
maximum term of ten years and generally vest over four years at the rate of 25 percent one year from the date of grant
and 1/48th monthly thereafter. On November 19, 2004, the effective date of the Company’s initial public offering, the
1998 Plan was terminated for future grants and the remaining 1,392,750 shares available for grant were moved to the
Company’s 2004 Equity Incentive Plan (the 2004 Plan). In addition, throughout the year, shares underlying options from
the 1998 Plan that are cancelled (for example, upon termination of service) are transferred to the 2004 Plan based on the
number of cancellations that occur throughout the year.
2004 Equity Incentive Plan
The Company’s Board of Directors adopted the Company’s 2004 Equity Incentive Plan in March 2004, and the
Company’s stockholders approved it in November 2004. Options granted under the 2004 Plan have a maximum term of
ten years. New hire grants generally vest over four years at the rate of 25 percent one year from the date of grant and
1/48th monthly thereafter. Refresh grants generally vest over four years at the rate of 50 percent two years from the date
of grant and 1/48th monthly thereafter. There were 800,000 shares initially reserved for issuance under the 2004 Plan.
The 2004 Plan provides for annual increases in the number of shares available for issuance beginning on January 1, 2005
equal to the least of: 5% of the outstanding shares of common stock on the first day of the year, 2,400,000 shares, or a
number of shares determined by the Board of Directors. The following is a summary of the 2004 Plan, which includes
stock options and restricted stock awards and units:
Available for Grant as of December 31, 2009
2010 Additions to Plan
2010 Grants
2010 Cancellations
Available for Grants as of December 31, 2010
2,023,943
1,758,265
(1,304,740 )
477,139
2,954,607
58
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the status of the Company’s stock option plans at December 31, 2010, 2009 and 2008 and changes therein
are presented in the table below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Stock Options
Outstanding at December 31, 2007 (3,722,936
options exercisable at a weighted-average
exercise price of $6.94 per share)
Options granted (weighted-average fair value
of $6.08 per share)
Options exercised
Options forfeited and expired
Outstanding at December 31, 2008 (3,766,630
options exercisable at a weighted-average
exercise price of $8.26 per share)
Options granted (weighted-average fair value
of $8.42 per share)
Options exercised
Options forfeited and expired
Outstanding at December 31, 2009 (4,112,763
options exercisable at a weighted-average
exercise price of $10.93 per share)
Options granted (weighted-average fair value
of $8.95 per share)
Options exercised
Options forfeited and expired
Outstanding at December 31, 2010
Options exercisable at December 31, 2010 and
expected to become exercisable
Options vested and exercisable at December 31,
2010
7,442,806 $
10.50
6.64 $
81,762,963
2,566,290 $
(1,417,585 ) $
(394,874 ) $
17.10
8.97
14.72
8,196,637 $
12.62
5.91 $
20,193,958
706,000 $
(1,217,272 ) $
(274,451 ) $
17.52
9.19
17.27
7,410,914 $
13.48
5.04 $
77,918,848
370,500 $
(1,452,245 ) $
(494,051 ) $
5,835,118 $
19.92
9.87
15.67
14.61
4.30 $
19,035,591
5,584,241 $
14.46
4.27 $
18,802,775
4,264,268 $
13.33
4.02 $
17,725,853
59
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes information as of December 31, 2010 concerning outstanding and exercisable options:
Range of
Exercises
Prices
$0.08 - $5.00
$7.50 - $10.37
$10.58 - $12.99
$13.01 - $15.08
$15.18 - $15.64
$15.74 - $15.74
$16.00 - $17.93
$17.98 - $19.91
$20.06 - $22.26
$22.47 - $25.84
Number
of Options
Outstanding
as if
12/31/2010
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Options Exercisable
Number
of Options
Exercisable
as of
12/31/2010
Weighted
Average
Exercise
Price
689,212
591,598
609,745
668,229
364,288
610,000
597,906
602,265
617,375
484,500
5,835,118
2.90 $
4.08 $
3.79 $
4.78 $
4.15 $
4.82 $
4.34 $
4.40 $
5.08 $
4.83 $
3.63
8.73
12.20
13.62
15.60
15.74
16.53
18.76
21.12
23.76
689,212 $
576,098 $
590,780 $
426,485 $
250,300 $
330,415 $
457,334 $
435,576 $
242,253 $
265,815 $
4,264,268
3.63
8.69
12.22
13.79
15.62
15.74
16.47
18.61
21.39
23.79
The total fair value of options that vested was $7.9 million, $10.5 million and $9.4 million, respectively, for the years
ended December 31, 2010, 2009 and 2008. Total intrinsic value of options exercised was $17.4 million, $15.0 million
and $20.5 million, respectively, for the years ended December 31, 2010, 2009 and 2008. Net cash proceeds from the
exercise of stock options were $14.3 million for the year ended December 31, 2010 and $11.2 million for the year ended
December 31, 2009. At December 31, 2010, unamortized compensation expense related to unvested options was
approximately $9.6 million. The weighted average period over which compensation expense related to these unvested
options will be recognized is approximately 1.8 years.
The employee stock-based compensation expense recognized under ASC 718-10-30 Compensation – Stock
Compensation – Overall – Initial Measurement, was determined using the Black-Scholes option pricing model. Option
pricing models require the input of subjective assumptions and these assumptions can vary over time. The Company
used the following weighted-average assumptions to determine the fair value of the awards granted during the respective
periods:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Year ended December 31,
2009
2010
2008
4.1
55.9 %
1.8 %
-
4.1
60.7 %
1.8 %
-
4.1
40.1 %
2.6 %
-
In estimating the expected term, the Company considers its historical stock option exercise experience, post vesting
cancellations and remaining contractual term of the options outstanding. In estimating the expected volatility, the
Company uses its own historical data to determine its estimated expected volatility. The Company uses the U.S.
Treasury yield for its risk-free interest rate and a dividend yield of zero as it does not issue dividends. The Company
applies a forfeiture rate that is based on options that have been forfeited historically.
Restricted Stock
A portion of the Company’s shares of common stock were issued under restricted stock purchase agreements. Under
these agreements, in the event of a termination of an employee, the Company has the right to repurchase the common
stock at the original issuance price of $0.001. The repurchase right expires over a 4-year period. A summary of our
restricted stock awards is presented in the table below:
60
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Weighted
Average
Grant Date
Fair Value
Per Share
Restricted
Stock Awards
Weighted
Average
Remaining
Recognition
Period (Years)
1.31
Outstanding at December 31, 2007
Awards released
Awards forfeited
Outstanding at December 31, 2008
Awards released
Awards forfeited
Outstanding at December 31, 2009
Awards released
Outstanding at December 31, 2010
175,539 $
(88,576 )
(16,586 )
70,377 $
(57,577 )
(6,250 )
6,550 $
(6,550 )
- $
10.86
10.53
9.62
11.55
11.29
8.64
16.62
16.62
-
The Company also grants restricted stock units, which vest generally over two to four years as determined by the
Company’s Compensation Committee, and are issued upon vesting. A summary of the restricted stock units is presented
in the table below:
Restricted
Stock
Units
Weighted
Average
Grant Date
Fair Value
Per Share
Weighted
Average
Remaining
Recognition
Period (Years)
1.91
Outstanding at December 31, 2007
Awards granted
Awards released
Awards forfeited
Outstanding at December 31, 2008
Awards granted
Awards released
Awards forfeited
Outstanding at December 31, 2009
Awards granted
Awards released
Awards forfeited
Outstanding at December 31, 2010
182,500 $
311,627
(96,125 )
(8,359 )
389,643 $
54,200
(146,447 )
(7,500 )
289,896 $
934,240
(230,874 )
(33,088 )
960,174 $
15.37
18.48
15.39
15.98
18.11
20.93
18.11
16.66
18.67
20.05
19.24
18.38
19.88
The total fair value of restricted stock awards and units that vested was $5.5 million, $2.7 million and $3.0 million for
the years ended December 31, 2010, 2009 and 2008, respectively. The intrinsic value related to restricted stock awards
and units released for the years ended 2010, 2009 and 2008 was $4.5 million, $3.8 million and $3.4 million, respectively.
The total intrinsic value of restricted units outstanding at December 31, 2010, 2009 and 2008 were $15.9 million, $7.1
million and $5.8 million, respectively. At December 31, 2010, unamortized compensation expense related to unvested
restricted stock units was approximately $11.5 million with a weighted average remaining recognition period of 2.9
years.
61
0.48
0.14
-
2.72
2.22
2.91
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On February 25, 2010, the Board granted 416,000 performance units to the Company’s executive officers. These
performance units generally vest over four years, with a graded acceleration feature that allows all or a portion of these
awards to be accelerated if certain performance conditions are satisfied. The amount of shares to be accelerated is based
on achieving certain performance targets, with the minimal acceleration occurring if performance exceeds at least 110%
of non-GAAP earnings per share as set forth in the Company’s annual operating plan approved by the Board, as
determined by the Compensation Committee in its sole discretion. The Compensation Committee has the discretion not
to accelerate any shares, if it so chooses, even if the performance targets are met. Based on the Company’s performance
in 2010, none of the shares were accelerated.
2004 Employee Stock Purchase Plan
Under the 2004 Employee Stock Purchase Plan (the Purchase Plan), eligible employees may purchase common stock
through payroll deductions. Participants may not purchase more than 2,000 shares in a six-month offering period or stock
having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period in
accordance with the Internal Revenue Code and applicable Treasury Regulations. A total of 200,000 shares of common
stock were reserved for issuance under the Purchase Plan. The Purchase Plan provides for an automatic annual increase
beginning on January 1, 2005 by an amount equal to the least of 1,000,000 shares; 2% of the outstanding shares of
common stock on the first day of the year; or a number of shares as determined by the Board of Directors. For the years
ended December 31, 2010, 2009 and 2008, 114,387 shares, 161,026 shares and 125,207 shares, respectively, were issued
under the Purchase Plan. The following is a summary of the Purchase Plan and changes during the year ended December
31, 2010:
Available Shares as of December 31, 2009
2010 Additions to Plan
2010 Purchases
Available Shares as of December 31, 2010
2,553,012
703,306
(114,387 )
3,141,931
The Purchase Plan is considered compensatory under ASC 718-50-25-2 Compensation – Stock Compensation –
Employee Share Purchase Plans – Recognition, and is accounted for in accordance with ASC 718-50-30-2
Compensation – Stock Compensation – Employee Share Purchase Plans – Initial Measurements – Look-Back Plans. The
intrinsic value for stock purchased was $0.3 million, $1.0 million and $0.8 million for the years ended December 31,
2010, 2009 and 2008, respectively. The unamortized expense as of December 31, 2010 was $0.1 million, which will be
recognized over 0.1 years. The Black-Scholes option pricing model was used to value the employee stock purchase
rights. For the years ended December 31, 2010, 2009 and 2008, the following assumptions were used in the valuation of
the stock purchase rights:
Expected term (years)
Expected volatility
Risk-free interest rate
Dividend yield
Year ended December 31,
2009
2010
2008
0.5
39.5 %
0.2 %
-
0.5
79.8 %
0.4 %
-
0.5
48.3 %
2.0 %
-
Cash proceeds from employee stock purchases for the year ended December 31, 2010, 2009 and 2008 was $1.9 million,
$1.8 million and $1.8 million, respectively.
62
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Net Income Per Share
Basic net income per share excludes dilution and is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if
outstanding securities or other contracts to issue common stock were exercised or converted into common stock, and
calculated using the treasury stock method. For the years ended December 31, 2010, 2009 and 2008, the Company had
securities outstanding, which could potentially dilute basic net income per share in the future, but were excluded from
the computation of diluted net loss per share in the periods presented, as their effect would have been anti-dilutive. The
following table shows the number of shares of common stock issuable upon conversion or exercise of such outstanding
securities:
Stock Options
8. Income Taxes
Year ended December 31,
2009
2,897,202
2010
1,952,379
2008
3,241,066
The components of income before income taxes for the years ended December 31, 2010, 2009 and 2008 are (in
thousands):
United States
International
Consolidated
2010
2009
2008
$
$
2,770 $
28,650
31,420 $
6,303 $
13,845
20,148 $
5,540
19,902
25,442
Federal income taxes have not been provided for the unremitted earnings of foreign subsidiaries totaling $76.0 million
because such earnings are intended to be permanently reinvested.
The income tax provision consists of the following (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Valuation allowance
Income tax provision
Year ended December 31,
2009
2010
2008
$
$
1,369 $
15
534
(1,415 )
(848 )
(61 )
2,263
1,857 $
344 $
70
147
315
(688 )
(85 )
371
474 $
(643 )
67
1,082
(1,245 )
(490 )
(47 )
2,492
1,216
63
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:
U.S. statutory federal tax rate
State taxes, net of federal benefit
Research and development credits
Stock compensation
Foreign income taxed at lower rates
Subpart F / Inventory transfer
Decrease of prior year FIN 48 liabilities
Change in valuation allowance on federal timing differences
Litigation reserves & Other
Effective tax rate
2010
December 31,
2009
2008
34.0 %
0.0
(2.9 )
5.6
(35.6 )
-
-
4.3
0.5
5.9 %
34.0 %
0.1
(0.9 )
8.6
(33.3 )
-
-
(6.0 )
(0.1 )
2.4 %
34.0 %
0.6
(2.7 )
6.3
(35.7 )
0.3
(4.4 )
5.2
1.2
4.8 %
The components of deferred tax assets and liabilities consist of the following (in thousands):
Deferred tax assets:
Research tax credits
Stock compensation
Other costs not currently deductible
Depreciation and amortization
Total deferred tax assets
Valuation allowance
Net deferred tax assets
December 31,
2010
2009
$
$
6,772 $
7,223
2,290
769
17,054
(16,815 )
239 $
5,982
6,249
1,592
969
14,792
(14,614 )
178
As a result of the cost sharing arrangements with the company’s international subsidiaries (cost share arrangements),
relatively small changes in costs that are not subject to sharing under the cost share arrangements can significantly
impact the overall profitability of the US entity. Historically, the US operations have shown an inconsistent earnings
pattern due to litigation costs not subject to cost sharing. The Company evaluated its US valuation allowance at
December 31, 2010 by reviewing both its earnings history and its expected earnings for the next 12 months in its US
entity. Because of the US entity’s inconsistent earnings history and uncertainty of future earnings, the Company has
determined that it is more likely than not that the US deferred tax benefits would not be realized.
As of December 31, 2010, the federal and state net operating loss carryforwards for income tax purposes were
approximately $6.9 million and $28.4 million, respectively. The federal net operating loss carryforwards will begin to
expire in 2027 and the State net operating loss carry forwards will expire beginning in 2021. $6.9 million of the federal
net operating loss carry forwards and $24.7 million of the state operating loss carry forwards are related to excess tax
benefits as a result of stock option exercises and therefore will be recorded in additional paid-in-capital in the period that
they become realized.
As of December 31, 2010, the Company had research tax credit carryforwards of $9.5 million for federal income tax
purposes, which will begin to expire in 2022 and $7.8 million for state income tax purposes, which can be carried
forward indefinitely. $2.9 million of the federal research tax credit and $0.8 million of the state research tax credit
carryovers are related to excess tax benefits as a result of stock option exercises and therefore will be recorded in
additional-paid-in-capital in the period that they become realized.
64
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ASC 740-10 Income Taxes - Overall sets forth the accounting for uncertainty in income taxes recognized in an entity’s
financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure
of tax positions taken or expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a
50% likelihood of being sustained. Additionally, ASC 740-10 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
At December 31, 2010, the Company had $9.1 million of unrecognized tax benefits, $5.0 million of which would affect
its effective tax rate if recognized after considering the valuation allowance. At December 31, 2009, the Company had
$9.0 million of unrecognized tax benefits, $4.9 million of which would affect its effective tax rate if recognized after
considering the valuation allowance.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2008
Gross increases for tax positions of prior year
Gross increases for tax position of current year
Reductions for prior year tax positions
Reduction due to statutes expiring
Balance at December 31, 2008
Gross increases for tax positions of prior year
Gross increases for tax position of current year
Reductions for prior year tax positions
Settlement
Reduction due to statutes expiring
Balance at December 31, 2009
Gross increases for tax positions of prior year
Gross increases for tax position of current year
Reductions for prior year tax positions
Settlement
Reduction due to statutes expiring
Balance at December 31, 2010
$
7,910
96
1,794
(1,245)
(2)
8,553
-
1,080
-
(615)
(12)
9,006
-
983
-
(883)
-
9,106
$
The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. At
December 31, 2008, 2009 and 2010, the Company has approximately $0.4 million, $0.5 million and $0.6 million
respectively, of accrued interest related to uncertain tax positions.
Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the
determination of the research and experimental tax credit. The Company estimates that there will be no material changes
in its uncertain tax positions in the next 12 months.
The Company files income tax returns in the U.S. federal jurisdiction, and various U.S. states and foreign jurisdictions.
Generally, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years prior to 2005 because of the statute of limitations. However, because the Company is currently
under an IRS audit for tax years ended December 31, 2006 and December 31, 2007, the statute of limitations for tax year
ended December 31, 2005 was extended to September 12, 2011.
Our U.S. Federal income tax returns for the years ended December 31, 2006 and December 31, 2007 are under
examination by the Internal Revenue Service (“IRS”). The IRS is also auditing the research and development credits
generated in the years 2000 through 2007, which will be carried forward to future tax years. We received a Notice of
Proposed Adjustments (“NOPA”) from the IRS in February 2011 to decrease the amount of research and development
credits generated in years 2000 through 2007, which we are currently reviewing.
65
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Commitments and Contingencies
The following table summarizes the Company’s commitments as of December 31, 2010 (in thousands):
Total
$
2,413 $
2011
2012
Payments by Period
2013
2014
2015
1,665 $
574 $
174 $
- $
Thereafter
-
- $
$
$
14,379 $
16,792 $
14,379 $
16,044 $
- $
574 $
- $
174 $
- $
- $
- $
- $
-
-
Operating leases
Outstanding
purchase
commitments
Lease Oligations
The Company leases it headquarters and sales offices in San Jose, California. The San Jose facility was sold and the new
landlord has exercised their right to terminate the lease, effective April 18, 2012. In addition, the Company entered into a
five-year lease arrangement in September 2004 for its manufacturing facility located in Chengdu, China. Pursuant to this
agreement, the Company contributed capital in the form of cash, in-kind assets, and/or intellectual property, of at least
$5.0 million to its wholly-owned Chinese subsidiary as the registered capital for the subsidiary and exercised the option
to purchase land use rights for the facility of approximately $0.2 million. The Company also has the option to acquire the
facility after a five-year lease term for the original construction cost less rents paid, which is currently estimated at $1.9
million and which becomes exercisable in March 2011. The Company will likely enter into a purchase agreement for this
facility at a date to be determined and as the opportunity necessitates. The Company also leases its sales offices in
Japan, China, Taiwan and Korea. Certain of the Company’s facility leases provide for periodic rent increases. Rent
expense for the years ended December 31, 2010, 2009 and 2008 was $1.8 million, $1.3 million and $1.1 million,
respectively.
Warranty and Indemnification Provisions
The Company provides a standard one-year warranty against defects in materials and workmanship and will either repair
the goods, provide replacements at no charge to the customer, or refund amounts for defective units. On occasion the
Company permits the return of defective products outside the normal warranty period. In such cases, the Company
accrues for the related costs at the time the decision to permit the return is made. Reserve requirements are recorded in
the period of sale and are based on an assessment of the products sold with warranty and historical warranty costs
incurred.
The changes in warranty reserves during 2010, 2009 and 2008 are as follows (in thousands):
Balance at beginning of year
Warranty costs
Reserve adjustments and unused warranty provision
Warranty provision for product sales
Balance at end of year
2010
2009
2008
294 $
(107 )
(224 )
801
764 $
764 $
(137 )
(728 )
395
294 $
1,025
(109 )
(724 )
572
764
$
$
The Company provides indemnification agreements to a supplier and certain direct or indirect customers. The Company
agrees to reimburse these parties for any damages, costs and expenses incurred by them as a result of legal actions taken
against them by third parties for infringing upon their intellectual property rights as a result of using the Company’s
products and technologies. These indemnification provisions are varied in their scope and are subject to certain terms,
conditions, limitations and exclusions. Such costs were $1.0 million for the year ended December 31, 2009. There were
no indemnification costs in 2008 and 2010. These costs are charged to operations as incurred. The Company also
provides for indemnification of its directors and officers.
66
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Litigation -
O2Micro
The Company has been engaged in a number of legal proceedings involving patent infringement claims with O2Micro,
Inc. and its parent corporation, O2Micro International Limited (referred to hereinafter as “O2Micro”). There are two
proceedings, both involving O2Micro’s U.S. Patent No. 7,417,382 (‘382 patent). On June 18, 2010, the U.S.
International Trade Commission (“ITC”) issued a final determination finding of no violation of Section 337 by the
Company or its customers in an action brought by O2Micro International, Ltd. in 2008. An ITC administrative law
judge had previously issued an initial determination on April 20, 2010 that also found no violation. The ITC's final
determination concludes that none of the Company’s accused products infringes O2Micro's U.S. Patent No. 7,417,382
(the '382 patent).
In addition to the matter before the ITC, a related case is pending before the Northern District of California Court in
Oakland, California. Subsequent to the ITC’s final determination finding of no violation, O2Micro filed a motion to
dismiss its claims for infringement of the '382 patent, with prejudice, and covenanted not to sue the Company or any of
its distributors or customers for infringement of the '382 patent. On June 23, 2010, the court granted this motion and
vacated the jury trial that was scheduled on July 12, 2010. The Company filed a motion seeking recovery of costs and
attorney fees from O2Micro. On March 3, 2011, the court issued an order granting the Company’s motion in part. It
ordered O2Micro to pay $339,315 in costs forthwith and ordered the parties to meet and confer to try to reach an
agreement as to the reasonable attorneys fees to be paid. If the parties are unable to reach an agreement, the Company is
to submit detailed documentation to the court in support of its fees request.
Linear Technology Corporation
On July 1, 2008, the United States District Court for the District of Delaware held as a matter of law that the Company
did not breach its October 1, 2005 Settlement and License Agreement with Linear Technology Corporation (“Linear”).
Based upon that ruling, the Company anticipates filing a motion to seek recovery of its attorney fees when the final
judgment is entered. The court has not issued its final judgment concerning the patent validity and enforceability
issues.
11. Employee Benefits Plan
The Company sponsors a 401(k) savings and profit-sharing plan (“the Plan”) for all employees in the United States who
meet certain eligibility requirements. Participants may contribute up to the amount allowable as a deduction for federal
income tax purposes. The Company is not required to contribute and did not contribute to the Plan for the years ended
December 31, 2010, 2009 and 2008.
12. Major Customers
The following table summarizes the percentages of accounts receivable, net and corresponding revenue for those
customers, with accounts receivable balances at year end that accounted for 10% or more of total accounts receivable,
net at the end of 2010 and 2009 or with sales that accounted for 10% or more of the Company’s revenue for each
respective year:
Customers
A
B
C
D
Revenue
Year ended December 31,
2009
2010
2008
Accounts Receivable, Net
as of December 31,
2010
2009
14 %
*
*
*
13 %
10 %
10 %
*
20 %
10 %
*
*
12 %
*
*
20 %
*
*
*
15 %
* Represents less than 10% of accounts receivable, net or revenue
67
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. Segment Information
As defined by the requirements of ASC 280-10-55, Segment Reporting – Overall – Implementation Guidance and
Illustrations, the Company operates in one reportable segment, the design, development, marketing and sale of high-
performance, mixed-signal analog semiconductors for the computing, consumer electronics and communications
markets. The Company’s chief operating decision maker is its chief executive officer. The Company does not
specifically allocate any of its resources to or measure the performance of, individual product families.
The Company derived a substantial majority of its revenue from sales to customers located outside North America
during 2010, 2009 and 2008, with geographic revenue based on the customers’ ship-to location.
The following is a summary of revenue by geographic region based on customer ship-to location for the years ended
December 31, 2010, 2009 and 2008 (in thousands):
Country
China
Korea
Taiwan
Europe
Japan
USA
Other
Total
Year ended December 31,
2009
2008
2010
$
$
105,233 $
33,761
25,840
20,416
14,255
8,415
10,920
218,840 $
66,694 $
32,028
21,719
19,251
11,972
6,106
7,238
165,008 $
72,402
25,747
21,978
12,918
15,583
4,330
7,553
160,511
The following is a summary of net revenue by product type for the years ended December 31, 2010, 2009 and 2008 (in
thousands):
Year ended December 31,
Product Family
DC to DC Converters
Lighting Control Products
Audio Amplifiers
Total
2010
$ 183,051
28,554
7,235
$ 218,840
% of
% of
Revenue
2009
Revenue
2008
% of
Revenue
83.7 % $ 123,581
27,836
13.0 %
13,591
3.3 %
100.0 % $ 165,008
74.9 % $ 115,373
32,308
16.9 %
12,830
8.2 %
100.0 % $ 160,511
71.9 %
20.1 %
8.0 %
100.0 %
The following is a summary of long-lived assets by geographic region, excluding restricted assets, as of December 31,
2010 and 2009 (in thousands):
China
United States
Taiwan
Japan
Other
TOTAL
December 31,
2010
2009
$
$
34,468 $
2,719
134
85
58
37,464 $
15,440
2,484
75
75
34
18,108
68
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. Valuation and Qualifying Accounts
The Company had insignificant activity and balance in its accounts receivable allowances in 2010, 2009 and 2008.
15. Stock Repurchase Program
On July 27, 2010, the Board of Directors approved a stock repurchase program that authorizes MPS to repurchase up to
$50.0 million in the aggregate of its common stock between August 2, 2010 and December 31, 2011. In February 2011,
the Board of Directors approved an increase from $50.0 million to $70.0 million. As of December 31, 2010, the
following shares have been repurchased through the open market and subsequently retired:
2010 Calendar Year
August
November
Total Shares Repurchased
Shares
Repurchased
983,189 $
916,600 $
1,899,789
Average
Price per
Share
Value
(in thousands)
16,998
14,529
31,527
17.29 $
15.85 $
$
On February 5, 2008, the Company announced that its Board of Directors approved a stock repurchase program that
authorizes the Company to repurchase up to $25.0 million of its common stock through the end of 2008. As of December
31, 2008, the following shares have been repurchased through the open market and subsequently retired:
2008 Calendar Year
February
March
April
May
June
July
August
September
October
Total Shares Repurchased
There were no shares repurchased in 2009.
Shares
Repurchased
Average
Price per
Share
Value
(in thousands)
464
9,028
4,043
2
390
309
2
5,784
5,021
25,043
16.88 $
17.12 $
20.03 $
21.98 $
21.66 $
21.86 $
22.03 $
18.82 $
15.05 $
$
27,500 $
527,332 $
201,863 $
100 $
18,000 $
14,155 $
100 $
307,355 $
333,700 $
1,430,105
69
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Quarterly Financial Data (Unaudited)
Revenue
Cost of revenue*
Gross profit
Operating expenses:
Research and development*
Selling, general and administrative*
Litigation expense
Three months ended
March 31,
2010
June 30,
2010
September
30,
2010
December
31,
2010
$
50,250 $
20,954
55,690 $
23,256
65,843 $
29,857
47,057
23,316
29,296
32,434
35,986
23,741
11,040
10,393
1,567
11,785
11,615
2,228
11,291
10,296
964
10,256
8,865
659
Total operating expenses
23,000
25,628
22,551
19,780
Income from operations
Other income (expense):
Interest and other income
Interest and other expense
6,296
6,806
13,435
3,961
347
-
338
(4 )
240
(159 )
Total other income, net
347
334
81
Income before income taxes
Income tax provision
Net income
Basic net income per share
Diluted net income per share
6,643
287
7,140
733
13,516
297
$
$
$
6,356 $
0.18 $
0.17 $
6,407 $
0.18 $
0.17 $
13,219 $
0.37 $
0.35 $
231
(71 )
160
4,121
540
3,581
0.10
0.10
Weighted average common shares outstanding
Stock options and restricted stock
Diluted weighted-average common equivalent shares
outstanding
35,421
2,362
36,291
2,064
36,185
1,542
35,420
1,309
37,783
38,355
37,727
36,729
* Stock-based compensation has been included in the following line items:
Cost of revenue
Research and development
Selling, general and administrative
Total
$
$
79 $
1,735
2,210
4,024 $
116 $
1,995
3,428
5,539 $
70 $
1,647
2,445
4,162 $
128
1,365
1,592
3,085
70
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue
Cost of revenue*
Gross profit
Operating expenses:
Research and development*
Selling, general and administrative*
Litigation expense
Litigation provision reversal, net
Three months ended
March 31,
2009
June 30,
2009
September
30,
2009
December
31,
2009
$
29,322 $
12,431
41,173 $
16,823
47,966 $
18,868
46,547
19,208
16,891
24,350
29,098
27,339
8,117
7,808
2,046
-
9,732
9,321
2,233
-
10,080
9,438
2,811
(6,356 )
10,366
10,185
2,367
-
Total operating expenses
17,971
21,286
15,973
22,918
Income (loss) from operations
Other income (expense):
Interest and other income
Interest and other expense
(1,080 )
3,064
13,125
4,421
385
(94 )
281
(185 )
161
(76 )
Total other income, net
291
96
85
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
(789 )
(61 )
3,160
(26 )
13,210
648
$
$
$
(728 ) $
(0.02 ) $
(0.02 ) $
3,186 $
0.09 $
0.09 $
12,562 $
0.36 $
0.34 $
220
(74 )
146
4,567
(87 )
4,654
0.13
0.12
Weighted average common shares outstanding
Stock options and restricted stock
Diluted weighted-average common equivalent shares
outstanding
33,696
-
34,070
2,319
34,552
2,695
34,987
2,418
33,696
36,389
37,247
37,405
* Stock-based compensation has been included in the following line items:
Cost of revenue
Research and development
Selling, general and administrative
Total
$
$
81 $
1,560
1,772
3,413 $
67 $
1,687
2,098
3,852 $
69 $
1,409
1,688
3,166 $
29
1,752
2,399
4,180
71
ITEM 9. CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934 as of the end of the period covered by this Annual Report on Form 10-K. Our
disclosure controls and procedures have been designed to ensure that material information relating to us, including our
consolidated subsidiaries, required to be disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the
benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and
procedures are effective at December 31, 2010 and provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
and Rule 15d-(f). Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in
accordance with generally accepted accounting principles (“GAAP”).
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are made only in accordance
with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective
is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control
objective would not be met. A deficiency in operation exists when a properly designed control does not operate as
designed, or when the person performing the control does not possess the necessary authority or competence to perform
the control effectively. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over
financial reporting that is less severe than a material weakness, yet important enough to merit attention by those
responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of December 31, 2010. In performing this assessment, management used the
72
criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control— Integrated Framework. Based upon this assessment, our management has concluded that, as of December 31,
2010, our internal control over financial reporting was effective.
Our independent registered public accounting firm, Deloitte & Touche LLP, which audited the consolidated financial
statements included in this annual report on Form 10-K, has issued an attestation report, included elsewhere herein, on
the effectiveness of our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
While our disclosure controls and procedures and internal control over financial reporting are designed to provide
reasonable assurance that their respective objectives will be met, we do not expect that our disclosure controls and
procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and
all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements
due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of the controls. The design of any system
of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December
31, 2010 that have materially affected or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Reference is made to the information regarding directors and nominees, code of ethics, corporate governance matters and
disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the
captions “Election of Directors” and “Compliance with Section 16(a) Beneficial Ownership Reporting Compliance” in
our Proxy Statement for our Annual Meeting of Stockholders to be held on June 16, 2011, which information is
incorporated in this Form 10-K by reference. Information regarding executive officers is set forth under the caption
“Executive Officers of the Registrant” in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under “Executive Officer Compensation” in our Proxy Statement for
the 2011 Annual Meeting of Stockholders, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan Information” in our Proxy Statement for the 2011 Annual Meeting of
Stockholders, and is incorporated herein by reference.
73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is set forth under the captions “Certain Relationships and Related Transactions”
and “Election of Directors” in our Proxy Statement for the 2011 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is set forth under the caption “Accounting Fees” in our Proxy Statement for the
2011 Annual Meeting of Stockholders, and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
(a) Documents filed as part of this report
(1) All financial statements
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Schedules
All schedules have been omitted because the required information is not present or not present in amounts
sufficient to require submission of the schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
(3) Exhibits
The exhibits listed on the accompanying index to exhibits in Item 15(b) below are filed as part of, or hereby
incorporated by reference into, this Form 10-K.
74
(b) Exhibits
Description
ended and Restated Certificate of Incorporation.
ended and Restated Bylaws.
Exhibit
Number
3.1 (1)
3.2 (2)
10.1+ (3) istrant’s 1998 Stock Plan and form of option agreement.
10.2+ (4) istrant’s Amended 2004 Equity Incentive Plan and form of option agreement.
10.3+ (5) istrant’s 2004 Employee Stock Purchase Plan and form of subscription agreement.
10.4+ (6) m of Directors’ and Officers’ Indemnification Agreement.
10.5† (7)
10.6 (8)
ndry Agreement between the Registrant and Advanced Semiconductor Manufacturing Corp. of Shanghai,
dated August 14, 2001.
Office Lease, First Amendment to Office Lease, and Second Amendment to Office Lease between the
Registrant and Boccardo Corporation, dated May 6, 2002, October 30, 2003, and May 6, 2004,
respectively.
ployment Agreement with Michael Hsing and Amendment thereof.
10.7+ (9)
10.8+ (10) ployment Agreement with Maurice Sciammas and Amendment thereof.
10.9+ (11) ployment Agreement with Jim Moyer.
10.10+ (12) ployment Agreement with Deming Xiao and Amendment thereof.
10.11+ (13) ployment Agreement with Paul Ueunten and Amendment thereof.
10.12 (14) ribution Agreement with Asian Information Technology Inc. Ltd., dated March 1, 2004.
10.13 (15) iness Purchase Agreement with Uppertech Hong Kong Ltd., dated March 1, 2004.
10.14† (16) stment and Cooperation Contract, dated August 19, 2004.
10.15† (17) nt License Agreement, dated May 1, 2004.
10.16† (18) lement Agreement with Linear Technology Corporation.
10.17+ (19) ployment Agreement with C. Richard Neely, Jr. and Amendment thereof
10.18 (20) lement Agreement with Microsemi Corporation.
10.19 (21) lement Agreement with Micrel Corporation.
10.20+ (22) ployment Agreement with Adriana Chiocchi and Amendment thereof.
10.21+ (23) m of Performance Unit Agreement.
10.22 (24)
lease Agreement between the Registrant and FedEx Freight West, Inc. and Brokaw Interests dated June 13,
2006.
10.23+ (25) er Agreement with Victor Lee.
10.24 (26)
Sublease Agreement between the Registrant and Anchor Bay Technologies for the property located at 983
University Avenue, Building A, Los Gatos, CA 95032 dated May 14, 2007.
10.25+ (27) er Agreement with Douglas McBurnie.
10.26+ (28) er Agreement with Karen A. Smith Bogart.
10.27 (29) Settlement Agreement with Taiwan Sumida Electronics.
10.28+ (30) istrant’s Employee Bonus Plan, as amended effective March 6, 2008.
10.29 (32) Lease Agreement between the Registrant and Brokaw Interests, dated October 23, 2008
10.30 (33) Form of Restricted Stock Award Agreement
10.31+ (36) mination Agreement between the Company and Adriana Chiocchi, dated December 15, 2009
10.32+ (35) er Agreement with Jeff Zhou
10.33
14.1 (31)
21.1 (34)
23.1
24.1
31.01
ployment Agreement with Meera P. Rao and Amendment thereof
Code of Ethics.
Subsidiaries of Monolithic Power Systems, Inc.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on Signature page to this Form 10-K).
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-
14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-
14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.02
32.01*
+
†
Management contract or compensatory plan or arrangement.
Confidential treatment requested for portions of this agreement, which portions have been omitted and filed
separately with the Securities and Exchange Commission
75
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings.
Incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 3.4 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.1 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.2 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004 and to
exhibits 9.01(c)(1) and (2) to the Registrant’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on December 7, 2004.
Incorporated by reference to Exhibit 10.3 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.4 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.5 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.6 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.7 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.1 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.8 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.3 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.9 of the Registrant’s Form S-1 Registration Statement (Registration No.
333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.10 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.4 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.11 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.6 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.11 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.14 of the Registrant’s Form S-1 Registration Statement (Registration
No. 333-117327), declared effective by the Securities and Exchange Commission on November 18, 2004.
Incorporated by reference to Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q, filed with the
Securities and Exchange Commission on March 13, 2006.
Incorporated by reference to Exhibit 10.17 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.2 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.18 of the Registrant’s annual report on Form 10-K, filed with the
Securities and Exchange Commission on March 28, 2006.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on September 22, 2006.
Incorporated by reference to Exhibit 10.20 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on March 11, 2008 and Exhibit 10.5 of the Registrant’s current report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2008.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on November 1, 2006.
76
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
Incorporated by reference to Exhibit 99.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on June 16, 2006.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on September 14, 2006.
Incorporated by reference to Exhibit 10 of the Registrant’s current report on Form 8-K filed with the Securities
and Exchange Commission on May 17, 2007
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on May 25, 2007
Incorporated by reference to Exhibit 10.2 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on May 25, 2007
Incorporated by reference to Exhibit 10.5 of the Registrant’s quarterly report on Form 10-Q filed with the
Securities and Exchange Commission on August 1, 2007.
Incorporated by reference to Exhibit 10.31 of the Registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 11, 2008.
Incorporated by reference to Exhibit 14.1 of the Registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 16, 2007.
Incorporated by reference to Exhibit 10 of the Registrant’s current report on Form 8-K filed with the Securities
and Exchange Commission on October 24, 2008.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 15, 2008.
Incorporated by reference to Exhibit 21.1 of the Registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on February 27, 2009.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2010.
Incorporated by reference to Exhibit 10.31 of the Registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on February 16, 2010.
77
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 4, 2011
MONOLITHIC POWER SYSTEMS, INC.
By: /s/ MICHAEL R. HSING
hael R. Hsing
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael R. Hsing and Meera P. Rao, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and re-substitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
March 4, 2011 by the following persons on behalf of the registrant and in the capacities indicated:
/S/ MICHAEL R. HSING
MICHAEL R. HSING
President, Chief Executive Officer, and Director (Principal Executive Officer)
/S/ MEERA P. RAO
MEERA P. RAO
Chief Financial Officer (Principal Financial and Accounting Officer and
Duly Authorized Officer)
/S/ KAREN A. SMITH BOGART
KAREN A. SMITH BOGART
Director
/S/ HERBERT CHANG
HERBERT CHANG
/S/ VICTOR K. LEE
VICTOR K. LEE
Director
Director
/S/ DOUGLAS MCBURNIE
DOUGLAS MCBURNIE
Director
/S/ JAMES C. MOYER
JAMES C. MOYER
/S/ UMESH PADVAL
UMESH PADVAL
/S/ JEFF ZHOU
JEFF ZHOU
Director
Director
Director
78