2007 ANNUAL REPORT
Product Mix
% of Net Sales (2007)
Net Sales
US$ millions
Mobile Communications
Multimedia SoCs
13%
10%
200
180
160
140
120
100
80
60
40
180
106
82
69
2004
2005
2006
2007
77%
Mobile Storage
Diluted Earnings per ADS
US$
Gross Margin
% of Net Sales
1.21
0.93
0.71
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
0.32
60
50
40
30
41％
50％
53％
53％
2004
2005
2006
2007
2004
2005
2006
2007
Dear Shareholders,
This year we celebrated our 12th anniversary as Silicon Motion. Next year will mark another important milestone: our first decade
as a designer and supplier of best-in-class microcontrollers for NAND flash storage devices. This makes us not only one of the
pioneers in this industry, but a leader in terms of depth, track record, and innovation in providing controller solutions to one of the
fastest growing and largest segments of the semiconductor market.
Our strategy as a fabless semiconductor company is based on the premise that we can remain a rapidly growing and highly
profitable company by achieving market leadership positions in specific niches in the semiconductor market that thrive on the
convergence of solid state storage, wireless communications, and multimedia capabilities for high-volume electronic devices. Our
focus on controllers for SSDs and flash cards, as well as on mobile TV silicon tuners are examples of this strategy. Strong demand
for these and other products led Silicon Motion to achieve great results this year, with sales that grew 69% to a record $180 million.
Expanding Presence in Mobile Storage
As a leading supplier of controllers to solid state storage device makers, we have benefited substantially from the rapid growth of the
NAND flash industry. In 2007, we increased sales of mobile storage products by 50%. The large and growing handset market,
especially of camera phones that increasingly require larger data storage capacity and use flash memory cards, was a major factor
that continued to drive our growth. We increased our sales faster than many of our competitors and significantly increased our
market share. We now have a market share in the flash memory card controller market of approximately 37%, up from 31% in 2006.
Dramatic Progress in Penetrating the Fast Growing SSD Market
Rapidly falling NAND flash prices as well as technological innovations are creating new categories of products. One of the most
exciting of these are solid state drives, or SSDs, which we believe will revolutionize how data is stored on PCs and other devices by
replacing or supplementing mechanical hard disk drives. A new segment of notebook PCs has already been created that is largely
reliant on SSDs. We played an important role in helping ASUSTeK create this low-cost, ultra-mobile notebook PC product segment
based on our SSD controllers. In 2007, we shipped over one million SSD controllers, which was significantly more than any other
company in the world by a substantial margin. In 2007, we also shipped SSD controllers for SSD solutions targeting mainstream
notebook PCs and servers. Our SSD controllers enabled leading storage device OEMs, such as Transcend, A-Data, and PQI to
develop SATA SSDs targeting mainstream notebook PCs. We shipped SSD controllers to Smart Modular which power the OEM’s
SATA SSDs targeting server and enterprise applications.
Tuning into Mobile TV Growth
In April 2007, we acquired FCI, one of Korea’s leading mobile TV silicon tuner design companies. FCI now forms the core of our
mobile communications product line. The acquisition has performed in line with our initial expectations. We have successfully
expanded our market share in Korea for mobile TV tuners to more than a third. This makes us the leading supplier in the second
largest mobile TV market in the world. At the end of 2007, we started shipping mobile TV tuners to China, where trial broadcasting
is underway in half a dozen major cities in advance of the 2008 Summer Olympic Games.
Outlook for 2008
As we look ahead to the remainder of 2008 and the following year, we see many exciting opportunities in the market. We believe
that we are well positioned to take advantage of the potential. The most important drivers include: the continued market growth of
low-cost, ultra-mobile notebook PCs and related SSDs; further mobile TV market expansion in Korea, the emergence of mobile TV
markets in China, plus continued expansion in Europe; and finally the robust global market growth for flash memory cards, led by
continued demand for camera phones and improving price elasticity as NAND flash prices continue to fall.
We remain concerned about prospects for a global economic slowdown. In this context, we are cautiously optimistic that our
business will benefit from falling NAND flash prices, which will not only drive down retail prices and stimulate demand, but also spur
the creation of new and innovative devices. In addition, increasingly budget sensitive consumers are trading down to lower capacity
products, which we believe will support overall sales in terms of volume. We believe consumers are increasingly treating flash
memory cards as a disposable consumable.
We are proud of the performance our team has delivered this year, and remain confident that we will continue to expand along
the trajectory we have mapped out over a decade of growth. Most of all, we appreciate your support as shareholders in our
exciting company.
Sincerely,
President & Chief Executive Officer
OUR KEY PRODUCTS
Mobile Storage
Flash card controllers
USB flash drive controllers
Card reader controllers
SSD controllers
Embedded flash controllers
Multimedia SoCs
Flash MP3 SoCs
PC camera SoCs
Embedded graphics
Mobile Communications
Mobile TV tuners
CDMA RF ICs
Electronic toll collection
system RF ICs
ABOUT SILICON MOTION
We are a fabless semiconductor company that
designs, develops and markets high performance,
low-power semiconductor solutions for the multime-
dia consumer electronics market. We have three
major product lines: mobile storage, mobile commu-
nications, and multimedia SoCs. Our mobile storage
business is composed of microcontrollers used in
NAND flash memory storage products such as flash
memory cards, USB flash drives, SSDs, embedded
flash applications, and card readers. Our mobile
communications business is composed of mobile TV
tuners, CDMA RF ICs, and electronic toll collection
RF ICs. Our multimedia SoCs business is composed
of products that support MP3 players, PC cameras,
and embedded graphics applications.
We are headquartered in Taiwan and have offices
and research facilities in the US, Taiwan, Korea,
China, and Japan.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
‘ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
For the transition period from
to
OR
‘ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report: N/A
Commission file number: 000-51380
Silicon Motion Technology Corporation
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
8F-1, No. 36, Taiyuan St.,
Jhubei City Hsinchu County 302
Taiwan
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary Shares, par value US$0.01 per share*
American Depositary Shares, each representing
four ordinary shares
Nasdaq Global Select Market
* Not for trading, but only in connection with the listing on the Nasdaq Global Select Market of American Depositary Shares, or ADSs,
each representing four ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities registered or to be registered pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by
the annual report: 132,870,191 ordinary shares as of March 31, 2008, US$0.01 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No ‘
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. ‘ Yes No ‘
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filed. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ‘
Indicate by check mark which financial statement item the registrant has elected to follow. ‘ Item 17 È Item 18
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ‘ No È
Non-accelerated filer ‘
Accelerated filer È
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
i
1
1
1
1
16
25
25
38
44
44
46
46
50
51
52
52
52
52
55
55
55
56
56
57
57
57
57
CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT
Unless otherwise indicated, references in this annual report to:
•
•
•
•
•
•
•
•
•
•
•
•
“ADRs” are to the American depositary receipts that evidence our ADSs;
“ADSs” are to our American depositary shares, each of which represents four ordinary shares;
“CAGR” are to compound annual growth rate;
“China” or “PRC” are to the People’s Republic of China excluding the special administrative regions of Hong Kong and Macau;
“Korea” are to the Republic of Korea, or South Korea;
“Nasdaq” are to the Nasdaq National Market;
“NT dollar,” “NT dollars” or “NT$” are to New Taiwan dollars, the legal currency of Taiwan;
“ROC” or “Taiwan” are to Taiwan, the Republic of China, the official name of Taiwan;
“shares” or “ordinary shares” are to our ordinary shares, with par value US$0.01 per share;
“U.S. GAAP” are to generally accepted accounting principles in the United States;
“U.S. dollar,” “U.S. dollars” or “US$” are to United States dollars, the legal currency of the United States; and
“we,” “us,” “our company,” “our” and “Silicon Motion” are to Silicon Motion Technology Corporation, its predecessor entities
and subsidiaries including (i) Silicon Motion, Inc., incorporated in Taiwan, or SMI Taiwan, and formerly known as Feiya
Technology Corporation and (ii) Silicon Motion, Inc., a California, USA, corporation, or SMI USA.
Silicon Motion, the Silicon Motion logo, FCI, the FCI logo, airRF, basicRF, ezRF, ezSYS, powerRF, twinRF, zipRF and
zipSYS are our trademarks or registered trademarks. We may also refer to trademarks of other corporations and organizations in this
document.
Unless otherwise indicated, our financial information presented in this annual report has been prepared in accordance with U.S.
GAAP.
Solely for your convenience, this annual report contains translations of certain NT dollar amounts into U.S. dollars at specified
rates. All translations from NT dollar to U.S. dollar amounts are made at the noon buying rate in the City of New York for cable
transfers of NT dollars as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the
translation from NT dollars into U.S. dollars and from U.S. dollars into NT dollars has been made at the noon buying rate in effect on
December 31, 2007, which was NT$32.43 to US$1.00. No representation is made that the NT dollar or U.S. dollar amounts referred
to in this annual report could have been or could be converted into U.S. dollar or NT dollar amounts, as the case may be, at any
particular rate or at all. See “Risk Factors — Fluctuation in exchange rates could result in foreign exchange losses” for discussions on
how fluctuating exchange rates could affect our profitability and your investment in us. On May 9, 2008, the noon buying rate was
NT$30.74 to US$1.00.
The “Glossary of Technical Terms” contained in Annex A of this report sets forth the description of certain technical terms and
definitions used in this annual report.
ii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. These forward-looking statements include statements regarding our
financial position; our expectations concerning future operations, margins, profitability, liquidity and capital resources; our business
strategy and other plans and objectives for future operations; and all other statements that are not historical facts. In some cases, you
can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”,
“believes”, “thinks”, “estimates”, “seeks”, “predicts”, “potential”, and similar expressions. Although we believe that these statements
are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes
and results to be materially different from those projected. There factors, risks and uncertainties include those listed under” Risk
Factors” and elsewhere in this annual report. Those factors, among others, could cause our actual results and performance to differ
materially from the results and performance projected in, or implies by, the forward-looking statements. They include:
•
unpredictable volume and timing of customer orders, which are not fixed by contract but vary on a purchase order basis;
•
•
•
•
•
•
•
•
•
•
the loss of one or more key customers or the significant reduction, postponement, rescheduling or cancellation of orders from
these customers;
general economic conditions or conditions in the semiconductor or multimedia consumer electronics market;
decreases in the overall average selling prices of our products;
changes in the relative sales mix of our products;
changes in our cost of finished goods;
the availability, pricing and timeliness of delivery of other components and raw materials used in our customers’ products;
our customers’ sales outlook, purchasing patterns and inventory adjustments based on consumer demands and general economic
conditions;
our ability to successfully develop, introduce and sell new or enhanced products in a timely manner;
our ability to continue to successfully integrate acquisitions, including our acquisition of Future Communications IC, Inc. in
April 2007; and
the timing of new product announcements or introductions by us or by our competitors.
One or more of these factors could materially and adversely affect our operating results and financial condition in future periods.
We cannot assure you that we will attain any estimates or maintain profitability or that the assumptions on which they are based are
reliable.
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise after the date of this annual report. All forward-looking statements contained in
this annual report are qualified by reference to this cautionary statement. As you read and consider this annual report, you should
carefully understand that the forward-looking statements are not guarantees of performance or results.
iii
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
PART I
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
KEY INFORMATION
ITEM 3.
Selected Consolidated Financial Data
You should read the following information with our consolidated financial statements and related notes and “Item 5. Operating
and Financial Review and Prospects” included elsewhere in this annual report.
The selected consolidated statements of income and cash flow data for the years ended December 31, 2005, 2006 and 2007 and
the selected consolidated balance sheet data as of December 31, 2006 and 2007 are derived from our audited consolidated financial
statements included elsewhere in this annual report and should be read in conjunction with, and are qualified in their entirety by
reference to, these consolidated financial statements and related notes. The selected consolidated statements of income and cash flow
data for the years ended December 31, 2003 and 2004 and the selected consolidated balance sheet data as of December 31, 2003,
2004 and 2005 are derived from our audited consolidated financial statements which are not included in this annual report. These
consolidated financial statements are prepared in accordance with U.S. GAAP.
Consolidated Statements of Income Data:
Net sales
Cost of sales
Gross profit
Operating expenses (income):
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Impairment of intangible assets (1)
Write-off of in-process research and development (2)
Compensation to customers (3)
Write-off of other receivable (4)
Gain from settlement of litigation (5)
Total operating expenses
Operating income
Total non-operating income
Income before income taxes
Income tax (benefit) expense
Net income
Weighted average shares outstanding:
Basic
Diluted
Earning per share:
Basic
Year Ended December 31,
2003
NT$
2004
NT$
2005
NT$
2006
NT$
2007
NT$
2007
US$
(in thousands, except for per share data)
915,070 2,166,727 2,686,492 3,460,459 5,847,329 180,306
424,668 1,274,410 1,342,749 1,612,019 2,757,102 85,017
490,402
892,317 1,343,743 1,848,440 3,090,227 95,289
203,646
125,680
69,262
24,145
54,143
—
—
—
—
238,485 373,548 502,225
141,136 157,278 200,526
103,303 129,141 219,395
—
4,501
—
—
—
—
—
8,122
40,039
—
(3,000)
—
17,758
11,718
—
—
—
—
822,747 25,370
9,195
298,199
381,749 11,771
5,048
163,704
— —
2,355
— —
— —
— —
76,377
476,876
512,400 672,590 959,185 1,742,776 53,739
13,526
379,917 671,153 889,255 1,347,451 41,550
2,512
21,187
44,204
79,268
46,632
1,438
16,038
(94,405)
401,104 715,357 968,523 1,394,083 42,988
2,516
133,101
21,032
42,055
81,578
110,443
268,003 673,302 947,491 1,312,505 40,472
96,901
96,901
103,878 114,083 123,251
103,878 116,015 125,488
129,041 129,041
133,291 133,291
1.14
2.58
5.90
7.69
10.17
0.31
1
Diluted
Earning per ADS(6):
Basic
Diluted
Year Ended December 31,
2003 2004 2005 2006 2007 2007
NT$ NT$ NT$ NT$ NT$ US$
(in thousands, except for per share data)
1.14 2.58 5.80 7.55 9.85 0.30
4.56 10.32 23.61 30.75 40.68 1.25
4.56 10.32 23.21 30.20 39.39 1.21
(1)
In 2003 and 2004 we determined that impairment of our intangible assets occurred as a result of a significant decline in expected
net sales and cash flows from new consumer products such as broadband Internet video phones, car navigation systems, and
Tablet PCs.
(2) Write-off of in-process research and development generated from FCI acquisition after it was determined that the underlying
(3)
projects had not reached technological feasibility and no alternative future uses existed.
In connection with our loss of inventory due to fire at our subcontractor’s factory in May 2005, we paid compensation to
customers for delay in shipment caused by the fire.
(4) Write-off of a non-trade related receivable, for which the collection was doubtful.
(5) Gain from favorable settlement of litigation with Phison Electronics Corporation.
(6) Each ADS represents four ordinary shares.
Consolidated Balance Sheet Data:
Cash and cash equivalents
Other current assets
Working capital
Long-term investments
Property and equipment, net
Intangible assets, net
Other non-current assets
Total assets
Total liabilities
Total shareholders’ equity
Consolidated Cash Flow Data(1):
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Depreciation and amortization
Capital expenditures
2003
NT$
2004
NT$
As of December 31,
2006
2005
NT$
NT$
(in thousands)
2007
NT$
2007
US$
727,165 1,581,993 1,808,042 1,608,272
49,592
763,545
459,634 1,324,343 2,341,402 3,141,162 3,743,933 115,446
976,767 1,339,418 3,292,041 3,990,702 3,894,692 120,094
119,535
3,686
519,189 16,010
— 2,849,437 87,865
8,629
279,865
1,362,345 2,167,037 4,088,131 5,528,684 9,120,231 281,228
253,754
960,561 1,536,124 47,368
1,108,591 1,448,233 3,449,785 4,568,123 7,584,107 233,860
7,195
52,610
38,080
41,281
15,954
83,734
—
65,048
3,142
65,657
6,843
39,887
170,942
319,356
718,804
638,346
89,182
128,322
9,706
268,562
28,210
(13,996)
234,703
(263,101)
(618,947)
146,020
(3,081) 1,278,868
21,734
(36,409)
23,906
(42,708)
596,765 1,599,288 49,315
(425,012) (1,950,946) (60,158)
3,849
2,846
(6,970)
124,816
92,284
(226,034)
59,929
35,596
(271,697)
(1) Subsequent to the issuance of the Company’s 2006 consolidated financial statements, the Company determined that purchases of
trading securities in 2005 have been erroneously reported as part of purchases of short-term investments in cash used in
investing activities in the statement of cash flows for the year ended December 31, 2005. As a result, cash used in investing
activities and cash used in operating activities have been restated from the amounts previously reported to reflect the purchases
of trading securities as cash used in operating activities as required by accounting principles generally accepted in the United
States.
Exchange Rate Information
Although a majority of our revenues and expenses are denominated in US dollars, our operational headquarters are in Taiwan
and we report our financial results in NT dollars. This annual report contains translations of NT dollar amounts into U.S. dollar
amounts at specific rates solely for the convenience of the reader. The
2
translations of NT dollar amounts into U.S. dollar amounts in this annual report are based on the noon buying rate in the City of New
York for cable transfers of the NT dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless
otherwise noted, all translations from NT dollar amounts to U.S. dollar amounts and from U.S. dollar amounts to NT dollar amounts
in this annual report were made at a rate of NT$32.430 to US$1.00, the noon buying rate in effect as of December 31, 2007. On
May 9, 2008, the noon buying rate was NT$30.74 to US$1.00.
We make no representation that any NT dollar or U.S. dollar amounts could have been, or could be, converted into U.S. dollar or
NT dollar amounts, as the case may be, at any particular rate, the rates stated below, or at all.
The following table sets forth information concerning exchange rates between NT dollars and U.S. dollars for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual
report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is
the Federal Reserve Bank of New York.
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008 (through May 9)
Noon Buying Rate
NT$ per US$
High
32.53
32.49
32.03
31.09
30.52
30.85
Low
32.30
32.15
30.90
29.99
30.24
30.44
The following table sets forth the average noon buying rates between NT dollars and U.S. dollars for each of the periods
indicated, calculated by averaging the noon buying rates on the last day of each month of the periods shown.
2003
2004
2005
2006
2007
3
Average Noon
Buying Rate
NT$ Per US$
34.40
33.27
32.16
32.49
32.43
Risk Factors
Risks Related to Our Business
Because our operating results for any period could be adversely affected by a number of factors and may therefore fluctuate
significantly, our annual and quarterly operating results are difficult to predict.
Although we have been able to generate strong revenue and earnings growth and maintain relatively stable gross margins and
operating margins, we cannot assure you that we will be able to maintain in the future growth rates and margins similar to those of
past periods. A variety of factors may cause our growth rates and/or margins to decline, including:
•
continuing downward pressure on the average selling prices of our products caused by intense competition in our industry and
other reasons;
decreases in demand for multimedia consumer electronics products, including mobile phones, into which our semiconductor
solutions are directly or indirectly incorporated;
our customers’ sales outlook, purchasing patterns and inventory adjustments based on consumer demands and general economic
conditions;
the loss of one or more key customers or the significant reduction, postponement, rescheduling or cancellation of orders from
these customers;
changes in the seasonality of our sales, which generally has a tendency toward increased sales in the second half of each year;
•
•
•
•
•
our ability to develop or acquire, introduce, market and transition to volume production new or enhanced products and
technologies, and in a cost-effective and timely manner;
changes in the relative sales mix of our products;
changes in foreign exchange rates;
•
•
•
the availability and pricing of third party semiconductor foundry, assembly and test capacity and raw materials, as well as other
changes in our cost of finished goods;
•
•
•
•
•
•
•
the availability, pricing and timeliness of delivery of other components and raw materials used in our customers’ products;
unpredictable volume and timing of customer orders, which are not fixed by contract but vary on a purchase order basis;
superior product innovations by our competitors;
the timing of new product announcements or introductions by us or by our competitors;
our ability to scale our operations in response to increasing demand by customers for our new or existing products;
our ability to timely and accurately predict market requirements and evolving industry trends and to identify and capitalize upon
opportunities in new markets; and
the overall cyclicality of, and changing economic and market conditions in, the semiconductor industry.
The result of these and other factors, as well as our recent rapid growth, makes it difficult for us to assess our future
performance. Our quarterly sales and operating results are difficult to predict and have in the past, and will likely in the future,
fluctuate from quarter to quarter. We could fail to achieve the operating targets that we have
4
announced, such as revenue growth, gross margin, operating margins, and earnings per ADS. In addition, our operating results in the
future may be below the expectations of public market analysts or investors, which would likely cause the market price of our ADSs
to decline. Any variations in our period-to-period performance may also cause the market price of our ADSs to fluctuate.
Accordingly, you should not rely on the results of any prior periods as a reliable indicator of our future operating performance.
We depend on a small number of customers for a significant portion of our revenues and a loss of some of these customers
would result in the loss of a significant portion of our revenues.
We have derived a substantial portion of our past revenue from sales to a relatively small number of customers. As a result, the
loss of any significant customer could materially and adversely affect our financial condition and results of operations. Sales to our
five largest customers represented approximately 38%, 35% and 40% of our net revenue in 2007, 2006 and 2005, respectively. We
only had one customer in 2007, 2006 and 2005 that accounted for 10% or more of our sales. The identities of our largest customers
and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.
Sales to our customers may be significantly higher if indirect sales are included with direct sales. In 2007, Samsung Electronics
was our largest customer and accounted for approximately 12% our sales. In 2007, ATP Electronics and Barun Electronics were our
second and ninth largest customers and accounted for approximately 8% and 3% of our sales, respectively. We believe a substantial
portion of our sales to ATP Electronics and Barun Electronics are included in the products of Samsung Electronics and that such
direct and indirect sales to Samsung Electronics amounted to between 19% and 20% of our net sales. We believe that if our sales to
ATP Electronics and Barun Electronics were included in our sales to Samsung Electronics in 2006 and 2005, such direct and indirect
sales to Samsung Electronics would amount to between 13% and 15% and 10% and 12% of our net sales in the respective years. In
2007, 2006 and 2005, Lexar Media was our tenth, ninth and fourth largest customer and accounted for approximately 3%, 3% and 7%
of our net sales in the respective years. We believe a substantial portion of our sales to Power Digital Card and Macrotron Systems in
2007, 2006 and 2005 are included in Lexar Media’s products and that such indirect and direct sales to Lexar Media amounted up to
4% of our net sales in 2007, up to 8% in 2006 and up to 18% of our net sales in 2005.
We expect that we will continue to depend on a relatively limited number of customers for a substantial portion of our net sales
and our ability to maintain good relationships with these customers will be important to the ongoing success of our business. We
cannot assure you that the revenue generated from these customers, individually or in the aggregate, will reach or exceed historical
levels in any future period. Our failure to meet the demands of these customers could lead to a cancellation or reduction of business
from these customers. In addition, loss, cancellation or reduction of business from, significant changes in scheduled deliveries to, or
decreases in the prices of products sold to, any of these customers could significantly reduce our revenues and adversely affect our
financial condition and operating results. Moreover, any difficulty in collecting outstanding amounts due from our customers
particularly customers who place large orders, would harm our financial performance. In addition, if our relationships with our largest
customers are disrupted for any reason, it could have a significant impact on our business.
We may make acquisitions that are dilutive to existing stockholders, resulting in unanticipated one-time charges or otherwise
adversely affect our results of operations, and result in difficulties in assimilating and integrating the operations, personnel,
technologies, products and information systems of acquired companies or businesses.
We continually evaluate and explore strategic opportunities as they arise, including business combinations and capital
investments. If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing stockholders.
Alternatively, acquisitions made entirely or partially for cash would reduce our cash reserves.
Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control,
and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our
business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could materially harm our
business and operating results. Even when an acquired company has already developed and marketed products, there can be no
assurance that such products will be successful after the closing, will not cannibalize sales of our existing products, that product
enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might
arise with respect to such company.
5
In April 2007 we completed the acquisition of Future Communications IC, Inc.(FCI), a privately held Korea-based fabless
mobile TV and wireless communications RF IC design company, and in November 2007 we acquired of select parts of the Centronix
mobile TV business of Korea Information Engineering Services Co., Ltd. Risks arising from these or other future acquisitions could
include among other things:
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our ability to accurately assess the business and prospects of an acquisition or the anticipated benefits of an acquisition;
delays in or failure to complete the development and application of the acquired technology or products;
our ability to successfully integrate acquired technologies, operations and personnel;
failure to achieve projected results of the acquisition;
disruption of our ongoing business;
diversion of management and employees’ attention from our business;
risks associated with entering into a geographic region or business market in which we have little or no prior experience and
specifically managing personnel in these regions;
difficulties in establishing and maintaining uniform standards, controls, policies and procedures;
deficiencies in the internal control of any acquired company could result in a material weakness in our overall internal control;
our ability to recover costs of the acquisition or investment;
amortization expenses or impairment charges related to goodwill or other intangible assets;
negative impact on our relationships with customers, suppliers or contractors;
loss of key employees of acquired business; and
potentially dilutive issuance of equity securities.
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Future acquisitions could result in large one-time charges, the incurrence of debt or contingent liabilities, adverse tax
consequences, deferred compensation charges, dilution to future earnings and amortization of amounts related to deferred
compensation and certain purchased intangible assets and large and immediate write-offs, any of which could negatively impact our
business financial conditions or results of operations and could cause our stock price to decline. We may be unable to identify suitable
acquisition candidates or investment opportunities or that we will be able to consummate any such transactions on terms and
conditions that are acceptable to us, if at all. We may not realize the anticipated benefits of any acquisition or investment.
We may not be able to sustain our current growth rates, and even if we do maintain them, we are susceptible to many
challenges relating to our growth.
We have experienced significant growth in the scope and complexity of our business in a short period of time. Our net sales
grew from approximately NT$915.1 million in 2003 to approximately NT$2,166.7 million in 2004 to approximately NT$2,686.5
million in 2005 to approximately NT$3,460.5 million in 2006 and to approximately NT$5,847.3 million (US$180.3 million) in 2007.
We may not be able to achieve similar revenue growth rates in future periods. In the event that we do achieve continued growth, the
expansion of our business and operations will likely place a strain on our management, personnel, systems and resources. If we are
unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new products,
enhance our technological capabilities, satisfy customer requirements, execute on our business plan or respond to competitive
pressures.
6
Challenges relating to managing our growth include our ability to anticipate and respond to expected changes in future demand
for our products. In the event the timing of our expansion does not match market demand, our business strategy may need to be
revised, and there could be delays in our roll-out of new products, which may adversely affect our growth and future prospects. If we
over-expand and demand for our products does not increase as we may have projected, our financial results will be materially and
adversely affected. However, if we do not expand, and demand for our products increases sharply, our business could be seriously
harmed because we may not be as cost-effective as our competitors due to our inability to take advantage of increased economies of
scale. In addition, we may not be able to satisfy the needs of our current customers or attract new customers, and we may lose
credibility and our relationships with our customers may be negatively affected. Moreover, if we do not properly allocate our
resources in line with future demand for particular products, we may miss changing market opportunities and our business and
financial results could be materially and adversely affected. We cannot assure you that we will be able to successfully sustain our
current growth rate or that we will be able to manage our growth in the future.
Industry standards and demands in the multimedia consumer electronics market are continuously and rapidly evolving, and
our success depends on our ability to anticipate and meet these changes and trends.
In order to remain competitive in the future, we must ensure that our products meet continuously evolving industry standards
and are compatible with rapidly changing customer requirements. If our products do not keep pace with evolving industry standards
or if our products are not in compliance with prevailing industry standards for an extended period of time, we could be required to
invest significant time, effort and funds to redesign our products to ensure compatibility with relevant standards. If we are slow to
anticipate changing trends and respond to such charges in a timely manner, we could miss opportunities to capture potential
customers and we could lose our existing market share or existing customers. Currently, our primary products are controllers used in
flash memory storage devices. If new technologies for storing digital media are developed that compete with flash memory
technology or render it obsolete and if we are not able to shift our product offerings accordingly, demand for our products would
likely decline and our business would be materially and adversely affected.
In addition, we may not have sufficient management resources to manage, R&D capabilities to address, and financial resources
to fund all of the required research to develop future innovations and meet changing industry standards. Moreover, even if we have
adequate management resources, R&D capabilities, and financial resources, our future innovations may be outpaced by competing
innovations. As a result, we may lose customers and significant sales, and our business and operating results may be materially and
adversely affected.
If demand for our products declines in the major end markets that we serve, our selling prices and our overall sales will
decrease.
Demand for our products is affected by a number of factors, including the general demand for the products in the end markets
that we serve and price attractiveness. A significant amount of our sales revenue is derived from customers who use our
microcontrollers in removable and irremovable flash memory storage solutions used in communications, consumer electronics and
computing devices, such as mobile phones, smart phones, digital cameras, PDAs, MP3 players and notebook and desktop PCs. Any
significant decrease in the demand for these devices may decrease the demand for our semiconductor solutions and may result in a
decrease in our revenues and earnings. A variety of factors, including economic, political and social instability, could contribute to a
slowdown in the demand for non-essential communications, consumer electronics and computing devices as consumers delay
purchasing decisions or reduce their discretionary spending. In addition, the historical and continuing trend of declining average
selling prices of communications, consumer electronics and computing devices places pricing pressure on our semiconductor
solutions. As a result, we expect that the average selling prices for many of our semiconductor solutions will continue to decline over
the long term. If we are not able to introduce higher margin products or reduce our cost of sales to offset expected declines in average
selling prices, our gross margin will decline, which could have a material and adverse effect on our financial condition and operating
results.
7
If the semiconductor industry suffers a shortage of flash memory, which is a key component in many of our customers’ end
products, our revenues could be adversely affected.
In 2005 and 2007, some of our customers indicated that they were unable to acquire enough flash memory to meet all of the
anticipated demand for their products. Several manufacturers of flash memory have increased manufacturing capacity for flash
memory since then. However, we cannot assure you that there will continue to be enough additional capacity to satisfy worldwide
demand for flash memory. Because flash memory is a key component in many of the products manufactured by our customers, if any
shortage in the supply of flash memory occurs and is not remedied, our customers may not be able to purchase enough flash memory
to manufacture their products and may therefore purchase fewer semiconductor solutions from us than they would have otherwise
purchased. Our ability to increase revenues and grow our profits could be materially and adversely affected as a result of any shortage
or decrease in the supply of flash memory.
A failure to accurately forecast customer demand may result in excess or insufficient inventory, which may increase our
operating costs and harm our business.
To ensure the availability of our products for our customers, in some cases we cause our manufacturers to begin manufacturing
our products based on forecasts provided by these customers in advance of receiving purchase orders. However, these forecasts do not
represent binding purchase commitments, and we do not recognize revenue from these products until they are shipped to the
customer. As a result, we incur inventory and manufacturing costs in advance of anticipated revenue. Because demand for our
products may not materialize, manufacturing based on forecasts subjects us to risks of high inventory carrying costs and increased
obsolescence and may increase our costs. If we overestimate customer demand for our products or if purchase orders are cancelled or
shipments delayed, we may end up with excess inventory that we cannot sell, which could have a material and adverse effect on our
financial results. Conversely, if we underestimate demand, we may not have sufficient product inventory and may lose market share
and damage customer relationships, which could also harm our business.
Any future downturns in the semiconductor industry may reduce our revenue and result in excess investory.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product
obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand.
The industry has, from time to time, experienced significant downturns, often connected with, or in anticipation of, maturing product
cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These
downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. Any future downturns may reduce our revenue or our revenue growth and result in us having excess
inventory. Furthermore, any industry upturn could result in increased competition for access to limited third-party foundry, assembly
and test capacity.
The average selling prices of our products have historically decreased rapidly and will likely do so in the future, which could
harm our revenue and profitability.
The products we develop and sell, especially those for flash memory storage solutions, are used for high volume applications
and many of them are subject to rapid declines in average selling prices. Our average selling prices have historically decreased
significantly in order to meet market demand, and we expect that we will continue to reduce prices in the future. We may experience
period-to-period fluctuations in future operating results if our average selling prices decline. We may be forced to reduce the average
unit price of our products in response to new product introductions by us or our competitors, competitive pricing pressures and other
factors. The semiconductor market is extremely cost sensitive, which may result in declining average selling prices of other
components used in our customers' products and create downward pressure on our average selling prices and operating results. To
maintain acceptable operating results, we will need to develop and introduce new products and product enhancements on a timely
basis and continue to reduce our costs. If we are unable to offset any reductions in our average selling prices by increasing our sales
volumes or reducing corresponding production costs, or if we fail to develop and introduce new products and enhancements on a
timely basis, our sales and operating results will be materially and adversely affected.
8
We rely primarily on a small number of distributors to market and distribute certain of our products, and if we fail to manage
our distributors effectively or if our distributors do not sell our products effectively, our revenues would likely decline.
Most of our embedded graphics processors and some of our other products are sold through independent distributors. Sales of
these products to distributors generate a material amount of our revenues. Our business will depend on our ability to maintain and
expand our relationships with distributors, develop additional channels for the distribution and sale of our products and effectively
manage these relationships. Because not all of our distributors are required to make a specified minimum level of purchases from us,
we cannot be certain that they will sell our products on a priority basis. As we continue to expand our indirect sales capabilities, we
will need to manage the potential conflicts that may arise with our indirect sales force. We also rely on our distributors to accurately
and timely report to us their sales of our products and to provide certain engineering support services to customers. Our inability to
obtain accurate and timely reports and to successfully manage these relationships would have a material and adverse effect on our
financial results.
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.
We rely heavily on the services of our key employees, including Wallace C. Kou, our President and Chief Executive Officer. In
addition, our engineers and other key technical personnel are a significant asset and are the source of our technological and product
innovations. We believe our future success will depend upon our ability to retain these key employees and our ability to attract and
retain other skilled managerial, engineering, technical and sales and marketing personnel. The competition for such personnel,
particularly technical personnel, is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of
technical personnel to support our anticipated growth. These technical personnel are required to refine the existing hardware system
and application programming interface and to introduce enhancements in future applications. Despite the incentives we provide, our
current employees may not continue to work for us, and if additional personnel were required for our operations, we may not be able
to obtain the services of additional personnel necessary for our growth. In addition, we do not maintain “key person” life insurance
for any of our senior management or other key employees. The loss of any of our key employees or our inability to attract or retain
qualified personnel, including engineers, could delay the development and introduction of, and have an adverse effect on our ability to
sell, our products as well as our overall growth.
In addition, if any other members of our senior management or any of our other key personnel joins a competitor or forms a
competing company, we may not be able to replace them easily and we may lose customers, business partners, key professionals and
staff members. Substantially all of our senior executives and key personnel have entered into confidentiality and non-disclosure
agreements. In the event of a dispute between any of our senior executives or key personnel and our operating companies in Taiwan,
China or Korea, we cannot assure you the extent, if any, to which these provisions may be enforceable in Taiwan, China, or Korea
due to uncertainties involving the Taiwan, China, or Korea legal system.
We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain or
expand our business.
Our revenue growth has been primarily from sales of our semiconductor solutions. Although we believe that our acquisition of
FCI will enable us to offer more comprehensive solutions for mobile devices, our future success depends, in part, on our ability to
develop successful new semiconductor solutions in a cost-effective and timely manner. We continually evaluate expenditures for
planned product developments and choose among alternatives based upon our expectations of future market trends. The development
of our semiconductor solutions is highly complex, and successful product development and market acceptance of our products
depends on a number of factors, including:
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our accurate prediction of the changing requirements of our customers;
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our timely completion and introduction of new designs;
the availability of third-party manufacturing, assembly and test capacity;
the ability of our foundries to achieve high manufacturing yields for our products;
our ability to transition to smaller manufacturing process geometries;
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the quality, price, performance, power efficiency and size of our products and those of our competitors;
our management of our indirect sales channels;
our customer service capabilities and responsiveness;
the success of our relationships with existing and potential customers; and
changes in industry standards.
We cannot assure you that we will be able to develop and introduce new or improved products in a timely and cost-effective
manner, that the products we introduce will generate significant revenues or that we will be able to accurately anticipate or respond to
future market trends.
We may not be able to deliver our products on a timely basis if our relationships with our suppliers, our semiconductor
foundries or our assembly and test subcontractors are disrupted or terminated.
We do not own or operate a semiconductor fabrication facility. Instead, we rely on third parties to manufacture our
semiconductors. Five outside foundries, UMC and TSMC, in Taiwan, SMIC and HeJian, in China, and STMicroelectronics in Europe
currently manufacture the majority of our semiconductors. As a result, we face several significant risks, including higher wafer prices,
lack of manufacturing capacity, quality assurance, manufacturing yields and production costs, limited control over delivery schedules
and product quality, increased exposure to potential misappropriation of our intellectual property, labor shortages or strikes and
actions taken by third party contractors that breach our agreements.
The ability of each foundry to provide us with semiconductors is limited by its available capacity. We do not have long-term
agreements with any of these foundries and we place orders on a purchase order basis. We place our orders based on our customers’
purchase orders and sales forecasts. However, the foundries can allocate capacity to the production of the products of their other
customers and reduce deliveries to us on short notice or increase the price they charge us. It is possible that other foundry customers
that are larger and better financed than we are, or have long-term agreements with these foundries, may induce these foundries to
reallocate capacity to them. Any reallocation could impair our ability to secure manufacturing capacity that we need for our products.
In addition, interruptions to the wafer manufacturing processes caused by a natural disaster or human error could result in partial or
complete disruption in supply until we are able to shift manufacturing to another fabrication facility. It may not be possible to obtain
sufficient capacity or comparable production costs at another foundry. Migrating our design methodology to a new third-party
foundry could involve increased costs, resources and development time comparable to a new product development effort. Any
reduction in the supply of semiconductors for our products could significantly delay our ability to ship our products and potentially
have negative effects on our relationships with existing customers and our results of operations. In addition, if our subcontractors
terminate their relationships with us, we would be required to qualify new subcontractors, which could take as long as six months,
resulting in unforeseen operations problems, and our operating results may be materially and adversely affected.
If the foundries that provide us with the products for our operations do not achieve satisfactory yield or quality, or if the
assembly and testing services fail us in the quality of their output, then our revenue, operating results and customer relationships
will be affected.
The manufacture of semiconductors is a highly complex process. Minor deviations in the manufacturing process can cause
substantial decreases in yield. In some situations, such deviations may cause production to be suspended. The foundries that
manufacture our semiconductors have from time to time experienced lower than anticipated manufacturing yields, including yields
for our semiconductors, typically during the production of new products or architectures or during the installation and start-up and
ramp-up of new process technologies or equipment. If the foundries that manufacture our semiconductors do not achieve planned
yields, our product costs could increase, and product availability would decrease.
After the wafer fabrication processes, our wafers are shipped to our assembly and testing subcontractors. We have a system to
maximize consistent product quality, reliability and yield which involve our quality assurance team working closely with pertinent
subcontractors in the various phases of the assembly and testing processes. We also emphasize a strong supplier quality management
practice through which our quality assurance team pre-qualifies our manufacturing suppliers and subcontractors. However, despite
our efforts to strengthen supplier quality management, if our foundries fail to deliver fabricated silicon wafers of satisfactory quality
in the volume and at the
10
price we require, or if our assembly and testing subcontractors fail to efficiently and accurately assemble and test our products, we
will be unable to meet our customers’ demand for our products or to sell those products at an acceptable profit margin, which would
have a material and adverse effect on our sales and margins and damage our customer relationships.
Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our ability
to compete.
We believe that the protection of our intellectual property rights will continue to be important to the success of our business. We
rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements with our employees, business partners and other third parties,
and have implemented procedures to control access to and distribution of our documentation and other proprietary information.
Despite these efforts, we cannot assure you that these measures will provide meaningful protection of our intellectual property rights.
Further, these agreements do not prevent others from independently developing technologies that are equivalent to or superior to our
technology. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring
unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in foreign countries, such as China, where the laws may not protect our proprietary rights as fully as do
the laws of the United States. In addition, if the foundries that manufacture our semiconductors lose control of our intellectual
property, it would be more difficult for us to take remedial measures because our foundries are located in countries that do not have
the same protection for intellectual property that is provided in the United States. Also, some of our contracts, including license
agreements, are subject to termination upon certain types of change-of-control transactions.
We currently have more than 66 patents and 105 patent applications pending in five countries. We cannot be certain that patents
will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give
us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared
invalid or unenforceable or provide only limited protection for our technologies. We also cannot be certain that others will not design
around our patented technology, independently develop our unpatented proprietary technology or develop effective competing
technologies on their own.
Failure to successfully defend against intellectual property lawsuits brought against us may adversely affect our business.
Companies in and related to the semiconductor industry often aggressively protect and pursue their intellectual property rights.
From time to time, we have received, and may continue to receive, notices that claim we have infringed upon, misappropriated or
misused other parties’ proprietary rights. Moreover, in the past we have been and we currently are engaged in litigation with parties
that claim that we infringed their patents or misappropriated or misused their trade secrets. In addition, we or our customers may be
sued by other parties that claim that our products have infringed their patents or misappropriated or misused their trade secrets, or
which may seek to invalidate one or more of our patents. An adverse determination in any of these types of disputes could prevent us
from manufacturing or selling some of our products, increase our costs of revenue and expose us to significant liability. Any of these
claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or
trade secret action, a court could issue a preliminary or permanent injunction that would require us or our customer to withdraw or
recall certain products from the market, redesign certain products offered for sales or under development. We may also be liable for
damages for past infringement and royalties for future use of the technology. See “Legal Proceedings”.
In addition, any litigation, whether to defend ourselves against claims that we have infringed the intellectual property rights of
others, could, regardless of the ultimate outcome, materially and adversely affect our operating results by requiring us to incur
significant legal expenses and diverting the resources of the company and the attention of management.
Failure to achieve and maintain technological leadership in our various multimedia consumer electronics markets could
erode our competitiveness and cause our profits to decrease.
The consumer electronics market and the semiconductor components used in such market are constantly changing with
increased demand for improved features such as low power or smaller size. If we do not anticipate these changes in technologies and
rapidly develop and introduce new and innovative technologies, we may not be
11
able to provide advanced semiconductor solutions on competitive terms. If we are unable to maintain the ability to provide advanced
semiconductor solutions on competitive terms, some of our customers may buy semiconductor solutions from our competitors instead
of us. To be competitive, we must anticipate the needs of the market and successfully develop and introduce innovative new products
in a timely fashion. We cannot assure you that we will be able to successfully complete the design of our new products, have these
products manufactured at acceptable manufacturing yields, or obtain significant purchase orders for these products. Furthermore, if
our future innovations are ahead of the then-current technological standards in our industry, customers may be unwilling to purchase
our platforms until the multimedia consumer electronics market is ready to accept them. The introduction of new products may
adversely affect sales of existing products and contribute to fluctuations in our operating results from quarter to quarter. Our
introduction of new products also requires that we carefully manage our inventory to avoid inventory surplus and obsolescence. Our
failure to do so could have a material and adverse effect on our operating results. Furthermore, failure to achieve advances in
technology or processes or to obtain access to advanced technologies or processes developed by others could erode our competitive
position.
Development of new platforms and products may require us to obtain rights to use intellectual property that we currently do not
have. If we are unable to obtain or license the necessary intellectual property on reasonable terms or at all, our product development
may be delayed, the gross margins on our planned products may be lower than anticipated and our business and operating results
would be materially and adversely affected.
Because the markets in which we compete are highly competitive and many of our competitors have greater resources than
we have, we cannot be certain that our products will compete favorably in the market place.
We face competition from a large number of competitors in each of our targeted areas. We currently compete with other
companies that produce flash storage controllers, such as Alcor Micro, Chipsbank, Genesys, Incomm, Phison, Samsung, Skymedi,
and USBest. We may also face competition from some of our customers who may develop products or technologies internally that
compete with our solution. For multimedia SoC products, the companies with whom we compete include Actions, ALi, AMD,
NVIDIA, Rockchip, SigmaTel, and Vimicro. For mobile communications products, the companies with whom we compete include
Analog Devices, Broadcom, DiBcom, Infineon, Qualcomm, Newport Media, NXP, RFMD, Siano, and Skyworks. We expect to face
increased competition in the future from our current and potential competitors. In addition, some of our customers have developed
products and technologies that could replace their need for our products or otherwise reduce their demand for our products.
Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger
customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources
than we have. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to
the development, promotion and sales of their products than we can. Our current and potential competitors may develop and introduce
new products that will be priced lower, provide superior performance or achieve greater market acceptance than our products. In
addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain capacity when we are unable to
do so.
The multimedia consumer electronics market, which is a principal end market for our products, has historically been subject to
intense price competition. In many cases, low-cost, high-volume semiconductor component producers have entered markets and
driven down profit margins. If a low-cost, high-volume producer should develop products that compete with our products, our sales
and profit margins would suffer.
Fluctuations in exchange rates could result in foreign exchange losses.
Our reporting currency is the NT dollar. The majority of our sales are denominated in US dollars, and to a lesser extent NT
dollars and Korean Won. Most of our cost of sales are denominated in US dollars. The majority of our operating expenses are
denominated in NT dollars, and to a lesser extent Korean Won, Renminbi and US dollar. As a result, appreciation or depreciation of
other currencies in relation to the NT dollar could result in material transaction or translation gains or losses that could adversely
affect, or cause fluctuations in, our results of operations. We do not currently engage in currency hedging activities.
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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 and risks of indemnification against defects in
our products.
Our products are complex and may contain undetected hardware or software defects or failures, especially when first introduced
or when new versions are released. These errors could cause us to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and materially affect our customer relations and business reputation. If we
deliver products with errors or defects, our credibility and the market acceptance and sales of our products could be harmed. Defects
could also lead to liability for defective products as a result of lawsuits against us or against our customers. We have agreed to
indemnify some of our customers in some circumstances against liability from defects in our products. A successful product liability
claim could require us to make significant damage payments.
Our intellectual property indemnification practices may adversely impact our business.
We may be required to indemnify our customers and our third-party intellectual property providers for certain costs and
damages of intellectual property infringement in circumstances where our products are a factor in creating the customer’s or these
third-party providers’ infringement exposure. This practice may subject us to significant indemnification claims by our customers and
our third-party providers. In some instances, our products are designed for use in devices manufactured by our customers that comply
with international standards, such as the MP3 compression standard. These international standards are often covered by patent rights
held by third parties, which may include our competitors. The combined costs of identifying and obtaining licenses from all holders of
patent rights essential to such international standards could be high and could reduce our profitability or increase our losses. The cost
of not obtaining these licenses could also be high if a holder of the patent rights brings a claim for patent infringement. In the
contracts under which we distribute semiconductor products, we generally have agreed to indemnify our customers against losses
arising out of claims of unauthorized use of intellectual property. In some of our licensing agreements, we have agreed to indemnify
the licensor against losses arising out of or related to our conduct or services. We cannot assure you that additional claims for
indemnification will not be made or that these claims would not have a material and adverse effect on our business, operating results
or financial condition.
Major earthquakes, fires or other natural disasters and resulting systems outages may cause us significant losses.
Our principal executive offices and a significant part of our operations are based in Taiwan. Many of our suppliers, providers of
semiconductor manufacturing services for us, including semiconductor foundries and primary subcontractors for the assembly and
testing of our products are located in Taiwan.
Taiwan is particularly susceptible to earthquakes. For example, in September 1999, Taiwan experienced a severe earthquake that
caused significant property damage and loss of life, particularly in the central part of Taiwan. Although earthquakes and other natural
disasters in Taiwan have not caused serious damages to us, if we, our suppliers, providers of semiconductor manufacturing services
and primary subcontractors are affected by an earthquake or other natural disasters, such as typhoons, our production schedule could
be interrupted or delayed. As a result, a major earthquake, natural disaster or other disruptive events in Taiwan could severely disrupt
the normal operation of business and have a material and adverse effect on our financial condition and operating results.
The manufacturers of our semiconductors use highly flammable materials such as alcohol, acetone, photo resistance, AsH3 and
pH3, in the manufacturing processes and are therefore subject to the risk of loss arising from explosion and fire. The risk of explosion
and fire associated with these materials cannot be completely eliminated. Semiconductor companies experience explosion and fire
damage from time to time. If any of their fabs or assembly facilities were to be damaged or cease operations as a result of an
explosion or fire, it could reduce their manufacturing capacity. Such a reduction in the manufacturing capacity of our manufacturers
could disrupt the production schedule of our products thereby causing us to miss orders from our customers, which will in turn have a
material and adverse effect on our business and operating results.
The recurrence of a severe acute respiratory syndrome outbreak or an outbreak of avian influenza or other outbreaks could
materially and adversely affect our operating results and financial conditions.
In early 2003, China and certain other areas in Asia experienced an outbreak of severe acute respiratory syndrome, or SARS. In
addition, in the spring of 2004, China had several reported cases of deaths caused by SARS. A general downturn in most Asian
economies accompanied the outbreak.
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In 2003, an outbreak of avian influenza affected bird and poultry populations in countries throughout Southeast Asia and other
parts of Asia, including China, Hong Kong and Japan. Avian influenza resulted in human deaths in Vietnam and Thailand. Any
recurrence of SARS, avian influenza or other outbreak may have a negative effect on our operations. Our operations may be impacted
by a number of health-related factors, including, among other things, quarantines or closure of our offices, the sickness or death of our
key officers and employees and a general slowdown in the economies of China, Hong Kong and Taiwan, among other countries
where we have operations.
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results
of operations and the market price of our ADSs.
We are subject to reporting obligations under securities laws of the United States. The Securities and Exchange Commission, or
the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every
public company to include a management report on such company’s internal controls over financial reporting in its annual report,
which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition,
an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over
financial reporting.
Our management and independent registered public accounting firm have concluded that our internal controls as of
December 31, 2007 are effective. However, we cannot assure you that in the future we or our independent registered public
accounting firm will not identify material weakness during the Section 404 of the Sarbanes-Oxley Act audit process or for other
reasons. In addition, 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. As a result, if we fail to maintain effective internal controls over financial reporting or should we be unable to
prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of
our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of our
ADSs, and harm our reputation. Furthermore, we have incurred and expect to continue to incur considerable costs and to use
significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-
Oxley Act.
Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their
investments.
Because the NASDAQ Global Select Market is likely to continue to experience extreme price and volume fluctuations, the price
of our ADS may decline. Since we completed our initial public offering in June 2005, the market price of our ADS has been and
likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the
following:
•
actual or anticipated variations in our quarterly operating results or those of our competitors, customers, or NAND flash
vendors;
actual or anticipated changes in NAND flash supply-demand dynamics;
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•
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actual or anticipated changes in our market share or the market share of our competitors;
the commencement or results of litigation;
announcements by us or our competitors of new products or technological innovations;
changes in financial estimates or recommendations by securities analysts; and
announcements by us or our competitors of significant acquisitions or partnerships.
Many of these factors are beyond our control and may negatively impact the market price of our ADS, regardless of our
performance. In addition, the stock market in general, and the market for technology and semiconductor companies in particular, have
been highly volatile. Our ADS may not trade at the same levels of shares as that of other semiconductor and technology companies,
and shares of semiconductor and technology companies, in general, may not sustain their current market prices. These fluctuations as
well as general economic, political, and market conditions may have an adverse effect on the market price of our ADS.
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Political, Regulatory and Economic Risks
We face substantial political risks associated with doing business in Taiwan because of the tense political relationship
between Taiwan and the People’s Republic of China.
While we also, through our acquisition of FCI, maintain substantive operations in Korea. our principal executive offices and a
majority of our employees and a significant portion of our research and development and operations are based in Taiwan. In addition,
four of our primary third party manufacturers, UMC and TSMC, are located in Taiwan and, SMIC and HeJian are located in China.
Accordingly, our business and results of operations and the market price of our ADSs may be affected by changes in Taiwan
governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or
affecting Taiwan that are outside of our control. Taiwan has a unique international political status. China does not recognize the
sovereignty of Taiwan. Although there have been significant economic and cultural ties between the Taiwan and China in recent
years, the political relations have often been strained. The government of China has indicated that it may use military force to gain
control over Taiwan, particularly under what it considers as highly provocative circumstances, such as a declaration of independence
by Taiwan or the refusal by Taiwan to accept China’s stated “one China” policy. On March 14, 2005, the National Peoples’ Congress
of China passed what is widely referred to as the “anti-secession” law, a law authorizing the Chinese military to attack in order to
block moves by Taiwan toward formal independence. Past developments in relations between Taiwan and China have on occasion
depressed the market prices of the securities of Taiwanese companies. Relations between Taiwan and China and other factors
affecting military, political or economic conditions in Taiwan could have a material adverse effect on our financial condition and
results of operations, as well as the market price of our ADSs.
The relations between Taiwan and China and other factors affecting military, political or economic conditions in Taiwan could
also have a material and adverse effect on the financial condition of four of our primary foundries that manufacture most of our
semiconductors. Two of the foundries, UMC and TSMC, are located in Taiwan, and the other two SMIC and HeJian, are located in
China. Such relations between Taiwan and China and other factors could also have a material and adverse effect on the financial
condition of Taiwan IC Packaging Corp. (TICP) and Youngtek Electronics Corp. (YTEC), two of our primary subcontractors for the
assembly and testing of our products, which are also located in Taiwan. In addition, any expansion or development of our research
and development team in China could be restricted or jeopardized, and our sales and marketing performance may be affected.
Our business depends on the support of the Taiwan government, and a decrease in this support may increase our tax
liabilities and decrease our net income.
The Taiwan government has been very supportive of technology companies such as ours. In particular, we, like many Taiwanese
technology companies, have benefited from tax incentives provided by the Taiwan government. For example, under the Statute for
Upgrading Industries of Taiwan, we are granted tax credits by the Taiwan Ministry of Finance at rates set at certain percentages of the
amounts utilized in qualifying research and development costs and in qualifying employee training expenses. If such tax credits
cannot be utilized in the fiscal year in which the relevant costs or expenses were incurred, they may be carried forward for up to the
next four years. In addition, Taiwan law offers preferential tax treatments to industries that are encouraged by the Taiwan
government. These preferential tax treatments include 5-year tax exemptions for income attributable to expanded production capacity
or newly developed technologies funded in whole or in part by proceeds from initial capital investments made by our shareholders, or
subsequent capital increases, or capitalization of our retained earnings. Such tax exemptions may be available either to the
shareholders of a company, or, if the shareholders so determine, to the company itself. SMI Taiwan has filed three applications for
such tax exemptions as SMI Taiwan had used the proceeds of the new share offerings received in 2002, 2003 and 2004 to fund
eligible research and development projects. In the first quarter of 2005 and the fourth quarter of 2007, SMI Taiwan received certain
requisite consents or approvals for tax exemptions. See “Management’s Discussion and Analysis of Financial Conditions and Results
of Operations — Principal Factors Affecting Our Results of Operations — Provision for income taxes” and note 15 to our
consolidated financial statements for a more detailed description of our ability to enjoy these preferential tax treatments. If any of our
tax credits or our ability to take advantage of these preferential tax treatments are curtailed or eliminated, our net income may
decrease materially.
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If we are unable to satisfy the conditions set by the Investment Commission of the Taiwan Ministry of Economic Affairs, or
the IC, the effectiveness of the share exchange leading to the establishment of our current corporate structure could be challenged
by the ROC government authorities.
Our current corporate structure is established as a result of a share exchange between us and the shareholders of SMI Taiwan.
Approval from the IC was sought and successfully granted for the share exchange. However the IC granted the approval on condition
that SMI Taiwan must firstly, apply for at least five patents in each of 2005, 2006 and 2007, secondly, employ between 15 to 20
research and development engineers in each of 2005, 2006, and 2007, and finally, maintain research and development expenditures in
the amount of at least NT$100 million (US$3.0 million) in each of 2005, 2006, and 2007. We are required to submit to the IC SMI
Taiwan’s annual financial statements audited by a certified public accountant and other relevant supporting documents in connection
with the implementation of those three conditions within four months after the end of each of 2005, 2006 and 2007. To the extent that
we are unable to satisfy any of those three conditions, the IC may revoke our rights of repatriation of profits to be distributed by SMI
Taiwan or rescind its approval of the share exchange. This would have an adverse effect on our corporate structure and consequently,
materially and adversely affect our ability to conduct our business.
We face substantial political risk associated from doing business in South Korea because of tension political relationship
between South Korea and North Korea.
Relations between South Korea and North Korea have been tense over most of South Korea’s history, and more recent concerns
over North Korea’s nuclear capability, and relations between the United States and North Korea, have created a global security issue
that may adversely affect Korean business and economic conditions. We cannot assure you as to whether or when this situation will
be resolved or change abruptly as a result of current or future events. An adverse change in economic or political conditions in South
Korea or in its relations with North Korea could have a material adverse effect on our Korean subsidiary and our company.
INFORMATION ON THE COMPANY
ITEM 4.
History and Development of the Company
Silicon Motion Technology Corporation (“Silicon Motion”) was incorporated in the Cayman Islands in January 2005 and
acquired Silicon Motion, Inc., a Taiwan corporation (“SMI Taiwan”) in April 2005. Originally SMI Taiwan was known as Feiya
Technology Corporation (“Feiya”), a Taiwan corporation which was incorporated in April 1997 but had changed its name to SMI
Taiwan after acquiring in August 2002 Silicon Motion, Inc., a California corporation (“SMI USA”), which was incorporated in
November 1995. Feiya was originally a flash memory products company and SMI USA a graphics processor company. In April 2007,
we acquired Future Communications IC, Inc. (“FCI”), a leading designer of RF ICs for mobile TV and wireless communications
based in South Korea.
Our principal executive offices are located at 8F-1, No. 36, Taiyuan St., Jhubei City, Hsinchu County 302, Taiwan. The address
of our United States subsidiary, SMI USA is 1591 McCarthy Blvd., Milpitas, CA 95035. Our ADSs have been listed and traded on
Nasdaq since June 2005.
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Below is the structure chart for our organization:
Overview
We are a fabless semiconductor company that designs, develops and markets, high-performance, low-power semiconductor
solutions for the multimedia consumer electronics market. We have three major product lines: our mobile storage business,
multimedia SoC business, and mobile communications business. Our mobile storage business is composed of microcontrollers used
in NAND flash memory storage products such as flash memory cards, USB flash drives, card readers, SSDs, and embedded flash.
These flash memory storage products are widely used for external or internal storage of data by consumer electronics devices such as
mobile phones, digital still cameras, personal digital assistants, personal navigation devices, personal multimedia players, and
notebook and desktop personal computers. Our multimedia SoC business is composed of products that support MP3 and personal
multimedia players, PC cameras and embedded graphics applications. Our mobile communications business is composed of mobile
TV tuners, CDMA RF ICs and electronics toll collection RF ICs, which became our new product line as a result of our acquisition of
FCI in April 2007.
We sell our semiconductor solutions to leading original equipment manufacturers (“OEMs”) and original design manufacturers
(“ODMs”) worldwide. We provide our high performance flash memory storage controller to
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companies such as Lexar Media, Samsung, Sony, STMicroelectronics, and Transcend. We are a leading supplier of controllers used
in flash memory cards sold bundled with mobile phones manufactured by most of the handset industry’s leading OEMs. Our
multimedia SoCs are important components of MP3 and embedded graphics applications that are sold by companies such as
Advantech, Fuji-Xerox, Kontron, Siemens, Toshiba-TEC, Funac, Motorola, Radisys, Wincorf-Nixdorf, ChipPC. We provide our
innovative mobile communications ICs to LG Electronics, Pantech & Curitel, Samsung and other companies. We sell our products
through our direct sales force and distributors in Canada, China, Europe, Japan, Korea, Singapore, Taiwan and the United States.
We have experienced rapid growth in our net sales. Our net sales grew from approximately NT$915.1 million in 2003 to
approximately NT$2,166.7 million in 2004 to approximately NT$2,686.5 million in 2005 to approximately NT$3,460.5 million in
2006, and to approximately NT$5,847.3 million (US$180 million) in 2007, representing a compound annual growth rate, or CAGR of
approximately 59%.
Acquisition of Future Communications IC, Inc.
In April 2007, we acquired Future Communications IC, Inc (FCI). FCI is a leading designer of RF ICs for mobile TV and
wireless communications based in Seoul, South Korea. The final purchase price for the transaction was approximately US$50 million
in cash and US$40 million in our ordinary shares and options to purchase our ordinary shares. We agreed to pay FCI shareholders up
to an additional US$12 million in cash under certain circumstances. The first condition is that FCI achieves, for its fiscal year 2007
ending December 31, 2007, a US$33 million revenue target and a 53% product margin target. The second condition relates to the
performance of our stock. If both the FCI revenue and product margin targets are reached, we have agreed to pay to FCI shareholders
in cash the difference between US$12 million and 90% of the appreciation of our ADSs over an agreed period of time in the stock
portion of the consideration received as part of this transaction. As the above described earn-out conditions set forth in the share
purchase agreement were achieved, in March 2008, we paid US$12 million to the former shareholders of FCI.
Industry Background
The convergence of consumer electronics, communications, and computing devices has been accelerating at a faster rate in
recent years as advances in technology enable different categories of electronic devices to offer similar functionalities, which often
involve the processing, storage, and transfer of digital multimedia content. Mobile phones for example have been transformed into
multimedia consumer electronics devices with camera, video recorder, music player, e-mail, Internet access, television, and other
functions, because mobile phones have increasingly sophisticated multimedia applications processing, data storage, and data transfer
capabilities. Personal computers have also been transformed into multimedia consumer electronics devices by multimedia data
processing, storage, and transfer technologies that include wireless connectivity, Internet telephony, video telephony, and more
advanced video and audio capabilities. Several important semiconductor technology developments have led to the significant
improvement by electronics devices to process, store, and transfer digital multimedia content and these include the development of
NAND flash as a widely used data storage medium, various high-performance multimedia application processors and advanced
communication-related RF ICs.
Our Markets and Products
We design, develop and supply a portfolio of multimedia data processing, storage, and transfer solutions targeted to consumer
electronics applications. Our current product offerings are primarily targeted at three main markets: mobile storage, multimedia SoCs
and mobile communications markets. The following is a brief description of each of our target markets.
Mobile Storage Products
We offer a broad range of controllers for NAND flash memory storage products, including flash memory cards, USB flash
drives and card readers, embedded flash and solid state drives. Flash memory storage products are widely used by consumers to store
data for multimedia consumer electronics devices such as mobile phones, digital still cameras, personal digital assistants, personal
navigation devices, personal multimedia players, and notebook and desktop PCs. Flash memory cards and USB flash drives are two
of the largest end applications for NAND flash. Our controllers are designed to be compatible with and the companion IC to the vast
majority of NAND flash produced by companies such as Hynix, Intel, Micron, Samsung, Spansion, STMicroelectronics and Toshiba.
Because NAND flash from different manufacturers may be dissimilar in terms of IC packaging, input/output timing, command code
and other factors, a controller plays an important role in ensuring NAND flash used in flash memory storage
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products are compatible with consumer electronics host devices. New NAND flash from different manufacturers or the same vendor
may require updates to the firmware in the controller, extensive and thorough debugging and testing of the controller with the updated
NAND flash driver and extensive and thorough compatibility testing of the NAND flash memory storage product.
Key functions of our flash memory card and USB flash drive controllers include:
managing data input and output between the NAND flash in the flash memory storage product and the consumer electronics host
device;
ensuring that flash memory storage products which use our controllers are compatible with the widest possible universe of
consumer electronics host devices;
ensuring data reliability in NAND flash by detecting and correcting individual bit errors in the NAND flash;
on a larger scale, ensuring data integrity in a NAND flash by mapping bad blocks and preventing the bad blocks from being
used for storing data;
maximizing the life of a NAND flash with wear-leveling algorithms which spreads out the use of the memory array and
equalizes the use of all the memory cells;
enhancing the read and write performance of NAND flash by utilizing two-plane architecture, interleaving, or other
technologies; and
implementing security features to protect software code, personal data and multimedia digital rights.
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Flash memory card controllers. NAND flash memory cards are non-volatile, solid state storage media that have become the
predominate media for the storage of multimedia data used in mobile phones, digital still cameras and other portable consumer
electronic devices because of their small and compact form factor, large storage capacity, low power consumption, high speed data
transfer rate, and support of certain copyright protection technologies.
We believe we offer the broadest line of high-performance controllers for all major NAND flash memory card formats,
including Compact Flash (“CF”), MultiMedia Card (“MMC”), Secure Digital (“SD”) and xD-Picture Card (“xD”), as well as sub-
types of these formats, such as SD card’s miniSD card and microSD card. We believe that our controllers are compatible with the
majority of NAND flash currently being produced by different flash memory manufacturers, including small and big block Single-
Level Cell (“SLC”) and Multi-Level Cell (“MLC”) NAND flash.
Our proprietary IC design methodology, strong firmware capability, proprietary assembly techniques and comprehensive testing
procedures enable us to offer controllers that have significant competitive advantages with respect to compatibility, speed,
connectivity and cost. Based on our proprietary QuickWrite technology, we believe our controllers outperform competing products on
product benchmarking tests. Our FastMDC technology enables high performance flash memory access time and high reliability of
data storage. Our flash memory controllers are also designed for very low stand-by power consumption, to withstand electro-static
discharge and to allow flexible flash memory configuration through both hardware and firmware. Our flash memory controller ICs
are manufactured using standard CMOS processes at 0.18 micron and 0.16 micron.
USB flash drive controllers. USB flash drives are NAND flash memory data storage devices integrated with a standard USB
(“universal serial bus”) interface, commonly high speed USB 2.0. They are typically small, lightweight, removable and rewritable.
USB flash drives are more compact, generally faster, have large capacity for data and are more robust and reliable than other types of
portable storage devices such as hard disk drives and CD or DVD optical storage medium used with optical drives.
Our high performance USB flash drive controllers can support single and dual-channel SLC and MLC NAND flash
configuration and are compatible with the majority of flash memory currently being produced by different flash memory
manufacturers. They are designed for high data transfer rates, low power consumption, offer our customers an overall low cost
solution with integrated voltage regulators and stand-by power components and support Master and Slave SPI (“Serial Peripheral
Interface”) for applications such as a fingerprint sensor. Our
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controllers can support Microsoft Vista’s ReadyBoost, which increases a PC’s respond time by caching application data on a USB
flash drive that supplements a PC’s RAM. Our ICs are manufactured using CMOS processes at 0.16 micron.
Card reader controllers. Because flash memory cards are widely used with a wide range of consumer, computing, and
communications devices, including mobile phones, digital still cameras, desktop and notebook PCs, printers, and TVs, these devices
require either external or internal card readers.
We believe that we are uniquely placed to supply controllers for card readers that can support the widest range of flash memory
cards because we supply more flash memory card controllers and for a wider range of card formats using a wider range of NAND
flash from different manufacturers than any of our competitors. Our card reader controllers are designed to support single or multiple
card slots for all the popular card formats, such as CF, Memory Stick, MMC, SD and xD. Our card reader controllers can also assist
host device OEMs in implementing certain security features.
Other storage controllers. In addition to controllers for flash memory cards, USB flash drives and card readers, we have recently
developed and have shipped to customers embedded controller solutions and controllers for solid state drives. Our embedded
controller solutions include controllers mounted on the printed circuit board of electronic devices, such as DVD players, digital
camcorders, and MP3 players, used to control NAND flash also mounted on the printed circuit board of the device, as well as
controllers contained in a single semiconductor package with one or more companion NAND flash dies. In 2007, we started shipping
controllers for solid state drives for use in notebook PCs and servers.
Multimedia SoCs
We design and develop a wide range of multimedia SoCs for MP3 and personal multimedia players, embedded graphics
applications and PC cameras. SoCs are integrated circuits that include a central processing unit, memory interfaces and other
components and that address a range of end application requirements, including low power, high performance, low cost and high
levels of system integration. Our SoCs are manufactured using standard CMOS processes.
Personal media player SoCs. Personal media players are battery-powered, flash memory-based portable devices that store and
play digital media such as audio, photos and video. The market for personal compressed audio players, commonly referred to as MP3
players, has grown rapidly and is beginning to incorporate other functions, such as video and wireless connectivity. MP3 players have
become one of the most popular consumer electronics devices and have largely replaced personal cassette players and other
traditional audio players.
We focus on SoCs for personal media players that use NAND flash as the data storage medium, the principal type of medium
for these devices, which have largely replaced hard disk drive as a storage medium except for the largest memory capacity devices.
Our solutions are designed to enable personal media players to manage thousands of digital media files, the number of which is
limited to a large extent only by the capacity of the NAND flash used in the device. Personal media player SoCs are integrated
solutions based on two key technology building blocks, codecs for audio and other media and a NAND flash controller. The
capabilities of a personal media player’s NAND flash controller is an important factor because the cost of NAND flash is a very large
percentage of a personal media player’s bill of materials and the largest category of cost.
Our personal media player SoCs are high performance, low power single-chip solutions that feature MP3 and WMA audio and
JPEG image decoders, a NAND flash controller, power management, supports Microsoft’s Windows Media DRM and interfaces to
an FM module, USB 2.0, flash memory card formats, such as SD and MMC, and color LCD. Our newer generation SoCs also feature
a motion JPEG digital signal processor.
Embedded graphics processors. Graphics processors are commonly used by desktop and notebook PCs, game consoles, work
stations and multimedia mobile phones to increase the speed and complexity of images that can be displayed on a monitor, TV or
screen, as well as improve color definition and image resolution. Graphics processors are also used to control the displays of servers
and a wide range of consumer and lifestyle, medical and industrial, office equipment, entertainment and other products.
Before we combined our business with Feiya in 2005, SMI USA was principally a graphics processor company. We are
currently focused primarily on designing, developing and marketing high-performance, low-power SoCs which contain a graphics
processor engine and embedded memory and are highly integrated and low cost,
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small in chip size, easy to design-in by systems integrators, and fully supported and not end-of-life. The markets in which we compete
include low-end servers, consumer and lifestyle products, medical and industrial applications, office equipment and casino slot
machines. Our embedded graphics processors are generally used to render text, 2D graphics and graphical user interface (GUI) on
displays.
Based on our DualMon technology, our display controllers can drive two separate displays using one controller. This saves on
costs as well as board estate. Our ReduceOn® technology enables intelligent power management which algorithmically varies the
clock and power to functional units based on system needs to significantly reduce average operating power usage. End-users can thus
use the mobile devices for longer periods without a reduction in performance.
Image processors. With improvements in the bandwidth of broadband internet access and video telephony software, consumers
are increasingly using desktop and notebook PCs equipped with webcams to conduct video telephony and conferences. An image
processor is required to process and enhance the image captured by the CMOS image sensors located behind the lens of a webcam.
Our single chip image controller for PC camera solutions supports CMOS image sensors of up to 2.0 megapixels. Our SoC
integrates a color processor engine, JPEG compression, AC-Link/IIS audio interface and high-speed USB 2.0 device controller and
also supports all legacy PC systems equipped with USB 1.1 host interfaces.
Mobile Communications
Beginning in May 2007, we started offering semiconductor solutions for mobile TV, mobile telephony, and electronic toll
collection systems. Our new mobile communications portfolio of products became a part of our company following the completion of
our acquisition of FCI at the end of April 2007. The core technology of FCI is RF ICs for mobile communications, whether for
receiving mobile TV signals on mobile phones, receiving and transmitting voice, video and data on mobile phones or receiving and
transmitting data between automobiles and highway toll collection systems for the wireless collection of toll fees.
Mobile TV tuners. Our products include mobile TV tuners for mobile phones and other portable devices. Our tuners are designed
for many mobile TV broadcast standards including S-DMB, T-DMB, DVB-H, T-MMB and CMMB. We also offer tuners for digital
audio (DAB) and digital TV (DVB-T and DMB-TH). According to competitor product benchmarking, we believe our mobile TV
tuners are among the best in the market in terms of smallest chip size, lowest power consumption, lowest noise and high adjacent
channel selectivity (ACS). We augment our own demodulator technologies by cooperating closely with many demodulator IC
partners and sell our products in a SiP combination with our own demodulator die or a demodulator die provided by our demodulator
IC partner. We also supply SoCs which combines our own RF and demodulator technologies.
CDMA RF ICs. We offer CDMA transmitters, receivers, transceivers, low noise amplifiers (LNA) and power amplifiers (PA).
Electronic toll collection system RF ICs. We are a leading supplier of transceiver ICs for Korea’s electronic toll collection
system.
Our Customers
We sell our semiconductor solutions to leading original equipment manufacturers, or OEMs, and original design manufacturers,
or ODMs, worldwide. We provide our high performance flash memory storage controller to companies such as Lexar Media,
Samsung, Sony, STMicroelectronics, and Transcend. We are a leading supplier of controllers used in flash memory cards sold
bundled with mobile phones manufactured by the handset industry’s leading OEMs. Our multimedia SoCs are important components
of MP3 and embedded graphics applications that are sold by companies such as Advantech, Fuji-Xerox, Kontron, Siemens, Toshiba-
TEC, Funac, Motorola, Radisys, Wincorf-Nixdorf, ChipPC. We provide our innovative mobile communications ICs to LG
Electronics, Pantech & Curitel, Samsung and other companies.
Sales to our five largest customers represented approximately 38%, 35% and 40% of our net revenue in 2007, 2006 and 2005,
respectively. We only had one customer in 2007, 2006 and 2005 that accounted for 10% or more of our sales. The identities of our
largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to
period.
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Sales to our customers may be significantly higher if indirect sales are included with direct sales. In 2007, Samsung Electronics
was our largest customer and accounted for approximately 12% our sales. In 2007, ATP Electronics and Barun Electronics were our
second and ninth largest customers and accounted for approximately 8% and 3% of our sales, respectively. We believe a substantial
portion of our sales to ATP Electronics and Barun Electronics are included in the products of Samsung Electronics and that such
direct and indirect sales to Samsung Electronics amounted to between 19% and 20% of our net sales. We believe that if our sales to
ATP Electronics and Barun Electronics were included in our sales to Samsung Electronics in 2006 and 2005, such direct and indirect
sales to Samsung Electronics would amount to between 13% and 15% and 10% and 12% in the respective years. In 2007, 2006 and
2005, Lexar Media was our tenth, ninth and fourth largest customer and accounted for approximately 3%, 3% and 7% of our sales in
the respective years. We believe a substantial portion of our sales to Power Digital Card and Macrotron Systems in 2007, 2006 and
2005 are included in Lexar Media’s products and that such indirect and direct sales to Lexar Media amounted up to 4% of our net
sales in 2007, up to 8% in 2006 and up to 18% of our net sales in 2005.
The majority of our customers purchase our products through purchase orders, as opposed to entering into long-term contracts
with us. The price for our products is typically agreed upon at the time a purchase order is placed.
Sales and Marketing
We market and sell our products worldwide through a combination of direct sales personnel and independent electronics
distributors. Our direct sales personnel are strategically located near our major OEM and ODM customers in Taiwan, Korea, China,
the United States, and Japan. Approximately 87% of our sales in 2007 were attributable to our direct sales force while the remainder
was attributable to distributors.
To supplement our direct sales, we have independent electronics distributors with locations throughout the world. We selected
these distributors based on their ability to provide effective field sales, marketing communications and technical support for our
products to our customers.
Our marketing groups focus on our product strategy, product development road maps, new product introduction process,
demand assessment, competitive analysis, and corporate communications. We seek to work with potential and existing customers
early in their design process in order to best match our products to their needs, and more broadly, ensure that product development
activities, product launches, and on-going demand and supply planning occur in a well-managed, timely basis in coordination with
our research and development, operations, and sales groups, as well as our customers and distributors. We also attend industry
tradeshows and technical conferences to promote our products and solutions, maintain close contact with our existing customers to
assess demand, and keep current with industry trends. Our participation in industry standards associations, such as the MMCA and the
SDCA for flash memory cards, helps us monitor the latest industry developments and promote our corporate profile. Our marketing
groups also work with our sales teams to identify new business opportunities.
We also have field application engineers, or FAEs, who provide technical support and assistance to existing and potential
customers in designing, testing and qualifying systems that incorporate our products. Our FAE organization is segmented by product
and market to support our customers.
Research and Development
We devote a significant amount of resources to research and development for broadening and strengthening our portfolio of
products and solutions. Our engineering team has expertise in system architecture, IC design, digital and mixed-signal design, RF,
and software engineering. As of December 2007, we had 66 patents in China, Japan, Korea, Taiwan, and the United States and 105
patents pending. We continue to actively pursue the filing of additional patent applications in China, Japan, Korea, Taiwan, and the
United States.
We believe technology research and product development are essential to our growth. Our primary research and development
centers are located in Hsinchu and Taipei, Taiwan, Seoul, South Korea, Shanghai, China and Milpitas, California. Our facilities in
Milpitas focus primarily on graphics products, facilities in Seoul focus primarily on mobile communications products, and facilities in
Hsinchu, Taipei, and Shanghai focus primarily on mobile storage and other products.
Our research and development expenses were approximately NT$373.5 million, NT$502.2 million and NT$822.7 million
(US$25.4 million) for the years ended December 31, 2005, 2006 and 2007, respectively.
22
Manufacturing
We design and develop our products and electronically transfer our proprietary designs to independent foundries for the
manufacturing and processing of silicon wafers. Once the wafers are manufactured, they are then shipped to third-party assembly and
testing subcontractors. Individual dies on each wafer are assembled into finished ICs and undergo several stages of testing before
delivery to our customers. We also ship bare dies to our customers. We believe that our strategy of outsourcing wafer fabrication,
packaging and testing enables us to benefit from the research and development efforts of leading manufacturers without the
requirement to commit our own substantial capital investments. Our fabless business model also provides us with the flexibility to
engage vendors who offer services that best complement our products and technologies.
Wafer fabrication. UMC and TSMC in Taiwan, HeJian and SMIC in China, and ST Microelectronics in Europe are currently
our primary foundries that manufacture most of our semiconductors. Our foundries in Taiwan and China currently fabricate our
devices using mature and stable CMOS process technology with line-widths of 0.16-, 0.18-, 0.25- and 0.35-micron. We also rely on
STMicroelectronics as our foundry for mobile communications products using Bi-CMOS process technology. We regularly evaluate
the benefits and feasibility, on a product-by-product basis, of migrating to more cost efficient manufacturing process technologies.
Assembly and testing. Following wafer fabrication, our wafers are shipped to our assembly and test subcontractors where they
are probed, singulated into individual die, assembled into finished IC packages, and undergo the process of electronic final testing. In
order to minimize cost and maximize turn-around time, our products are designed to use low cost, industry standard packages and can
be tested with widely available automatic test equipment. We currently engage companies such as SPIL, Taiwan IC Packaging
(TICP), King Yuan Electronics, and Youngtek Electronics in Taiwan and Amkor in Korea as our primary subcontractors for the
assembly and testing of our products. We have dedicated teams of manufacturing engineers who maintain control over the process
from the early stages of manufacturing. Our engineers work closely with our subcontractors to develop product testing and packaging
programs to ensure these programs meet our product specifications, thereby maintaining our ownership of the functional and
parametric performance of our semiconductors.
Quality and Reliability Assurance. We have designed and implemented a quality assurance system that provides the framework
for continual improvement of products, processes and customer service. To ensure consistent product quality, reliability and yield, our
quality assurance teams perform reliability engineering, quality control, ISO system development, document control, subcontractor
quality management and customer engineering services to closely monitor the overall process from IC design to after-sale customer
support. In particular, we rely on in-depth simulation studies, testing and practical application testing to validate and verify our
products. We emphasize a strong supplier quality management practice in which our manufacturing suppliers and subcontractors are
pre-qualified by our quality assurance teams. Our suppliers are required to have a quality management system, certified to ISO 9000
standard. Our operations have been ISO 9001 certified since November 18, 1999.
Competition
The semiconductor industry is characterized by intense competition. Our customers face supply shortages or oversupply, rapid
technological changes, evolving industry standards and declining average selling prices.
We currently compete with other companies that produce flash memory storage controllers, such as Alcor Micro, Chipsbank,
Genesys, Incomm, Phison, Samsung, Skymedi, and USBest. We may also face competition from some of our customers who may
develop products or technologies internally that compete with our solution. For multimedia SoC products, the companies with whom
we compete include Actions, ALi, AMD, NVIDIA, Rockchip, SigmaTel, and Vimicro. For mobile communications products, the
companies with whom we compete include Analog Devices, Broadcom, DiBcom, Infineon, Qualcomm, Newport Media, NXP,
RFMD, Siano, and Skyworks.
Intellectual Property
Our success and future revenue growth depends, in part, on our ability to protect our intellectual property. We rely on a portfolio
of intellectual property rights, registered in the United States, Taiwan, and other countries, including patents, copyright rights,
trademark registrations, trade secret laws, contractual provisions, licenses, and other methods to protect our intellectual property.
As of December 31, 2007, we held 66 patents in the United States, Taiwan, and other countries and have 105 pending patent
applications in the United States, Taiwan, and other countries. There can be no assurance that
23
patents will ever be issued with respect to these pending applications. Furthermore, it is possible that any patents held by us may be
invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us
with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with
respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the
future. We expect to continue to file patent applications where appropriate to protect our proprietary technologies.
Companies in the semiconductor industry have frequently demonstrated a readiness to commence litigation based on allegations
of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We
may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially
reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources,
including our management’s time. Any such litigation could materially adversely affect us.
We intend to protect our intellectual property rights vigorously, but there can be no assurance that our efforts will be successful.
In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to
the same extent as the laws of the United States.
While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that
our technical expertise, customer support capabilities, and ability to introduce new products in a timely and cost effective manner will
be important factors in maintaining our competitive position.
We claim copyright and trademark protection for proprietary documentation for our products and a variety of branding marks.
We have registered “Silicon Motion” and its logo (a three-dimensional cube depiction of the letters “SM”), FCI, the FCI logo, airRF,
basicRF, ezRF, ezSYS, powerRF, twinRF, zipRF and zipSYS as trademarks in the United States, Taiwan, and other countries.
We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers,
employees and consultants, and through other customary security measures.
We have entered into license agreements with third party intellectual property vendors for wafer fabrication tool libraries,
semiconductor IP core, computer aided design tools, and software.
Employees
The following table sets forth the number of our employees categorized by function as of the dates indicated.
Management and administration
Operations
Research and development
Sales and marketing
Total
As of December 31,
2006
64
11
202
84
361
2005
44
10
141
47
242
2007
93
18
320
139
570
As of December 31, 2007, we had 570 total employees, including 299 in Taiwan, 30 in the United States, 119 in China, 118 in
Korea, and 4 in Japan. 402 of our total employees are engineers.
We do not have any collective bargaining arrangements with our employees. We consider our relations with our employees to be
good.
Facilities
Our corporate headquarters are located in Hsinchu, Taiwan. We own this 72,600 square feet facility which houses our
management and administration, operations, and research and development departments. We purchased
24
our two floor facility in August, 2007 for NT$260 million (US$8 million). In order to house our expanding research and development
and other departments, we purchased in March 2008 an additional floor in the same building with 36,100 square feet of floor space
for NT$132 million (US$4 million). In Taiwan, we also lease premises in Taipei, occupying approximately 26,400 square feet of
floor space and housing sales and marketing, as well as research and development departments.
In addition to these facilities in Taiwan, we also lease facilities in Seoul, Korea, Shanghai, Shenzhen, and Beijing, China,
Milpitas, California, and Yokohama, Japan for research and development, sales and marketing, as well as administration. These
facilities in aggregate consist of approximately 45,000 square feet of floor space with lease terms expiring at various dates between
2008 and 2012. In April, 2007, we entered into an agreement to acquire 6,300 square feet of floor space in Seoul for NT$54 million
(US$1.7 million). This building in which we own one floor is currently under construction. We expect to move into the facilities by
December 2010. We are also currently exploring the purchase of facilities in Shanghai with an aggregate floor space of approximately
15,900 square feet. Total purchase cost for the facilities in Shanghai is expected to be approximately NT$130 million (US$4.0
million). We anticipate that we will complete this purchase before the end of 2008.
We also own commercial property in Taipei of approximately 6,200 square feet, which we purchased in October, 1998 for
NT$32 million (US$1 million). This property was formerly our Taipei sales office, has not been used by us since 2004, and which we
have leased out as office premises. It is our intention that we will sell this property as we do not intend to use it for operating
purposes.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction
with our consolidated financial statements and their related notes included in this annual report. This discussion contains forward-
looking statements that involve risks and uncertainties. We caution you that our business and financial performance are subject to
substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In
evaluating our business, you should carefully consider the information provided under the caption “Risk Factors” included in Item 3
of this annual report.
Principal Factors Affecting Our Results of Operations
Net sales. Our net sales consist primarily of sales of our semiconductors, after deducting sales discounts and allowances for
returns. We have achieved significant sales growth since our inception, primarily due to significant increases in the number of
semiconductors we have sold, offset partially by the lower average selling prices of each type of semiconductor. We compete
primarily in the markets for controllers for flash-based storage products, mobile communications ICs, and multimedia SoCs. Net sales
generated by these product groups for the periods indicated were as follows:
2005
Year Ended December 31,
2006
2007
Net Sales
Mobile storage(1)
Mobile Communications (2)
Multimedia SoCs (3)
Other products (4)
Total
25
NT$
%
NT$
(in thousands, except percentage data)
%
NT$
%
— —
2,270,121 85 3,004,507 87 4,500,115 77
— — 761,608 13
402,139 15 432,072 12 563,739 10
21,867 —
23,880
2,686,492 100 3,460,459 100 5,847,329 100
14,232 —
1
(1)
(2)
(3)
(4)
Includes controllers for flash memory cards, USB flash drives, SSDs, embedded flash applications, and flash card readers.
Includes mobile TV tuners, CDMA RF ICs, and electronic toll collection RF ICs.
Includes graphics processors and MP3 SoCs.
Includes primarily demo boards.
We market and sell our products worldwide through a combination of direct sales personnel focusing on sales to ODMs and
OEMs that tend to purchase in higher volumes, as well as through independent distributors focusing on customers that generally
purchase in smaller volumes. We have direct sales personnel in Taiwan, Korea, and the United States. Most of our products are sold
to large customers who tend to buy in higher volumes, and therefore we sell most of these products through our direct sales personnel
(79% and 82% of net sales for the years ended December 31, 2006 and 2007, respectively), with a smaller portion sold through
independent distributors (21% and 18% of net sales for the years ended December 31, 2006 and 2007, respectively).
In determining whether to sell directly or through distributors, we consider, among other factors, our experience in those
particular markets, creditworthiness of customers, our ability to identify customers, extent of volume demand in the market and our
ability to provide technical support easily in the market.
For the years ended December 31, 2005, 2006 and 2007 we derived approximately 59%, 58%, and 41%, respectively, of our net
sales from customers located in Taiwan and approximately 19%, 10%, and 6%, respectively, of our net sales from customers located
in the United States. We anticipate that a majority of our net sales will continue to come from customers located outside of the United
States. The percentages of our net sales by geographic area for the periods indicated were as follows:
Country
Taiwan
Korea
United States
Others
Year Ended December 31,
2006
2005
2007
59%
4%
19%
18%
58%
11%
10%
21%
41%
26%
6%
27%
Our net sales are denominated in U.S. dollars and NT dollars. The percentages of our net sales by currency for the periods
indicated are set forth in the following table:
Currency
U.S. dollars
NT dollars
Korean Won
Year End December 31,
2006
2005
2007
54%
46%
57%
43%
—
—
55%
34%
11%
The length of our sales cycle, from the day purchase orders are received until products are shipped to customers, is dependent on
the availability of our product inventories. If we do not have sufficient inventories on hand to meet customer demands, it generally
requires approximately three months from the day purchase orders are received until finished goods are manufactured and shipped to
customers. This cycle can take up to six months during times when capacity at independent foundries is being fully utilized. The
potential delays inherent in the manufacturing process increase the risk that we may not be able to fulfill a customer’s order on time.
All of our sales are made by purchase orders. Because our practice, which is consistent with industry practice, allows customers to
reschedule orders on relatively short notice, order backlog may not be a good indicator of our future sales.
26
Because many of our semiconductor solutions are designed for the multimedia consumer electronics market such as flash-based
storage products, mobile phones, DSCs, and MP3 players, we expect our business to be subject to seasonality, with increased net
sales in the second half of each year, when customers place orders to meet increased demand for year-end holiday seasons, and
generally, decreased net sales in the first half of each year. However, our recent rapid sales growth makes it difficult for us to assess
the impact of seasonal factors on our business.
Cost of sales. Our cost of sales consists primarily of the following costs:
•
cost of wafer fabrication;
assembly, testing and shipping costs of our semiconductors;
personnel and equipment costs associated with manufacturing support;
quality assurance and occupancy costs paid to third-party manufacturers; and
cost of raw materials, for example, SDRAM used with our graphics processors.
•
•
•
•
We engage independent foundries for the manufacturing and processing of our semiconductors. Our manufacturing cost is
subject to the cyclical supply and demand conditions typical of the semiconductor industry. Our cost per wafer generally fluctuates
with the availability of capacity at independent foundries. We believe that our cost of sales is substantially variable in nature, and will
likely fluctuate as market conditions in the semiconductor industry change.
Research and development expenses. Our research and development expenses consist primarily of employee salaries and
contractor costs, stock-based compensation expense, fees paid for the use of intellectual properties and design tools developed by
third parties, development cost of software, expenses for the design, development and testing of system architecture, new product or
product alternatives, costs for the construction of prototypes, occupancy costs and depreciation on research and development related
equipment. We expense research and development expenditures as they are incurred. We expect research and development expenses
to increase in future periods in absolute terms as we continue to broaden and strengthen our product portfolio.
Sales and marketing expenses. Our sales and marketing expenses consist primarily of employee salaries and related costs, stock-
based compensation expense, commissions paid to independent distributors and costs for our advertising and promotional activities.
We expect that our sales and marketing expenses will increase in absolute terms over the next several years. However, we believe that
as we continue to achieve scale and greater operating efficiencies, our sales and marketing expenses may over time decline as a
percentage of our net sales.
General and administrative expenses. Our general and administrative expenses consist primarily of general employee salaries
and related costs, stock-based compensation expense, insurance premiums, professional fees and allowance for doubtful accounts. We
expect that general and administrative expenses will increase in absolute terms in future periods as we continue to expand our
operations, and as a result of the increased costs necessary to comply with the legal and regulatory requirements applicable to publicly
listed companies in the United States.
Amortization of acquired intangible assets. Amortization of acquired intangible assets relates to the amortization of intangible
assets acquired in the FCI and Centronix acquisitions. Acquisition-related identified intangibles are amortized on a straight-line basis
over the estimated economic lives of four years for core technology and customer relationships and three months for order backlog.
Acquired in-process research and development. Acquired in-process research and development relates to the in-process research
and development expensed upon the acquisition of FCI as it was determined that the underlying projects had not reached
technological feasibility and no alternative future uses existed.
Accounting for stock-base compensation. The SFAS No. 123(R) was adopted on January 1, 2006. We recognize stock
compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.
We elected the modified prospective application method for adopting SFAS No. 123(R). Under this method, the unrecognized
expense of awards not yet vested at January 1, 2006, the date of adoption is recognized in
27
net income in the periods after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the
original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as disclosed in our previous annual report.
Non-operating income and expenses. Our non-operating income and expenses include our gains or losses on the sales of our
investment, our interest from deposited cash or short-term investments, our gains or losses on foreign exchange rates, our impairment of
long-term investments, our interest paid on loans and capital leases and other non-operating income and expenses not categorized above.
We conduct an assessment on the value of our long-term investments annually, generally at the end of every fiscal year, and make
corresponding adjustments as needed to the value of our long-term investments.
Provision for income taxes. We accrue income taxes at the applicable statutory rates in accordance with the jurisdictions where our
subsidiaries are located and as adjusted for certain items including accumulated losses carried forward, non-deductible expenses, research
and development tax credits, certain tax holidays, as well as changes in our deferred tax assets and liabilities and related valuation
allowance. Furthermore, Taiwan tax regulations require our Taiwan subsidiary to pay an additional 10% tax on unappropriated earnings.
The Taiwan government enacted the Alternative Minimum Tax Act (the AMT Act), which became effective on January 1, 2006. The
alternative minimum tax (AMT) imposed under the AMT Act is a supplemental tax levied at a rate of 10% which is payable if the income
tax payable determined pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. In addition,
Taiwan law offers preferential tax treatments to industries that are encouraged by the Taiwan government. These preferential tax treatments
include five-year tax exemptions for income attributable to expanded production capacity or newly developed technologies funded in
whole or in part by proceeds from initial capital investments made by our shareholders, or subsequent capital increases, or capitalization of
our retained earnings. Such tax exemptions may be available either to the shareholders of a company, or, if the shareholders so determine,
to the company itself. SMI Taiwan has filed three applications for such tax exemptions as SMI Taiwan had used the proceeds of the share
offerings it received in 2002, 2003 and 2004 to fund eligible research and development projects. In the first quarter of 2005, SMI Taiwan
received (a) all approvals, including shareholders’ consent for tax exemptions in connection with research and development projects using
funds raised in 2002, which exemptions have become effective as of January 1, 2005; in the forth quarter of 2007, SMI Taiwan received
(b) all approvals, including shareholders’ consent for tax exemptions in connection with research and development projects using funds
raised in 2003, which exemptions have become effective as of January 1, 2010, and (c) the preliminary approval for tax exemptions in
connection with research and development projects using funds raised in 2004. We intend to let SMI Taiwan enjoy the tax exemptions in
connection with research and development projects using funds raised in 2004. Once all the required governmental approvals and
shareholders’ consents are received for particular research and development projects, SMI Taiwan will be entitled to tax exemptions for
income derived from products using technologies from such projects for five years, starting from the fiscal year determined by SMI Taiwan
in accordance with relevant regulations. With a combination of tax credits and exemptions, we expect our effective tax rate to be lower than
the statutory tax rate, so long as we are able to continue to take advantage of the Taiwanese government’s favorable tax policies. See “Risk
Factors — Risks Related to Our Business — Our business depends on the support of the Taiwanese government, and a decrease in this
support may increase our tax liabilities and decrease our net income” for the risks related to our ability to enjoy favorable tax policies of the
Taiwanese government.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amount
of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an
on-going basis, including those related to product returns and pricing allowances, allowances for doubtful accounts, inventories, long-lived
assets, income taxes, litigation and contingencies. We base our estimates and judgments on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future considering available information. Because our estimates may vary in each
situation, our actual results may differ from our estimates under different assumptions and conditions.
Our management considers the following factors in reviewing our financial statements:
•
•
the selection of critical accounting policies; and
the judgments and other uncertainties affecting the application of those critical accounting policies.
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the
sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial
statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial statements included elsewhere in
this annual report.
We believe the following critical accounting policies affect our more significant judgments used in the preparation of our financial
statements.
Revenue recognition. Revenue from product sales are generally recognized upon shipment to the customer provided that we have
received a signed purchase order, the price has been fixed or is determinable, transfer of title has occurred in accordance with the shipping
terms specified in the arrangement with the customer, collectability from the customer is considered reasonably assured, product returns are
reasonably estimable and there are no remaining significant obligations or customer acceptance requirements.
We record reserves to cover the estimated returns from our customers. Certain of our distributors have limited rights of return and
price protection rights on unsold inventory. The return rights are generally limited to five percent of the monetary value of products
purchased within the preceding six months, provided the distributor places a corresponding restocking order of equal or greater value. The
allowance for sales returns for distributors and all customers is recorded at the time of sale based on historical returns information
available, management’s judgment and any known factors at the time the financial statements are prepared that would significantly affect
the allowance. However, because of the inherent nature of estimates, actual returns and allowances could be significantly different from our
estimates. To the extent rates of return change, our estimates for the reserves necessary to cover such returns would also change which
could have a negative impact on our recorded revenue and gross margin. As of December 31, 2005, 2006, and 2007, our allowance for
sales returns was approximately NT$18.1 million, NT$35.1 million and NT$ 45.8million (US$1.4 million), respectively, representing
approximately 1.0%, 1.0% and 0.8% of our gross sales for those respective periods.
28
Occasionally, we have reduced our product pricing due to market conditions, competitive considerations and other factors. Price
protection rights are granted to certain distributors under our distribution agreements. When we reduce the price of our products, it allows
the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand
as of the date of the price reduction. A reserve for price adjustments is recorded at the time of sale based on our historical experience.
During 2007, the actual price adjustments to distributors was nil.
Allowance for doubtful accounts. We record an allowance for doubtful accounts based on our evaluation of the collectability of our
accounts receivable. Normal payment terms are provided to customers and apply upon transfer of title. On an ongoing basis, we analyze the
payment history of customer accounts, including recent customer purchases. In circumstances where we are aware of a specific customer’s
inability to meet its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable
to the amount we reasonably believe will be collected. For all other accounts receivable due from customers, we categorize accounts
receivables and make provisions based on a percentage of each category. We determine these percentages by examining our historical
collection experience and current trends in the credit quality of our customers as well as our internal credit policies. If the financial
condition of our customers, or economic conditions in general, were to deteriorate, additional allowances may be required in the future and
such additional allowances would increase our operating expenses and therefore reduce our operating income and net income.
As of December 31, 2006 and 2007 our allowance for trade-related doubtful accounts was approximately NT$13.4 million and
NT$23.1 million (US$0.7 million), respectively, representing approximately 1.0% and 1.9% of our gross accounts receivables as of those
respective dates. In 2006, we also wrote-off a NT$40.0 million (US$1.2 million) non-trade related receivable, the collection of which we
believe is doubtful.
Inventory valuation. We value inventories at the lower of cost or market value which represents the replacement cost for raw materials
and net realizable value for finished goods and work in process. We write down our inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions are less favorable than those we projected, additional inventory write-
downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed
to income even if circumstances later suggest that increased carrying amounts are recoverable. In estimating our reserves for obsolescence,
we primarily evaluate estimates based on the timing of the introduction of our new products and the quantities remaining of our old
products and provide reserves for inventory on hand in excess of the estimated demand.
Stock-based compensation The SFAS No. 123(R) was adopted on January 1, 2006. We recognize stock compensation expense over
the requisite service period of the individual grantees, which generally equals the vesting period.
We elected the modified prospective application method for adopting SFAS No. 123(R). Under this method, the unrecognized expense
of awards not yet vested at January 1, 2006, the date of adoption is recognized in net income in the period after the date of adoption using
the same Black-Scholes valuation method and assumptions determined under the original provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation, “as disclosed in our previous annual report.
Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant using the
valuation model requires judgment. We use the Black-Scholes-Merton valuation formula to estimate the fair value of employee stock
options, which is consistent with the provisions of SFAS No. 123(R). Option pricing models, including the Black-Scholes-Merton formula,
require the use of input assumptions, including expected volatility, expected term, expected dividend rate and expected risk-free rate of
return. Because our stock became publicly traded in June 2005, we do not have a meaningful observable share-price volatility; therefore,
we estimate our expected volatility based on that of similar publicly-traded companies and expect to continue to do so until such time as we
might have adequate historical data from our own traded share price. We estimated our options’ expected terms using our best estimate of
the period of time from the grant date that we expect the options to remain outstanding. If we determine another method to estimate
expected volatility or expected term is more reasonable than our current methods, or if another method for calculating these input
assumptions is prescribed by authoritative guidance, the fair value calculated for future share-based awards could change significantly from
those
29
used for past awards, even if the critical terms of the awards are similar. Higher volatility and expected terms result in an increase to
share-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate of return are not as
significant to the calculation of fair value.
Valuation of long-lived assets and intangible assets. We evaluate the recoverability of long-lived assets and intangible assets
whenever events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than
the carrying value. If impairment occurs, a loss based on the excess of carrying value over the fair market value of the long-lived asset
is recognized. Fair market value is determined by reference to quoted market prices, if available, or discounted cash flows, as
appropriate. The impairment evaluations and the estimate of fair market value involve management estimates of assets’ useful lives
and future cash flows. Actual useful lives and cash flows could be different from those estimated by our management. This could
have a material effect on our operating results and financial condition. During 2007, we recognized impairment losses of
approximately NT$14.4 million (US$0.4 million) on long term investments identified for the investment of Spright Co., Ltd. as a
result of recurring operating losses and reduced forecasts which indicated that the Company’s investment was not recoverable within
a reasonable period of time.
Accounting for income taxes. In preparing our consolidated financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income within the relevant jurisdiction and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. We have provided for a valuation allowance to the extent we believe
that it is more likely than not that the deferred tax assets will not be recovered from future taxable income. Should we determine that
we would not be able to realize all or part of our net deferred tax asset in the future, an additional allowance for the deferred tax asset
would be charged to income in the period such determination was made.
30
Effective January 1, 2007, we adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes. The new standard
defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax
benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be
realized. The total amount of unrecognized tax benefits as of December 31, 2007 was NT137.4 million (US$4.2 million), excluding
accrued interest and penalties. These tax benefits of NT$27,079 thousand (US$835 thousand) would affect our effective tax rate if
recognized. Interest and penalties recorded for uncertain tax positions are included in our income tax provision. As of December 31,
2007, NT$3,243 thousand (US$100 thousand) of interest and penalties was accrued. Fiscal years 1996 and 2004 through 2006 remain
subject to examination by US Internal Revenue Service. Fiscal years 2002 through 2006 remain subject to examination
by other foreign tax jurisdictions . The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable
settlement of any particular issue would require the use of cash and could result in increased income tax expense. Favorable
resolution could result in reduced income tax expense. Within the next 12 months, we do not expect that our unrecognized tax
benefits will change significantly. See Note 15 to the Consolidated Financial Statements for further information regarding the impact
of adopting this new standard as well as changes in unrecognized tax benefits during 2007.
Litigation and contingencies. From time to time, we have been subject to legal proceedings and claims with respect to such
matters as patents and other actions arising out of the normal course of business, as well as other matters identified in “Legal
Proceedings, Item 8 of this Annual Report.” Our success and future revenue growth will depend, in part, on our ability to protect our
intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods, to protect our proprietary technologies. We have been issued patents and may have additional patents
in the future; however, we cannot provide assurance that any patent will be issued as a result of any applications or, if issued, that any
claims allowed will be sufficiently broad to protect our technology. In addition, it is possible that existing or future patents may be
challenged, invalidated or circumvented. It may be possible for a third party to copy or otherwise obtain and use our products or
technology without authorization, develop corresponding technology independently or design around our patents. Effective copyright,
trademark and trade secret protection may be unavailable or limited in foreign countries. These disputes may result in costly and time
consuming litigation or the license of additional elements of our intellectual property for free.
It is possible that other companies might pursue litigation with respect to any claims such companies purport to have against us.
The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringed
technology, pay substantial damages under applicable law, cease the use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail.
We have been or are currently involved in various claims and legal proceedings and have incurred certain costs associated with
defending litigation matters. Periodically, we review the status of each significant matter and assess the potential financial exposure.
If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability
for the estimated loss. Because of uncertainties related to these matters, accruals are based only on the best information available at
the time.
Given the uncertainties associated with litigation, if our assessments prove to be wrong, or if additional information becomes
available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we
would record the minimum estimated liability, which could have a material and adverse effect on our operations, financial condition
and cash flows.
31
Results of Operations
The following table sets forth our statements of operations as a percentage of net sales for the periods indicated:
Net sales
Cost of sales
Gross profit
Operating expenses (income):
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Write-off of in-process research and development
Compensation to customers
Write-off of other receivable
Gain from settlement on litigation
Total operating expenses
Operating income
Non-operating income (expenses):
Gain on sales of short-term investments — net
Gain on sales of long-term investment — net
Interest income
Interest expense
Foreign exchange gain (loss) — net
Impairment of long-term investment
Other income, net
Total non-operating income
Income before income taxes
Income tax expense
Net income
2005
Year Ended December 31,
2006
100.0% 100.0% 100.0%
46.6
53.4
50.0
50.0
47.2
52.8
2007
13.9
5.8
4.8
0.2
—
0.3
—
—
25.0
25.0
14.1
14.5
5.1
5.8
6.5
6.3
2.8
—
1.3
—
—
—
—
1.2
(0.1) —
29.8
27.7
23.0
25.7
0.4
—
1.0
(0.0)
0.1
—
0.1
1.6
26.6
1.6
25.0%
0.5
—
1.9
(0.0)
(0.2)
—
0.1
2.3
28.0
0.6
27.4%
0.4
0.1
0.9
(0.0)
(0.3)
(0.3)
0.0
0.8
23.8
1.4
22.4%
Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006
Net sales. Our net sales for the year ended December 31, 2007 were approximately NT$5,847.3 million (US$180.3 million)
compared to approximately NT$3,460.5 million for the year ended December 31, 2006, an increase of approximately 69%. Total unit
shipments of our products increased 96% because of strong mobile storage and multimedia SoCs sales, as well as sales from FCI, our
new mobile communications product line, which we had acquired in April 2007 and began consolidating in May 2007. Strong unit
shipment growth was however partially offset by a decrease in average selling prices caused by intense market place competition.
Net sales of mobile storage products increased 50% to NT$4,500.1 million (US$138.8 million) for the year ended December 31,
2007 primarily because of strong sales of flash memory cards controllers and USB flash drive controllers. Net sales of multimedia
SoC products increased 30% to NT$563.7 million (US$17.4 million), mainly because of strong MP3 SoC and graphics processors
sales. Net sales of mobile communication products contributed NT$761.6 million (US$23.5 million), with sales from mobile TV
tuners, CDMA RF ICs, and electronic toll collection (ETC) RF ICs.
For the year ended December 31, 2007, we shipped approximately 297.2 million units of semiconductors for mobile storage
products in total, an increase of approximately 85% from approximately 160.8 million units for the year ended December 31, 2006.
Total unit shipment of our multimedia SoCs for the year ended December 31, 2007 increased to 7.1 million from 1.8 million units for
the year ended December 31, 2006.
Cost of Sales and Gross profit. Our cost of sales grew to approximately NT$2,757 million (US$85 million) for the year ended
December 31, 2007 from approximately NT$1,612 million in 2006. Our gross margin decreased to 52.8% for the year ended
December 31, 2007 from 53.4% for the year ended December 31, 2006 as a result of slightly higher silicon wafer and testing costs for
mobile storage products, as well as an increase in sales of lower gross margin MP3 SoCs and USB flash drive controllers.
32
Research and development expenses. Our research and development expenses increased to approximately NT$822.7 million
(US$25.4 million), or 14.1% of net sales, for the year ended December 31, 2007 from approximately NT$502.2 million, or 14.5% of
net sales, for the year ended December 31, 2006. Several factors contributed to the 64% increase in research and development
expenses. Salary, benefits and compensation expenses grew as we increased our headcount from 202 to 320 employees in our
research and development group. Our project expense increased as we continued to invest in all our product lines. We expect research
and development expenses to increase in absolute terms in future periods as we continue to increase our staffing and associated costs
to pursue additional product development opportunities.
Sales and marketing expenses. Our sales and marketing expenses increased to approximately NT$298.2 million (US$9.2
million), or 5.1% of net sales, for the year ended December 31, 2007 from approximately NT$200.5 million, or 5.8% of net sales, for
the year ended December 31, 2006. Several factors contributed to the 49% increase in sales and marketing expenses. Salary, benefits,
rental and compensation expenses grew as we increased our headcount from 84 to 139 employees in our sales and marketing group.
We expect sales and marketing expenses to increase in dollar amount in future periods as we continue to increase the size of our
operations.
General and administrative expenses. Our general and administrative expenses increased to approximately NT$381.7 million
(US$11.8 million), or 6.5% of net sales, for the year ended December 31, 2007 from approximately NT$219.4 million, or 6.3% of net
sales, for the year ended December 31, 2006. Several factors contributed to the 74% increase in general and administrative expenses.
Salary, benefits, rental and compensation expenses grew as we increased our headcount from 64 to 93 employees in our general and
administrative group. Our general and administrative expenses also increased because of higher costs necessary to comply with the
legal and regulatory requirements applicable to publicly listed companies in the United States. We expect our general and
administrative expenses to increase in absolute dollars in future periods as we continue to expand our operations.
Amortization of intangible assets. Our expense relating to amortization of intangible assets increased to approximately
NT$163.7 million (US$5.0 million). This expense was associated with the amortization of intangible assets relating to our acquisition
of FCI and Centronix in April and November 2007, respectively.
Write-off of in-process research and development. In-process research and development (“IPR&D”) expenses are from research
and development projects in-process at the time of our FCI acquisition that have not demonstrated technological feasibility and that
do not have alternative future uses.
Write-Off of Other Receivables. For the year ended December 31, 2006, we wrote-off a NT$40.0 million (US$1.2 million) non-
trade receivable, the collection of which we believed was doubtful. We did not have a similar write-off for the year ended
December 31, 2007.
Gain on sales of long-term investments. In August 2007, we sold all of our investment in Chipmast and recognized a realized
investment gain of NT$4,991 thousand (US$154 thousand)
Interest expense. Our interest expense increased to approximately NT$1,053 thousand (US$32 thousand) for the year ended
December 31, 2007 from approximately NT$33 thousand for the year ended December 31, 2006. Our interest expense for 2007
increased as a result of the Future Communications IC, Inc.’s borrowings from the bank and government.
Gain from settlement on litigation. Our dispute with Phison was settled on September 22, 2006 after Phison paid us NT$3,000
thousand.
Foreign exchange gain (loss). Foreign exchange loss due to changes in exchange rates increased from NT$5.1 million in 2006 to
NT$18.7 million (US$0.6 million) in 2007. The foreign exchange loss is attributable to the appreciation of the NT dollar relative to
the US dollar during the period.
Interest income. Our interest income decreased to approximately NT$52.4 million (US$1.6 million) for the year ended
December 31, 2007 from approximately NT$65.2 million for the year ended December 31, 2006. Our interest income decreased as a
result of decreases in our cash and cash equivalent position.
33
Impairment of long-term investment. During the fourth quarter of fiscal 2007, we determined that our investment in Spright was
impaired. Because of a combination of recurring losses and reduced forecasts indicating that ours investment was not recoverable
within a reasonable period of time, we determined the impairment to be other than temporary and recorded an impairment charge of
NT$14,447 thousand (US$445 thousand).
Income tax expense. Our income tax expense increased to approximately NT$81.6 million (US$2.5 million) for the year ended
December 31, 2007 from an income tax expense of approximately NT$21.0 million for the year ended December 31, 2006. Our
income tax expense increased because our pre-tax income increased and also because we adopted FIN 48, which requires us to accrue
additional tax liabilities.
Net income. Net income increased to approximately NT$1,312.5 million (US$40.5 million) for the year ended December 31,
2007 from approximately NT$947.5 million for the year ended December 31, 2006.
Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005
Net sales. Our net sales for the year ended December 31, 2006 were approximately NT$3,460.5 million compared to
approximately NT$2,686.5 million for the year ended December 31, 2005, an increase of approximately 29%. The increase in our net
sales was primarily due to an increase in net sales from our mobile storage product, which had increased from 85% of overall net
sales in 2005 to 87% of overall net sales in 2006.
The increase in the net sales of our mobile storage products was due to strong volume demand for our mobile storage products,
especially our controllers for flash memory cards, partially offset by declining average selling prices. The strong volume demand for
our mobile storage products was due in part to the growing demand for digital multimedia devices that use flash-based storage
medium, combined with what we believe to be our favorable competitive position in the markets that we serve, which we believe is
primarily due to our ability to deliver products that are universally compatible, highly efficient and require minimal power
consumption at competitive cost and to provide comprehensive post-sale support services.
For the year ended December 31, 2006, we shipped approximately 161 million units of semiconductors for mobile storage
products in total, an increase of approximately 103% from approximately 79 million units for the year ended December 31, 2005.
Total unit shipment of our multimedia SoCs for the year ended December 31, 2006 remained unchanged at 2 million units with the
year ended December 31, 2005.
Cost of sales and gross profit. Our cost of sales grew to approximately NT$1,612 million for the year ended December 31, 2006
from approximately NT$1,342.7 million in 2005. Our cost of sales as a percentage of net sales declined from approximately 50.0% of
our net sales in 2005 to 46.6% of our net sales in 2006. Our cost of sales increased as a result of the increased number of
semiconductors sold. However, our cost per unit declined because of several factors. Our cost per unit declined as we migrated our
manufacturing process technology to smaller geometries which increased the number of dies per silicon wafer and lowered our unit
cost. A second factor was the shift towards shipping a larger percentage of our flash memory controllers in bare die form. The lack of
chip assembly removed a cost component that we had previously passed along to our customers without much mark-up. A third factor
was that wafer prices in general were lower in 2006 than in 2005. Our gross margin increased to 53.4% for the year ended
December 31, 2006 from 50.0% for the year ended December 31, 2005 due to improvements in our cost of sales.
Research and development expenses. Our research and development expenses increased to approximately NT$502.2 million, or
14.5% of net sales, for the year ended December 31, 2006 from approximately NT$373.5 million, or 13.9% of net sales, for the year
ended December 31, 2005. Several factors contributed to the 34% increase in research and development expenses. Salary, benefits,
rental and compensation expenses grew as we increased our headcount from 141 to 202 employees in our research and development
group, and also as we started accounting for stock-based compensation in 2006, the amount of which was NT$37.7 million. Our
project expense increased as we continued to invest in card readers, portable audio SoCs for MP3 players and image processor for PC
cameras. We expect research and development expenses to increase in absolute terms in future periods as we continue to increase our
staffing and associated costs to pursue additional product development opportunities.
Sales and marketing expenses. Our sales and marketing expenses increased to approximately NT$200.5 million, or 5.8% of net
sales, for the year ended December 31, 2006 from approximately NT$157.3 million, or 5.8% of net sales, for the year ended
December 31, 2005. Several factors contributed to the 28% increase in sales and marketing expenses. Salary, benefits, rental and
compensation expenses grew as we increased our headcount from
34
47 to 84 employees in our sales and marketing group, and also as we started accounting for stock-based compensation in 2006, the
amount of which was NT$13.5 million. We expect sales and marketing expenses to increase in dollar amount in future periods as we
continue to increase the size of our operations.
General and administrative expenses. Our general and administrative expenses increased to approximately NT$219.4 million, or
6.3% of net sales, for the year ended December 31, 2006 from approximately NT$129.1 million, or 4.8% of net sales, for the year
ended December 31, 2005. Several factors contributed to the 70% increase in general and administrative expenses. Salary, benefits,
rental and compensation expenses grew as we increased our headcount from 44 to 64 employees in our general and administrative
group, and also as we started accounting for stock-based compensation in 2006, the amount of which was NT$31.0 million. Our
general and administrative expenses also increased because of higher costs necessary to comply with the legal and regulatory
requirements applicable to publicly listed companies in the United States. We expect our general and administrative expenses to
increase in absolute dollars in future periods as we continue to expand our operations.
Write-Off of Other Receivable. For the year ended December 31, 2006, we wrote-off a NT$40.0 million (US$1.2 million) non-
trade receivable, the collection of which we believed was doubtful. We did not have a similar write-off for the year ended
December 31, 2005.
Interest expense. Our interest expense decreased to approximately NT$33,000 for the year ended December 31, 2006 from
approximately NT$46,000 for the year ended December 31, 2005. Our interest expense for 2006 decreased as a result of less capital
lease payments under which we rented some of our office equipment in our US subsidiary.
Gain from settlement on litigation. Our dispute with Phison was settled on September 22, 2006 after Phison paid us NT$3,000
thousand.
Foreign exchange gain (loss). For the year ended December 31, 2006, we incurred a foreign exchange loss of NT$5.2 million,
compared with a gain of NT$1.8 million for the year ended December 31, 2005. The foreign exchange loss is attributable to the
weakening of the exchange rate of the NT dollar as compared to the U.S. dollar during the period.
Interest income. Our interest income increased to approximately NT$65.2 million for the year ended December 31, 2006 from
approximately NT$26.9 million for the year ended December 31, 2005. Our interest income increased as a result of increases in our
cash and cash equivalent position as well as rising interest rates.
Income tax expense. Our income tax expense decreased to approximately NT$21.0 million for the year ended December 31,
2006 from an income tax expense of approximately NT$42.1 million for the year ended December 31, 2005. Our income tax expense
decreased primarily as a result of income tax credit earned in 2006.
Net income. As a result of the foregoing, our net income increased to approximately NT$947.5 million for the year ended
December 31, 2006 from approximately NT$673.3 million for the year ended December 31, 2005.
Liquidity and Capital Resources
As of December 31, 2007, we had approximately NT$1,608.2 million (US$49.6 million) in cash and cash equivalents,
approximately NT$1,751.1 million (US$54.0 million) in short-term investments and approximately NT$65.1 million (US$2.0
million) in restricted assets for reserving foundry capacity with our manufacturing partners. We maintain our cash balances in
deposits with banks in Taiwan and in money market instruments offshore. Our short-term investments consist primarily of bond funds
that we trade and are denominated in NT dollars and invested primarily in time deposits and Taiwan government and corporate bonds.
On April 30, 2007 we acquired FCI. The final purchase price for the transaction was approximately US$50 million in cash and
US$40 million in our ordinary shares and options to purchase our ordinary shares. Cash which we paid as part of the purchase price
reduced our cash and cash equivalent and short-term investments by US$50 million. We agreed to pay FCI shareholders up to an
additional $12 million in cash as an earn-out payment if FCI met certain revenue and product margin targets. We have determined
that FCI has substantially met its revenue and product margin targets and in March 2008, we paid US$12 million to the former
shareholders of FCI.
We believe our existing cash balances and short-term investments, together with cash we expect to be generated from operating
activities, will be sufficient to meet our anticipated cash needs for at least the next 12
35
months. Our future capital requirements will depend on many factors, including the level of our net sales, the timing and extent of
spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new
products, the costs to ensure access to adequate manufacturing capacity, the continuing market acceptance of our products and
availability of attractive acquisition opportunities. We could be required, or could elect, to seek additional funding through public or
private equity or debt financing, and additional funds may not be available on terms acceptable to us or at all.
The following table sets forth a summary of our cash flows for the periods indicated:
Consolidated Cash Flow Data:
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Depreciation and amortization
Capital expenditures
Year Ended December 31,
2005
(Restated)
NT$
2006
NT$
2007
NT$
2007
US$
(In thousands)
(618,947) 596,765 1,599,288 49,315
146,020 (425,012) (1,950,946) (60,158)
3,849
1,278,868
59,929
2,846
35,596
23,906
(6,970)
(42,708) (271,697)
92,284
(226,034)
124,816
Operating activities.
Our net cash provided by operating activities was approximately NT$1,599.3 million (US$49.3 million) for the year ended
December 31, 2007, an increase of approximately NT$1,002.5 million over net cash provided by operating activities of approximately
NT$596.8 million for the year ended December 31, 2006. The primary sources of operating cash flow for the year ended
December 31, 2007 were net cash provided by operating activities that increased in 2007 primarily as a result of higher income from
operations and non-cash charges including depreciation and amortization, share-based compensation, and write off of in-process
research and development.
Our net cash provided by operating activities was approximately NT$596.8 million for the year ended December 31, 2006, an
increase of approximately NT$1,215.7 million over net cash used in operating activities of approximately NT$618.9 million for the
year ended December 31, 2005. Our net cash provided by operating activities increased in 2006 primarily as a result of our higher
income from operations and less purchase of trading securities.
Investing activities.
Our net cash used in investment activities includes the acquisition of long-term investment and purchase of properties was
approximately NT$1,950.9 million (US$60.1 million) for the year ended December 31, 2007, compared to net cash used in investing
activities of approximately NT$425.0 million for the year ended December 31, 2006. Our net cash used in investing activities in 2007
was primarily a result of our acquisition of FCI and Centronix and prepayment for land and buildings.
Our net cash used in investment activities includes the acquisition of long-term investment and purchase of properties was
approximately NT$425.0 million for the year ended December 31, 2006, compared to net cash provided by investing activities of
approximately NT$146.0 million for the year ended December 31, 2005. Our net cash used in investing activities in 2006 was
primarily a result of our investments in Chipmast and Vastview, and prepayment for construction in progress.
36
Financing activities.
Our net cash provided by financing activities was approximately NT$124.8 million (US$3.8 million) for the year ended
December 31, 2007, compared to net cash provided by financing activities of approximately NT$59.9 million for the year ended
December 31, 2006. Proceeds of NT$104.5 million (US$3.2 million) were received from the issuance of 1.9 million shares of our
common stock upon exercise of employee stock options. Such proceeds were used for working capital and funding research and
development of new products.
Our net cash provided by financing activities was approximately NT$59.9 million for the year ended December 31, 2006,
compared to net cash provided by financing activities of approximately NT$1,278.9 million for the year ended December 31, 2005.
Proceeds of NT$38.1 million were received from the issuance of 1.2 million shares of our common stock upon exercise of employee
stock options and adjustment for additional proceeds of NT$21.8 million from our initial public offering in 2005. Such proceeds were
used for working capital and funding research and development of new products.
Contractual Obligations
The following table sets forth our commitments to settle contractual obligations in cash as of December 31, 2007:
Operating leases
Capital leases
Pension
Long term liabilities
Construction in-progress obligations
Contractual cash obligations
Amount of Commitment Maturing by Year
Less
Than
1 Year
NT$
Total
NT$
1-3
Years
NT$
(In thousands)
3-5 Years
NT$
More Than
5 Years
NT$
29,976 27,588
—
57,564
199
199
42,127
42,127
—
5,658
135,378
129,266 127,704
1,562
364,534 205,664 29,150
(a)
—
—
(a)
129,720
—
129,720
—
—
(a)
—
—
—
(a) Our pension obligation after one year has not been estimated.
We recognized additional long-term taxes payable of NT$30,692 thousand related to uncertain tax positions in the year ended
December 31, 2007. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual
years beyond 12 months due to uncertainties in the timing of tax audit outcomes.
Off-balance Sheet Arrangements
We currently do not have any outstanding derivative financial instruments, off-balance sheet guarantees or arrangements,
interest rate swap transactions, or foreign currency forward contracts. We do not engage in any trading activities involving non-
exchange traded contracts.
Inflation and Monetary Risk
The principal markets for our products have been in Taiwan, Korea, and the United States and we do not believe that inflation in
Taiwan, Korea, or the United States has had a material impact on our results of operations. The rate of inflation in Taiwan was
approximately 2.3%, 1.0%, and 1.8% for 2005, 2006, and 2007, respectively.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements, but brings up guidance on how to measure fair
value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for the Company
beginning January 1, 2008. The Company does not except to have a significant impact on financial position of the Company.
37
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (SFAS No. 159). Under this standard, the Company may choose to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in earnings. This selection is irrevocable. SFAS No. 159
provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were
previously required to use a different accounting method that the related hedging contracts when the complex provisions of SFAS
No. 133 hedge accounting are not met. The Company believes that there is no impact on the result of operations and financial position
of the Company after adoption of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes
principles and requirements on how acquirer recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in an acquire, including the recognition and measurement of goodwill acquired in
a business combination. The Company will evaluate how the new requirements could impact the accounting for any acquisitions
completed beginning in fiscal year 2009 and beyond, and the potential impact on the Company's consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Executive Officers and Directors
Members of our board of directors are elected by our shareholders. Our board of directors consists of seven directors.
Our executive officers are appointed by, and serve at the discretion of, our board of directors. The following table sets forth
information regarding our directors and executive officers as of the date of this annual report.
Name
James Chow
Wallace C. Kou
Henry Chen
Tsung-Ming Chung
C. S. Ho
Lien-Chun Liu
Yung-Chien Wang
Riyadh Lai
Ken Chen
Frank Chang
Arthur Yeh
James Yun
Age Position
58 Chairman of the Board
50 President, Chief Executive Officer and Director
43 Director
59 Director
59 Director
51 Director
45 Director
39 Chief Financial Officer
47 VP of Operations
42 VP of R&D, Mobile Storage
47 VP of Sales, Mobile Storage and Multimedia SoCs
44 Executive VP, Mobile Communications
Executive Officers and Directors
James Chow, Chairman of the Board of Directors
James Chow has served as the Chairman of our board of directors since April 2005. Mr. Chow became the Chairman of Concord
Financial Co., Ltd. in July 1993. Concord Financial Co., Ltd. is a venture capital firm and was one of our significant shareholders.
Since May 2003, Mr. Chow has also served as the Chairman of Waffer Technology Corporation, a manufacturer of magnesium alloy
products in Taiwan. Mr. Chow received an MBA from Columbia University.
Wallace C. Kou, President, Chief Executive Officer, Director
Mr. Kou, our President and Chief Executive Officer, joined our board of directors on April 22 2005. He is responsible for our
overall strategy and management. Mr. Kou founded SMI USA in 1996. Prior to founding SMI USA, Mr. Kou was the Vice President
and Chief Architect at the Multimedia Products Division of Western Digital Corporation, which developed graphics processors for
notebook PCs and was sold to Philips Semiconductor in 1995.
38
Before Western Digital, Mr. Kou worked for Wyse Technology. Mr. Kou received a BS in Electrical & Control Engineering from the
National Chiao Tung University in Taiwan and an MS in Electrical & Computer Engineering from the University of California at
Santa Barbara.
Henry Chen, Director
Mr. Chen joined our board of directors in June 2005. Mr. Chen is the Chairman of Mercuries and Associates, Ltd., a company
listed on the main board of the Taiwan Stock Exchange. He was previously the President of Worldsec Capital Management Inc. and
had worked for Goldman Sachs in New York, Hong Kong and Taipei. Mr. Chen has a BA in International Trade from the National
Chengchi University and an MBA from Georgetown University.
Tsung-Ming Chung, Director
Mr. Chung joined our board of directors in June 2005. Mr. Chung currently serves as the Chairman and Chief Executive Officer
of Dynapack International Technology Corp, a leading provider of battery packs for notebook computer and other handheld devices.
From 1985 to 2000, Mr. Chung was an audit partner at Arthur Andersen. He also serves as a managing director of Far East
International Bank and Taiwan Cellular Corp. Mr. Chung has a BA in Business Administration from the National Taiwan University
and an MBA from the National Cheng-chi University.
C. S. Ho, Director
Mr. Ho joined the board of directors in June 2005. He currently serves as the Chairman and Chief Executive Officer of the SiPix
Group. He also serves as Chairman of the Computer Skills Foundation in Taiwan. From 1989 to 1995, Mr. Ho served as Chairman of
the Taipei Computer Association and from 1991 to 1995 as Chairman of Southeast Asia Information Technology Organization.
Mr. Ho is the founder and a general partner of PTI Ventures. Prior to founding PTI Ventures, from 1974 to 1997 he founded and
served as Vice Chairman of the MiTAC Group. Mr. Ho received his BS in Electrical Engineering from the National Taiwan
University.
Lien-Chun Liu, Director
Ms. Liu joined our board of directors in June 2005. Ms. Liu is a research fellow at the Taiwan Research Institute. She also
currently serves on the board of supervisors of Concord VIII Venture Capital Co., Ltd and on the board of directors of New Tamsui
Golf Course. From 2000 to 2004, she also served on the board of supervisors of China Television Corp. Ms. Liu has a BA from
Wellesley College and a JD from Boston College Law School.
Yung-Chien Wang, Director
Mr. Wang joined our board of directors in June 2005. Mr. Wang has more than 18 years of working experience in the human
resource and legal services industry. Mr. Wang has been a consultant of Professional Trust Co., Ltd., a human resource consulting
firm in Taiwan since August 1998 and is currently its Vice President. Mr. Wang has a law degree from Fu Jen Catholic University in
Taiwan.
Riyadh Lai, Chief Financial Officer
Mr. Lai joined us in April 2007 from ING Corporate Finance, Asia, where he was the Head of the Technology Group.
Previously, he was with Morgan Stanley, ABN AMRO, and PepsiCo in Hong Kong and New York. Mr. Lai has over 11 years of
M&A transaction experience, including eight years managing transactions involving leading global and Asian technology companies.
He holds a BA degree in Economics from Georgetown University and an MBA from New York University.
Ken Chen, VP of Operations
Mr. Chen has served as our Vice President in charge of operations since November 2003. Mr. Chen has over 20 years of
manufacturing and operations experience in the semiconductor industry, managing supply chain and virtual manufacturing systems
including wafer fabrication, mask tooling, assembly and testing. Mr. Chen previously served in management positions at Faraday
Technology and UMC. He joined us in 2003. Mr. Chen holds a BS degree in Industrial Engineering from Chung Yuan Christian
University and an MS degree in Industrial Engineering and Engineering Management from the National Tsing Hua University,
Taiwan.
39
Frank Chang, VP of R&D, Mobile Storage
Mr. Chang has served as our director of research and development since August 2002. Mr. Chang is head of the research and
development for our mobile storage products. Mr. Chang has more than 14 years of experience in the chip design industry. He was
previously a project manager of firmware development at Holtek, Semiconductors. Mr. Chang has a BS in Electrical Engineering
from the National Changhua University of Education.
Arthur Yeh, VP of Sales, Mobile Storage and Multimedia SoCs
Mr. Yeh has served as our Vice President in charge of our mobile storage and multimedia SoC sales since November 2004.
Mr. Yeh has over 15 years of sales experience managing marketing strategies, including product promotions and sales activities, for
semiconductor products. Mr. Yeh previously served in management positions at VIA Technologies for 10 years. He joined us in
2004. Mr. Yeh holds an MS degree in Management Business Administration from the National Chung Hsing University, Taiwan.
James Yun, Executive VP, Mobile Communications
Mr. Yun became our Executive VP of mobile communications following the acquisition of FCI in April 26, 2007. Mr. Yun
founded FCI in September 1998 and had served as FCI's CEO and President prior to our acquisition. He has over 19 years of
experience developing RF monolithic microwave integrated circuits for the wireless industry. For 11 years, he was a Senior Engineer
at Korea's Electronics and Telecommunications Research Institute (ETRI). Mr. Yun has an M.S in Electronic Engineering from
Yonsei University, Korea and a Ph.D. in Electronic Engineering from Pohang University of Science and Technology, Korea.
There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person
referred to above was selected as a director or member of senior management.
Board Practices
Board Committees
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate
governance committee.
Audit Committee. The audit committee is responsible for reviewing the financial information that will be provided to
shareholders and others, reviewing the systems of internal controls that management and the board of directors have established,
appointing, retaining and overseeing the performance of the independent registered public accounting firm, overseeing our accounting
and financial reporting processes and the audits of our financial statements, and pre-approving audit and permissible non-audit
services provided by the independent registered public accounting firm. Messrs. Tsung-Ming Chung, Henry Chen, and Lien-Chun Liu
are members of our audit committee. Our board of directors has determined that Mr. Tsung-Ming Chung, the Chairman of the audit
committee, is the committee’s “Financial Expert” as required by Nasdaq and SEC rules.
Compensation Committee. The compensation committee’s basic responsibility is to review the performance and development of
management in achieving corporate goals and objectives and to assure that our senior executives are compensated effectively in a
manner consistent with our strategy, competitive practice and the requirements of the appropriate regulatory bodies. Toward that end,
this committee oversees, reviews and administers all of our compensation, equity and employee benefit plans and programs. Messrs.
Henry Chen and Lien-Chun Liu are members of our compensation committee, with Mr. Chen serving as the Chairman of such
committee.
Nominating and Corporate Governance Committee. The nominating and corporate governance committee is responsible for
overseeing, reviewing and making periodic recommendations concerning our corporate governance policies, and for recommending
to the full board of directors candidates for election to the board of directors. Messrs. C.S. Ho, Henry Chen, Lien-Chun Liu and Yung-
Chien Wang are members of our nominating and corporate governance committee, with Ms. Liu serving as the Chairman of such
committee.
Our board of directors has adopted a code of ethics, which is applicable to all of our employees.
40
Duties of Directors
Under Cayman Islands law, our directors have a duty to act honestly, in good faith and with a view to the best interests of our
company. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to our company, our directors must ensure compliance with our
memorandum and articles of association.
•
•
•
•
•
•
•
The functions and powers of our board of directors include, among others:
•
convening shareholders’ meetings and reporting its work to shareholders at such meetings;
implementing shareholders’ resolutions;
determining our business plans and investment proposals;
formulating our profit distribution plans and loss recovery plans;
determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the
issuance of debentures;
formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
proposing amendments to our amended and restated memorandum and articles of association; and
exercising any other powers conferred by the shareholders’ meetings or under our amended and restated memorandum and
articles of association.
Terms of Directors and Officers
Under Cayman Islands law and our articles of association, our directors hold office until a successor has been duly elected and
qualified. Our articles of association provide that our directors serve for a term of three years, with one-third of the directors (or, if
their number is not a multiple of 3, the number nearest to but not greater than one-third) subject to reelection at each annual general
meeting of shareholders (chairman and managing director not subject to retirement by rotation nor to be taken into account in
determining the number of directors to retire), unless the director was appointed by the board of directors, in which case such director
holds office until the next annual meeting of shareholders at which time such director is eligible for re-election. One of our seven
directors is currently subject to reelection at our next annual general meeting of shareholders. All of our executive officers are
appointed by and serve at the discretion of our board of directors.
Limitation on Liability and Other Indemnification Matters
Cayman Islands law and our articles of association allow us to indemnify our directors, secretary and other officers acting in
relation to any of our affairs against actions, costs, charges, losses, damages and expenses incurred by reason of any act done or
omitted in the execution of their duties as our directors, secretary and other officers. Under our memorandum and articles of
association, indemnification is not available to any matter in respect of any fraud, dishonesty, willful misconduct or bad faith which
may attach to any of them.
Compensation of Directors and Executive Officers
For the year ended December 31, 2007, the aggregate compensation to our directors and senior executive officers was
approximately NT$63.8 million (US$1.97 million). In 2007, we granted options and restricted stock units to our executive officers as
a group to acquire an aggregate of 1,144,780 ordinary shares. The options granted to our executive officers and non-executive
directors are subject to the same vesting conditions as our employees.
41
Service Contracts
We currently do not have service contracts with our directors.
Share-based Compensation Plans and Option Grants
In April 2005, our board of directors and shareholders adopted our 2005 Incentive Plan. Our stockholders approved our
Amended and Restated 2005 Incentive Plan (referred to in this report as the “Plan”) at our Annual General Meeting in August 2006,
including an amendment to increase the authorized number of shares available for issuance under the plan from 10,000,000 shares to
25,000,000 shares. The Plan provides for the grant of stock options, stock bonuses, restricted stock awards, restricted stock units and
stock appreciation rights, which may be granted to our employees (including officers), directors and consultants.
Share Reserve. The aggregate number of ordinary shares that may be issued pursuant to awards granted under the Plan will not
exceed 25,000,000 inclusive of ordinary shares issuable upon exercise of awards previously granted under the Silicon Motion, Inc.
Guidelines for Issuance and Subscription of Employee Stock Option, which options we have, subject to the consent of the respective
option-holders, agreed to assume in the share exchange.
The following types of shares issued under the Plan may again become available for the grant of new awards under the Plan:
restricted stock issued under the Plan that is forfeited or repurchased by us prior to it becoming fully vested; shares withheld for taxes;
shares tendered to us to pay the exercise price of an option; and shares subject to awards issued under the Plan that have expired or
otherwise terminated without having been exercised in full.
Administration. The board of directors will administer the Plan and may delegate this authority to administer the plan to a
committee. Subject to the terms of the Plan, the plan administrator, which is our board of directors or its authorized committee,
determines recipients, grant dates, the numbers and types of stock awards to be granted and the terms and conditions of the stock
awards, including the period of their exercisability and vesting. Subject to certain limitations, the plan administrator will also
determine the exercise price of options granted, the purchase price for restricted stock and restricted stock units, and, if applicable, the
strike price for stock appreciation rights.
Capitalization adjustments. In the event of a dividend or other distribution (whether in the form of cash, ordinary shares, other
securities, or other property), recapitalization, stock split, reorganization, merger, consolidation, exchange of our ordinary shares or
our other securities, or other change in our corporate structure, the board of directors may adjust the number and class of shares that
may be delivered under the Plan and the number, class and price of the shares covered by each outstanding stock award.
Changes in control. In the event of a change in control of the company, all outstanding options and other awards under the 2005
Incentive Plan may be assumed, continued or substituted for by any surviving or acquiring entity. If the surviving or acquiring entity
elects not to assume, continue or substitute for such awards, the vesting of such awards held by award holders whose service with us
or any of our affiliates has not terminated will be accelerated and such awards will be fully vested and exercisable immediately prior
to the consummation of such transaction, and the stock awards shall automatically terminate upon consummation of such transaction
if not exercised prior to such event.
Amendment and termination. The board of directors may amend (subject to shareholder approval as required by applicable law),
suspend or terminate the Plan at any time. Unless sooner terminated by the board of directors, the Plan will terminate pursuant to its
terms on April 22, 2015.
Share Ownership
Under U.S. securities law, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting
power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to
dispose of or to direct the disposition of such security. A person is also deemed to be the beneficial owner of any securities of which
that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of securities as to which such person has no economic interest.
42
There were 132,870,191 of our ordinary shares issued and outstanding as of March 31, 2008. The following table sets forth
information with respect to the beneficial ownership of our ordinary shares as of March 31 2008, unless otherwise indicated in the
footnotes, by:
•
each of our directors and officers; and
each person known to us to own beneficially more than 5.0% of our ordinary shares.
•
Executive Officers and Directors:
James Chow(1)
Wallace C. Kou(2)
Henry Chen(3)
Tsung-Ming Chung(4)
Lien-Chun Liu(5)
C. S. Ho(6)
Yung-Chien Wang(7)
Riyadh Lai(8)
Ken Chen(9)
Frank Chang(10)
Arthur Yeh(11)
James Yun(12)
Principal Shareholders:
Brandywine Global Investment Management, LLC (13)
ING Groep N.V. (14)
Trivium Capital Management LLC. (15)
Shares Beneficially
Owned
Number
%
2,366,266 1.7
2,444,194 1.7
*
20,000
*
20,000
*
120,000
*
193,050
*
734,394
*
296,000
*
287,057
*
196,333
*
8,000
1,557,422 1.1
12,772,720 9.73
7,938,812 6.05
8,160,000 6.22
Less than one percent
*
(1) Represents 2,301,266 shares owned by Mr. Chow and 65,000 shares that Mr. Chow has the right to acquire within the next 60
days upon the exercise of options. Mr. Chow is the chairman of Concord Consulting Inc. and Concord Financial Co. Ltd. which
own 586,445 and 1,502,535 shares, respectively. Mr. Chow disclaims any beneficial ownership of these shares.
(2) Represents 1,909,100 shares owned by Mr. Kou, 35,094 shares owned by his spouse and 500,000 shares that Mr. Kou has the
right to acquire upon the exercise of options or RSUs.
(3) Represents 20,000 shares that Mr. Chen has the right to acquire within the next 60 days upon the exercise of options.
(4) Represents 20,000 shares that Mr. Chung has the right to acquire within the next 60 days upon the exercise of options.
(5) Represents 100,000 shares owned by Ms. Liu and 20,000 shares that Ms. Liu has the right to acquire within the next 60 days
upon the exercise of options.
(6) Represents 103,050 shares owned by Mr. Ho and 70,000 shares owned by his spouse and 20,000 shares that Mr. Ho has the right
to acquire within the next 60 days upon the exercise of options.
(7) Represents 714,394 shares owned by Mr. Wang and 20,000 shares that Mr. Wang has the right to acquire within the next 60
days upon the exercise of options.
(8) Represents 28,000 shares owned by Mr. Lai, 168,000 shares owned by his spouse and 100,000 shares that Mr. Lai has the right
to acquire within the next 60 days upon the exercise of options or RSUs.
(9) Represents 251,332 shares owned by Mr. Chen and 5,725 shares owned by his spouse and 30,000 shares that Mr. Chen has the
right to acquire within the next 60 days upon the exercise of options or RSUs.
43
(10) Represents 100,000 shares owned by Mr. Chang and 96,333 shares that Mr. Chang has the right to acquire within the next 60
days upon the exercise of options or RSUs.
(11) Mr. Yeh has the right to acquire 8,000 shares within the next 60 days upon the exercise of options or RSUs.
(12) Represents 1,540,727 shares owned by Mr. Yun and 16,695 shares that Mr. Yun has the right to acquire within the next 60 days
upon the exercise of options or RSUs.
(13) Represents 3,193,180 ADSs, each representing four ordinary shares, based on the Schedule 13G/A filing with the U.S.
Securities and Exchange Commission on February 14, 2008.
(14) Represents 1,984,703 ADSs, each representing four ordinary shares, based on the Schedule 13G filing with the U.S. Securities
and Exchange Commission on March 19, 2008.
(15) Represents 2,040,000 ADSs, each representing four ordinary shares, based on the Schedule 13G filing with the U.S. Securities
and Exchange Commission on January 24, 2008.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
As of March 31, 2008, there were 132,870,191 of our ordinary shares issued and outstanding. The Bank of New York, the
depositary under our ADS deposit agreement, has advised us that as of March, 2008, we had 32,350,451 ADSs, representing
129,401,804 ordinary shares.
The table in Item 6 above includes information known to us regarding those shareholders that beneficially own 5% or more of
our ordinary shares. To our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign
government or by any other natural or legal persons, severally or jointly. We are not aware of any arrangement which may at a later
date result in a change of control of our company.
No holder of our ordinary shares has preferential voting rights.
Related Party Transactions
There were no related party transactions since the beginning of fiscal year 2007 through the date of this annual report.
ITEM 8. FINANCIAL INFORMATION
Consolidated Financial Statements
See “Item 18. Financial Statements” and pages F-1 through F-33 of this annual report.
Legal Proceedings
We are subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business.
Although the outcome of such proceedings and claims cannot be predicted with certainty, management does not believe that the
outcome of any of these matters will have a material adverse effect on our business, results of operations, financial position or cash
flows. Any litigation, however, involves potential risk and potentially significant litigation costs, and therefore there can be no
assurance that any litigation which is now pending or which may arise in the future would not have such a material adverse effect on
our business, financial position, results of operations or cash flows.
On January 2, 2003, O2Micro International Limited, or O2Micro, a Cayman Islands company, filed an action for a preliminary
injunction against SMI Taiwan with the Taiwan Hsinchu District Court. On February 6, 2003, SMI Taiwan filed an action for a
preliminary injunction against O2Micro. A court-appointed appraiser completed a report stating that SMI Taiwan’s products raised in
the case do not infringe O2Micro’s patent and O2Micro’s application for a preliminary injunction was thus dismissed. O2Micro
appealed this case to the Taiwan High Court on November 28, 2005. On January 14, 2004, O2Micro filed for a preliminary injunction
against SMI Taiwan and Microstar, a Taiwan customer of SMI Taiwan with the Taiwan Panchiao District Court. On May 20,
44
2004, the Taiwan Panchiao District Court issued a preliminary injunctive order against SMI Taiwan and Microstar. The Taiwan High
Court rejected the appeal filed by SMI Taiwan on March 10, 2005, and SMI Taiwan appealed to the Taiwan Supreme Court. On
November 10, 2005, the Taiwan Supreme Court vacated the Taiwan High Court Ruling and the case was remanded for further
proceedings. On February 3, 2004, O2Micro filed an application for a provisional seizure of NT$15 million against SMI Taiwan with
the Taiwan Hsinchu District Court. The Taiwan Hsinchu District Court issued a provisional seizure order and attached some of SMI
Taiwan’s assets. On September 24, 2004, O2Micro filed an action against SMI Taiwan with the Taiwan Hsinchu District Court. On
February 9, 2007, SMI Taiwan and O2Micro agreed to withdraw the case and provide no payment, as well as all the aforementioned
claims and application. As a result of this settlement, no payments were made by Silicon Motion to O2Micro.
On May 1, 2005, SMI Taiwan incurred a loss on inventory in the possession of subcontractor, Advanced Semiconductor
Engineering Inc., or ASE, due to fire. SMI Taiwan is currently in the claims process with ASE for an amount exceeding the book
value of loss inventory. After consultation with the Company’s outside legal counsel, the Company believes it is highly probable for
the Company to receive reimbursement for the lost inventory at full book value, and the Company subsequently recorded NT$41,226
thousand (US$1.3 million) of inventory loss, offset by NT$41,226 thousand (US$1.3 million) of fire loss reimbursement, resulting in
zero impact to the earnings for the period. In connection with the inventory loss, the Company also recorded NT$8,122 thousand
(US$249,000) under non-operating expenses for amounts paid to certain customers for delays in shipment caused by the fire.
On December 12, 2005, SMI Taiwan filed an action against ASE with the Taiwan Taoyuan District Court. SMI Taiwan alleges
that ASE destroyed the wafer which SMI Taiwan had sub-contract to ASE with the OEM Agreement between SMI and ASE, and that
ASE should pay SMI Taiwan a sum of NT$77,218 thousand (US$2.4 million) for damages. The Taiwan Taoyuan District Court is
currently conducting preparatory proceeding.
On October 23, 2007, SanDisk Corp. (“SanDisk”) filed a complaint in the United States International Trade Commission
(“ITC”) against multiple respondents, including Silicon Motion Technology Corp., SMI Taiwan and SMI USA (in aggregate “Silicon
Motion”). SanDisk claims that certain Silicon Motion flash memory controllers and products containing these Silicon Motion flash
memory controllers infringe specific SanDisk patents. The complaint requests that the ITC institute an investigation into the matter
and seeks a permanent exclusion order to exclude from entry into the United States all flash memory controllers and products
containing controllers that infringe any of the asserted patents. The complaint also seeks a permanent cease and desist order, directing
respondents with respect to their domestic inventories to cease and desist from marketing, advertising, demonstrating, sampling,
warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any flash memory controllers and
products containing flash controllers that infringe any of the asserted patents.
On October 24, 2007, SanDisk Corp. filed two complaints, for alleged patent infringement against multiple defendants,
including Silicon Motion in the United States District Court for the Western District of Wisconsin. The complaints allege that Silicon
Motion's flash memory controllers infringe certain SanDisk patents and seek unspecified damages, injunctive relief, a trebling of
damages for alleged willful conduct and attorneys' fees. Both cases have been stayed until SanDisk’s ITC proceeding becomes final.
On December 6, 2007, the ITC instituted an investigation, identifying forty-seven companies, including Silicon Motion, as
respondents. An ITC hearing has been set for October 27, 2008. As of December 31, 2007, we are unable to ascertain the ultimate
amount of any monetary liability or financial impact that we may incur with these matters.
The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the
diversion of other resources to prosecute and defend. The results of legal proceedings are inherently uncertain, and material adverse
outcomes are possible. The resolution of any future intellectual property litigation may require us to pay damages for past
infringement or one-time license fees or running royalties, which could adversely impact gross profit and gross margins in future
periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees
involved in such litigation may perform for us. From time to time the Company may enter into confidential discussions regarding the
potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will
occur or will result in a settlement. The settlement of any pending litigation or other proceeding could require us to incur substantial
settlement payments and costs. In addition, the settlement of any intellectual property proceeding may require the us to obtain a
license under the other party’s intellectual property rights that could require one-time license fees and/or royalty payments in the
future and/or to grant a license to certain of our intellectual property rights to the other party under a cross-license agreement. If any
of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected.
45
See further discussion of our material legal proceedings in Note 18 to our consolidated financial statements in “Item 18.
Financial Statements.”
ITEM 9. THE OFFER AND LISTING
Market and Share Price Information
Our ADSs, each representing four of our ordinary shares, have been listed on Nasdaq since June 30, 2005. Our ADSs trade
under the symbol “SIMO.” The Nasdaq Global Select Market is the principal trading market for our ADSs, which are not listed on
any other exchanges in or outside the United States.
The high and low sales prices of our ADSs on Nasdaq since listing are as follows:
Annual:
2005 (beginning June 30, 2005)
2006
2007
Quarterly:
First Quarter, 2006
Second Quarter, 2006
Third Quarter, 2006
Fourth Quarter, 2006
First Quarter, 2007
Second Quarter, 2007
Third Quarter, 2007
Fourth Quarter, 2007
First Quarter, 2008
Second Quarter, 2008 (through May 9)
Monthly
January 2008
February 2008
March 2008
April 2008
May 2008 (through May 9)
Price per ADS (US$)
Low
High
16.32
18.22
29.00
17.45
15.86
17.10
18.22
27.28
26.85
29.00
26.10
17.60
17.66
17.62
15.25
17.60
8.75
11.03
15.60
11.03
11.50
12.11
14.41
15.60
19.92
16.60
16.52
16.95
13.66
14.01
12.40
16.95
ITEM 10. ADDITIONAL INFORMATION
Memorandum and Articles of Association
The information called for by Item 10B (“Memorandum and Articles of Association”) is incorporated by reference to the
information under the heading “Description of Share Capital” in our Registration Statement on Form F-1, as amended (Registration
Number 333-125673), as filed with the SEC on June 5, 2005.
Material Contracts
We have not entered into any material contracts within the past two fiscal years other than in the ordinary course of business,
other than those described in Item 4: “Information on the Company” or elsewhere in this annual report.
46
Taxation
United States Federal Income Taxation
The following discussion summarizes certain U.S. federal income tax consequences to a U.S. Holder, as defined below, who
purchases our ADSs and ordinary shares. This discussion assumes that investors will hold their ADSs or ordinary shares as capital
assets (generally, property held for investment). This discussion does not discuss all aspects of U.S. federal income taxation which
may be important to particular investors in light of their individual circumstances, including investors subject to special taxation, such
as:
•
•
•
•
•
•
•
banks;
dealers in securities or currencies; financial institutions; insurance companies; tax-exempt organizations;
persons holding ADSs or ordinary shares as part of hedging, conversion, constructive sale, straddle or other integrated
transactions;
traders in securities that have elected the mark-to-market method of accounting;
persons who own 10% or more of our ADSs or shares;
U.S. persons whose “functional currency” is not the U.S. dollar; or
Non-U.S. Holders (as defined below).
This discussion is based in part on representations by the depositary and assumes that each obligation under the deposit
agreement and any related agreement will be performed in accordance with its terms. Furthermore, the discussion below is based
upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, and U.S. Treasury regulations, rulings and
judicial decisions thereunder as of the date hereof. Such authorities are subject to change, possibly on a retroactive basis, which may
result in U.S. federal income tax consequences different from those discussed below. This discussion does not attempt to address the
consequences to holders of shares or ADSs who acquired their shares or ADSs through the exercise of an employee stock option or
otherwise as compensation or through a tax-qualified retirement plan.
A U.S. Holder considering an investment in our ADSs or ordinary shares is urged to consult its tax advisor concerning the U.S.
federal, state, local and non-U.S. income and other tax consequences.
A U.S. Holder is a beneficial owner of ADSs or ordinary shares that is a U.S. person. A U.S. person is:
•
a citizen or resident individual of the United States;
•
•
•
a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States, any
state thereof, or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation, regardless of its source; or
a trust if it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the
authority to control all substantial decisions of the trust or has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
A beneficial owner of ADSs or ordinary shares that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”
If a partnership or limited liability company treated as a partnership for U.S. federal income tax purposes holds ADSs or
ordinary shares, the tax treatment of a partner or member will generally depend on the status of the partner or member and the
activities of the partnership or such limited liability company. A partner of a partnership or a member of such a limited liability
company holding ADSs or ordinary shares is urged to consult its tax advisors regarding an investment in our ADSs or ordinary
shares.
47
ADSs. In general, for U.S. federal income tax purposes, a U.S. Holder of ADSs will be treated as the owner of the underlying
ordinary shares that are represented by such ADSs. Deposits and withdrawals of ordinary shares in exchange for ADSs will not be
subject to U.S. federal income taxation.
Distributions on ADSs or ordinary shares. Unless the passive foreign investment company rules, as discussed below, apply, the
gross amount of the distributions in respect of the ADSs or ordinary shares will be subject to tax as dividend income to the extent of
our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. Subject to certain
limitations, dividends paid to non-corporate U.S. Holders, including individuals, may be eligible for a reduced rate of taxation if we
are deemed to be a “qualified foreign corporation” for U.S. federal income tax purposes and provided that such holder satisfies certain
holding period requirements with respect to the ownership of our ADSs, or ordinary shares. The reduced rate of tax applicable to
dividends from a “qualified foreign corporation” does not apply to taxable years beginning after December 31, 2010. Subject to the
exceptions discussed below, a qualified foreign corporation includes:
•
•
a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that
includes an exchange of information program; and
a foreign corporation if its stock with respect to which a dividend is paid or its ADSs backed by such stock are readily
tradable on an established securities market within the United States.
The Cayman Islands does not currently have comprehensive income tax treaty with the United States. A foreign corporation
(even if it is described above) does not constitute a qualified foreign corporation if, for the taxable year in which the dividend is paid
or the preceding taxable year, the foreign corporation is or was a passive foreign investment company. Although we believe that we
will be a qualified foreign corporation because the ADSs will be traded on an established U.S. securities market, no assurance can be
given in this regard. In addition, our status as a qualified foreign corporation may change. A U.S. Holder that exchanges its ADSs for
ordinary shares may not be eligible for the reduced rate of taxation on dividends if the ordinary shares are not deemed to be readily
tradable on an established securities market within the United States.
Dividends will be includable in a U.S. Holder’s gross income on the date actually or constructively received by the depositary,
in the case of ADSs or, in the case of ordinary shares, by such U.S. Holder. These dividends will not be eligible for the dividends-
received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
To the extent we pay dividends on the ADSs or ordinary shares in a currency other than the U.S. dollar, the U.S. dollar value of
such dividends should be calculated by reference to the exchange rate prevailing on the date of actual or constructive receipt of the
dividend, regardless of whether the foreign currency is converted into U.S. dollars at that time. If the foreign currency is converted
into U.S. dollars on the date of actual or constructive receipt of such dividends, the tax basis of the U.S. Holder in such foreign
currency will be equal to its U.S. dollar value on that date and, as a result, the U.S. Holder generally should not be required to
recognize any foreign currency exchange gain or loss. Dividends paid in respect of the ADSs or ordinary shares generally will be
treated as income from sources outside the United States.
To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits, the distribution will
first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or ordinary shares, and the balance
in excess of adjusted basis will be taxed as capital gain.
Sale, exchange or other disposition of ADSs or ordinary shares. Unless the passive foreign investment company rules, as
discussed below, apply, upon the sale, exchange or other disposition of ADSs or ordinary shares a U.S. Holder generally will
recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and the
adjusted tax basis of the U.S. Holder in the ADSs or ordinary shares. The capital gain or loss generally will be long-term capital gain
or loss if, at the time of sale, exchange or other disposition, the U.S. Holder has held the ADS or ordinary share for more than one
year. Net long-term capital gains of non-corporate U.S. Holders, including individuals, are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations. Any gain or loss that a U.S. Holder recognizes generally will be treated as gain
or loss from sources within the United States for U.S. foreign tax credit limitation purposes.
Passive foreign investment company rules. In general, we will be classified as a passive foreign investment company for any
taxable year in which either (a) at least 75% of our gross income is passive income or (b) at least 50% of the value (determined on the
basis of a quarterly average) of our assets is attributable to assets that produce
48
or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties,
rents (other than rents and royalties derived in the active conduct of a trade or business and not derived from a related person),
annuities and gains from assets that produce passive income. If we own directly or indirectly at least 25% by value of the equity
shares of another corporation, we will be treated for purposes of the passive foreign investment company tests as owning a
proportionate share of the assets of the other corporation, and as receiving directly a proportionate share of the other corporation’s
income.
We believe, based on our present and projected composition of our income and valuation of our assets, that we are not currently
and, should not in the future, be classified as a passive foreign investment company for U.S. federal income tax purposes, although no
assurance can be given in this regard. Whether we are a passive foreign investment company for any particular taxable year is
determined on an annual basis and will depend on the composition of our income and assets, including goodwill. The calculation of
goodwill will be based, in part, on the then market value of our capital stock, which is subject to fluctuation. In addition, the
composition of our income and assets will be affected by how we spend the cash we raise in this offering. Accordingly, there can be
no assurance that we will not be classified as a passive foreign investment company in the current or any future taxable year.
If we are a passive foreign investment company for any taxable year during which a U.S. Holder has an equity interest in our
company, unless the U.S. Holder makes a mark-to-market election as discussed below, such U.S. Holder will be subject to special tax
rules in any future taxable year regardless of whether we are classified as a passive foreign investment company in such future years
with respect to (a) “excess distributions” and (b) gain from the disposition of stock. Excess distributions are defined generally as the
excess of the amount received with respect to the equity interests in the taxable year over 125% of the average annual distributions
received in the shorter of either the three previous years or a U.S. Holder’s holding period before the taxable year and must be
allocated ratably to each day of the U.S. Holder’s holding period. The amount allocated to the current taxable year or any year before
we became a passive foreign investment company will be included as ordinary income in a U.S. Holder’s gross income for that year.
The amount allocated to other prior taxable years will be taxed as ordinary income at the highest rate in effect for a U.S. Holder in
that prior year and the tax is subject to an interest charge at the rate applicable to deficiencies in income taxes. The entire amount of
any gain realized upon the sale or other disposition of the equity interests will be treated as an excess distribution made in the year of
sale or other disposition and as a consequence will be treated as ordinary income and, to the extent allocated to years prior to the year
of sale or disposition with respect to which we were a passive foreign investment company, will be subject to the interest charge
described above.
In certain circumstances, instead of being subject to the excess distribution rules discussed above, a U.S. Holder may make an
election to include gain on the ADSs or ordinary shares of a passive foreign investment company as ordinary income under a mark-to-
market method, provided that the ADSs or ordinary shares are regularly traded on a qualified exchange. Under current law, the mark-
to-market election is only available for ADSs or ordinary shares that are regularly traded within the meaning of U.S. Treasury
regulations on certain designated U.S. exchanges and foreign exchanges that meet trading, listing, financial disclosure and other
requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations. The Nasdaq National Market is a
qualified exchange. The ordinary shares may not be eligible for mark-to-market treatment under the foregoing rule even if the ADSs
otherwise satisfy the applicable requirement.
If a U.S. Holder makes a mark-to-market election, the U.S. Holder will include each year as ordinary income, rather than capital
gain, the excess, if any, of the fair market value of the U.S. Holder’s ADSs or ordinary shares at the end of the taxable year over such
U.S. Holder’s adjusted basis in the ADSs (or ordinary shares, if applicable) and will be permitted an ordinary loss in respect of the
excess, if any, of the adjusted basis of these ADSs or ordinary shares over their fair market value at the end of the taxable year, but
only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s basis in
the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. Any gain or loss on the sale of the ADSs or
ordinary shares will be ordinary income or loss, except that this loss will be ordinary loss only to the extent of the previously included
net mark-to-market gain.
If a U.S. Holder owns ADSs or ordinary shares during any year that we are a passive foreign investment company, the U.S.
Holder must file Internal Revenue Service Form 8621.
49
A U.S. Holder is urged to consult its tax advisor concerning the U.S. federal income tax consequences of an investment in our
ADSs or ordinary shares if we are or become a passive foreign investment company, including the possibility of making a market-to-
market election.
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company levied
by the Government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or after
execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands are not party to any double taxation treaties.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
We have, pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, obtained an undertaking
from the Governor-in-Council that:
•
•
no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation
applies to us or our operations; and
the aforesaid tax or any tax in the nature of estate duty or inheritance tax are not payable on our ordinary shares, debentures
or other obligations.
The undertaking that we have obtained is for a period of 20 years from March 1, 2005.
Documents on Display
We have previously filed with the SEC our registration statement on Form F-1 and prospectus under Securities Act with respect
to our ADSs.
We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, or
the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are
required to file annually a Form 20-F no later than six months after the close of each fiscal year, which is December 31. As a foreign
private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and
proxy statements, and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit
recovery provisions of Section 16 of the Exchange Act.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates
at the public reference facilities maintained by the Securities and Exchange Commission at the SEC’s public reference room in
Washington D.C. at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The SEC also maintains a Website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. Our exposure to interest risk for changes in interest rates is limited to the interest income generated by our cash
deposited with banks and short-term investments maintained in bond funds. We do not believe that a 1% change in interest rates
would have a significant impact on our operations.
Foreign currency risk. Substantial portions of our net sales and expenses are denominated in currencies other than the NT dollar.
As of Dec 31, 2007, more than 74% of our accounts payable and payables were denominated in currencies other than the NT dollar,
primarily in U.S. dollars. More than 45% of our accounts receivable were denominated in currencies other than the NT dollar, mainly
in U.S. dollars. In 2007, most of our sales were quoted in U.S. dollars and approximately 34% of our sales quotes were invoiced in
NT dollars using the opening average exchange rate on the day of the sales invoice. In 2007, approximately 76% of our cost of sales
and operating expenses were denominated in U.S. dollars. Hypothetically, if the U.S. dollar value had increased or decreased by 10%
against the NT dollar in 2007, our operating income would have increased or decreased, as the case may be, by approximately 9%,
assuming all other factors remain constant. We anticipate that we will continue
50
to quote substantially most of our sales in U.S. dollars. We do not believe that we have a material currency risk with regard to the
Japanese Yen, Euros, Renminbi, or South Korean Won. We believe any potential adverse foreign exchange impacts on our operating
assets may be offset by a potential favorable foreign exchange impact on our operating liabilities. We do not utilize foreign exchange
derivatives contracts to protect against the volatility changes in foreign exchange rates. See “Risk Factors—Fluctuations in exchange
rates could result in foreign exchange losses.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
51
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND THE USE OF PROCEEDS
The following discussion relates to the initial public offering our ADSs by us and certain selling shareholders, pursuant to a
registration statement on Form F-1 (File No. 333-125673), which was completed on July 5, 2005. The registration statement was
declared effective by the SEC on June 29, 2005.
We received net proceeds (after deducting underwriting discounts and commissions and other expenses related to the offering)
of approximately US$41.1 million from the offering 4,300,000 ADSs, representing 17,200,000 ordinary shares. The selling
shareholders received net proceeds (after deducting underwriting discounts and commissions and other expenses related to the
offering) of approximately US$23.4 million from the offering 2,400,000 ADSs, representing 9,600,000 ordinary shares. We did not
receive any proceeds from the sale of our ADSs by the selling shareholders
The expenses incurred by us in connection with the issuance and distribution of the registered securities totaled US$5.8 million,
including US$4.9 million for underwriting discounts and commissions and US$0.9 million for other expenses. None of the
transaction expenses included payments to our directors, executive officers, persons owning 10% or more of our equity securities or
our affiliates. Deutsche Bank Securities, WR Hambrecht + Co, and Needham & Company LLC were the underwriters for the
offering.
From July 5, 2005 through May 9, 2008, we have used the entire net proceeds from our initial public offering, together with cash
flows from operations, as follows:
•
•
•
research and development expenditure of NT$998 million (US$30.6 million)
invested US$3.7 million in our operation in China
partial payment for our US$90 million acquisition of FCI, of which US$50 million was payment in cash
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2007. Disclosure controls and procedures are designed to ensure that the material financial and non-financial
information required to be disclosed in this annual report on Form 20-F and filed with the SEC is recorded, processed, summarized
and reported in a timely manner. The evaluation was performed with the participation of our key corporate senior management, and
under the supervision of our Chief Financial Officer, or CFO, Riyadh Lai, and our President and Chief Executive Officer, or CEO,
Wallace Kou. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurances of achieving the
desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. Based on the foregoing, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were effective.
We identified as of December 31, 2006 in the process developing and implementing additional internal control policies and
procedures in our internal control over financial reporting that were remediated during fiscal year 2007. These in the process
developing and implementing additional internal control policies and procedures are described in detail in our Annual Report on
Form-20-F for the year ended December 31, 2006.
52
During 2007, we established an independent Whistleblower hotline and email system for complainants to confidentially contact
our audit committee and also implemented anti-fraud controls involving formally surveying our employees to identify potential areas
of risk.
Management’s 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 defined under Exchange Act Rules 13a-15(f) and 15d-15(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 financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. 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 as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that the our receipts and expenditures are being made only in
accordance with appropriate authorizations; 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 the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by
this annual report based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Their assessment included an evaluation of the design of our internal control
over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on that
assessment, our management concluded that as of December 31, 2007 the company’s internal control over financial reporting was
effective.
Our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 excluded the
internal control over financial reporting of FCI Inc., because FCI was acquired on April 30, 2007 and whose financial statements
constitute 7 percent and 10 percent of net and total assets, respectively, 13 percent of revenues, and 12 percent of net income of the
consolidated financial statement amounts as of and for the year ended December 31, 2007.
Changes in Internal Control Over Financial Reporting
During 2007, no change to our internal control over financial reporting occurred that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
53
Inherent Limitations on Effectiveness of Controls
All internal control systems no matter how well designed and implemented have inherent limitations. Even systems determined
to be effective may not prevent or detect misstatements or fraud and can only provide reasonable assurance with respect to disclosure
and financial statement presentation and reporting. Additionally, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changed conditions and the degree of compliance with the policies
or procedures may deteriorate.
Attestation Report Of The Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Silicon Motion Technology Corporation
We have audited the internal control over financial reporting of Silicon Motion Technology Corporation and subsidiaries (the
“Company”) as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control
Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at FCI Inc., which
was acquired on April 30, 2007 and whose financial statements constitute 7 percent and 10 percent of net and total assets,
respectively, 13 percent of revenues, and 12 percent of net income of the consolidated financial statement amounts as of and for the
year ended December 31, 2007. Accordingly, our audit did not include the internal control over financial reporting at FCI Inc. 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 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 opinions.
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, 2007 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
54
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, 2007 of the Company and our report dated April 29,
2008 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 29, 2008
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Tsung-Ming Chung, the Chairman of our audit committee, is a “financial expert”
under Nasdaq’s Marketplace Rules.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics applicable to every employee of our company,
including our CEO and our CFO, consistent with the requirements of the Nasdaq Global Market. A copy of our code of ethics has
been filed with the SEC as Exhibit 11.1 to our annual report on Form 20-F filed on June 30, 2006. For further information, see our
Code of Ethics posted on our website (www.siliconmotion.com).
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche has acted as the independent public accountants of our company and its subsidiaries for 2006 and 2007. The
following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered
by Deloitte & Touche for the periods indicated.
(in thousands)
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total
2007
NT$
2006
NT$
7,600 29,502
2,000 —
2,571
1,500
— —
11,100 32,073
(1) Audit Fees. This category includes the audit and review of our annual financial statements and services that are normally
provided by the independent auditors in connection with regulatory filings or engagements, consultations provided on audit and
accounting matters that arise during, or as a result of, the audits or the reviews of interim financial statements, audit procedures
related to reviews of offering documents, registration statements and issuance of comfort letters.
(2) Audit-Related Fees. This category consists of assurance and related services by Deloitte & Touche that are reasonably related to
the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services
for the fees disclosed under this category include consultation with respect to adoption of new requirements for reporting on
internal control over financial reporting.
(3) Tax Fees. This category consists of professional services rendered by Deloitte &Touche for tax compliance and tax advice. The
services for the fees disclosed in this category include tax return preparation and technical tax advice.
(4) All other fees. Deloitte & Touche did not provide any services under this category in 2006 or 2007.
Our audit committee is responsible for the retention of our independent registered public accounting firm, which currently is
Deloitte & Touche. Our audit committee has adopted its own rules of procedure, in the form of an audit committee charter. The audit
55
committee’s rules of procedure provide for a process with respect to the prior approval of all non-audit services to be performed by
our independent auditors. Our audit committee reports to our board of directors regarding the scope and results of our annual audits,
compliance with our accounting and financial policies and management’s procedures and policies related to the adequacy of our
internal accounting controls.
In 2007 our audit committee approved all of the audit services provided by Deloitte & Touche, and the other services provided
by Deloitte & Touche.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
56
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements are included in this annual report at pages F-2 through F-33.
ITEM 19. EXHIBITS
Exhibit
Number Description
1.1
Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 to the company’s Registration
Statement on Form F-1 (file no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
1.2
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
4.6
Articles of Association of the Registrant (incorporated by reference to Exhibit 3.2 to the company’s Registration Statement
on Form F-1 (file no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
Specimen of American Depositary Receipt (incorporated by reference to Exhibit 3.3 to the company’s Registration
Statement on Form F-1 (file no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
Form of Deposit Agreement (incorporated by reference to Exhibit 4.2 to the company’s Registration Statement on Form F-1
(file no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
Amended and Restated Silicon Motion Technology Corporation 2005 Equity Incentive Plan 2005 (incorporated by reference
to Exhibit 2.3 to the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on July 2,
2007 and posted on our website)
Lease Agreement between Silicon Motion, Inc. (Taiwan) and Fang Shinn Industrial Co., Ltd. dated May 4, 2004
(incorporated by reference to Exhibit 10.1 to the company’s Registration Statement on Form F-1 (file no. 333-125673) filed
with the Securities and Exchange Commission on June 9, 2005).
Lease Agreement between Silicon Motion, Inc. (Taiwan) and TaiHsing Printing and Binding Co., Ltd dated February 23,
2005 (incorporated by reference to Exhibit 10.2 to the company’s Registration Statement on Form F-1 (file no. 333-125673)
filed with the Securities and Exchange Commission on June 9, 2005).
Lease Agreement between Silicon Motion, Inc. (Taiwan) and Winsome Development Inc. dated November 27, 2003
(incorporated by reference to Exhibit 10.3 to the company’s Registration Statement on Form F-1 (file no. 333-125673) filed
with the Securities and Exchange Commission on June 9, 2005).
Lease Agreement between Silicon Motion, Inc. (Taiwan) and Richtek Technology Corp. dated February 4, 2005
(incorporated by reference to Exhibit 10.4 to the company’s Registration Statement on Form F-1 (file no. 333-125673) filed
with the Securities and Exchange Commission on June 9, 2005).
Lease Agreement between Silicon Motion, Inc. (California) and Orchard Investment Company Number 205 dated January
21, 2004 (incorporated by reference to Exhibit 10.5 to the company’s Registration Statement on Form F-1 (file no. 333-
125673) filed with the Securities and Exchange Commission on June 9, 2005).
Bank Line of Credit Agreement between Silicon Motion, Inc. (Taiwan) and Chinatrust Commercial Bank Co., Ltd. dated
November 25, 2004 (incorporated by reference to Exhibit 10.6 to the company’s Registration Statement on Form F-1 (file
no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
57
Exhibit
Number Description
4.7
Financial Transaction Agreement between Silicon Motion, Inc. (Taiwan) and Chinatrust Commercial Bank Co., Ltd. dated
November 25, 2004 (incorporated by reference to Exhibit 10.7 to the company’s Registration Statement on Form F-1 (file
no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
4.8
4.11
4.12
8.1
Specific Clause Agreement between Silicon Motion, Inc. (Taiwan) and Chinatrust Commercial Bank Co., Ltd. dated
November 25, 2004 (incorporated by reference to Exhibit 10.8 to the company’s Registration Statement on Form F-1 (file
no. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
Purchase and Supply Agreement between Lexar Media, Inc. and Silicon Motion Technology Corporation, dated September
1, 2005 (incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F filed with the Securities
and Exchange Commission on June 30, 2006).
Share Purchase Agreement dated as of April 18, 2007 among Silicon Motion Technology Corporation, Lake Tahoe
Investment Corporation, Future Communications IC, Inc. (“FCI”) and Kwang Jun Yun and the shareholders of FCI
(incorporated by reference to Exhibit 4.12 to the Company’s Annual Report on Form 20-F filed with the Securities and
Exchange Commission on July 2, 2007).
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Company’s Registration Statement on Form F-1 (file
No. 333-125673) filed with the Securities and Exchange Commission on June 9, 2005).
11.1
Code of Ethics (incorporated by reference to Exhibit 11.1 to the company’s Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006).
12.1* Certification of Chief Executive Officer Required by Rule 13a-14(a).
12.2* Certification of Chief Financial Officer Required by Rule 13a-14(a).
13.1*
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
*
Filed herewith.
58
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
SILICON MOTION TECHNOLOGY CORPORATION
By:
/s/ WALLACE C. KOU
Wallace C. Kou,
President and Chief Executive Officer
Date: May 12, 2008.
59
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2007
Consolidated Statements of Income for the Years Ended December 31, 2005, 2006 and 2007
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2005, 2006 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 (as restated), 2006 and 2007
Notes to the Consolidated Financial Statements
F-1
F-2
F-3
F-5
F-7
F-9
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Silicon Motion Technology Corporation
We have audited the accompanying consolidated balance sheets of Silicon Motion Technology Corporation and its subsidiaries
( the “Company”) as of December 31, 2006 and 2007, and the related consolidated statements of income, changes in shareholders’
equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2007, all
expressed in New Taiwan dollars. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated 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 the
Company as of December 31, 2006 and 2007, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 2 to the consolidated financial statements, the Company changed its method of accounting for uncertainty
in income taxes upon adoption of Financial Accounting Standards Board Interpretation No.48, Accounting for Uncertainty in Income
tax - an interpretation of FASB statement No.109 on January 1, 2007.
As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated financial statements have been
restated.
Our audits also comprehended the translation of New Taiwan dollar amounts into U.S. dollar amounts and, in our opinion, such
translation has been made in conformity with the basis stated in Note 3 to the consolidated financial statements. Such U.S. dollar
amounts are presented for the convenience of the readers 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, 2007, 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
April 29, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting. As described in
Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control
over financial reporting at Future Communication Inc., which was acquired on April 30, 2007 and whose financial statements
constitute 7 % and 10 % of net and total assets, respectively, 13 % of revenues, and 12 % of net income of the consolidated financial
statement amounts as of and for the year ended December 31, 2007. Accordingly, our audit did not include the internal control over
financial reporting at Future Communication IC. Inc.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 29, 2008
F-2
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Par Value)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Notes and accounts receivable, net
Inventories, net
Restricted assets- current
Deferred income tax assets, net
Prepaid expenses and other current assets
Total current assets
Long-term investments
Property and equipment, net
Deferred income tax assets, net
Goodwill
Intangible assets, net
Other assets
Restricted assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes and accounts payable
Income tax payable
Current portion of long-term debt
Current portion of long-term payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term payable, net of current portion
Accrued pension cost
Other long-term liabilities
FIN 48 liabilities
Total liabilities
F-3
2006
NT$
December 31
2007
NT$
US$
(Note 3)
103,603
68,455
65,000 127,466
83,526
86,282
1,808,042 1,608,272 49,592
1,458,847 1,751,113 53,997
1,018,141 1,148,146 35,403
427,116 547,400 16,879
3,931
2,576
2,660
4,949,204 5,352,205 165,038
170,942 119,535
3,686
319,356 519,189 16,010
5,664
— 2,187,586 67,456
— 661,851 20,409
2,950
95,692
15
488
5,528,684 9,120,231 281,228
47,241 183,685
8,845
33,096
—
—
525,218 444,444 13,706
7,011
139,268 227,356
40
1,300
134
4,358
294,016 780,055 24,053
958,502 1,457,513 44,944
1,418
— —
60
946
960,561 1,536,124 47,368
—
1,019
1,040
—
2,165
30,692
45,754
ASSETS
Commitments and Contingencies ( Note 18)
Shareholders’ Equity
Ordinary Shares at US$ 0.01 par value per share
Authorized: 500,000,000 shares
Issued and outstanding: 123,780,268 shares at December 31, 2006 and 131,974,654
shares at December 31, 2007
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
2006
NT$
December 31
2007
NT$
US$
(Note 3)
41,735
39,031
45,774
1,287
3,522,094 5,208,225 160,599
2,232
961,224 2,261,729 69,742
4,568,123 7,584,107 233,860
5,528,684 9,120,231 281,228
72,418
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
F-4
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Shares and Earnings Per Share)
Year Ended December 31
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES (INCOME)
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Write off of in-process research and development
Compensation to customers
Gain from settlement on litigation
Write-off of other receivable
Total operating expenses
OPERATING INCOME
NON-OPERATING INCOME (EXPENSES)
Gain on sales of short-term investments
Gain on sales of long-term investment
Interest income
Unrealized holding gain on marketable securities
Foreign exchange gain (expense), net
Impairment of long-term investment
Interest expense
Other income, net
Total non-operating income
INCOME BEFORE INCOME TAX
INCOME TAX EXPENSE
NET INCOME
EARNINGS PER ORDINARY SHARE:
Basic
Diluted
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING
Basic (Thousands)
Diluted (Thousands)
F-5
2005
NT$
2006
NT$
US$
(Note 3)
2,686,492 3,460,459 5,847,329 180,306
NT$
2007
1,342,749 1,612,019 2,757,102 85,017
95,289
1,343,743 1,848,440 3,090,227
373,548
157,278
129,141
4,501
—
8,122
—
—
672,590
671,153
502,225
200,526
219,395
—
—
—
(3,000)
40,039
822,747 25,370
9,195
298,199
11,771
381,749
5,048
163,704
2,355
76,377
—
—
—
—
—
—
959,185 1,742,776 53,739
889,255 1,347,451 41,550
12,799
—
26,942
—
1,811
—
(46)
2,698
44,204
715,357
42,055
673,302
21,896
4,991
52,373
1,119
(18,702)
(14,447)
(1,053)
455
17,857
—
65,220
3
(5,174)
—
(33)
1,395
79,268
675
154
1,615
35
(578)
(445)
(32)
14
1,438
968,523 1,394,083 42,988
46,632
21,032
2,516
947,491 1,312,505 40,472
81,578
5.90
5.80
7.69
7.55
10.17
9.85
0.31
0.30
114,083
116,015
123,251
125,488
129,041 129,041
133,291 133,291
Year Ended December 31
2007
2006
2005
EARNINGS PER ADS (one ADS equals four ordinary shares) :
Basic
Diluted
WEIGHTED AVERAGE ADS OUTSTANDING
Basic (Thousands)
Diluted (Thousands)
NT$ NT$ NT$ US$
(Note 3)
23.61 30.75 40.68
23.21 30.20 39.39
1.25
1.21
28,521 30,813 32,260 32,260
29,004 31,372 33,323 33,323
The accompanying notes are an integral part of the consolidated financial statements
(Concluded)
F-6
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS)
(In Thousands, Except Per Share Data)
Capital Stock
Ordinary Share
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
(Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Shareholders’
Equity
(thousands)
NT$
(thousands)
NT$
NT$
NT$
NT$
NT$
BALANCE, JANUARY 1,
2005 . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .
Net realized gains on
available-for-sale
securities . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . . .
Total comprehensive
income . . . . . . . . . . . . . . . .
Issuance of ordinary shares in
exchange for SMI Taiwan
common stock . . . . . . . . . .
Proceeds from initial public
offering of ordinary
shares . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
105,412
1,054,120
1,053,601
—
—
—
—
—
—
—
—
—
—
—
—
105,412
33,215
(105,412)
(1,054,120) 1,020,905
17,200
5,444
— 1,273,730
81
—
(659,569)
1,448,233
673,302
673,302
(697)
49,773
—
—
—
—
—
—
—
—
—
13,733
947,491
(697)
49,773
722,378
—
1,279,174
3,449,785
947,491
— 3,348,236
49,157
—
—
—
—
—
—
—
—
(5,483)
—
(5,483)
21,796
—
—
2,100
85,699
66,363
—
—
942,008
21,796
2,100
85,699
66,735
—
—
—
—
— 3,522,094
45,774
961,224
4,568,123
—
—
—
—
—
—
—
—
— 1,259,331
—
—
32,394
261,350
—
133,056
—
—
—
(464)
27,108
—
—
—
—
—
—
1,312,505
—
1,312,505
(464)
—
—
—
—
—
—
27,108
1,339,149
1,261,429
32,394
261,350
133,662
(12,000)
(12,000)
— 5,208,225
72,418
2,261,729
7,584,107
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-7
BALANCE, DECEMBER 31,
2005 . . . . . . . . . . . . . . . . . . . . .
122,612
38,659
Net income . . . . . . . . . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . . .
Total comprehensive
income . . . . . . . . . . . . . . . .
Adjustment of proceeds from
initial public offering of
ordinary shares in 2005 . . .
Initial application of SFAS
No. 158 . . . . . . . . . . . . . . .
Stock-based compensation
expenses . . . . . . . . . . . . . .
Issuance of ordinary shares
upon exercise of employee
stock options . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
1,168
372
BALANCE, DECEMBER 31,
2006 . . . . . . . . . . . . . . . . . . . . .
123,780
39,031
Net income . . . . . . . . . . . . . .
Deferred pension loss . . . . . .
Foreign currency translation
adjustments . . . . . . . . . . . .
Total comprehensive
income . . . . . . . . . . . . . . . .
Issuance of ordinary shares
—
—
—
—
—
—
—
—
for FCI acquisition . . . . . .
6,306
2,098
Issuance of options for FCI
acquisition . . . . . . . . . . . . .
Stock-based compensation
expenses . . . . . . . . . . . . . .
Issuance of ordinary shares
upon exercise of employee
stock options . . . . . . . . . . .
Cumulative effect of
adopting FASB
Interpretation No. 48 . . . . .
—
—
—
—
1,889
606
—
—
BALANCE, DECEMBER 31,
2007 . . . . . . . . . . . . . . . . . . . . .
131,975
41,735
BALANCE, JANUARY 1, 2007
Shares
(thousands)
123,780
Amount
US$
1,204
Shares
(thousands)
Amount
US$
— — 108,606
1,411
Capital Stock
Ordinary Share
Common Stock
Accumulated
Other
Comprehensive
Income
(Loss)
US$
Additional
Paid-in
Capital
US$
— —
— —
— —
— —
— —
— —
— —
— —
—
—
—
—
6,306
65
— —
38,832
— —
— —
999
— —
— —
8,059
—
(15)
836
—
—
—
—
Retained
Earnings
(Accumulated
Deficit)
US$
29,640
Total
Shareholders’
Equity
US$
140,861
40,472
—
40,472
(15)
—
—
—
—
—
836
41,293
38,897
999
8,059
Net income
Deferred pension loss
Foreign currency
translation adjustments
Total comprehensive
income
Issuance of ordinary shares
for FCI acquisition
Issuance of options for FCI
acquisition
Stock-based compensation
expenses
Issuance of ordinary shares
upon exercise of
employee stock options
Cumulative effect of
adopting FASB
Interpretation No. 48
BALANCE, DECEMBER 31,
2007
1,889
18
— —
4,103
—
—
4,121
— —
— —
—
—
(370)
(370)
131,975
1,287
— — 160,599
2,232
69,742
233,860
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
F-8
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
Unrealized holding gain on marketable securities
Amortization of intangible assets
Write off of in–process research and development
Gain on sales of short-term investments
Gain on sales of long-term investment
Impairment of long-term investment
Stock-based compensation
Loss on disposal of property and equipment
Deferred income taxes
Accrued pension cost
Deferred rent
Changes in operating assets and liabilities:
Short-term investments
Notes and accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Notes and accounts payable
FIN 48 liabilities
Accrued expenses and other current liabilities
Income tax payable
Net cash provided by (used in) operating
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments
Proceeds from sales of short-term investments
Acquisition of long-term investments
Proceed from disposal of long-term investments
Business acquisition-net of cash and cash equivalents acquired
Purchase of property and equipment
Changes in restricted assets
Proceeds from disposal of property and equipment
Net cash provided by (used in) investing activities
F-9
Year Ended December 31
2005
(Restated)
NT$
(Note 2)
2006
NT$
2007
NT$
US$
(Note 3)
673,302 947,491 1,312,505 40,472
23,906
—
4,501
—
(12,799)
—
—
—
291
(22,731)
552
(372)
35,596
(3)
—
—
(17,857)
—
—
85,699
29
(85,704)
(2,247)
(570)
(1,157,955) (283,032)
(240,417) (289,862)
230,621 (148,588)
(195)
(37,735)
2
—
(226,840) 206,240
—
120,118 115,242
34,524
26,611
—
92,284
(1,119)
163,704
76,378
(21,896)
(4,991)
14,447
261,350
2,485
(111,073)
(1,482)
(73)
(269,096)
(11,683)
20,745
(703)
58,157
(162,571)
26,136
89,186
66,598
2,846
(35)
5,048
2,355
(675)
(154)
445
8,059
77
(3,425)
(46)
(2)
(8,298)
(360)
640
(22)
1,793
(5,013)
806
2,750
2,054
(618,947) 596,765 1,599,288 49,315
(7,192,388)
7,399,615
—
—
— —
—
— —
—
(588)
(19,058)
(12,812) (155,090)
—
1,882
61,037
— (1,792,264) (55,266)
(6,970)
(226,034)
783
25,342
1
31
146,020 (425,012) (1,950,946) (60,158)
(42,708) (271,697)
1,346
429
(6,089)
402
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares upon exercise of employee stock
options
Proceeds from initial public offering of ordinary shares
Proceed from government grants
Repayment of short-term borrowings
Proceeds from long-term debt and payable
Repayment of long-term debt and payable
Net cash provided by financing Activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL INFORMATION
Exercise of stock option in lieu of offsetting accrued bonuses
Interest paid
Income taxes paid
Acquisition of FCI
Year Ended December 31
2005
(Restated)
NT$
(Note 2)
2006
NT$
2007
NT$
US$
(Note 3)
—
1,279,174
—
—
—
(306)
1,278,868
805,941
38,133
21,796
—
—
—
—
59,929
231,682
104,453
20,299
(6,503)
15,190
(8,623)
3,221
— —
626
(200)
468
(266)
124,816 3,849
(226,842) (6,994)
48,887
(5,633)
27,072
834
727,165 1,581,993 1,808,042 55,752
1,581,993 1,808,042 1,608,272 49,592
—
46
38,175
28,602
33
113,362
29,208
832
901
26
38,439 1,185
Fair value of assets acquired, net of cash and cash equivalents acquired
Fair value of liabilities assumed, including earn-out contingency of NT$389,160 thousand
(US$12,000 thousand)
Issuance of stock and options
Cash paid for FCI acquisition
Acquisition of Centronix
Fair value of assets acquired, net of cash acquired
Cash paid for Centronix acquisition
3,559,201 109,751
(589,003)
(1,293,823)
1,676,375
(18,163)
(39,896)
51,692
115,889
115,889
3,574
3,574
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
F-10
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. ORGANIZATION AND OPERATIONS
Silicon Motion Technology Corporation (“SMTC”, collectively with its subsidiaries the “Company”) is a holding company
incorporated in the Cayman Islands on January 27, 2005. A significant part of the Company’s operations are conducted through
Silicon Motion, Inc. (“SMI Taiwan”), a wholly-owned subsidiary of SMTC, located in Taiwan. The Company is a fabless
semiconductor company that designs, develops and markets, high-performance, low-power semiconductor solutions for the
multimedia consumer electronics market. The Company has three major product lines: mobile storage, mobile communications, and
multimedia SoC. Our mobile storage business is composed of microcontrollers used in NAND flash memory storage products such as
flash memory cards, USB flash drives, SSDs, embedded flash applications, and card readers. Our mobile communications business is
composed of mobile TV tuners, CDMA Radio Frequency Integrated Circuits (“RFIC”) and electronic toll collection RF ICs. Our
multimedia SoC business is composed of products that support MP3 players, PC cameras, and embedded graphics applications.
The Company acquired SMI Taiwan in April 2005. Originally SMI Taiwan was known as Feiya Technology Corporation (“Feiya”), a
Taiwan corporation which was incorporated in April 1997 but had changed its name to SMI Taiwan after acquiring in August 2002
Silicon Motion, Inc., a California corporation (“SMI USA”), which was incorporated in November 1995. Feiya was originally a flash
memory products company and SMI USA a graphics processor company. In April 2007, we acquired Future Communications IC, Inc.
(“FCI”), a leading designer of RF ICs for mobile TV and wireless communications based in South Korea.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). The consolidated financial statements include the accounts of SMTC and its wholly-owned
subsidiaries. The Company owns 100% of the outstanding shares in all of its subsidiaries, except for Silicon Motion Hong Kong
Limited and FCI which the Company owns 99.99% and 99.59%, respectively. All significant intercompany balances and transactions
have been eliminated upon consolidation.
Restatement
On December 30, 2005, the Company sold its portfolio of available-for-sale securities and purchased trading securities totaling
approximately NT$1,157,955 thousand, which were included in the balance sheet line item, “Short-term investments.” As the
Company contemporaneously changed its investment objective for such securities, the Company included this purchase of trading
securities as part of the other purchases of “Short-term investments” made throughout 2005 and classified all of them as cash flows
from investing activities in the statement of cash flows.
Subsequent to the issuance of the Company’s 2006 consolidated financial statements, the Company determined that purchases of
trading securities made on December 30, 2005 have been erroneously reported as part of purchases of short-term investments in cash
used in investing activities in the statement of cash flows for the year ended December 31, 2005. As a result, cash used in investing
activities and cash used in operating activities have been restated from the amounts previously reported to reflect the purchases of
trading securities as cash used in operating activities as required by accounting principles generally accepted in the United States.
The table below summarizes the impact of this reclassification. The reclassification has no impact on the Company’s consolidated
balance sheets, statements of income or earnings per share as of and for the year ended December 31, 2005. (in NT$ thousands)
F-11
2005 Statement of Cash Flows
Cash Flows from Operating Activities:
Changes in short-term investments
Net cash flow provided by (used in) operating activities
Cash Flows from Investing Activities:
Purchases of short-term investments
Net cash flow (used in) provided by investing activities
As Previously
Reported
As Restated
—
539,008
(1,157,955)
(618,947)
(8,350,343)
(1,011,935)
(7,192,388)
146,020
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. The actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents,
investment in debt securities and accounts receivable. Cash are deposited with high credit-quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers’ financial condition and the Company maintains an
allowance for doubtful accounts receivable based upon a review of the expected collectibility of individual accounts.
The Company’s direct and indirect customers include manufactures, OEMs and ODMs of major flash memory-based storage products
as well as portable digital media devices. Many of the Company’s customers sell brand name consumer electronics products that
include the Company’s products. For flash memory card, UFD and card reader controllers, the Company’s worldwide customers
include companies such as Lexar Media, Samsung, Sony, STMicroelectronics and Transcend. For the multimedia products, the
Company’s worldwide customers include Advantech, Fuji Xerox, GE, Intel, Kontron, Mattel, Panasonic, Philips, Sharp, Siemens,
Sony, Thomson and Toshiba. For mobile communication, the Company’s worldwide customers include Samsung, LG, Pantech &
Curitel. For the year ended December 31, 2005, 2006 and 2007, only one of the Company’s customers individually accounted for
greater than 10% of net sales. The Company’s top ten customers in 2005, 2006 and 2007 accounted for approximately 62%, 53% and
57% of net sales.
Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, including cash and cash equivalents, notes and accounts receivable and
notes and accounts payables approximates fair value due to the short-term maturity of the instruments. Fair values of short-term
investments and long-term investments represent quoted market prices, if available. If no quoted market prices are available, fair
values are estimated based on discounted cash flow, or other valuation techniques. The Company’s long-term liabilities approximate
their fair values as they contain interest rates that vary according to market interest rates.
Cash Equivalents
The Company considers all highly liquid investments with maturities within three months from the date of purchase to be cash
equivalents.
Short-term Investments
The Company invests its excess cash in bond funds and uses the average cost method when determining their cost basis. Marketable
securities that are bought and held principally for the purpose of selling them in near term are classified as trading securities and are
initially recognized at fair value, with subsequent changes in fair value recorded in earnings as unrealized gains and losses. Available-
for-sale securities are initially recognized at fair value with subsequent changes in fair value reported as unrealized gain or loss in a
separate component of shareholders’ equity. Other than temporary loss is recorded in earnings and is based on the Company’s
assessment of any significant sustained reductions in the investment’s market value and of the market indicators affecting the
available-for-sale securities.
F-12
Allowance for Doubtful Receivables
An allowance for doubtful receivables is provided based on a review of the collectibility of accounts receivables. The Company
determines the amount of allowance for doubtful receivables by examining the historical collection experience and current trends in
the credit quality of its customers as well as its internal credit policies.
Inventories
Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate
weighted-average cost at the balance sheet date. Market value represents the current replacement cost for raw materials and net
realizable value for finished goods and work in process. The Company assesses its inventory for estimated obsolescence or
unmarketable inventory based upon management’s assumptions about future demand and market conditions. In estimating reserves
for obsolescence, the Company primarily evaluates estimates based on the timing of the introduction of new products and the
quantities remaining of old products and provides reserves for inventory on hand in excess of the estimated demand. Estimated losses
on slow-moving items are recognized and included in the allowance for losses.
Long-term Investments
Long-term investments wherein the Company does not exercise significant influence are accounted for under the cost method of
accounting. Management evaluates related information (e.g., budgets, business plans, financial statements, etc.) in determining
whether an other than temporary decline in value exists. Factors indicative of an other than temporary decline include recurring
operating losses, credit defaults and subsequent rounds of financings at an amount below the cost basis of the investment.
Management periodically weighs all quantitative and qualitative factors in determining if any impairment loss exists. When a decline
in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in other income and expense.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Significant additions, renewals and betterments are
capitalized, while maintenance and repairs are expensed as incurred.
Depreciation is computed using the straight-line method over estimated useful lives that range as follows: buildings—25 to 50 years;
machinery and equipment—3 to 6 years; furniture and fixtures—3 to 8 years; software—1 to 5 years; leasehold and buildings
improvement—the shorter of the estimated useful life or lease term, which is generally 2 to 6 years. Depreciation expense recognized
for the years ended December 31, 2005, 2006 and 2007 was approximately NT$23,906 thousand, NT$35,596 thousand and
NT$92,284 thousand (US$2,846 thousand), respectively.
Upon the sale or other disposal of property and equipment, the related cost and accumulated depreciation are removed from the
accounts, and any gain or loss is credited or charged to operating income.
Government Grants
Grants received by the Company from the Korean government to assist with specific research and development activities are deducted
from those research and development costs incurred, in the period in which the related expenses are incurred, to the extent that they
are non-refundable. Government grants that were used for the acquisition of fixed assets are deducted from the acquisition costs of the
acquired assets, and amortized over the useful lives of the related assets. The Company recognizes refundable government grants as
long-term payable and included in current portion of long-term payable on its consolidated balance sheet.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying
value may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to
result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may
differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the business model
or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value, an impairment loss is
recognized, measured as the amount by which the carrying value exceeds the fair value of the asset.
F-13
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value of the net tangible and intangible assets acquired in a business
combination. Intangible assets, which consist primarily of core technology, customer relationship and order backlog, are amortized
over their estimated useful lives, ranging from 3 months to 4 years at the time of acquisition. The Company evaluates goodwill for
impairment, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount
may not be recoverable. The Company has selected November 30 as the annual goodwill impairment testing date.
Other Assets
Other assets primarily consist of industry property right and deposits for office leases.
Restricted Assets
Restricted assets consist of deposits required for litigation and the restricted cash, which has been set aside as collateral for obtaining
foundry capacity, borrowings and restricted as to usage in relation to government grants.
Pension Costs
For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to
employees’ individual pension accounts. For employees under defined benefit pension plans, pension costs are recorded based on
actuarial calculations.
Revenue Recognition
Revenue from product sales is generally recognized upon shipment to the customer provided that the Company has received a signed
purchase order, the price is fixed or determinable, transfer of title has occurred in accordance with the shipping terms specified in the
arrangement with the customer, collectibility from the customer is considered reasonably assured, product returns are reasonably
estimable and there are no remaining significant obligations or customer acceptance requirements.
The Company grants certain distributors limited rights of return and price protection rights on unsold products. The return rights are
generally limited to five percent of the monetary value of products purchased within the preceding six months, provided that the
distributor places a corresponding restocking order of equal or greater value. An allowance for sales returns for distributors and all
customers is recorded at the time of sale based on historical returns information available, management’s judgment and any known
factors at the time the financial statements are prepared that would significantly affect the allowance. Price protection rights are based
on the inventory products the distributors have on hand at the date the price protection is offered. A reserve for price adjustments is
recorded based on the estimated products on hand at the distributors and historical experience. The Company incurred actual price
adjustments to distributors of NT$4 thousand, NT$512 thousand and nil during 2005, 2006 and 2007, respectively.
The Company provides a warranty period of one year for manufacturing defects of its products. Warranty returns have been
infrequent and relate to defective or off-specification parts. The Company estimates a reserve for warranty based on historical
experience and records this amount to cost of sales. For the years ended December 31, 2005, 2006 and 2007, the Company did not
experience significant costs associated with warranty returns.
Research and Development
Research and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the
discovery of new knowledge that will be useful in developing new products or at significantly enhancing existing products as well as
expenditures incurred for the design and testing of product alternatives. All expenditures related to research and development
activities of the Company are charged to operating expenses when incurred. Third-party research and development costs are expensed
when the contracted work has been performed or as milestone results have been achieved.
F-14
Advertising Expenses
The Company expenses all advertising as incurred. Advertising costs charged to expense amounted to NT$978 thousand, NT$1,270
thousand and NT$3,806 thousand (US$117 thousand) for the years ended December 31, 2005, 2006, and 2007, respectively.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income
Taxes,”(“SFAS No. 109”). The provision for income tax represents income tax paid and payable for the current year plus the changes
in the deferred income tax assets and liabilities during the years. Deferred income tax assets are recognized for net operating loss
carryforwards, research and development credits, and temporary differences. In July 2006, the Financial Accounting Standards Board
(“FASB”) issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN 48 provides
that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax
positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48
and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. In January 2007, the Company adopted FIN.48 and decreased
deferred income tax assets and reduced retained earnings by NT$12,000 thousand (US$370 thousand) in connection with its adoption.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. See Note 16,
“Income Taxes,” for further discussion of the effects of adoption of FIN 48.
Under Taiwan tax regulations, the current year’s earnings, on an after tax basis, that are not distributed in the following year are
subject to a 10% additional income tax. This 10% additional income tax is recognized in the period during which the related earnings
are generated.
The R.O.C. government enacted the Alternative Minimum Tax Act (“the AMT Act”), which became effective on January 1, 2006.
The alternative minimum tax (“AMT”) imposed under the AMT Act is a supplemental tax levied at a rate of 10% which is payable if
the income tax payable determined pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act.
The taxable income for calculating the AMT includes most of the income that is exempted from income tax under various laws and
statutes. The Company has considered the impact of the AMT Act in the determination of its tax liabilities.
Foreign Currency Transactions
Foreign currency transactions are recorded at the rates of exchange in effect when the transaction occurs. Gains or losses, resulting
from the application of different foreign exchange rates when cash in foreign currency is converted into the entities’ functional
currency, or when foreign currency receivables and payables are settled, are credited or charged to income in the period of conversion
or settlement. At the balance sheet date, assets and liabilities denominated in foreign currencies are remeasured based on prevailing
exchange rates and any resulting gains or losses are credited or charged to income.
Translation of Foreign Currency Financial Statements
The reporting currency of the Company is the New Taiwan dollar. The functional currency is the local currency of the respective
entities. Accordingly, the financial statements of the foreign subsidiaries are translated into New Taiwan dollars at the following
exchange rates: assets and liabilities – current rate on the balance sheet date; shareholders’ equity – historical rates; income and
expenses- average rate during the period. The resulting translation adjustment is recorded as a separate component of shareholders’
equity in accumulated other comprehensive income.
F-15
Comprehensive Income (Loss)
Comprehensive income and loss represents net income plus the results of certain changes in shareholders’ equity during a period from
non-owner sources that are not reflected in the consolidated statements of income.
Legal Contingencies
The Company is currently involved in various claims and legal proceedings. Periodically, the Company reviews the status of each
significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered
probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Because of uncertainties related to
these matters, accruals are based only on the best information available at the time. As additional information becomes available, the
Company reassesses the potential liability related to the pending claims and litigation and revises these estimates as appropriate. Such
revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position.
Earnings Per Share
Basic earnings per share are computed by dividing net earnings attributable to common/ordinary shareholders by the weighted
average number of common/ordinary shares outstanding during the period. Diluted earnings per share reflect the potential dilution
that could occur if stock options and other dilutive securities were exercised. Dilutive securities are excluded from the computation of
the diluted income per share in periods when their effect is anti-dilutive. The Company’s dilutive securities consist of employee stock
options.
Stock-Based Compensation
The Company grants stock options to its employees and directors. Prior to January 1, 2006, the Company accounted for options
granted under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and complied
with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation
expense is measured based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the
exercise price.
On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using
the modified prospective application method. In accordance with the transition method, the Company’s consolidated financial
statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
The following pro forma information, as required by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and
Disclosure, an amendment of FASB Statement No. 123,” is presented for comparative purposes and illustrates the pro forma effect on
net income and related earnings per share for the year ended December 31, 2005, as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation for that period.
Net income as reported
Add: Stock compensation as reported
Less: Stock compensation determined using the fair value method
Pro forma net income
Earnings per share:
Basic as reported
Pro forma basic
Diluted as reported
Pro forma diluted
F-16
Year ended
December 31,2005
NT$
(In Thousands, except
earnings per share)
673,302
—
(52,181)
621,121
5.90
5.44
5.80
5.35
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS
No. 157 does not require any new fair value measurements, but brings up guidance on how to measure fair value by providing a fair
value hierarchy used to classify the source of the information. This statement is effective for the Company beginning January 1, 2008.
The Company does not except to have a significant impact on financial position of the Company.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS
No. 159). Under this standard, the Company may choose to report financial instruments and certain other items at fair value on a
contract-by-contract basis with changes in value reported in earnings. This selection is irrevocable. SFAS No. 159 provides an
opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method that the related hedging contracts when the complex provisions of SFAS No. 133 hedge
accounting are not met. The Company believes that there is no impact on the result of operations and financial position of the
Company after adoption of SFAS No. 159.
In December 2007, the FASB issued SFAS No.141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles
and requirements on how acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in an acquire, including the recognition and measurement of goodwill acquired in a
business combination. The Company will evaluate how the new requirements could impact the accounting for any acquisitions
completed beginning in fiscal year 2009 and beyond, and the potential impact on the Company’s consolidated financial statements.
3. US DOLLAR AMOUNTS
The Company maintains its accounts and expresses its financial statements in New Taiwan dollars. For convenience only, U.S. dollar
amounts presented in the accompanying financial statements have been translated from New Taiwan dollars, using the U.S. Federal
Reserve Bank of New York non-buying rate of NT$32.43 to US$1 on December 31, 2007. The convenience translations should not
be construed as representations that the New Taiwan dollar amounts have been, could have been or could in the future be, converted
into U.S. dollars at this or any other exchange rate.
ACQUISITION
FCI
On April 30 2007, the Company completed its acquisition of FCI, a leading designer of RF ICs for mobile television and wireless
communications based in Seoul, South Korea.
In exchange for 99.59% of outstanding shares of common stock of FCI and assumption of all vested and unvested FCI options, the
Company issued 6,306 thousand ordinary shares, 370,274 stock options and paid approximately NT$1,659,831 thousand (US$51.2
million) in cash and incurred transaction costs of approximately NT$61,051 thousand (US$1.88 million). The value of the
6,306 thousand ordinary shares issued was determined based on the average market price of the Company’s ordinary shares over the
20-day period before and after the terms of the acquisition were agreed to and announced. In addition, the Company has agreed to pay
former FCI shareholders an additional US$12 million in cash (“Earn-out”) upon achieving of certain operating and financial
milestones in 2007. The Company recorded the entire amount of Earn-out as an addition to the purchase consideration as of
December 31, 2007. The Company also agreed to accelerate the vesting of 50% of the options held by FCI employee if the Earn-out
targets are met and Earn-out is or will be paid. In accordance with the Share Purchase Agreement, such options became exercisable
immediately after announcement of the Company’s 2007 earning results on February 1, 2008. The incremental compensation cost
associated with the accelerated vesting was insignificant.
F-17
The total purchase consideration is summarized as follows:
Value of ordinary shares issued and stock options assumed
Cash consideration (including Earn-out payable of NT$389,160)
Transaction costs
Total purchase consideration
NT$
US$
(Note 3)
39,896
63,182
1,882
3,403,865 104,960
1,293,823
2,048,991
61,051
The Company issued approximately 370,274 stock options valued at NT$ 64,376 thousand (US$1.99 million) in exchange for FCI
stock options held by FCI’s employees at the closing date. Of the total stock options issued, approximately 277,705 stock options
were unvested at the closing date. In accordance with SFAS No. 123(R), vested stock options or awards issued by an acquirer in
exchange for outstanding awards held by employees of the acquiree should be considered as a part of the purchase price paid by the
acquirer for the acquiree in a business combination. Accordingly, the fair value of the new awards of NT$32,394 thousand (US$0.97
million) was included in the purchase price.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Property and equipment
Other assets
Goodwill
Identifiable intangible assets
In-process research and development(IPR&D)
Accounts payable
Short term borrowings
Accrued expenses and other current liabilities
Current portion of long term debt
FIN 48 liability
Long-term payable
Net assets acquired
NT$
44,507
118,322
141,030
92,480
79,375
129,906
2,156,570
765,140
76,378
(81,797)
(6,503)
(60,475)
(10,089)
(4,556)
(36,423)
3,403,865
US$
(Note 3)
1,372
3,649
4,349
2,852
2,447
4,005
66,499
23,594
2,355
(2,522)
(201)
(1,865)
(311)
(140)
(1,123)
104,960
The excess of the purchase price over the fair value of the net tangible assets acquired has been reflected as identifiable intangible
assets. The identifiable intangible assets and respective useful lives are as follows:
Core Technology
Customer relationship
Order backlog
Total identifiable intangible assets
NT$
US$ Useful Life
(Note 3)
4 years
446,717 13,775
4 years
277,056 8,543
41,367 1,276 3 months
765,140 23,594
The core technology represented the existing know-how in IC design for RF receivers including all the developed and in –process
products for the FCI business.
Customer relationships can be identified as intangible assets when an entity has a practice of establishing contracts with customers,
regardless of whether a contract existed at the date of acquisition.
The estimated fair value attributed to order backlog was based on outstanding purchase orders at the date of acquisition.
The estimated fair value of in-process research and development was defined as research and development projects in process at the
time of the transaction that have not demonstrated their technological feasibility and that do not have an alternative future use. The
entire amount was written off immediately in the second quarter of 2007. The IPR&D relates to the research and development of ICs
used in mobile TV-related application.
F-18
Goodwill represents the excess of the purchase price over the estimated fair values of the net tangible and intangible assets. The
factors that contributed to the recognition of goodwill primarily relate to expansion into new product areas and potential synergies
created from combined capabilities.
The operating results of FCI have been included in the Company’s operations beginning May 1, 2007. The following unaudited pro
forma information represents a summary of the results of operations as if the acquisition occurred on January 1, 2006 and 2007 and
includes certain pro forma adjustments, including amortization of identifiable intangibles and unrecognized compensation cost from
that date (in thousands except earnings per share):
Year Ended December 31
Net sales
Net income
Earnings per share
Basic
Diluted
Weighted average ordinary shares outstanding (thousands)
Basic
Diluted
2006
NT$
2007
NT$
US$
(Note 3)
3,980,069 6,112,636 188,487
868,275 1,185,819 36,565
6.70
6.58
9.05
8.65
0.28
0.27
129,556 131,044 131,044
131,924 137,148 137,148
The pro forma results are based on various assumptions and are not necessarily indicative of what would have occurred had the
acquisition closed on January 1, 2006 and 2007.
Centronix
On November 30, 2007, the Company acquired select parts of the Centronix mobile TV business of Korea information Engineering
Services Co., Ltd. (“KIES”). This business segment develops and markets products and services related to mobile TV. The aggregate
purchase consideration was NT$115,889 thousand (US$3,574 thousand) in cash. The value of this acquisition did not have a material
effect on the Company’s results of operations in 2006 or 2007 and therefore, its unaudited pro forma results are not included herein.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
Property and equipment
Intangible assets
Goodwill
Total assets acquired
NT$
23,606
60,843
31,440
115,889
US$
(Note 3)
728
1,876
970
3,574
Intangible assets acquired represented core technology which has a weighted-average useful life of approximately 4 years.
5. CASH AND CASH EQUIVALENTS
Cash and deposits in bank
Time deposits
Bonds acquired under repurchase agreements
F-19
December 31
2007
2006
NT$
NT$
US$
(Note 3)
1,269,400 396,867 12,237
434,700 1,211,405 37,355
103,942
— —
1,808,042 1,608,272 49,592
6. SHORT-TERM INVESTMENTS
The Company had short-term investments classified as available-for-sale securities in 2005 and trading securities in 2006 and 2007.
Realized gains on sales of short-term investments were NT$12,799 thousand, NT$17,857 thousand and NT$21,896 thousand
(US$675 thousand) for the years ended December 31, 2005, 2006 and 2007, respectively. Unrealized holding gains for available-for-
sale securities recorded as part of stockholders’ equity was nil as of December 31, 2005. Unrealized holding gains for trading
securities recognized in income was NT$3 thousand and NT$1,119 thousand (US$35 thousand) as of and for the year ended
December 31, 2006 and 2007, respectively.
7. NOTES AND ACCOUNTS RECEIVABLE
December 31
Notes receivable
Trade accounts receivable
Allowance for doubtful accounts
Allowance for sales returns and discounts
The changes in the allowances are summarized as follows:
Allowances for doubtful accounts
Balance, beginning of year
Impact of FCI acquisition
Additions charged to expense
Write-offs
Balance, end of year
Allowances for sales returns and discounts
Balance, beginning of year
Additions
Write-offs
Balance, end of year
F-20
2006
NT$
2007
NT$
US$
(Note 3)
176,376
183,192 5,649
890,265 1,033,856 31,879
1,066,641 1,217,048 37,528
(23,069)
(711)
(45,833) (1,414)
1,018,141 1,148,146 35,403
(13,433)
(35,067)
Year Ended December 31
2007
2006
2005
NT$ NT$ NT$ US$
(Note 3)
4,833 5,973 13,433
— — 3,192
1,140 7,863 9,197
—
(403) (2,753)
5,973 13,433 23,069
414
98
284
(85)
711
Year Ended December 31
2005
NT$
2006
NT$
2007
NT$
US$
(Note 3)
1,081
16,755 18,104 35,067
27,203 49,728 41,852 1,292
(25,854) (32,765) (31,086)
(959)
18,104 35,067 45,833 1,414
8. INVENTORIES
The components of inventories are as follows:
Finished goods
Work in process
Raw materials
December 31
2007
2006
NT$
NT$
US$
(Note 3)
210,908 154,375 4,760
162,831 352,477 10,869
53,377 40,548 1,250
427,116 547,400 16,879
9. LONG-TERM INVESTMENTS
As of December 31, 2006 and 2007, the Company held equity investments in several private-held companies with the carrying value
as follows:
Cost method:
Cashido Corp. (Cashido) (2.40%, 2.40%)
Spright Co., Ltd. (Spright) (13.50%, 13.50%)
Chipmast Technology, Corp. (Chipmast) (18.92%, -)
Vastview Technology, Corp. (Vastview) (9.13%, 10.55%)
2006
NT$
December 31
2007
NT$
US$
(Note 3)
3,142
7,444
97
3,142
21,999
230
55,909 — —
89,892 108,949 3,359
170,942 119,535 3,686
In December 2006 and February 2007, the Company invested in the common stocks of Vastview. Vastview is the electro-optical
integrated company.
In November 2006, the Company invested in the common stocks of Chipmast. Chipmast is a semiconductor design and application
company. In August 2007, the Company sold all its investment in Chipmast and recognized a realized investment gain of NT$4,991
thousand (US$154 thousand).
The Company accounts for these investments using the cost method. These investments are evaluated for impairment on an annual
basis or as the circumstances indicated. No impairment were been recorded for the years ended December 31, 2005 and 2006. During
the fourth quarter of fiscal 2007, the Company determined an impairment indicator existed related to the cost method investment in
Spright. As of December 31, 2007 as the combination of recurring losses and reduced forecasts indicated that the Company’s
investment was not recoverable within a reasonable period of time, the Company determined the impairment to be other than
temporary and recorded an impairment charge of NT$14,447 thousand (US$445 thousand).
F-21
10. PROPERTIES AND EQUIPMENT
2006
NT$
December 31
2007
NT$
US$
(Note 3)
Cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold and buildings improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,259
13,907
61,040
31,164
19,206
55,453
94,498
185,202
213,067
69,179
23,859
128,305
2,914
5,711
6,570
2,133
735
3,956
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199,029
714,110
22,019
Accumulated depreciation:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold and buildings improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayment and construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,566
30,958
14,749
13,354
38,252
101,879
222,206
6,522
133,026
34,692
14,842
88,053
277,135
82,214
201
4,101
1,070
458
2,715
8,545
2,536
319,356
519,189
16,010
The Company entered into capital leases for certain office equipment with remaining lease payments as of December 31,
2007 of NT$179 thousand in 2008 and nil in 2009 and thereafter.
In April 2006, the Company leased its land and buildings located in Taipei, Taiwan, to a third party under a three years
operating lease. Net carrying value of the leased land and building as of December 31, 2007 was NT$18,259 thousand
(US$563 thousand) and NT$8,784 thousand (US$271 thousand), respectively.
11. INTANGIBLE ASSETS
The intangible assets acquired from the Company’s acquisition of FCI and Centronix in 2007 is as follows:
Cost:
Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Order backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Accumulated amortization:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Order backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31
2007
NT$
US$
(Note 3)
507,560
277,056
41,367
(428)
15,650
8,543
1,276
(12)
825,555
25,457
76,161
46,176
41,367
163,704
2,348
1,424
1,276
5,048
661,851
20,409
Amortization expense of acquisition-related intangible assets was NT$163,704 thousand (US$5,048 thousand) for the year
ended December 31, 2007. The estimated future amortization expense of acquisition-related intangible assets as of
December 31, 2007 is as follows:
Year Ending December 31
NT$
US$
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191,327
191,327
191,327
87,870
(Note 3)
5,900
5,900
5,900
2,709
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
661,851
20,409
F-22
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Earn-out payable (see Note 4)
Wages and bonus
Professional fees
Research and development payable
Commission payable
License fee payable
Accrued customer incentives
Others
December 31
2007
2006
NT$
NT$
US$
(Note 3)
— 389,160 12,000
156,788 177,855 5,484
18,854 51,257 1,581
898
29,174 29,121
48
1,558
223
7,246
32,471 79,094 2,439
46,380 44,764 1,380
294,016 780,055 24,053
1,246
9,103
13. LONG-TERM DEBT
The long-term debt as of December 31, 2007 represents the current portion of loan from Korea Small Business Corporation (“SBC”)
and it is due in 2008 with interest rates of 5.88% per annum.
14. PENSION PLAN
The Labor Pension Act (the “Act”) of Taiwan became effective on July 1, 2005 and the pension mechanism under the Act is deemed
a defined contribution plan. The employees who were subject to the Labor Standards Law prior to July 1, 2005 were allowed to
choose to be subject to the pension mechanism under the Act or continue to be subject to the pension mechanism under the Labor
Standards Law. For those employees who were subject to the Labor Standards Law prior to July 1, 2005 and still work for the same
company after July 1, 2005 and have chosen to be subject to the pension mechanism under the Act, their seniority as of July 1, 2005
shall be maintained. The Act prescribes that the rate of contribution by an employer to employees’ pension accounts per month shall
not be less than 6% of each employee’s monthly salary. The Company made monthly contributions and recognized pension costs of
NT$3,476 thousand, NT$8,831 thousand and NT$12,624 thousand (US$389 thousand) for the years ended December 31, 2005, 2006
and 2007, respectively.
The Company has a defined benefit plan under the Labor Standards Law that provides benefits based on an employee’s length of
service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of
salaries paid each month to a pension fund (the “Fund”) ,which is administered by the Labor Pension Fund Supervisory Committee
established by the government (the “Committee”) and deposited in the Committee’s name in the Bank of Taiwan (originally the
Central Trust of China, which was merged into the Bank of Taiwan on July 1, 2007). Under the Labor Standards Law, the
government is responsible for the administration of the Fund and determination of the investment strategies and policies. As of
December 31, 2006 and 2007, the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the
Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a two-year time deposit published
by the local banks. The government is responsible for any shortfall in the event that the rate of return is less than the required rate of
return. Future contributions will be based on 2% of the employee salaries at that time. The Company estimates its contribution for the
year ending December 31, 2008 to be NT$1,773 thousand which was determined based on 2% of estimated salaries in 2008. The
measurement date of the plan is December 31.
The effect of adopting SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An
Amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”)on individual line items in the consolidated balance
sheet as of December 31, 2006 was as follows (in NT$ thousand):
Liability for pension benefit
Total liabilities
Accumulated other comprehensive income
Total shareholders’ equity
Before Application
of SFAS No. 158
3,119
$
962,661
43,674
4,566,023
Adjustments
(2,100)
$
(2,100)
2,100
2,100
After Application
of SFAS No. 158
1,019
$
960,561
45,774
4,568,123
F-23
The changes in benefits obligation and plan assets and the reconciliation of funded status are as follows:
Change in benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Fair value of plan assets at end of year
Reconciliation of funded status
Funded status
Amounts recognized as an other asset (liability)
Amount recognized in accumulated other comprehensive income
Net loss (gain)
Transition obligation (assets)
Total recognized in accumulated other comprehensive income
The components of net periodic benefit cost are as follows:
Service cost
Interest cost
Projected return on plan assets
Amortization of unrecognized net transition obligation and unrecognized net actuarial gain
Curtailment loss
Net periodic benefit cost
December 31
2006
NT$
2007
NT$
US$
(Note 3)
453
2
12
11
478
422
10
51
483
5
5
(51)
1
(50)
12,670 14,697
58
46
412
1,569
404
346
14,697 15,505
11,219 13,678
318
1,652
13,678 15,648
300
2,159
(1,019)
(1,019)
143
143
(2,125)
25
(2,100)
(1,660)
24
(1,636)
Year Ended December 31
2006
2005
2007
NT$ NT$ NT$
US$
(Note 3)
2
2,334
12
365
(12)
(342)
(1)
(175)
349 — — —
1
58
404
(401)
(35)
46
412
(397)
(148)
2,531
(87)
26
Other changes in plan assets and benefit obligation recognized in other comprehensive income
Net loss (gain)
Transition obligation (assets)
Recognize the decrease in net gain
Amortization of Net gain
Amortization of net obligation at transition
Total recognized in accumulated other comprehensive income
F-24
2006
NT$ NT$
2007
(2,125) —
25 —
— 429
36
(1)
(2,100) 464
—
2007
US$
(Note 3)
—
—
14
1
—
15
Weighted-average assumptions used to determine benefit obligations:
Discount rate
Rate of compensation increase
Weighted-average assumptions used to determine net projected benefit cost:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
15. INCOME TAXES
The components of income tax (benefit) expense are as follows:
Current
Domestic
Foreign
SMI Taiwan
FCI
SMI USA and others
Deferred
Domestic
Foreign
SMI Taiwan
FCI
SMI USA and others
Income tax expense
The income before income taxes for domestic and foreign entities is as follows:
Domestic
Foreign entities
SMI Taiwan
SMI USA
FCI
Others
2005
2006
2007
3.25% 2.75% 2.50%
5.00% 5.00% 4.75%
3.25% 2.75% 2.50%
3.25% 2.75% 2.50%
5.00% 5.00% 4.75%
Year Ended December 31
2005
NT$
2006
NT$
2007
NT$
US$
(Note 3)
—
—
—
—
64,398 100,343 109,113
25,490
1,062
—
6,393
—
389
64,787 106,736 135,665
3,365
786
32
4,183
—
—
— —
(25,074)
—
2,342
(22,732)
42,055
(39,067)
—
(46,637)
(85,704)
21,032
(59,835)
5,748
(1,845)
178
— —
(1,667)
2,516
(54,087)
81,578
Year Ended December 31
2005
NT$
2006
NT$
(44,415)
(121,391)
2007
NT$
US$
(Note 3)
(345,514) (10,654)
790,386 1,051,978 1,794,663 55,340
1,304
(16,056)
83,212
5,626
—
—
(8,628)
(14,558)
(45,276)
968,523 1,394,083 42,988
715,357
42,287
182,444
(279,797)
Since the Company is based in the Cayman Islands, a tax-free country, domestic tax on pretax income is calculated at the Cayman
Islands statutory rate of zero for each year.
F-25
The Company and its subsidiaries file separate income tax returns. A reconciliation of income tax expense on pretax income at
statutory rate and income tax expense is shown below:
Year Ended December 31
Cayman statutory rate
Tax on pretax income at statutory rate
Tax-exempt income
Permanent differences
AMT
Income tax (10%) on undistributed earnings
Income tax credit utilized
Net operating loss carryforwards
Net change in valuation allowance of deferred income tax assets
FIN 48 liabilities
Adjustment of prior years’ taxes and others
Income tax expense
Deferred income tax assets were as follows:
Current:
Temporary differences and others
Investment tax credits
Net operating loss carryforwards
Valuation allowance
Non-current:
Temporary differences and others
Investment tax credits
Net operating loss carryforwards
Valuation allowance
2007
2005
NT$
2006
NT$
NT$
—
(35,090)
1,394
US$
(Note 3)
— —
—
151,447 312,944 473,457 14,599
(194,463) (228,755) (433,434) (13,365)
(1,141)
19
4,683
(3,748)
(706)
780
806
589
2,516
(36,996)
629
75,721 151,853
(51,490) (121,583)
(22,916)
25,317
26,136
19,115
81,578
(1,882)
22,732 (112,737)
—
60,927
21,032
39,114
—
81,173
(70,121)
4,465
—
7,708
42,055
2006
NT$
December 31
2007
NT$
US$
(Note 3)
22,830
56,179
30,705
(6,111)
103,603
44,668 1,378
38,858 1,198
— —
— —
83,526 2,576
(1,772)
69,092 2,131
86,457 129,271 3,986
247,806 243,854 7,519
(285,250) (258,532) (7,972)
47,241 183,685 5,664
The valuation allowance shown in the table above relates to net operating loss carryforwards and tax credits for which the Company
believes that realization is uncertain. As of December 31, 2007, SMI Taiwan had unused research and development tax credits of
NT$199,710 thousand (US$6,158 thousand) which will expire in 2009 to 2011. In addition, profits generated from certain products
are exempted from income tax for five years beginning January 1, 2006. For the years ended December 31, 2005, 2006 and 2007, the
Company had NT$777,851 thousand, NT$915,018 thousand and NT$1,733,736 thousand of tax-exempt income, resulting savings on
income tax expense of NT$194,463 thousand, NT$228,755 thousand and NT$433,434 thousand, respectively. Basic and diluted
earnings per share effects from the savings on income tax expense were NT$1.70 and NT$1.67, NT$1.86 and NT$1.82, and NT$3.36
and NT$3.25 for the years ended December 31, 2005, 2006 and 2007, respectively.
As of December 31, 2007, the Company’s United States federal and state net operating loss carryforwards for income tax purposes
were approximately NT$706,325 thousand (US$21,780 thousand) and NT$41,802 thousand (US$1,289 thousand), respectively. If not
utilized, the federal net operating loss carryforwards will expire in 2020 and the state net operating loss carryforwards will expire in
2011.
F-26
As of December 31, 2007, the Company’s United States federal and state research and development tax credit carryforwards for
income tax purposes were approximately NT$30,225 thousand (US$932 thousand) and NT$26,969 thousand (US$832 thousand),
respectively. If not utilized, the federal tax credit carryforwards will expire in 2021 while the state tax credit carryforward has no
expiration date.
Current United States federal and California state laws include substantial restrictions on the utilization of net operating losses and
credits in the event of an “ownership change” of a corporation. Accordingly, the Company’s ability to utilize net operating loss and
tax credit carryforwards may be limited as a result of such “ownership change”. Such a limitation could result in the expiration of
carryforwards before they are utilized.
Unrecognized Tax Benefit
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits if as follows:
Balance at January 1, 2007
Gross increases in tax positions taken in prior year
Gross increases in tax positions taken in current year
Gross decreases as a result of settlement in current year
Reduction as result of a lapse of statue of limitations during the period
Balance at December 31, 2007
Year Ended December 31
2007
NT$
31,334
35,102
70,997
—
—
137,433
US$
(Note 3)
966
1,082
2,189
—
—
4,237
FIN 48 issued by the FASB in June 2006 requires companies to assess the probability that a tax position taken may not ultimately be
sustained. For those positions that do not meet the more-likely-than-not recognition threshold required under FIN 48, no benefit may
be recognized. The Company adopted FIN 48 as of January 1, 2007 and recorded the cumulative effect as an adjustment to retained
earnings of NT$12,000 thousand (US$370 thousand) in connection with its adoption.
If these tax benefits were recognized in the consolidated financial statements, the portion of these amounts that would reduce the
Company’s effective tax rate would be NT$27,079 thousand (US$835 thousand). The Company also has accrued penalty and interest
associated with any unrecognized tax benefits in the amount of NT$3,243 thousand (US$100 thousand). The Company does not
anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months.
The Company files income tax returns in US and foreign jurisdictions. The following table summarizes the Company’s major
jurisdictions and tax year that remain subject to examination by such jurisdiction’s tax authorities as of December 31, 2007:
Tax Jurisdiction
SMI Taiwan
FCI
SMI USA
Tax Years
2002 and onward
2003 and onward
1996 and 2004 onward
16. SHAREHOLDERS’ EQUITY
Appropriations from Earnings
Pursuant to the laws and regulations of the ROC and the respective Articles of Incorporation, the Company’s subsidiary in Taiwan
must make appropriations from annual earnings to non-distributable reserve which could affect the Company’s ability to pay cash or
stock dividends, if any. The Taiwan subsidiary may only distribute dividends after it has made allowances as determined under ROC
GAAP at each year-end for:
Payment of taxes;
a.
b.
Recovery of prior years’ deficits, if any;
F-27
c.
d.
e.
10% of remaining balance after deduction for a and b as legal reserve;
Special reserve based on relevant laws or regulations or 10% of remaining balance for deduction from a to c as special reserve;
Cash or stock bonus to employees at 0.01% of any remaining earnings after the above reserves have been appropriated, based on
a resolution of the board of directors. If bonus to employees is in the form of stock, the bonus may also be appropriated to
employees of subsidiaries under the board of directors’ approval;
17. EQUITY INCENTIVE PLAN
2004 Stock Option Plan and 2005 Equity Incentive Plan
In 2004, SMI Taiwan adopted a 2004 Employee Stock Option Plan (“the 2004 Plan”). The 2004 Plan reserved 8,000 units with each
unit entitled to subscribe for 1,000 shares of common stock after the requisite service is rendered. The options may be granted to
qualified employees of the Company or any of its domestic or foreign subsidiaries and expire no later than six years from the date of
grant. Generally, the options are granted at an exercise price not lower than the market value of the SMI Taiwan’s common stock at
the date of the grant and vest over four years at certain percentages after two years from the date of grant. On December 31, 2004,
4,000 units were granted to employees at an exercise price of NT$40 (US$1.26) per share. As part of the share exchange between the
Company and the shareholders of SMI Taiwan effective on April 25, 2005, the Company agreed to assume the share options
previously issued by SMI Taiwan. Subsequently on June 3, 2005, the Company amended the 2004 Plan such that options under the
2004 Plan are granted at an exercise price not lower than the market value of the Company’s ordinary shares at the date of the grant
and vest over four years at certain percentages after one year from the date of grant.
On April 22, 2005, the Company adopted its 2005 Equity Incentive Plan (“the 2005 Plan”). The 2005 Plan provides for the grant of
stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights, which may be granted to
employees (including officers), directors and consultants. The 2005 Plan reserved 10,000 thousand shares of ordinary shares,
inclusive of the number of assumed share options under the 2004 Plan, for issuance upon the exercise of stock options.
In 2006, the Company amended the 2005 Plan to reserve additional 15,000 thousand shares of ordinary shares for issuance upon
exercise of stock options and restricted stock units.
Restricted stock units are converted into shares of the Company’s ordinary share upon vesting on one-for-one basis. The vesting of
restricted stock unit is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the
fair value of the Company’s ordinary share on the date of the grant, and compensation is recognized on a straight-line basis over the
requisite service period of 3 to 5 years. The Company’s restricted stock units are considered nonvested share awards as defined under
SFAS No. 123(R).
Adoption of SFAS No. 123(R)
The Company adopted SFAS No. 123(R) effective January 1, 2006. SFAS 123(R) requires the recognition of the fair value of stock
compensation in net income. The Company recognizes stock compensation expense over the requisite service period of the individual
grantees, which generally equals the vesting period. Prior to January 1, 2006, the Company followed Accounting Principles Board
Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock compensation. Under the
intrinsic value method, no stock-based compensation expense had been recognized in the Company’s consolidated statements of
income, because the exercise price of the Company’s stock options granted to employees and directors equaled the fair value of the
underlying stock at the date of grant.
The Company elected the modified prospective application method for adopting SFAS No. 123(R). Under this method, the
unrecognized expense of awards not yet vested at January 1, 2006, the date of adoption is recognized in net income in the periods
after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions
of SFAS No. 123, “Accounting for Stock-Based Compensation,” as disclosed in the Company’s previous annual report.
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards
that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s consolidated
statement of income for the year ended December 31, 2006 includes compensation expense
F-28
for stock options granted subsequent to December 31, 2005 and stock options granted before January 1, 2006 but unvested yet. The
grant date fair values of those stock options were determined in accordance with the provision of SFAS No. 123 (R). The Company
recognizes compensation net of a forfeiture rate for only those awards expected to vest, on a straight line basis over the requisite
service period of the award which is about 3 to 5 years. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock Option and Restricted Stock Units Activity
The following is a summary of, the 2004 Plan and the 2005 Plan, which includes stock options and restricted stock units:
Available for grant at January 1, 2005
Authorized
Options granted
Available for grant at January 1, 2006
Authorized
Options granted
Available for grant at January 1, 2007
Options granted
Restricted stock units granted
Available for grant at December 31, 2007
Unit
(in Thousands)
4,000
2,000
(4,350)
1,650
15,000
(2,950)
13,700
(761)
(4,527)
8,412
Stock Options
A summary of the stock option activity and related information is as follows:
Outstanding at January 1, 2007
Options granted
Options canceled
Options exercised
Outstanding at December 31, 2007
Options Vested and expected to vest
after December 31, 2007
Options Exercisable a December 31,
2007
Number of
Options Shares
(in Thousands)
9,615
761
(1,145)
(1,889)
7,342
6,678
2,288
Weighted Average
Exercise Price
(US$)
Weighted Average
Remaining
Contractual Life
(Years)
Aggregate Intrinsic
Value
(US$ thousand)
2.468
3.318
2.251
2.272
2.641
2.640
2.594
7.54
7.29
7.33
5,885
32,145
12,053
4,234
The weighted-average-grant date fair value of stock options granted during the years ended December 31, 2005, 2006 and 2007 was
US$2.66, US$3.46 and US$3.32, respectively.
As of December 31, 2007, there was NT$ 140,835 thousand (US$4,343 thousand), net of estimated forfeitures, of total unrecognized
compensation cost related to non-vested share-based compensation awards granted under the Company’s stock option plans. This cost
will be amortized over a weighted average period of approximately 1.25 years.
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing
stock price on the last trading day of fiscal year 2007 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on December 31, 2007. Intrinsic value
will change in future periods based on the fair market value of the Company’s stock and the number of shares outstanding.
F-29
Determining Fair Value
The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation model requires the input of highly subjective assumptions, including the
expected stock price volatility. The Company used the following weighted-average assumptions for each year in calculating the fair
value of the options granted:
Expected dividend yield
Expected volatility
Risk free interest rate
Expected life
2005
—
Year Ended December 31
2006
—
2007
—
59.82%–66.39%
4.10%–4.37%
2.38 years
55.35%–68.17%
4.74%–5.03%
3.08 years
45.85%–51.88%
4.54%–4.59%
0.8–3.08 years
The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model that use
the assumptions in the following table. Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected volatilities are based on historical volatilities of stock prices of companies similar to the Company. Expected term
represents the periods that the Company’s share- based awards are expected to be outstanding and was determined based on historical
experience regarding similar awards, giving consideration to the contractual term of the share-based awards. The dividend yield is
zero as the Company has never declared or paid dividends on the ordinary shares or other securities and does not anticipate paying
dividends in the foreseeable future.
Restricted Stock Units
A summary of the status of restricted stock units and changes during the year ended December 31, 2007 is as follows:
Nonvested at January 1, 2007
Restricted stock units granted
Restricted stock units canceled
Nonvested at December 31, 2007
Number of
Nonvested
Stock Units
(in Thousand)
—
4,527
(276)
4,251
Weighted Average
Grant Date Fair
Value (US$)
Weight Average
Remaining
Recognition
Period (Years)
—
5.02
4.78
5.03
3.60
As of December 31, 2007, there was NT$568,276 thousand (US$17,523 thousand) of total unrecognized compensation cost related to
restricted stock units granted under the 2005 Plan.
18. COMMITMENTS AND CONTINGENCIES
In 2001, SMI Taiwan received a subsidy from the ROC Industrial Development Bureau (IDB) for research and development of
controller products and a semiconductor data storage system. The subsidy was in the form of cash of NT$5,093 thousand and non-
interesting bearing loan of NT$5,093 thousand. The non-interesting bearing loan in eight consecutive quarterly payments and has
been totally paid off by the Company in January 2005. SMI Taiwan is required to pay the IDB 2% of sales as royalty payments from
any products resulting from the research and development project for a period of three years following the initial sale. Total royalties
paid cannot exceed 30% of the total amount of the subsidy loan amount, or approximately NT$1,530 thousand. As of December 31,
2007, the Company completed the research and development project under this agreement, however, the Company has not sold any
products using this technology and the products were end of product life cycle therefore the Company will not pay or accrue any
royalty payments related to the projects.
In 2000, FCI entered into a government grant agreement expiring in 2010 with the Ministry of Commerce Industry and Energy in
Korea (“MOCIE”) to develop new technology. The agreement requires FCI to pay back 20~30% of the total
F-30
received government grant and accordingly, the Company recorded a liability in the amount of NT$39,293 thousand (US$1,212
thousand), of which NT$183 thousand (US$6 thousand) and NT$39,110 thousand (US$1,206 thousand) were included in the current
portion of long-term payable and long-term payable, respectively, on the balance sheet as of December 31, 2007. If the project is
unsuccessful in accordance with the Industrial Technology Development Operation Guideline (“Guideline”) issued by the MOCIE,
FCI may be required to refund all or a portion of the remaining 70~80% of the total received government grant. Based on historical
experience that FCI has not been required to refund any received government grant, anticipated chance of success in the project as
well as due care that FCI has exercised, FCI believes that it will not be required to refund the grant in accordance with the Guideline
and determined that no additional liability is required at December 31, 2007.
Operating Leases
The Company entered into various operating lease agreements for office space that expire on various dates through March 2012. The
Company recognized rent expense during the years ended December 31, 2005, 2006 and 2007 of NT$24,215 thousand, NT$33,673
thousand and NT$43,744 thousand (US$1,349 thousand), respectively. The minimum operating lease payments under these leases as
of December 31, 2007 were NT$29,976 thousand, NT$13,417 thousand, NT$13,185 thousand, NT$4,122 thousand, and NT$1,045
thousand for the years ending December 31, 2008, 2009, 2010, 2011 and 2012, respectively.
Litigation
The Company are subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of
business. Although the outcome of such proceedings and claims cannot be predicted with certainty, management does not believe that
the outcome of any of these matters will have a material adverse effect on our business, results of operations, financial position or
cash flows. Any litigation, however, involves potential risk and potentially significant litigation costs, and therefore there can be no
assurance that any litigation which is now pending or which may arise in the future would not have such a material adverse effect on
our business, financial position, results of operations or cash flows.
On August 15, 2002, SMI Taiwan filed an action against two of its former employees and Phison Electronics Corporation, or Phison,
with the Taiwan Hsinchu District Court. The complaint alleges that the two former SMI Taiwan employees who were subsequently
hired by Phison, and Phison violated the Business Secret Law and Copyright Law of the ROC for the infringement of certain
intellectual property rights to compact flash controller chips owned by SMI Taiwan. On May 15, 2003, SMI Taiwan named Winbond
Electronics Corporation, or Winbond, as a defendant in the same action. On April 8, 2004, the Taiwan Hsinchu District Court issued a
ruling determining that the two former SMI Taiwan employees, Phison and Winbond did not violate the Business Secret Law and
Copyright Law of the ROC. The Taiwan Hsinchu District Court ruling stated that there was sufficient evidence to show that the
defendants obtained SMI Taiwan’s consent to respectively produce and purchase the compact flash controller chips that were the
subject of the lawsuit. On May 4, 2004, SMI Taiwan appealed the Taiwan Hsinchu District Court’s ruling to the Taiwan High Court.
After a sum of NT$3,000 thousand for compensation had been paid by Phison , the dispute was settled out on September 22, 2006.
On January 2, 2003, O2Micro International Limited, or O2Micro, a Cayman Islands company, filed an action for a preliminary
injunction against SMI Taiwan with the Taiwan Hsinchu District Court. On February 6, 2003, SMI Taiwan filed an action for a
preliminary injunction against O2Micro. A court-appointed appraiser completed a report stating that SMI Taiwan’s products raised in
the case do not infringe O2Micro’s patent and O2Micro’s application for a preliminary injunction was thus dismissed. O2Micro
appealed this case to the Taiwan High Court on November 28, 2005. On January 14, 2004, O2Micro filed for a preliminary injunction
against SMI Taiwan and Microstar, a Taiwan customer of SMI Taiwan with the Taiwan Panchiao District Court. On May 20, 2004,
the Taiwan Panchiao District Court issued a preliminary injunctive order against SMI Taiwan and Microstar . The Taiwan High Court
rejected the appeal filed by SMI Taiwan on March 10, 2005, and SMI Taiwan appealed to the Taiwan Supreme Court. On
November 10, 2005, the Taiwan Supreme Court vacated the Taiwan High Court Ruling and the case was remanded for further
proceedings. On February 3, 2004, O2Micro filed an application for a provisional seizure of NT$15 million against SMI Taiwan with
the Taiwan Hsinchu District Court. The Taiwan Hsinchu District Court issued a provisional seizure order and attached some of SMI
Taiwan’s assets. On September 24, 2004, O2Micro filed an action against SMI Taiwan with the Taiwan Hsinchu District Court.
On February 9, 2007, SMI Taiwan and O2Micro agreed to withdraw this case and provide no payment, as well as all the above-
mentioned claims and application. As a result of this settlement, no payments were made by Silicon Motion to O2Micro.
F-31
On May 1, 2005, SMI Taiwan incurred a loss on inventory in the possession of subcontractor, Advanced Semiconductor Engineering
Inc., or ASE, due to fire. SMI Taiwan is currently in the claims process with ASE for an amount exceeding the book value of loss
inventory. After consultation with the Company’s outside legal counsel, the Company believes it is highly probable for the Company
to receive reimbursement for the lost inventory at full book value, and the Company subsequently recorded NT$41,226 thousand
(US$1.3 million) of inventory loss, offset by NT$41,226 thousand (US$1.3million) of fire loss reimbursement, resulting in zero
impact to the earnings for the period. In connection with the inventory loss, the Company also recorded NT$8,122 thousand
(US$249,000) under non-operating expenses for amounts paid to certain customers for delays in shipment caused by the fire.
On December 12, 2005, SMI Taiwan filed an action against ASE with the Taiwan Taoyuan District Court. SMI Taiwan alleges that
ASE destroyed the wafer which SMI Taiwan had sub-contract to ASE with the OEM Agreement between SMI and ASE, and that
ASE should pay SMI Taiwan a sum of NT$77,218 thousand (US$2.4 million) for damages. The Taiwan Taoyuan District Court is
currently conducting preparatory proceeding.
On October 23, 2007, SanDisk Corp. (“SanDisk”) filed a complaint in the United States International Trade Commission (“ITC”)
against multiple respondents, including Silicon Motion Technology Corp., SMI Taiwan and SMI USA (in aggregate “Silicon
Motion”). SanDisk claims that certain Silicon Motion flash memory controllers and products containing these Silicon Motion flash
memory controllers infringe specific SanDisk patents. The complaint requests that the ITC institute an investigation into the matter
and seeks a permanent exclusion order to exclude from entry into the United States all flash memory controllers and products
containing controllers that infringe any of the asserted patents. The complaint also seeks a permanent cease and desist order, directing
respondents with respect to their domestic inventories to cease and desist from marketing, advertising, demonstrating, sampling,
warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any flash memory controllers and
products containing flash controllers that infringe any of the asserted patents.
On October 24, 2007, SanDisk Corp. filed two complaints, for alleged patent infringement against multiple defendants, including
Silicon Motion, in the United States District Court for the Western District of Wisconsin. The complaints allege that Silicon Motion’s
flash memory controllers infringe certain SanDisk patents and seek unspecified damages, injunctive relief, a trebling of damages for
alleged willful conduct and attorneys’ fees. Both cases have been stayed until SanDisk’s ITC proceeding becomes final. On
December 6, 2007, the ITC instituted an investigation, identifying forty-seven companies, including Silicon Motion, as respondents.
An ITC hearing has been set for October 27, 2008. As of December 31, 2007, the Company is unable to ascertain the ultimate amount
of any monetary liability or financial impact that the Company may incur with these matters.
19. SEGMENT INFORMATION
The Company designs, develops and markets semiconductor products. The Company operates in one segment. The chief operating
decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making
operating decisions and assessing financial performance.
Net sales by product consist of the following:
Product
Mobile storage
Mobile communications
Multimedia SoCs
Other products
F-32
Year Ended December 31
2005
2006
2007
NT$
NT$
NT$
US$
(Note 3)
2,270,121 3,004,507 4,500,115 138,764
— 761,608 23,485
402,139 432,072 563,739 17,383
674
2,686,492 3,460,459 5,847,329 180,306
14,232
21,867
23,880
—
Net sales by geographic area are presented based upon the customer’s bill to location:
Year Ended December 31
Country
Taiwan
United States
Japan
Korea
China
Others
2005
NT$
2006
NT$
2007
NT$
98,510 116,272 106,702
US$
(Note3)
1,576,731 2,021,288 2,422,501 74,699
515,848 340,327 348,658 10,751
3,290
119,198 368,198 1,525,816 47,050
249,842 307,422 969,168 29,885
126,363 306,952 474,484 14,631
2,686,492 3,460,459 5,847,329 180,306
Long-lived assets by geographic area were as follows:
Year Ended December 31
Country
Taiwan
United States
Korea
Others
2005
2006
NT$ NT$
2007
NT$
US$
(Note3)
79,023 308,117 401,511 12,381
209
3,377
— — 98,022 3,023
1,334
397
83,734 319,356 519,189 16,010
8,348 12,879
2,891
6,777
20. SUBSEQUENT EVENT
On March 12, 2008, the Company announced a share repurchase program under which the Company, or one of its affiliates, may
repurchase up to US$40 million of its American Depositary Shares (“ADS”). Repurchases under the program may be conducted at
any time during the period commencing March 12, 2008 and extending through March 11, 2009. The program does not obligate the
Company to acquire any particular amount of ADS and the program may be modified or suspended at any time at the Company’s
discretion. The repurchases will be made in the open market, in privately negotiated transactions, or in structured share purchase
programs and will be funded from available working capital.
F-33
AC-Link/IIS
ACS
AsH3
Bad block
Annex A
GLOSSARY OF TECHNICAL TERMS
An audio interface. Has significant advantages over the most prevalent power conversion technologies, which
are based on Pulse Width Modulation (PWM). These advantages stem from the simplicity and versatility of
its circuit topology (hardware), combined with the sophistication of its control methodology (software).
Adjacent Channel Selectivity. ACS is a measurement of a receiver’s ability to process a desired signal while
rejecting a strong signal in an adjacent frequency channel. ACS is defined as the ratio of the receiver filter
attenuation on the assigned channel frequency to the receiver filter attenuation on the adjacent channel
frequency.
Arsine. A colorless, flammable, highly toxic gas used as a doping agent for the preparation of semiconductor
materials.
Most NAND flash, like all types of mass storage memory, contain some initial bad blocks within the memory
array, which are typically marked as bad by the manufacturer to indicate that they should not be used.
Because good blocks in a NAND flash can degrade and wear out, it is important for devices using NAND
flash to track not only the initial, factory-marked bad blocks but also the blocks that go bad during normal
operation and manage this issue with appropriate bad block management algorithm. A block is the smallest
erasable entity in a NAND flash.
Bit error
A NAND flash is occasionally affected by corruption of memory at the binary digit (bit) level, which must be
corrected by complex error correcting algorithms, know as error correction codes (ECC).
Board estate
The space a device occupies on a motherboard.
CF
CDMA
CMOS
CPU
DAB
DRAM
DSC
DVB-H
Compact Flash. A type of non-volatile memory storage media commonly used in portable devices such as
personal computers, digital cameras, video camcorders, and audio players.
Code division multiple access. A form of multiplexing and a method of multiple access that divides up a radio
channel by using different pseudo-random code sequences for each user. Also refers to digital cellular
telephony systems that make use of this multiple access scheme.
Complementary Metal Oxide Silicon. A fabrication process that incorporates n-channel and p-channel
complementary metal oxide semiconductor transistors within the same silicon substrate. This is the most
commonly used integrated circuit fabrication process technology.
Central Processing Unit.
Digital Audio Broadcasting. A technology for broadcasting audio using digital radio transmission.
Dynamic Random Access Memory. A memory cell in which digital information (data) is stored in a volatile
state. It is a key component of digital circuits.
Digital Still Camera
Digital Video Broadcasting – Handheld. A technical specification for bringing digit TV broadcast services to
mobile phones. The major competitor of this technology is Digital Multimedia Broadcasting (DMB), which
can either operate via terrestrial (see T-DMB) or satellite (see S-DMB) transmission.
A-1
DualMon
DVD
IC
Interleaving
JPEG
FastMDC
Our technology that enables one graphics processor to control two different displays containing two different
images, which saves cost and board estate.
Digital video disc
Integrated Circuit. A miniaturized electronic circuit (consisting mainly of semiconductor devices, as well as
passive components) that has been manufactured in the surface of a thin substrate of semiconductor material.
A method of writing to multiple NAND flash memories simultaneously to increase the data transfer rate
between the storage device and the host device.
Joint Photographic Experts Group. A commonly used standard method of compression for digital images.
Fast Management Data-link & Calculation. A cost-effective solution for ultra high performance of flash
access time and high reliability of data storage.
Flash memory
A type of solid-state, non-volatile memory. The name “flash” is derived from the rapid block erase operation.
Flash memory is the most popular form of non-volatile semiconductor memory currently available.
LCD
LNA
Liquid Crystal Display.
Low Noise Amplifier. A semiconductor device in the receiver section of a wireless system that receives
signals from an antenna at extremely low signal levels which are amplified by a factor of approximately 10 to
1,000 with the addition of as little interference as possible.
Memory
A device that can store information for later retrieval.
Memory Stick
A removable flash memory card format developed by Sony. Also used in general to describe the whole
family of Memory Sticks, including the Memory Stick PRO, a revision that allows greater storage capacity
and faster file transfer speeds (including the Memory Stick PRO-HG, a high speed variant of the PRO, to be
used for high definition still and video cameras); Memory Stick Duo, a small-form-factor version of the
Memory Stick (including the PRO Duo); and the even smaller Memory Stick Micro (M2).
Micron
A term for micrometer, which is a unit of linear measure that equals one one-millionth (1/1,000,000) of a
meter. There are 25.4 microns in one one-thousandth of an inch.
Mixed-signal
The combination of analog and digital circuitry in a single semiconductor.
MLC
MMC
MMCA
MP3
Multi-Level Cell. A NAND flash technology that enables two or more times the capacity compared to a SLC
NAND flash, therefore more capacity for a similar cost. A 2x MLC stores 2 bits of data per physical cell
instead of the traditional 1 bit per cell using SLC technology.
MultiMediaCards. A flash memory card format. Also used in general to describe the whole family of MMCs,
including RS-MMC, a smaller form-factor version of MMC, and the even smaller MMCmicro.
MultiMediaCard Association. A memory card organization that promotes the MMC format.
MPEG-1 Audio Layer 3. A popular audio encoding format, which uses compression algorithm that is
designed to greatly compress the amount of data required to represent the audio recording.
NAND flash
A type of flash memory.
ODM
OEM
Original Design Manufacturer.
Original Equipment Manufacturer.
A-2
PA
Power Amplifier. Provides signal amplification in the transmitter section of a wireless system in order to
boost a signal through the antenna.
PC Architecture
The design of a personal computer (i.e. configuration of the motherboard, CPU and memory).
PCMCIA
PDA
PH3
RAM
ReadyBoost
ReduceOn
RF IC
S-DMB
SD
SDCA
SDRAM
Personal Computer Memory Card International Association. An organization consisting of some 500
companies that has developed a standard for PC cards used in notebook computers.
Personal Digital Assistant.
Phosphine. Gaseous compound commonly used in silicon manufacturing as a source of phosphorus.
Random Access Memory. A type of data storage used in computers that allows the stored data to be
accessed at random.
A data caching technology first included with Microsoft’s Windows Vista operating system. It aims to
make computers running Windows Vista more responsive by using flash memory on a USB 2.0 drive, SD
card, CompactFlash, or other form of flash memory, in order to boost system performance.
Our graphics processor technology which enables intelligent power management that algorithmically varies
the clock and power to functional units based on system needs to significantly reduce average operating
power usage.
Radio Frequency Integrated Circuit. Includes amplifiers, mixers, modulators/demodulators, receivers,
transmitters and transceivers.
Satellite Digital Multimedia Broadcasting. A satellite digital radio transmission system for sending
multimedia (radio, TV, and datacasting) to mobile devices such as mobile phones.
Secure Digital. A flash memory card format. Also used in general to describe the whole family of SD cards,
including miniSD, a smaller form-factor version of SD, and the even smaller microSD.
Secure Digital Card Association. A memory card organization that promotes the SD format.
Synchronous DRAM. A type of DRAM (see DRAM) that can run at much higher clock speeds than
conventional memory. SDRAM synchronizes itself with the CPU’s bus.
Semiconductor
An element with an electrical resistivity within the range of an insulator and a conductor. A semiconductor
can conduct or block the flow of electric current depending on the direction and magnitude of applied
electrical biases. Refers to the controller, multimedia SoC, RF IC, etc.
Semiconductor solution Includes the controller as well as the software.
SiP
SLC NAND
SoC
System-in-Package. A multi-chip module that integrates a number of integrated circuits enclosed in a single
package. A SiP solution is valuable in space constrained environments such as MP3 players and mobile
phones and helps reduce the complexity of the PCB and overall design.
Single-Level Cell. A 1 bit of data per physical cell NAND flash memory technology. SLC offers less
capacity per cost compared to MLC, but better robustness, reliability, speed and endurance
System-on-a-Chip. A chip that incorporates functions usually performed by several different devices into a
single chip and therefore generally offers better performance and lower cost.
A-3
SPI
STiMi
T-DMB
Serial Peripheral Interface. A board-level serial peripheral bus.
Satellite Terrestrial Interactive Multiservice Infrastructure. A mobile TV broadcasting standard developed
by the Academy of Broadcasting Science of China’s State Administration of Radio Film and Television
(SARFT).
Terrestrial Digital Multimedia Broadcasting. A terrestrial digital radio transmission system for sending
multimedia (radio, TV, and datacasting) to mobile devices such as mobile phones.
Two plane architecture
A NAND flash architecture that allows simultaneous transfer of data in and out of two different memory
planes, nearly doubling memory performance.
UFD
USB
WCDMA
Wear-leveling
USB Flash Drive.
Universal Serial Bus.
Wideband Code Division Multiple Access. A type of 3G cellular network that utilizes the direct sequence
CDMA signaling method to achieve higher speeds and support more users.
A technique for prolonging the service life of certain kinds of erasable computer storage media, such as
flash memory and hard disk drives by arranging data so that erasures and re-writes are distributed evenly
across the medium. In this way, no single part of the medium prematurely fails due to a high concentration
of write cycles.
Windows Media DRM
A Digital Rights Management service for the Windows Media platform, which is designed to provide secure
delivery of audio and/or video content over an IP network to a PC or other playback device in such a way
that the distributor can control how that content is used.
WMA
xD
Windows Media Audio. Microsoft’s proprietary audio codec designed to compete with MP3.
xD Picture Card. A flash memory card format.
A-4
EXHIBIT 12.1
I, Wallace C. Kou, certify that:
1.
I have reviewed this annual report on Form 20-F of Silicon Motion Technology Corporation;
CERTIFICATIONS
2.
3.
4.
5.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this report;
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d and 15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the
company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of company’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: May 12, 2008
/s/ WALLACE C. KOU
Wallace C. Kou,
Chief Executive Officer
EXHIBIT 12.2
I, Riyadh Lai, certify that:
1.
I have reviewed this annual report on Form 20-F of Silicon Motion Technology Corporation;
CERTIFICATIONS
2.
3.
4.
5.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods
presented in this report;
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d and 15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the
company’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of company’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: May 12, 2008
/s/ RIYADH LAI
Riyadh Lai,
Chief Financial Officer
CERTIFICATION
EXHIBIT 13.1
Pursuant to 18 U.S.C. Section 1350, the undersigned each hereby certifies that, to his knowledge, the annual report on Form 20-
F of Silicon Motion Technology Corporation for the year ended December 31, 2007 fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the such report
fairly presents, in all material respects, the financial condition and results of operations of Silicon Motion Technology Corporation.
Date: May 12, 2008
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
/s/ WALLACE C. KOU
Wallace C. Kou,
Chief Executive Officer
/s/ RIYADH LAI
Riyadh Lai,
Chief Financial Officer
ADS LISTING
Silicon Motion Technology Corporation’s
American Depositary Share (ADS) trades on
The NASDAQ Global Select Market under
the symbol “SIMO”
ADS DEPOSITARY
The Bank of New York
New York, NY
LEGAL COUNSEL
Kirkpatrick & Lockhart Preston Gates
Ellis LLP
Taipei, Taiwan
INDEPENDENT AUDITORS
Deloitte & Touche
Taipei, Taiwan
INVESTOR RELATIONS
For more information about Silicon Motion,
please visit our website at
www.siliconmotion.com or email us at
ir@siliconmotion.com
BOARD OF DIRECTORS
James Chow
Chairman of the Board
Silicon Motion Technology Corporation
Wallace C. Kou
President & Chief Executive Officer
Silicon Motion Technology Corporation
Henry Chen
Chairman
Mercuries and Associates, Ltd.
Tsung-Ming Chung
Chairman & CEO
Dynapack International Technology Corp.
C. S. Ho
Chairman
SiPix Group
Lien-Chun Liu
Research Fellow
Taiwan Research Institute
Yung-Chien Wang
Vice President
Professional Trust Co., Ltd.
EXECUTIVE OFFICERS
Wallace C. Kou
President & Chief Executive Officer
Riyadh Lai
Chief Financial Officer
Ken Chen
VP of Operations
Frank Chang
VP of R&D, Mobile Storage
Arthur Yeh
VP of Sales, Mobile Storage and Multimedia SoCs
James Yun
Executive VP, Mobile Communications
www.siliconmotion.com