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Financial Highlights
Product Mix
7%
25%
68%
Storage
Communications
Multimedia
Net Sales
180
169
91
143
218
2007
2008
2009
2010
2011
1.21
0.29
-2.61
-0.18
1.25
Diluted Earnings
per ADS
2007
2008
2009
2010
2011
Gross Margin
53%
47%
41%
47%
48%
2007
2008
2009
2010
2011
% of Net Sales % of Net SalesUS$ millionsUS$ Dear Shareholders,
2011 was a record year for Silicon Motion. We grew
been delivering best-in-class controllers for managing
our revenue 58% to $218 million, the highest in our
next generation NAND flash manufactured with finer
corporate history, and grew diluted earnings per
design geometry processes and advanced TLC
ADS to $1.25, another corporate milestone. Also
architectures. Our high performance, cost competitive
this year, growth from our 4G LTE transceivers, the
controllers are attractive to OEMs who use them to
first of our New Growth Products, scaled with sales
focus on the smartphone bundled card market, high
into six Samsung smartphones and tablets and
perfomance memory cards for the retail market, as
accounted for over 10% of our total revenue. While
well as faster growing eMMC and SSD markets, and
most of our growth over the last many years came
as a result, our sales to OEMs more than doubled
from our memory card and USB flash drive
last year.
controllers, we have been investing significant R&D
resources on New Growth Products, specifically
We are off to a strong start in 2012. Our market
LTE transceivers as well as SSD and embedded
leading memory card and USB flash drive controllers
flash memory controllers, which will drive our longer
remain in strong demand by OEMs and module
term growth. We began initial mass production of
makers. Currently, we have almost twice the LTE
our eMMC controllers, our second New Growth
transceiver design-wins with Samsung compared to
Product, at the end of 2011 and believe our eMMC
2011. Our eMMC controllers have entered mass
controllers will also contribute materially to our
production, are now shipping to both Samsung and
growth in 2012. eMMC is a type of embedded flash
SK Hynix and have been designed into smartphones
memory that is widely used by smartphone and
and tablets with at least 11 OEMs. We believe that
tablet OEMs as the “SSD” for their mobile devices.
while growth from our memory card and USB flash
We increased our Mobile Storage revenue by a stellar
Products which are now scaling, are capable of
55% last year. Our performance was the result of
driving the longer term growth of Silicon Motion.
drive controllers will moderate, our New Growth
strong memory card controller sales, robust global
smartphone growth, market share gains, controller
Once again, I would like to thank our customers,
technology leadership, and our OEM customer focus.
employees and shareholders for their continuing
We grew our memory card controller revenue 77% in
support. Our successes would not have been
2011, after growing it 56% in 2010. Global sales of
possible without you.
smartphones, specifically Android ones, increased
strongly in 2011, and many of these smartphones are
sold with bundled memory cards. We benefited from
this trend given that over half of our card controller
sales are for bundled memory cards. Additionally, we
believe our market share for memory card controllers
Sincerely,
increased to over 30% in 2011. To capture
market growth opportunities and to increase
our competitiveness, we have been investing
aggressively in controller technology. We have
President & Chief Executive Officer
About Silicon Motion
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: mobile storage, mobile communications, 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, and
embedded flash applications. Our mobile communications business is composed primarily of
handset transceivers and mobile TV IC solutions. Our multimedia SoCs business is composed
primarily of embedded graphics processors.
We are headquartered in Taiwan and have offices and research facilities in the US, Taiwan,
Korea, China, and Japan.
Mobile Storage
· Memory Card Controllers
· USB Flash Drive Controllers
· Solid Stated Drive Controllers
· Embedded Flash Controllers
eMMC
Multimedia SoCs
· Embedded Graphics
Mobile Communications
· LTE & CDMA EV-DO RTx
· Mobile TV
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(cid:0)
⌧
(cid:0)
(cid:0)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
For the transition period from to
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
Tel: +886 3 552 6888
Fax: + 886 3 560 0336
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary shares, par value US$0.01 per share*
American Depositary Shares, each representing
four ordinary shares
Name of each exchange on which registered
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: 124,572,544, ordinary shares as of December 31, 2011, 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
(cid:0)
⌧
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
(cid:0)
⌧
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
No
⌧
(cid:0)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
(cid:0)
(cid:0)
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
(cid:0)
Accelerated filer
Non-accelerated filer
⌧
(cid:0)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
⌧
U.S. GAAP
International Financial Reporting Standards as issued
(cid:0)
by the International Accounting Standards Board
(cid:0)
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the
(cid:0)
(cid:0)
registrant has elected to follow.
Item 17
Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
(cid:0)
⌧
Act): Yes
No
PART I
TABLE OF CONTENTS
KEY INFORMATION
OFFER STATISTICS AND EXPECTED TIMETABLE
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
FINANCIAL INFORMATION
THE OFFER AND LISTING
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
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
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
i
1
1
1
1
14
20
20
37
43
43
44
45
48
49
50
50
50
50
52
52
52
52
52
53
53
54
54
54
54
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 of our 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 Stock 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”, “SMTC” and “Silicon Motion” are to Silicon Motion Technology Corporation, its
•
•
•
•
•
•
•
•
•
•
•
predecessor entities and subsidiaries including but not limited to (i) Silicon Motion, Inc., incorporated in Taiwan, or SMI
Taiwan, and formerly known as Feiya Technology Corporation, (ii) Silicon Motion, Inc., a California, USA, corporation,
or SMI USA, and (iii) FCI, Inc., incorporated in Korea, or FCI.
Silicon Motion, the Silicon Motion logo, FCI, the FCI logo, airRF, basicRF, ezRF, ezSYS, powerRF, twinRF, zipRF, zipSYS,
SSDLifeGuard, SSDLifeSaver, TurboMLC and FerriSSD 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 exchange rate as set forth in the statistical release of the
Federal Reserve Board. 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 exchange rate in effect on December 30, 2011, which was NT$30.27 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 — We are subject to risks associated with
international operations which may harm our business” for discussions on how fluctuating exchange rates could affect our
profitability and your investment in us. On April 13, 2012, the exchange rate was NT$29.48 to US$1.00.
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. These 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 implied 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 consumer electronics market, including effects of the
global economic recession of 2008 and 2009;
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’ financial health, sales outlook, purchasing patterns and inventory adjustments based on consumer demand,
market adoption of new technologies and general economic conditions;
our ability to successfully develop, introduce and sell innovative, new or enhanced products in a timely manner; 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.
ITEM 3.
Selected Consolidated Financial Data
KEY INFORMATION
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, 2009, 2010 and 2011 and
the selected consolidated balance sheet data as of December 31, 2010 and 2011 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, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007,
2008 and 2009 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 goodwill and long-lived assets
(1)
Write-off of in-process research and development
Gain from settlement of litigation
(3)
Total operating expenses
(2)
Operating income (loss)
Total non-operating income (loss)
Income (Loss) before income taxes
Income tax expense (benefit)
Net income (loss)
2007
NT$
2008
NT$
Year Ended December 31,
2010
NT$
2009
NT$
(in thousands, except for per share data)
2011
NT$
2011
US$
5,847,329 5,528,051 2,893,230 4,177,250 6,603,424 218,151
2,757,102 2,914,587 1,702,808 2,219,634 3,415,861 112,846
3,090,227 2,613,464 1,190,422 1,957,616 3,187,563 105,305
—
76,377
—
395,985
464,688
192,391
1,236,549
368,863
675,285
193,800
—
—
—
822,747 1,080,918 1,122,491 1,054,194 1,194,647 39,466
389,065 428,563 14,158
298,199
305,613 333,724 11,025
381,749
763
69,244
163,704
—
—
—
—
—
(46,941)
1,742,776 2,318,866 3,412,104 1,771,175 1,980,022 65,412
186,441 1,207,541 39,893
1,347,451
(360,677) 183,597
46,632
6,065
(174,236) 1,391,138 45,958
1,394,083
5,606
(18,869) 169,706
81,578
(155,367) 1,221,432 40,352
1,312,505
294,598 (2,221,682)
85,431
(80,732)
380,029 (2,302,414)
6,784
86,608
293,421 (2,309,198)
23,088
—
—
—
—
—
1
Weighted average shares outstanding:
Basic
Diluted
Earnings (Loss) per share:
Basic
Diluted
Earnings (Loss) per ADS :
(4)
Basic
Diluted
Year Ended December 31,
2007
NT$
2008
NT$
2009
NT$
2010
NT$
2011
NT$
2011
US$
(in thousands, except for per share data)
129,041 124,080 110,694 116,159 123,082 123,082
133,291 125,304 110,694 116,159 129,370 129,370
10.17
9.85
2.36
2.34
(20.86)
(20.86)
(1.34)
(1.34)
9.92
9.44
40.68
39.39
9.46
9.37
(83.45)
(83.45)
(5.35) 39.69
(5.35) 37.77
0.33
0.31
1.31
1.25
Impairment of goodwill and long-lived assets relating to FCI and Centronix acquisitions.
(1)
(2) Write-off of in-process research and development generated from FCI acquisition after it was determined that the underlying
projects had not reached technological feasibility and no alternative future uses existed.
(3) Gain from favorable settlements of litigation with Advanced Semiconductor Engineering Inc. in 2010.
(4) Each ADS represents four ordinary shares. We did not pay any dividends on our ordinary shares or ADS during the above
periods.
Consolidated Balance Sheet Data:
Cash and cash equivalents
Other current assets
Working capital
Long-term investments
Property and equipment, net
Goodwill and intangible assets, net
Other non-current assets
Total assets
Total liabilities
Total shareholders’ equity
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
2007
NT$
2008
NT$
As of December 31,
2009
NT$
(in thousands)
2010
NT$
2011
NT$
2011
US$
119,535
519,189
88,792
1,608,272
1,586,941 1,951,584 1,569,792 2,687,746
3,743,933 1,970,959 1,157,042 1,840,541 2,749,412
90,830
3,894,692 2,510,053 2,323,606 2,601,488 4,143,519 136,885
178
24,736
38,769
7,385
9,120,231 7,444,651 5,419,537 5,604,536 7,588,387 250,690
45,841
1,536,124
7,584,107 6,289,590 4,513,742 4,726,432 6,200,796 204,849
5,399
743,028 748,751
2,849,437 2,641,504 1,261,159 1,191,895 1,173,546
253,881 223,533
878,104 1,387591
15,709
773,218
50,368
911,884
1,155,061
260,825
282,995
279,865
905,795
5,399
1,599,288 2,785,044
(994,483)
(1,950,946)
124,816 (1,617,456)
155,225
(586,750)
92,284
(226,034)
323,927
(45,299)
18,471
163,129
(99,480)
(278,583) 1,562,339
(289,194) (428,083)
—
150,672 164,058
(137,087) (160,634)
—
51,613
(14,142)
—
5,420
(5,307)
2
Exchange Rate Information
Although a majority of our revenues and expenses are denominated in U.S. dollars, our operational headquarters is 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 translations of NT dollar amounts into U.S. dollar amounts for
periods through December 31, 2008 were made at the year-end 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 (“Noon Buying Rate”). For January 1, 2009
and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the statistical release of the Federal Reserve
Board. 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$30.27 to US$1.00, the exchange rate in effect as of December 30,
2011. On April 13, 2012, the exchange rate was NT$29.48 to US$1.00.
We make no representation that any NT dollar or U.S. dollar amounts could have been, or could be, converted into U.S. dollar or
NT dollar amounts, as the case may be, at any particular rate, the rates stated below, or at all.
The following table sets forth information concerning exchange rates between NT dollars and U.S. dollars for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual
report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is
the statistical release of the Federal Reserve Board.
January 2012
February 2012
March 2012
April 2012 (through April 13)
Exchange Rate
NT$ per US$
High
30.49
29.73
29.61
29.55
Low
29.64
29.24
29.37
29.45
The following table sets forth the average exchange rates between NT dollars and U.S. dollars for each of the periods indicated,
calculated, with respect to 2007-2008, by averaging the Noon Buying Rates on the last day of each month of the periods shown, and
with respect to 2009 through April 13, 2012, by averaging the exchange rates on the last day of each month of the periods shown
using the exchange rates reported in the statistical release of the Federal Reserve Board.
2007
2008
2009
2010
2011
2012 (through April 13)
Average
Exchange
Rate NT$
Per US$
32.43
31.52
32.96
31.39
29.42
29.49
Risk Factors
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.
Our operating results have fluctuated in the past and could do so in the future. Fluctuations in our operating results may be due
to a number of factors, including, but not limited to, those listed below and those identified throughout this “Risk Factors” section:
•
•
•
continuing downward pressure on the average selling prices of our products caused by intense competition in our industry;
decreases in demand for consumer electronics products, including mobile phones and smartphones, into which our
semiconductor solutions are directly or indirectly incorporated;
our customers’ financial health, sales outlook, purchasing patterns and inventory adjustments based on consumer demand,
market adoption of new technologies and general economic conditions;
3
•
•
•
•
•
•
•
•
•
•
•
•
•
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 in
a cost-effective and timely manner;
changes in supply and availability of flash memory from closures of less efficient fabs and fabs operating at lower utilization rates;
changes in the relative sales mix of our products;
changes in foreign currency 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 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.
These and other factors make it difficult for us to assess our future performance. Our sales and operating results are difficult to predict and
have in the past, and will likely in the future, fluctuate from period to period. We could fail to achieve the operating targets that we have
announced, such as revenue growth, gross margin, and operating expense. In addition, our operating results in the future may be below the
expectations of securities 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.
The global recession of 2008 and 2009 and the downturn in the semiconductor industry adversely affected our operating results and stock
price in a material manner.
We operate primarily in the semiconductor industry, which is cyclical and has, from time to time, experienced significant downturns, most
recently in connection with the global economic downturn. These downturns are frequently characterized by decreases in product demand,
production overcapacity, excess inventories and accelerated erosion of selling prices. These factors could cause substantial fluctuations in our
revenue and results of operations. In addition, during these downturns, manufacturers of components, specifically NAND flash components that
are used in our customers’ products, may choose to reduce their output and reduce availability of NAND flash components to our customers,
which would lead to reduced demand for our controller products. Furthermore, during these downturns some competitors may become more
aggressive in their pricing practices, which would adversely impact the prices of our competing products. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of the industry or our mobile storage, mobile communications, and multimedia SoCs
markets to fully recover from downturns could negatively impact our revenue, business, financial condition and results of operations. The
semiconductor foundry industry also periodically experiences increased demand which limits the availability of third-party foundry, assembly
and testing capacity and may affect our ability to ship sufficient products to meet our customers’ purchase requests. Accordingly, our operating
results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause large fluctuations in our
stock price.
General worldwide economic conditions deteriorated significantly in 2008 and 2009. Although conditions in the semiconductor market in
which we participate improved in 2010 and more significantly in 2011, if general global economic conditions deteriorate or do not continue to
improve, it could adversely affect the semiconductor market and make it extremely difficult for us, our customers, our vendors, and
manufacturers of components that are used in our customers’ products to accurately forecast and plan future business activities. Furthermore,
during challenging economic times, our customers may face issues in gaining timely access to sufficient credit, which could impair their ability to
make timely payments. If that were to occur, we could be required to increase our allowance for doubtful accounts and our days sales outstanding
for accounts receivable would be negatively impacted. Any future downturn may reduce our revenue or our revenue growth and result in our
having excess inventory. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, either
worldwide, or in the semiconductor industry. If the economy and the markets in which we operate do not improve from current conditions or if
they deteriorate, our customers or potential customers could reduce or delay their purchases of our products, which would adversely impact our
revenues and our ability to manage inventory levels, collect customer receivables and, ultimately, adversely impact our profitability. In addition,
we may record additional charges related to the restructuring of our business and the impairment of our goodwill and other long-lived assets, and
our business, financial condition and results of operations may be materially and adversely affected.
4
Since we have limited visibility as to the sales volume by our customers of devices using our products, our ability to accurately
forecast future demand for and sales of our products is limited.
We sell our ICs to original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and module makers
that integrate our products into their devices. We have limited visibility as to the volume of our products that our OEM, ODM and
module maker customers are selling to their customers or carrying in their inventory. If our customers procure less than expected
amounts of other primary components used in their products, specifically NAND flash components, experience a slowing of products
sold through to their end customers, or have excess inventory, our sales orders from customers will likely slow down, which would
adversely impact our future sales and inventory.
We may make acquisitions that are dilutive to existing shareholders, resulting in unanticipated one-time charges or that may
otherwise adversely affect our results of operations, and which may 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 shareholders.
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 our acquisition, 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.
In April 2007 we completed the acquisition of FCI, Inc. (“FCI”), a privately held Korea-based fabless mobile TV and wireless
communications RF IC design company, and in November 2007 we acquired select parts of the Centronix mobile TV business of
Korea Information Engineering Services Co., Ltd. The products from our FCI and Centronix acquisitions comprise our mobile
communications product line. In the fourth quarter of 2009, we determined that goodwill and certain long-lived assets relating to our
mobile communication product line were impaired and took an impairment charge of US$38.7 million. This is a non-cash impairment
charge to GAAP earnings for our 2009 fiscal year and with this impairment charge, the net carrying cost of our mobile
communication product line assets at the end of fourth quarter 2009 was reduced to US$32.4 million. See “We are exposed to
potential impairment charges on intangible assets relating to recent acquisitions and on investments if business conditions
deteriorate” below. 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 technologies or products;
timing of the rollout and adoption of mobile TV services and standards globally;
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 other business activities;
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 resulting in a material weakness in our overall internal control;
our ability to recover costs of the acquisition or investment;
amortization expenses and large and immediate write-offs;
impairment charges related to goodwill or other assets;
negative impact on our relationships with customers, suppliers or contractors;
5
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loss of key employees of an acquired business; and
potentially dilutive issuance of equity securities.
In addition, future acquisitions could result in the incurrence of debt or contingent liabilities, adverse tax consequences, deferred
compensation charges, dilution to future earnings, and large fees for professional advisor services, 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 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 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%, 41% and 51% of our net revenue in 2009, 2010 and 2011, respectively. We
had one customer in 2009 and 2011 and two customers in 2010 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 2010 and 2011, Samsung
Electronics (“Samsung”) was our largest customer and accounted for approximately 13% and 28% of our sales, respectively. In past
years, sales to Samsung may have been significantly higher if indirect sales were included with direct sales. In 2010 and 2011, we do
not believe there were indirect sales to Samsung. In 2009, if a material portion of our sales to other customers are included in products
of Samsung, our direct plus indirect sales to Samsung may have accounted for between 19% and 20% of our sales.
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.
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.
During many periods in past years, some of our customers have 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 or are planning to
increase manufacturing capacity for flash memory. 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 controllers 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.
We operate in intensely competitive industries, and our failure to respond quickly to technological developments and
incorporate new features into our products could harm our ability to compete.
We operate in intensely competitive industries that experience rapid technological developments, changes in industry standards,
changes in customer requirements, and frequent new product introductions and improvements. If we are unable to respond quickly
and successfully to these developments, we may lose our competitive position, and our products or technologies may become
uncompetitive. To compete successfully, we must maintain a successful R&D effort, develop new products and production processes,
and improve our existing products and processes at the same pace or ahead of our competitors. Many types of events could have a
variety of negative effects on our overall competitive position and our financial results, such as reducing our revenue, increasing our
costs, lowering our gross margin percentage, lowering our operating profitability and requiring us to recognize impairments on our
assets. We may not be able to develop and market new products successfully, new markets at which our products target may not grow
as expected, the products we invest in and develop may not be well received by customers, and products developed and new
technologies offered by others may affect demand for our products.
6
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, and we believe that it is possible they may also fall 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.
If we are unable to accurately predict our future sales and to appropriately budget for our expenses, our results of operations
could suffer.
The rapidly changing nature of the global economy and the markets in which we sell our products limits our ability to accurately
forecast quarterly and annual sales. Because many of our expenses are fixed in the short term or are incurred in advance of anticipated
sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales, or expand our R&D and other
operating infrastructure in a timely manner to capture anticipated business opportunities. If we expand our business operations and
demand for our products does not increase as we may have projected, our operating results could be affected by our higher operating
expense levels. Conversely, if we maintain or reduce our business operations and related expenses in accordance with our projections
and demand for our products increases more than expected, our operating results could be affected by lost business opportunity, less
competitive economies of scale, and damaged relationships with our customers.
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.
Industry standards and demands in the 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.
7
If demand for our products declines in the major end-markets that we serve, our sales will decrease.
Demand for our products are 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 consumer electronics, such as mobile phones,
smartphones, tablets, digital cameras, 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, consumer
electronics as consumers delay purchasing decisions or reduce their discretionary spending. In addition, the historical and continuing
trend of declining average selling prices of consumer electronics 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.
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 design and develop integrated
circuits, including firmware, and to introduce product enhancements for use 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 have an adverse effect on our overall growth.
In addition, if any other members of our senior management or any of our other key personnel join a competitor or form 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 Taiwanese, Chinese, or Korean legal systems.
We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain or expand
our business.
Currently, we sell most of our solid state storage controller solutions to manufacturers of flash memory cards and USB flash
drives. Flash memory cards were originally used in digital still cameras as storage for digital pictures and videos. The market for flash
memory cards expanded significantly as smaller form factor cards were developed, NAND flash component and controller prices
decreased, and mobile phone manufacturers incorporated embedded cameras and other advanced multimedia functionalities and card
slots into their products to utilize flash memory cards as primary storage for pictures, video, music, and other data generated or
enjoyed by consumers of mobile phones. The market for flash memory cards further expanded as the categories of mobile phones that
utilize flash memory cards as data storage expanded from camera phones to smartphones and tablets. The market for USB flash drives
is principally related to the PC market as USB flash drives are popularly used as peripheral storage for desktop and notebook PCs. We
have been successful in developing controllers for flash memory cards used in digital cameras, camera phones, and smartphones and
controllers for USB flash drives used with desktop and notebook PCs. The future growth of our mobile storage revenue, if any, will
depend in part on our ability to expand beyond the flash memory card and USB flash drive markets, particularly into markets for solid
state drives and embedded memory applications.
Currently, we sell a significant portion of our RF IC solutions to Korean manufacturers of handsets, smartphones, and
tablets. The future growth of our mobile communications revenue, if any, will depend in part on our customers remaining successful
in their markets and continuing to use our solutions, our ability to continue expanding beyond the Korean market to new markets such
as China, and our ability to target and successfully enter new RF markets. Our LTE transceiver products are solely dependent on
Samsung and the success of Samsung’s LTE handsets and tablets. Sales of our LTE transceiver products to Samsung are also
dependent on their sourcing strategies and should they change materially, our ability to grow this business could be severely
impacted.
8
Each of these markets, whether for solid state storage controllers, LTE transceivers or mobile TV IC solutions, present distinct
and substantial risks. Most of these markets are new, still developing, and relatively small. If any of the new markets does not develop
as we currently anticipate or if we are unable to penetrate it successfully, our overall corporate revenue and revenue growth rate, if
any could be materially and adversely affected.
If we fail to penetrate these other new markets upon which we target our resources, our revenue and revenue growth rate, if any,
will likely decrease over time and our financial condition could suffer.
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 semiconductor fabrication facilities. Instead, we rely on third parties to manufacture our
semiconductors. Four outside foundries, Silterra in Malaysia, Taiwan Semiconductor Manufacturing Company (“TSMC”),
Semiconductor Manufacturing International Corporation (“SMIC”) 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,
availability of wafers and other raw materials, 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 and access to wafers. 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 that involves 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 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.
9
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 Taiwan, Korea, and 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 could 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.
As of February 1, 2012, we have 182 patents and 614 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 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 or 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 certain technologies. See “Legal
Proceedings,” below.
In addition, any litigation 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 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 lower 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 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 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.
10
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 target markets. Our competitors in our mobile storage
market include Alcor Micro, Asolid, Phison, Skymedi, Solid State Systems, and ITE. For multimedia SoCs products, the companies
with whom we compete include AMD, NVIDIA, and SiS. For mobile communications products, the companies with whom we
compete include GCT, I&C, Newport Media, Raontech, and Siano. 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 consumer electronics market, which is the 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.
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 warranty or
product liability claim could require us to make significant 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 infringement exposure. In
some instances, our products are designed for use in devices manufactured by our customers that comply with international standards.
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 may
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 licensee against losses arising out of or related to our conduct or services.
We cannot assure you that 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.
We are exposed to potential impairment charges on intangible assets relating to recent acquisitions and on investments if
business conditions deteriorate.
We are required to perform testing for impairment losses relating to long-lived assets used in operations when indicators of
impairment, such as reductions in demand or significant economic slowdowns in our business, are present. Through our acquisitions
of FCI and other assets, we acquired core technology, customer relationships, goodwill and other intangible assets. The carry value of
goodwill relating to these acquisitions must be tested for impairment at least on an annual basis. In November 2009, we recorded
NT$217.2 million of impairment charges relating to our long-lived assets. Additionally, in November 2009, as a result of our annual
impairment assessment of the carrying value of goodwill, we determined that the goodwill balance was impaired, and wrote down the
goodwill balance by NT$1,019.4 million. As of December 31, 2011, the Company had goodwill associated with our acquisitions of
NT$1,173.5 million (US$38.8 million). Although we recorded an impairment on goodwill and other long-lived assets in 2009, we
cannot be certain that these assets will not be subject to further write-downs in future periods.
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We have not made any passive investments in private companies since February 2007. If the companies in which we have
invested in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and
we could potentially lose the amounts we invested. We evaluate our investments on a regular basis to determine if impairments have
occurred and have recorded impairment charges in past years. These and future impairment charges could have a material impact on
our operating results. In 2009, 2010 and 2011, we recorded impairment charges relating to our private company investments of
NT$8.6 million, NT$7.3 million and nil, respectively.
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 in its annual report 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, 2011 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 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 and results of operations, negatively impact the market price of our ADSs and harm our reputation.
Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their investments.
Since we completed our initial public offering in June 2005, the market price of our ADSs 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:
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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;
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;
announcements by us or our competitors of significant acquisitions or partnerships; and
actual or anticipated changes in the global economic outlook.
Many of these factors are beyond our control and may negatively impact the market price of our ADSs, 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 ADSs may not trade at the same price levels 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 ADSs.
We are subject to risks associated with international operations which may harm our business.
We conduct our business worldwide. We are headquartered in Taiwan and have most of our operations outside of the United
States. We undertake our design and development activities primarily in China, Korea and Taiwan. Our integrated circuits are
manufactured, assembled, tested and packaged by third-parties located primarily in China, Europe, Korea, Malaysia and Taiwan. We
generated 93%, 90% and 89% of our revenue in 2009, 2010 and 2011, respectively, from sales to customers outside the United States.
International operations are subject to many other inherent risks, including but not limited to:
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international economic and political conditions, such as political tensions between countries in which we do business
(please also refer to Risk Factors relating to Taiwan and Korea);
unexpected changes in, or impositions of, legislative or regulatory requirements;
complying with a variety of foreign laws;
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differing legal standards with respect to protection of intellectual property and employment practices;
cultural differences in the conduct of business;
inadequate local infrastructure that could result in business disruptions;
exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions;
financial risks such as longer payment cycles and difficulty in collecting accounts receivable;
imposition of additional taxes and penalties; and
other factors beyond our control such as nature disasters, terrorism, civil unrest, war and diseases such as severe acute
respiratory syndrome, the Avian influenza, and the Swine influenza.
Although our reporting currency is the NT dollar, the majority of our sales and cost of sales are denominated in the U.S. dollar.
The majority of our operating expenses are denominated in the NT dollar, and to a lesser extent Korean won, Chinese renminbi, and
U.S. dollar. As a result, appreciation or depreciation of other currencies in relation to the NT dollar could result in material transaction
and 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.
Parts of the world, including Taiwan, Japan, China and the United States are susceptible to earthquakes. In 1999, 2008, and 2011
Taiwan, China, and Japan respectively, experienced severe earthquakes that caused significant property damage and loss of
life. Although the 1998, 2008 and 2011 earthquakes did not have a material impact on our business, a major earthquake and
consequent disruptive events could severely disrupt the normal operations of our business and have a material and adverse effect on
our financial condition and operating results.
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,
most of our foundries and assembly and testing suppliers such as SPIL, SMIC, Advanced Semiconductor Engineering Group
(“ASE”), Taiwan IC Packing Corp. (“TICP”), TSMC, King Yuan, and Youngtek Electronics Corp. (“YTEC”) are located in either
Taiwan or 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 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 People’s 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 or companies with significant business activities in Taiwan.
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 and the liquidity of our ADSs.
We face substantial political risk associated from doing business in South Korea because of tensions in the 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 and ballistic missile capabilities, hostile actions by North Korea against South Korea, North Korea’s
leadership succession, and relations between the United States and North Korea, have created a global security issue that may
adversely affect South Korean business and economic conditions. South Korea was not a signatory of the armistice agreement that
ended the Korean War, and since no peace treaty was signed between South Korea and North Korea, the two countries are technically
still at war. 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, including, without limitation, the effects, if any, of the recent transition of the “Supreme Leader” Kim Jong Il to Kim
Jong Un that resulted after the passing of Kim Jong Il in 2011. 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 South Korean subsidiary and our company.
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Our business depends on the support of the Taiwanese and South Korean governments, and a decrease in this support may
increase our tax liabilities and decrease our net income.
The Taiwanese and South Korean governments have been supportive of technology companies such as ours. In particular, we,
like many Taiwanese technology companies, have benefited from tax incentives provided by the Taiwanese government. For
example, under the Statute for Upgrading Industries of Taiwan, we were granted tax credits by the Taiwan Ministry of Finance for
qualifying research and development costs and in qualifying employee training expenses. In addition, Taiwan law offers preferential
tax treatments to industries that are encouraged by the government. In 2010, “Statute for Industries Innovation” was passed to replace
the “Statute for Upgrading Industries” in tax incentives. However, we are still eligible to use certain previously granted unutilized,
unexpired tax credits and exemptions. See “Operating and Financial Review and Prospects — Principal Factors Affecting Our Results
of Operations — Provision for income taxes” and note 14 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.
The South Korean government provides a variety of tax incentives designed to promote designated industries such as the
technology industry. We, like many Korean technology companies, have benefited from certain tax incentives, including tax credits
for applicable research and development expenses and tax credit for investments made to improve business productivity. If these and
other tax incentives are curtailed or eliminated, our net income may decrease materially.
ITEM 4.
INFORMATION ON THE COMPANY
History and Development of the Company
Silicon Motion Technology Corporation (“Silicon Motion”) is a corporation which 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 FCI, Inc. (“FCI”), a leading designer of RF ICs for mobile TV and wireless communications
based in South Korea. We established SMI BV in the Netherlands in 2011 with the purpose of expanding our business activities in
Europe, as well as to provide supervisory, financing, legal support, accounting services and shareholding for our businesses in other
parts of the world.
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, Silicon Motion, Inc. is 1591 McCarthy Blvd., Milpitas, CA 95035. Our ADSs have been listed and
traded on Nasdaq since June 2005.
Below is the structure chart for our organization. All subsidiaries are wholly owned:
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Overview
We are a global leader in developing semiconductor solutions for Solid State Storage devices (“SSDs”) and wireless
communications. We have three major product lines: mobile storage, multimedia SoCs, and mobile communications. Our mobile
storage is composed of microcontrollers used in NAND flash memory storage products such as flash memory cards, universal serial
bus (“USB”) flash drives, SSDs, and embedded flash memory. These flash memory storage products are widely used for external or
internal storage of data by consumer electronics devices such as mobile phones, smartphones, tablets, digital still cameras,
camcorders, personal navigation devices, and notebook and desktops personal computers. Our multimedia SoCs product line is
composed primarily of products that support embedded graphics applications. Our mobile communications product line is composed
of mobile TV IC solutions and handset transceiver ICs, and became our new product line as a result of our acquisition of FCI in April
2007.
We sell our semiconductor solutions to leading module makers, original equipment manufacturers (“OEMs”) and original design
manufacturers (“ODMs”) worldwide. We provide our high performance flash memory storage controller to companies such as
Netcom, Micron, Samsung, Sony and Transcend. We are a leading supplier of controllers used in flash memory cards sold bundled
with mobile phones and smartphones manufactured by most of the handset industry’s leading OEMs and a leading supplier of
controllers used in flash memory cards and USB flash drives sold in the retail market. Our multimedia SoCs are used primarily for
thin clients, office and factory automation, industrial PCs, and other applications by companies such as Advantech, Siemens,
ThinNetworks, and Toshiba-TEC. We provide our innovative mobile communications ICs to LG, Pantech, Samsung, and other
companies. We sell our products through our direct sales force and distributors in China, Europe, Japan, Korea, Taiwan and the
United States.
In past years, we experienced periods of rapid sales decline and growth. Our net sales grew from approximately NT$5,847.3
million in 2007 before declining to approximately NT$5,528.1 million in 2008 and declining further to approximately NT$2,893.2
million in 2009, and recovering to approximately NT$4,177.3 million in 2010, and increasing to approximately NT$6,603.4 million
(US$218.2 million) in 2011.
Acquisition of FCI, Inc.
In April 2007 we acquired 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$62 million in cash and US$40 million in our
ordinary shares and options to purchase our ordinary shares.
Industry Background
The convergence of consumer electronics, communications, and computing devices has been accelerating at a fast 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, electronic games, 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, high-performance multimedia application processors and advanced
communications-related RF ICs. We believe that we are a leader in providing microcontrollers for NAND-based storage devices and
transceivers for 4G LTE and 3G CDMA EV-DO mobile devices.
Our Markets and Products
We design, develop and supply a portfolio of multimedia data processing, storage, and transfer semiconductor solutions targeted
primarily at consumer electronics applications. Our current product offerings address three main markets: mobile storage, multimedia
SoCs and mobile communications markets. The following is a brief description of each of our markets.
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Mobile Storage Products
We offer a broad range of controllers for NAND flash memory storage products, including flash memory cards, USB flash drives,
embedded flash memory 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, smartphones, tablets, digital still cameras, camcorders, personal navigation devices, 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, SanDisk 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 products are compatible with consumer electronics host devices. New NAND flash from different manufacturers or the same vendor
may require new silicon microcontroller solutions, 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:
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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;
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 spread out the use of the memory array and equalize 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
preventing data loss during sudden, unexpected host device power failures with our advanced power cycling solutions;
implementing security features to protect software code, personal data and multimedia digital rights.
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In order to improve the performance of our controllers and solid state storage devices using our controllers, we continuously develop and
upgrade our Error Correction Codes (“ECCs”) and wear leveling algorithms, technologies that enhance data reliability and integrity and
maximize the endurance of storage device. To further improve the performance of our controllers and our customers’ storage devices, we have
introduced other technologies in our controllers which include enhanced ECC, an ECC engine that can be customized to fully utilize NAND
flash spare memory to maximize data integrity, Vth tracking, a controller firmware algorithm that automatically adjusts to recover data after a
NAND flash cell voltage threshold shift, DMA pipeline, a controller hardware algorithm that maximizes data throughput rates to improve data
read/write performance, block early retirement, a controller firmware algorithm that automatically detects weaker NAND flash cells and
retires the cells to avoid potential future data loss, and power cycling, controller firmware and hardware algorithms that prevent data loss
during unexpected storage device power failure.
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 Memory Stick (“MS”), 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 controllers support two-bits per cell MLC and three-bits per cell MLC NAND flash, which is also know as Triple-
Level Cell (“TLC”) NAND flash. Our controllers also support NAND flash designed and fabricated at all the primary process geometries.
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. Our flash memory card controllers are also designed for very low standby power consumption, to withstand electro-static discharge and
to allow flexible flash memory configuration through both hardware and firmware.
USB flash drive controllers. USB flash drives are NAND flash memory data storage devices integrated with a standard USB 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.
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Our high performance USB flash drive controllers can support single- and dual-channel SLC and MLC NAND flash
configurations 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 and low power consumption. Furthermore, they offer our customers an
overall low cost solution with integrated voltage regulators and standby power components and support Master and Slave SPI (“Serial
Peripheral Interface”) for applications such as a fingerprint sensor.
Embedded flash memory and SSD controllers. In addition to controllers for flash memory cards and USB flash drives, we also
offer controller solutions for embedded flash memory and controllers for SSDs. SSD is a next generation storage technology designed
to replace or compliment hard disk drives. SSDs are potentially faster in terms of data read/write speed, are more durable and not
prone to mechanical malfunction, more power efficient, generate less heat, and are quieter and smaller in form factor. Our embedded
controller solutions include controllers mounted on the printed circuit board of electronic devices 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 solution such as eMMC and eUSB flash drive. In 2007, we started shipping controllers for solid
state drives and embedded memory solutions for use in industrial, networking, and consumer applications, including notebook PCs
and servers.
Multimedia SoCs
We design and develop graphics processors for embedded applications, primarily thin clients, industrial PCs, office and factory
automation equipment. Our graphics processors include memory interfaces and other components that address a range of end
application requirements, including low power, high performance, low cost and high levels of system integration, and are
manufactured using standard CMOS processes.
Mobile Communications
We design and develop specialty RF semiconductor solutions for mobile phones and other devices.
Mobile TV IC Solutions. Our products include mobile TV tuners and integrated tuner plus demodulator SoCs for mobile phones
and other portable devices. Our solutions are designed for many mobile TV broadcast standards including T-DMB, ISDB-T, DVB-
H/T, CMMB and ATSC-M/H. According to competitor product benchmarking, we believe our mobile TV tuners and SoCs are among
the most competitive in the market in terms of smallest chip size, lowest power consumption, lowest noise and high adjacent channel
selectivity.
Handset transceivers. We offer 3G CDMA EV-DO transceivers and 4G LTE transceivers. Our LTE transceivers are designed to
specifically support Samsung LTE baseband solutions and our CDMA EV-DO transceivers are designed to specifically support VIA
Telecom CDMA EV-DO baseband solutions.
Our Customers
We sell our semiconductor solutions to leading module makers, OEMs, and ODMs worldwide. We provide our high
performance flash memory storage controller to companies such as Netcom, Micron, Samsung, Sony and Transcend. We are a leading
supplier of controllers used in flash memory cards sold bundled with mobile phones and smartphone manufactured by the handset
industry’s leading OEMs and a leading supplier of controllers used in flash memory cards and UBS flash drives sold in the retail
market. Our multimedia SoCs are used primarily for thin clients, office and factory automation, industrial PCs, and other applications
by companies such as Advantech, Siemens, ThinNetworks, and Toshiba-TEC. We provide our innovative mobile communications
ICs to LG, Pantech, Samsung, and other companies.
Sales to our five largest customers represented approximately 38%, 41% and 51% of our net revenue in 2009, 2010 and 2011,
respectively. We only had one customer in 2009 and 2011 and two customers in 2010 that accounted for 10% or more of our sales.
The identities of our five 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 2010 and 2011, Samsung
was our largest customer and accounted for approximately 13% and 28% of our sales, respectively. In past years, sales to Samsung
may have been significantly higher if indirect sales were included with direct sales. In 2010 and 2011, we do not believe there were
indirect sales to Samsung. In 2009, if a material portion of our sales to other customers are included in products of Samsung, our
direct plus indirect sales to Samsung may have accounted for between 19% and 20% of our sales.
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.
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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 modular maker, OEM and ODM customers in Taiwan,
Korea, China, the United States, and Japan. Approximately 73% of our sales in 2009, 75% of our sales in 2010 and 77% of our sales
in 2011 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 group focuses on our product strategy, product development road maps, new product introduction process,
demand assessment, competitive analysis, and product marketing. 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, to 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 JEDEC and the SD
Card Association for flash memory cards, helps us monitor the latest industry developments and promote our corporate profile. Our
marketing group also works 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, digital, mixed-signal and RF IC design, and
software engineering. As of February 1, 2012, we had 182 patents in China, Japan, Korea, Taiwan, and the United States and 614
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 and Shenzhen, China and Milpitas, California. Our
facilities in Milpitas focus primarily on graphics products, our facilities in Seoul focus primarily on mobile communications products,
and our facilities in Hsinchu and Taipei focus primarily on mobile storage products, and our facilities in Shanghai and Shenzhen
focus primarily on specific product requirements of our customers in China.
Our research and development expenses were approximately NT$1,122.5 million, NT$1,054.2 million and NT$1,194.6 million
(US$39.5 million) for the years ended December 31, 2009, 2010 and 2011, respectively.
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 chips 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. TSMC worldwide, SMIC in China, Silterra in Malaysia and STMicroelectronics in Europe are currently our
primary foundries that manufacture most of our semiconductors. Our foundries in Taiwan, Singapore, Malaysia and China currently
fabricate our devices using mature and stable CMOS process technology primarily with line-widths of 0.09-, 0.11-, 0.13-, 0.15-, 0.16-
, 0.18-, and 0.25- micron. We also rely on STMicroelectronics as our foundry for mobile communications products using Bi-CMOS
process technology primarily with line-widths of 0.25 and 0.35 micron. We regularly evaluate the benefits and feasibility, on a
product-by-product basis, of migrating to more cost efficient manufacturing process technologies.
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Assembly and testing. Following wafer fabrication, our wafers are shipped to our assembly and test subcontractors where they
are probed, singulated into individual dies, assembled into packaged chips, 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 testing equipment. We currently engage companies such as ASE, SPIL, TICP, King Yuan,
YTEC and Giga Solution Tech 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.
Our primary competitors in our mobile storage market include Alcor Micro, ASolid, Phison, Skymedi, Solid State Systems and
ITE. For multimedia SoCs products, the companies with whom we compete include AMD, NVIDIA, and SiS. For mobile
communications products, the companies with whom we compete include GCT, I&C, Newport Media, Raontech, and Siano.
Seasonality
See “Risk Factors — Because our operating results for any period could be adversely affected by a number of factors and
therefore fluctuate significantly, our annual and quarterly operating results are difficult to predict” in Item 3 above and “Operating
and Financial Review and Prospects — Principal Factors Affecting Our Results of Operations” in Item 5 below.
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 February 1, 2012, we held 182 patents in the United States, Taiwan, and other countries and have 614 pending patent
applications in the United States, Taiwan, and other countries. There can be no assurance that 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.
19
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,” “zipSYS,” “SSDLifeGuard,” “SSDLifeSaver,” “TurboMLC”
and “FerriSSD” 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.
Facilities
Our corporate headquarters are located in Hsinchu, Taiwan. We own this 108,800 square feet facility, which houses our
management and administration, operations, and research and development departments. In Taiwan, we also lease premises in Taipei,
occupying approximately 44,400 square feet of floor space, which houses our sales and marketing, as well as research and
development departments.
In addition to these facilities in Taiwan, in 2008 we purchased a facility in Shanghai with an aggregate floor space of
approximately 15,900 square feet. We lease facilities in Seoul, Korea, Shenzhen, and Beijing, China, Milpitas, California, and
Yokohama, Japan for research and development, sales and marketing, and administration. These facilities in aggregate consist of
approximately 59,400 square feet of floor space with lease terms expiring at various dates between 2013 and 2017.
We also own commercial property in Taipei of approximately 6,200 square feet, which we purchased in October 1998 for
NT$32 million. This property, which was formerly our Taipei sales office, has not been used by us since 2004, and we currently lease
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.
Government Regulation
See Risk Factors — “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,” “Our business depends on the support of the Taiwan and South
Korea governments, and a decrease in this support may increase our tax liabilities and decrease our net income,” and “We face
substantial political risk associated from doing business in South Korea because of tensions in the political relationship between South
Korea and North Korea” in Item 3 above.
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.
20
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. The semiconductors that we sell are mobile storage ICs, mobile communications ICs, and multimedia SoCs. Net sales
generated by these product groups for the periods indicated are as follows:
Net Sales
Mobile Storage
(1)
Mobile Communications
(2)
Multimedia SoCs
(3)
Other products
(4)
Total
2009
Year Ended December 31,
2010
2011
NT$
%
NT$
%
NT$
%
(in thousands, except percentage data)
1,802,982 62 2,911,576 70 4,513,670 68
780,012 19 1,665,284 25
444,366 11 398,524
7
25,946 —
41,296 —
2,893,230 100 4,177,250 100 6,603,424 100
727,798 25
350,822 12
1
11,628
(1)
(2)
(3)
(4)
Includes controllers for flash memory cards, USB flash drives, SSDs, and embedded flash applications.
Includes mobile TV IC solutions and handset transceiver ICs.
Includes graphics processors.
Includes demo boards and non-recurring engineering income.
For the years ended December 31, 2009, 2010 and 2011 we derived approximately 36%, 38%, and 27% respectively, of our net
sales from customers located in Taiwan and approximately 7%, 10%, and 11% 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
China
United States
Others
Year Ended December 31,
2010
2009
2011
36%
32%
16%
7%
9%
38%
23%
23%
10%
6%
27%
35%
22%
11%
5%
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 Ended December 31,
2010
2009
2011
76%
13%
11%
86%
13%
1%
89%
4%
7%
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, approximately
three months are generally required 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.
21
Because many of our semiconductor solutions are designed for the multimedia consumer electronics market such as mobile
phones, smartphones, digital cameras, and desktop and notebook PCs, 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 decreased net sales in the first half of each year. However, our rapid sales growth in the past two years makes assessment
of the impact of seasonal factors on our business difficult.
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;
cost of raw materials, for example, SDRAM used with our graphics processors; and
write-off of inventory.
•
•
•
•
•
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 our market conditions change.
Research and development expenses. Our research and development expenses consist primarily of employee salaries and related
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 absolute terms in future periods as our net sales increase.
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 as our net sales increase.
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 our net sales increase.
Amortization of acquired intangible assets. Amortization of acquired intangible assets relates to intangible assets, such as core
technology and customer relationships, but excluding goodwill.
Acquired in-process research and development. Acquired in-process research and development relates to the in-process research
and development expensed upon an acquisition when it was determined that the underlying projects had not reached technological
feasibility and no alternative future uses existed.
Impairment of goodwill and long-lived assets. We evaluate the recoverability of goodwill and long-lived assets annually, or
sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable.
Accounting for stock-base compensation. We grant both stock options and restricted stock units to our employees and members
of the Board of Directors. The value of our restricted stock units is based on the closing price of our shares on the date of grant and
expensed over the vesting period. We estimate the fair value of stock options on the date of grant using the Black-Scholes option-
pricing model and recognize stock compensation expense over the requisite service period of the individual grantees, which generally
equals the vesting period.
Non-operating income and expenses. Our non-operating income and expenses include gains or losses on the sales of
investments, interest from deposited cash or short-term investments, gains or losses on foreign exchange rates, impairment of long-
term investments, 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 quarterly and make corresponding write-downs as required to the
value of the long-term investments.
22
Provision for income taxes. We must make certain estimates and judgments in determining income tax expenses for financial
statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, deductions and allowance, and in
the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to
these estimates may result in an increase or decrease to our tax provision in a subsequent period.
We have operations in several countries and determine income taxes for each of the jurisdictions where we operate. Taiwan and
Korea are our two primary countries of operations.
In Taiwan, we have received tax exemptions from the government that are valid for a number of years and for certain income
streams relating to the expansion of production capacity or the development of new technologies. We also receive significant amounts
of tax credits for applicable research and development expenses incurred in Korea. Because of these and other tax benefits, the
effective tax rates of our Taiwan and Korea operations have been and will continue to be lower than statutory tax rates. See “Risk
Factors — Our business depends on the support of the Taiwanese and South Korean governments, and a decrease in this support may
increase our tax liabilities and decrease our net income” for the risks relating to our ability to enjoy favorable tax policies of the
Taiwanese and Korean governments.
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, goodwill, long-lived assets, long-term investments, 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 consolidated 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.
Revenue on development service orders is generally recognized upon completion and customer acceptance of contractually agreed
milestones.
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. Our allowance for sales
returns and discounts were approximately NT$58.0 million, NT$59.9 million and NT$82.0 million (US$2.7 million) in 2009, 2010
and 2011, respectively, representing approximately 2.0%, 1.0% and 1.2% of our gross sales for those respective periods.
23
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, price
protection 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. Our reserve for price adjustments to distributors were NT$381 thousand, NT$1,490 thousand and NT$5
thousand (US$2 hundred) in 2009, 2010 and 2011, respectively.
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 applied 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 receivable 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.
Our allowance for trade-related doubtful accounts were approximately NT$97.8 million, NT$90.8 million and NT$80.2 million
(US$2.6 million) in 2009, 2010 and 2011, respectively, representing approximately 14.7 %, 9.4% and 6.0% of our gross accounts
receivables at the end of each respective periods. Allowance for trade-related doubtful accounts have improved because our
customers’ business conditions have improved following the 2008 and 2009 economic recession.
Inventory valuation. We value inventories 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, 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 write down the value of inventory on hand in excess of the estimated demand. We wrote
down NT$214.4 million, NT$44.2 million and NT$140.6 million (US$4.6 million) in 2009, 2010 and 2011, respectively, for
estimated obsolete or unmarketable inventory.
Stock-based compensation. All share-based payments, including grants of stock options and restricted stock units, are
recognized in our financial statements based upon their respective grant date fair values.
Calculating the fair value of stock option awards at the date of grant requires the use of an appropriate valuation model and
judgment. We use the Black-Scholes valuation formula to estimate the fair value of employee stock options. The Black-Scholes
formula requires the use of input assumptions, including expected volatility, expected term, expected dividend rate and expected risk-
free rate of return. 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 our ADS prices. 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 determined that another method for estimating
expected volatility or expected term is more reasonable than our current methods, or if another method for calculating these input
assumptions was prescribed by authoritative guidance, the fair value calculated for future stock option awards could change
significantly from those used for past awards, even if the critical terms of the awards were similar. Higher volatility and expected
term will result in an increase to the fair value of stock option awards 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. Stock option awards are expensed over the requisite
service period of the individual grantees, which generally equals the vesting period.
Valuation of long-lived assets and intangible assets with finite useful life. 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 sum of 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
management. This could have a material effect on our operating results and financial condition. In 2009, we recognized impairment
losses of approximately NT$217.2 million. No impairment losses were recognized in 2010 and 2011.
24
Impairment of long-term investments. We evaluate the recoverability of long-term investments whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Impairment charges are determined based on the difference
between our carrying value and our proportionate ownership of the investee company’s net assets at year end. During 2009 and 2010,
we recognized impairment losses of approximately NT$8.6 million and NT$7.3 million, respectively in long term investments in
Spright Co., Ltd. and Vastview Technology Corp. as a result of recurring operating losses and reduced forecasts of the investee
companies which indicated that our investments were not recoverable within a reasonable period of time.
Business combinations. When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and
identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price
requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially
with respect to intangible assets. These estimates are based on historical experience and information obtained from the management
of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in
the future, the appropriate weighted-average cost of capital, and the synergistic benefits expected to be derived from the acquired
business. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur
which may affect the accuracy or validity of such estimates.
Goodwill. We record goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and
intangible assets acquired. We amortize acquisition-related identified intangibles on a straight-line basis over their estimated
economic lives of four years for core technology, four years for customer relationships and three months for order backlog.
We measure and test goodwill on an annual basis or more frequently if we believe indicators of impairment exist. Our
impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We
determined that our reporting units are equivalent to our operating segments or components of an operating segment for the purposes
of completing our impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible
impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues,
costs and cash flows from such units. The second step, if necessary, measures the amount of such impairment by comparing the
implied fair value of goodwill to its carrying value. If the carrying amount of goodwill exceeds its implied fair value, an impairment
loss is recognized equal to that excess.
In 2009, we recorded an impairment charge of NT$1,019.4 million because the carrying value of the reporting unit exceed its
fair value. In 2010 and 2011, no impairment charges were recorded. The assessment which resulted in our 2009 impairment charge
was based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow was based upon,
among other things, certain assumptions about expected future operating performance such as revenue growth rates and operating
margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and
determination of appropriate market comparables. We based our fair value estimates on assumptions we believed to be reasonable but
that are unpredictable and inherently uncertain. The long-term financial forecast represented the best estimate that we had at that time
and we believed that its underlying assumptions were reasonable. However, actual performance in the near-term and longer-term
could be materially different from the forecast, which could impact future estimates of fair value of our reporting units and may result
in a charge to earnings in future periods due to the potential for further write-down of goodwill in connection with future impairment
tests.
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 provide 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. Realization of the future tax
benefits related to the deferred tax assets is dependent on many factors, including our ability to generate taxable income within the
period during which the temporary differences reverse, the outlook for the economic environment in which we operate, and the
overall future industry outlook. 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 the determination was made.
25
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The total amount of
unrecognized tax benefits as of December 31, 2009, 2010 and 2011 was NT$321.2 million, NT$184.1 million and NT$85.6 million
(US$2.8 million), respectively, excluding accrued interest and penalties. As of December 31, 2010 and 2011, NT$9.1 million and
NT$23.6 million (US$0.8 million) of interest and penalties was accrued. Fiscal years 2007 through 2011 remain subject to
examination by the US Internal Revenue Service. Fiscal years 2006 through 2011 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 would change
significantly. See Note 14 to the Consolidated Financial Statements for further information regarding changes in unrecognized tax
benefits during 2011.
Functional Currency. On January 1, 2012, the Company changed the functional currency of SMI Taiwan, its largest operating
subsidiary, from the New Taiwan dollars to the U.S. dollar based on an evaluation of economic facts and circumstances and
functional currency analysis prescribed in ASC 830. As a result of SMI Taiwan’s functional currency change, the Company changed
its reporting currency from the New Taiwan dollars to the U.S. dollar.
In 2005, at the time of the Company’s IPO, the Company determined that SMI Taiwan’s functional currency was the New
Taiwan Dollars and this determination was used consistently until the Company believed significant and permanent changes in
economic facts and circumstances warrant a change in functional currency. Since the business profile and activities of SMI Taiwan
had changed significantly and permanently, the Company re-evaluated the functional currency of SMI Taiwan based on recent
economic facts and circumstances, including analysis prescribed in ASC 830, and determined that the US Dollar had become the
functional currency of SMI Taiwan.
Litigation and contingencies. From time to time, we have been subject to legal proceedings and claims relating to intellectual
property rights and other actions arising out of the normal course of business, as well as other matters identified in “Legal
Proceedings,” in 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 may 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 laws, 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 losses associated with these contingencies, then we
would record the reasonably estimated liability, which could have a material and adverse effect on our operations, financial condition
and cash flows.
26
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
Gain from settlement of litigation
Impairment of goodwill and long-lived assets
Total operating expenses
Operating income (loss)
Non-operating income (expenses):
Gain on sales of short-term investments — net
Interest income
Interest expense
Foreign exchange gain (loss) — net
Impairment of long-term investment
Other income (loss), net
Total non-operating income (loss)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Year Ended December 31,
2010
100.0%
53.1
46.9
2009
100.0%
58.9
41.1
2011
100.0%
51.7
48.3
38.8
13.7
16.1
6.6
—
42.7
117.9
(76.8)
0.0
0.8
(0.1)
(3.1)
(0.3)
(0.1)
(2.8)
(79.6)
0.2
(79.8)%
25.3
9.3
7.3
1.7
(1.1)
—
42.5
4.4
0.0
0.3
(0.1)
(8.6)
(0.1)
(0.1)
(8.6)
(4.2)
(0.5)
(3.7)%
18.1
6.5
5.1
0.4
—
—
30.1
18.2
0.0
0.3
(0.0)
2.5
—
0.0
2.8
21.0
2.5
18.5%
Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010
Net sales.
Net sales
Mobile storage
Mobile communications
Multimedia SoCs
Other products
Net sales
Years Ended December 31
2011
2010
NT$
% of net sales
NT$
% of net sales
$ change
% change
(in thousands, except percentage data)
4,513,670
1,665,284
398,524
25,946
6,603,424
68
25
7
—
100
2,911,576
780,012
444,366
41,296
4,177,250
70
19
11
—
100
1,602,094
885,272
(45,842)
(15,350)
2,426,174
55
113
(10)
(37)
58
Our net sales increased 58% year-over-year to approximately NT$6,603.4 million (US$218.2 million) in 2011 as total unit
shipment for our products increased 48%.
Our mobile storage unit shipments increased 49% year-over-year due to better availability of NAND flash supply to our
customers and strong demand for devices using our controllers. Mobile storage ASP increased 9% year-over-year with the sales of
higher value-added solutions. Our card controller revenue increased 77% year-over-year, and USB flash drive controllers revenue
increased 64% year-over-year due to stronger end demand and better availability of NAND flash components. Mobile
communications revenue increased 113% largely because of improved sales of mobile TV ICs and LTE transceivers. Multimedia
SoCs revenue decreased 10% largely due to discontinuation of certain products.
27
Gross profit.
Gross profit
Years Ended December 31
NT$
2011
% of net sales
NT$
2010
% of net sales
$ change
% change
3,187,563
(in thousands, except percentage data)
47
48 1,957,616
1,229,947
63
Gross profit as a percentage of net sales increased from 47% in 2010 to 48% in 2011 primarily because of increased sales of
higher value-added, higher margin products. Our gross profit excluding obsolete and unmarketable inventory write-downs as a
percentage of revenue increased from 48% in 2010 to 50% in 2011.
Research and development expenses.
Salary and benefits
Stock-based compensation
Other research and development
Research and development
Years Ended December 31
NT$
2011
% of net sales
NT$
2010
% of net sales
(in thousands, except percentage data)
$ change
% change
634,838
148,405
411,404
1,194,647
499,184
10
102,209
2
452,801
6
18 1,054,194
12
2
11
25
135,654
46,196
(41,397)
140,453
27
45
(9)
13
Our research and development expenses increased 13% year-over-year to approximately NT$1,194.6 million (US$39.5 million)
in 2011. Salary and benefits increased 27% year-over-year to approximately NT$634.8 million (US$21.0 million), primarily because
of higher headcount and compensation expenses in 2011. Stock-based compensation increased 45% year-over-year to approximately
NT$148.4 million (US$4.9 million), primarily because of higher cost of restricted stock units granted to employees in 2011. Other
expenses decreased 9% year-over-year to approximately NT$411.4 million (US$13.6 million), primarily because of lower IC tape-
outs and other project expenses in 2011.
Sales and marketing expenses.
NT$
Years Ended December 31
2011
2010
% of net sales
Salary and benefits
Stock-based compensation
Other sales and marketing
Sales and marketing
241,828
60,626
126,109
428,563
NT$
% of net sales
(in thousands, except percentage data)
5
4 204,525
1
1
45,520
3
2 139,020
9
7 389,065
$ change
% change
37,303
15,106
(12,911)
39,498
18
33
(9)
10
Our sales and marketing expenses increased 10% year-over-year to approximately NT$428.6 million (US$14.2 million) in
2011. Salary and benefits increased 18% year-over-year to approximately NT$241.8 million (US$8.0 million), primarily because of
the higher headcount and compensation expenses in 2011. Stock-based compensation increased 33% year-over-year to approximately
NT$60.6 million (US$2.0 million), primarily because of higher cost of RSUs granted to employees in 2011. Other sales and
marketing expenses decreased 9% year-over-year to approximately NT$126.1 million (US$4.2 million) primarily because of lower
testing fees in 2011.
28
General and administrative expenses.
Salary and benefits
Stock-based compensation
Other general and administrative
General and administrative
Years Ended December 31
2011
2010
NT$
% of net sales
NT$
% of net sales
$ change % change
189,996
44,511
99,217
333,724
(in thousands, except percentage data)
4
3
1
1
2
1
7
5
169,454
37,488
98,671
305,613
20,542
7,023
546
28,111
12
19
1
9
Our general and administrative expenses increased 9% year-over-year to approximately NT$333.7 million (US$11.0 million) in
2011. Salary and benefits increased 12% year-over-year to approximately NT$190.0 million (US$6.3 million), primarily because of
higher headcount and compensation expenses in 2011. Stock-based compensation increased 19% year-over-year to approximately
NT$44.5 million (US$1.5 million), primarily because of higher cost of RSUs granted to employees in 2011.
Stock-based compensation
The following table presents details of total stock-based compensation expense that is included in each functional line item in
our consolidated statements of income:
Years Ended December 31
NT$
2011
% of net sales
NT$
2010
% of net sales
$ change % change
Cost of sales
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
7,489
148,405
60,626
44,511
261,031
(in thousands, except percentage data)
—
2
1
1
4
5,911
102,209
45,520
37,488
191,128
—
2
1
1
4
1,578
46,196
15,106
7,023
69,903
27
45
33
19
37
Total stock-based compensation increased NT$69.9 million (US$2.3 million) primarily because of higher cost of RSUs granted
to employees in 2011.
See Note 16 of Notes to Consolidated Financial Statements for a discussion of activity related to share-based awards.
Amortization of intangible assets.
NT$
Amortization of intangible assets
23,088
Years Ended December 31
2011
2010
% of net sales
NT$
% of net sales
(in thousands, except percentage data)
2
69,244
—
$ change
% change
(46,156)
(67)
Our amortization of intangible asset decreased 67% year-over-year to approximately NT$23.1 million (US$0.8 million) because
amortization of intangible assets relating to our acquisitions of FCI and Centronix in April 2011.
Interest expense. Our interest expense decreased to approximately NT$2.2 million (US$0.1 million) for the year ended
December 31, 2011 from approximately NT$3.1 million for the year ended December 31, 2010 primarily because of smaller
government grants in 2011 compared with 2010.
Foreign exchange gain (loss). For the year ended December 31, 2011, we had a foreign exchange gain of NT$167.4 million
(US$5.5 million), compared with a foreign exchange loss of NT$358.3 million for the year ended December 31, 2010. The foreign
exchange gain in 2011 resulted primarily from the depreciation of the NT dollar relative to the U.S. dollar during the period as
compared to 2010. We do not presently engage in any hedging activities.
29
Interest income. Our interest income increased to approximately NT$17.7 million (US$0.6 million) for the year ended
December 31, 2011 from approximately NT$11.3 million for the year ended December 31, 2010 because of higher levels of cash and
cash equivalents.
Impairment of long-term investment. No impairment was recognized in 2011. In 2010, we determined that our investments in
Spright and Vastview were impaired because a combination of recurring losses and reduced forecasts indicated that our investments
were not recoverable within a reasonable period of time and that the impairments were other than temporary and recorded a combined
impairment charge of NT$7.3 million.
Income tax expense (benefit). Our income tax expense was approximately NT$169.7 million (US$5.6 million) for the year ended
December 31, 2011 compared to an income tax benefit of approximately NT$18.9 million for the year ended December 31, 2010.
Net income (loss). Net income was approximately NT$1,221.4 thousand (US$40.4 million) for the year ended December 31,
2011 compare to a net loss of approximately NT$155.4 million for the year ended December 31, 2010.
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
Net sales.
Net sales
Mobile storage
Mobile communications
Multimedia SoCs
Other products
Net sales
Years Ended December 31
NT$
2010
% of net sales
NT$
2009
% of net sales
(in thousands, except percentage data)
$ change
% change
2,911,576
780,012
444,366
41,296
4,177,250
70
19
11
—
100
1,802,982
727,798
350,822
11,628
2,893,230
62
25
12
1
100
1,108,594
52,214
93,544
29,668
1,284,020
61
7
27
255
44
Our net sales increased 44% year-over-year to approximately NT$4,177.3 million in 2010 as total unit shipment for our products
increased 55%.
Our mobile storage unit shipments increased 53% year-over-year due to better availability of NAND flash supply to our
customers and strong demand for devices using our controllers. Mobile storage ASP increased 11% year-over-year. Our card
controller revenue increased 56% year-over-year, USB flash drive controllers revenue increased 96% year-over-year, and SSD and
embedded flash memory controller revenue increased over 130% year-over-year. Mobile communications revenue increased 7%
largely because of improved mobile TV IC sales. Multimedia SoCs revenue increased 27% largely because of strong embedded
graphics sales.
30
Gross profit.
Gross profit
Years Ended December 31
NT$
2010
% of net sales
NT$
2009
% of net sales
(in thousands, except percentage data)
$ change % change
1,957,616
47 1,190,422
41
767,194
64
Gross profit as a percentage of net sales increased from 41% in 2009 to 47% in 2010 primarily because of less obsolete and
unmarketable inventory write-downs. Our gross profit excluding obsolete and unmarketable inventory write-downs as a percentage of
revenue declined from 49% in 2009 to 48% in 2010, due to increased sales of lower gross margin products and reduced gross margins
for some of our products.
Research and development expenses.
Salary and benefits
Stock-based compensation
Other research and development
Research and development
Years Ended December 31
2010
2009
NT$
% of net sales
NT$
% of net sales
$ change
% change
(in thousands, except percentage data)
499,184
102,209
452,801
1,054,194
477,059
12
224,220
2
421,212
11
25 1,122,491
17
8
14
39
22,125
(122,011)
31,589
(68,297)
5
(54)
7
(6)
Our research and development expenses decreased 6% year-over-year to approximately NT$1,054.2 million in 2010. Salary and
benefits increased 5% year-over-year to approximately NT$499.2 million, primarily because of lower expenses in 2009 due to a
temporary company-wide salary reduction in effect in 2009. Stock-based compensation decreased 54% year-over-year to
approximately NT$102.2 million, primarily because of higher expenses in 2009 from cost relating to the accelerated vesting of certain
soon-to-vest RSUs and cancellation of a small portion of outstanding RSUs previously granted to employees. Other expenses
increased 7% year-over-year to approximately NT$452.8 million, primarily because of IC tape-outs and other project expenses
increasing as we continued to invest in all our product lines.
Sales and marketing expenses.
NT$
Salary and benefits
Stock-based compensation
Other sales and marketing
Sales and marketing
204,525
45,520
139,020
389,065
Years Ended December 31
2010
2009
% of net sales
NT$
% of net sales
(in thousands, except percentage data)
7
5
3
1
4
3
14
9
199,879
77,500
118,606
395,985
$ change
% change
4,646
(31,980)
20,414
(6,920)
2
(41)
17
(2)
Our sales and marketing expenses decreased 2% year-over-year to approximately NT$389.1 million in 2010. Salary and benefits
increased 2% year-over-year to approximately NT$204.5 million, primarily because of lower expenses in 2009 due to a temporary
company-wide salary reduction in effect in 2009. Stock-based compensation decreased 41% year-over-year to approximately
NT$45.5 million, primarily because of higher expenses in 2009 from cost relating to the accelerated vesting of certain soon-to-vest
RSUs and cancellation of a small portion of outstanding RSUs previously granted to employees of 2009. Other sales and marketing
expenses increased 17% year-over-year to approximately NT$139.0 million primarily because of higher testing fees in 2010.
31
General and administrative expenses.
NT$
Years Ended December 31
2010
2009
% of net sales
Salary and benefits
Stock-based compensation
Other general and administrative
General and administrative
169,454
37,488
98,671
305,613
NT$
% of net sales
(in thousands, except percentage data)
6
4
4
1
2
6
16
7
174,572
120,298
169,818
464,688
$ change
% change
(5,118)
(82,810)
(71,147)
(159,075)
(3)
(69)
(42)
(34)
Our general and administrative expenses decreased 34% year-over-year to approximately NT$305.6 million in 2010. Salary and
benefits decreased 3% year-over-year to approximately NT$169.5 million, primarily because of a 5% decrease in the number of
employees engaged in general and administrative activities. Stock-based compensation decreased 69% year-over-year to
approximately NT$37.5 million, primarily because of higher expenses in 2009 from cost relating to the accelerated vesting of certain
soon-to-vest RSUs and cancellation of a small portion of outstanding RSUs previously granted to employees in 2009. Other general
and administrative expenses decreased 42% year-over-year to approximately NT$98.7 million primarily because reserves for doubtful
accounts decreased NT$34.7 million and tax and legal advisory fees decreased NT$8.9 million in 2010.
Stock-based compensation
The following table presents details of total stock-based compensation expense that is included in each functional line item in
our consolidated statements of income:
Years Ended December 31
2010
2009
NT$
% of net sales
Cost of sales
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
5,911
102,209
45,520
37,488
191,128
NT$
% of net sales
(in thousands, except percentage data)
1
8
3
4
16
24,445
224,220
77,500
120,298
446,463
—
2
1
1
4
$ change
% change
(18,534)
(122,011)
(31,980)
(82,810)
(255,335)
(76)
(54)
(41)
(69)
(57)
Total stock-based compensation decreased NT$255.3 million primarily because of higher expenses in 2009 from cost relating to
the accelerated vesting of certain soon-to-vest RSUs and cancellation of a small portion of outstanding RSUs previously granted to
employees. Total expense incurred for the acceleration and cancellation, net of forfeiture adjustment, was approximately NT$163.8
million.
See Note 16 of Notes to Consolidated Financial Statements for a discussion of activity related to share-based awards.
Amortization of intangible assets.
NT$
Amortization of intangible assets
69,244
Years Ended December 31
2010
2009
% of net sales
NT$
% of net sales
(in thousands, except percentage data)
7
2 192,391
$ change
% change
(123,147)
(64)
Our amortization of intangible asset decreased 64% year-over-year to approximately NT$69.2 million in 2010 due to a write
down of the value of certain long-lived assets in December 2009. This expense is associated with the amortization of intangible assets
relating to our acquisitions of FCI and Centronix.
32
Impairment of goodwill and long-lived assets.
We performed annual impairment assessments of the carrying value of goodwill and other long-lived assets in November 2010
and 2009. No impairment was recognized in 2010. During our 2009 evaluation, we compared the carrying value of our mobile
communications reporting unit to its estimated fair value and determined that goodwill and certain other long-lived assets were
impaired and recognized approximately NT$1,019.4 million for goodwill impairment and NT$217.2 million for impairment of certain
other long-lived assets.
See Note 11 of Notes to Consolidated Financial Statements for a further discussion of impairment of goodwill and other long-
lived assets.
Interest expense. Our interest expense decreased to approximately NT$3.1 million for the year ended December 31, 2010 from
approximately NT$3.5 million for the year ended December 31, 2009 primarily because of reducing government grants in 2010
compared with 2009.
Foreign exchange gain (loss). For the year ended December 31, 2010, we incurred foreign exchange losses of NT$358.3
million, compared with NT$88.9 million for the year ended December 31, 2009. The foreign exchange loss in 2010 resulted primarily
from the strength of the NT dollar relative to the U.S. dollar. We do not presently engage in any hedging activities.
Interest income. Our interest income decreased to approximately NT$11.3 million for the year ended December 31, 2010 from
approximately NT$22.1 million for the year ended December 31, 2009 because of lower levels of cash and cash equivalents and
lower interest rates.
Impairment of long-term investment. In 2010, we determined that our investments in Spright and Vastview were impaired
because a combination of recurring losses and reduced forecasts indicated that our investments were not recoverable within a
reasonable period of time and that the impairments were other than temporary and recorded a combined impairment charge of NT$7.3
million. In 2009, we determined that our investment in Vastview was impaired and recorded a NT$8.6 million charge.
Income tax expense (benefit). Our income tax benefit was approximately NT$18.9 million for the year ended December 31, 2010
compared to an income tax expense of approximately NT$6.8 million for the year ended December 31, 2009. In 2010, our income tax
expense decreased by NT$25.7 million when compared to 2009 because of several net tax benefits, including a NT$193.3 million net
benefit from the revaluation of deferred tax assets related to new alternative minimum tax (“AMT”) tax in Taiwan and a NT$99.6
million net benefit from increased unrealized tax benefits relating to changes in accrued liabilities, partially offset by several net tax
expenses, including a NT$117 million net expense primary from an increase in unrealized foreign exchange loss and a NT$92.0
million net expense from utilization of net operating loss carry forwards.
Net income (loss). Net loss was approximately NT$155.4 thousand for the year ended December 31, 2010 compare to a net loss
of approximately NT$2,309.2 million for the year ended December 31, 2009.
Liquidity and Capital Resources
As of December 31, 2011, we had approximately NT$2,687.7 million (US$88.8 million) in cash and cash equivalents and
approximately NT$90.2 million (US$3.0 million) in short-term investments. We maintain our cash balances in bank deposits and in
money market instruments. We do not currently engage in any currency hedging activities. Our short-term investments consist
primarily of bond funds that we trade and which invest primarily in Taiwan government and Taiwan investment grade corporate
bonds denominated in NT$.
We believe our existing cash balances and short-term investments, together with cash we expect to generate from operating
activities, will be sufficient to meet our anticipated cash needs for at least the next 12 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.
33
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
Operating activities
Year Ended December 31,
2009
NT$
2010
NT$
2011
NT$
2011
US$
(in thousands)
323,927
(45,299)
18,471
163,129
(99,480)
(278,583)
(289,194)
—
150,672
(137,087)
1,562,339
(428,083)
67,456
164,058
(160,634)
51,613
(14,142)
2,228
5,420
(5,307)
Our net cash provided by operating activities was approximately NT$1,562.3 million (US$51.6 million) for the year ended
December 31, 2011, compared to net cash used in operating activities of approximately NT$278.6 million and net cash provided by
operating activities of approximately NT$323.9 million during 2010 and 2009, respectively.
For the year ended December 31, 2011, cash flow provided by operations of NT$1,562.3 million (US$51.6million) resulted
primarily from our net income of NT$1,221.4 million (US$40.4 million) and the following reasons:
•
•
•
Our net income includes substantial non-cash charges, namely NT$187.1 million (US$6.2 million) of depreciation and
amortization and NT$261.0 million (US$8.6 million) of stock-based compensation.
Our purchase of short-term investments net of sale of short-term investments were NT$48.7 million (US$1.6 million).
We increased working capital by NT$126.3 million (US$4.2 million) to support increasing sales. Inventory increased by
NT$219.4 million (US$7.2 million), accounts receivable increased by NT$363.6 million (US$12.0 million), accounts
payable increased by NT$305.7 million (US$10.1 million), income tax payable increased by NT$62.5 million (US$2.1
million), and other assets net of other liabilities provided NT$88.9 million (US$2.9 million) of cash.
For the year ended December 31, 2010, cash flow used in operations of NT$278.6 million resulted primarily from our net loss of
NT$155.4 million and the following reasons:
•
•
•
Our net loss includes substantial non-cash charges, namely NT$219.9 million of depreciation and amortization, NT$191.1
million of stock-based compensation, and NT$7.2 million of loss on impairment of assets.
Our purchase of short-term investments net of sale of short-term investments were NT$20.0 million.
We increased working capital by NT$517.0 million to support increasing sales. Inventory increased by NT$240.8 million,
accounts receivable increased by NT$300.8 million, accounts payable increased by NT$5.4 million, income tax payable
decreased by NT$1.1 million, and other assets net of other liabilities provided NT$20.3 million of cash.
Investing activities
Our net cash used in investing activities was approximately NT$428.1 million (US$14.1 million) for the year ended
December 31, 2011, compared to net cash used in investing activities of approximately NT$289.2 million for the year ended
December 31, 2010. Investments in 2011 comprised of purchases of design tools and other items and collateral provided to our
foundry supplier.
Our net cash used in investing activities was approximately NT$289.2 million for the year ended December 31, 2010, compared
to net cash used in investing activities of approximately NT$45.3 million for the year ended December 31, 2009. Investments in 2010
were comprised of purchases of design tools and other items and collateral provided to our foundry supplier.
Financing activities
Our net cash provided by financing activities was approximately NT$67.5 million (US$2.2 million) for the year ended
December 31, 2011, compared to no net cash provided by financing activities for the year ended December 31, 2010. Our cash
generated from financing activities in 2011 was primarily from issuance of ordinary shares upon exercise of employee stock options.
Our net cash provided by financing activities was zero for the year ended December 31, 2010, compared to net cash provided by
financing activities of approximately NT$18.5 million for the year ended December 31, 2009.
34
Contractual Obligations
The following table sets forth our commitments to settle contractual obligations in cash as of December 31, 2011:
Amount of Commitment Maturing by Year
Less Than
Total
NT$
1 Year 1-3 Years
NT$
NT$
(in thousands)
3-5 Years
NT$
More Than
5 Years
NT$
Operating leases
Capital leases
Pension
Other long term liabilities
Contractual cash obligations
65,808
26,544
30,355
7,901
1,008
371
260
111
—
32,880
32,880
(a )
(a )
20,029
12,389
7,640
—
—
(a )
—
119,088
72,073
38,106
7,901
1,008
(a) Our pension obligation after one year has not been estimated.
We increased long-term taxes payable of NT$11.1 million (US$0.4 million) related to uncertain tax positions as of
December 31, 2011. 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 and outcome of tax audit.
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.
Recent Accounting Pronouncements
In September 2009, the FASB issued an accounting standard update which provides guidance on how to separate consideration
in multiple-deliverable arrangements and significantly expands disclosure requirements. The standard establishes a hierarchy for
determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The update is effective for
annual reporting periods beginning on or after June 15, 2010. This guidance is effective for the Company for the year ending
December 31, 2011. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial
position and cash flows.
In September 2009, the FASB issued an accounting standard update on arrangements that include software elements. Tangible
products that have software components that are essential to the functionality of the tangible product will no longer be within the
scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue
recognition guidance. The update is effective for annual reporting periods beginning on or after June 15, 2010. This guidance is
effective for the Company for the year ending December 31, 2011. The adoption of the guidance did not have a material effect on the
Company’s results of operations, financial position and cash flows.
In January 2010, the FASB issued an accounting update that amended guidance and clarified the disclosure requirements about
fair market value measurement. These amended standards require new disclosures for significant transfers of assets or liabilities
between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3
fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure
Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which are effective for the
Company as of January 1, 2011, the remaining new disclosure requirements were effective for the Company as of January 1, 2010.
The Company has included these new disclosures, as applicable, in Note 19, “Fair Value Measurement”.
In April 2010, the FASB issued an accounting update that provides guidance on defining a milestone and determining when it
may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under
this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period
in which it is achieved, only if the milestone meets all criteria to be considered substantive. This standard is effective for the
Company on a prospective basis as of January 1, 2011. The adoption of the guidance did not have a material effect on the Company’s
results of operations, financial position and cash flows.
35
In April 2010, the FASB issued an accounting update to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades must not be considered
to contain a market, performance, or service condition. Therefore, an entity should not classify such an award as a liability if it
otherwise qualifies for classification in equity. This guidance is effective for annual periods beginning on or after December 15, 2010,
and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment to the opening
balance of retained earnings for all awards outstanding as of the beginning of the annual period in which the guidance is adopted.
Earlier application is permitted. This guidance is effective for the Company for the year ending December 31, 2011. The adoption of
the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In December 2010, the FASB issued an accounting update to require that supplemental pro forma information disclosures
pertaining to acquisitions should be presented as if the business combination(s) occurred as of the beginning of the prior annual period
when comparative financial statements are presented. This guidance also expands the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in
periods beginning after December 15, 2010. Early adoption is permitted. This guidance is effective for the Company for the year
ending December 31, 2011. The Company has included these new disclosures, as applicable, in Note 4, “Business Acquisition”.
In December 2010, the FASB issued an accounting update to modify Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment
test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.
For public entities, this guidance is effective for impairment tests performed during entities’ fiscal years that begin after December 15,
2010. Early application will not be permitted. This guidance is effective for the Company for the year ending December 31, 2011.
The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In May 2011, the FASB issued an accounting update to amend the fair value measurement guidance and include some enhanced
disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3
measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. Early
adoption is not permitted. The Company does not expect the adoption will have a material impact on the Company’s results of
operations, financial position or cash flows.
In June and December 2011, the FASB issued accounting updates to eliminate the current option to report other comprehensive
income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income
and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The new requirements
do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an
item of other comprehensive income must be reclassified to net income. This guidance must be applied retroactively and is effective
for fiscal years beginning after December 15, 2011. Earlier application is permitted. The Company is currently evaluating which
presentation option it will elect, but the adoption of these provisions will have no effect on its results of operations, financial position
or cash flows.
In September 2011, the FASB issued an accounting update, which is intended to reduce the cost and complexity of the annual
goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further
impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is
necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-
not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. Earlier adoption is permitted. The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial position or cash flows.
In December 2011, the FASB issued an accounting update, which creates new disclosure requirements regarding the nature of
an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain
disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be
required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. The
disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013 with retrospective application
required. Since this standard impacts disclosure requirements only, its adoption is not expected to have a material impact on the
Company’s results of operations, financial condition or cash flows.
36
Trend Information
2011 represented the second year of recovery for our business as improving global economic conditions bolstered our overall business
performance. We benefited from the continuing increase in NAND flash supply with the introduction of new manufacturing facilities, the
continuing move to finer manufacturing process geometries and more multi-level cell NAND including two- and three-bit per cell NAND flash.
All of these factors have contributed to an improving supply of NAND flash in 2011 and has helped to lower the cost of NAND flash. With the
improving affordability of NAND flash, demand for flash has increased and is now being adopted in a broader range of devices including
smartphones, notebook and industrial PCs, tablets, networking equipment, consumer electronics and other devices. We continue to benefit from
the increasing adoption and improving affordability of NAND flash as more of our controllers are being used for these devices. As a result, sales
from our mobile storage product line increased by 55% in 2011. Within our controller business, card controller sales increased by 77% and USB
flash drive controller sales increased 64%. 2011 also was the year that we began shipping our LTE transceiver products in volume to Samsung
and generated material LTE transceiver revenue.
As we entered 2012, the industry trends that have favored our business and bolstered our growth in the past two years continue to provide
strong tailwinds to our business. We believe that overall NAND flash supply growth will remain healthy in 2012, leading to lower cost of NAND
flash and wider adoption of flash in the consumer, enterprise and industrial end-markets. Overall supply increase will continue to come from the
migration to finer manufacturing process geometry, the increase in the mix of two- and three-bit MLC NAND flash, and the continuing build-out
and expansion of the three new 300mm NAND flash manufacturing facilities in Singapore, Japan and South Korea. We believe the secular trend
of incorporating NAND flash memory into a broader range of devices including mobile phones, tablets, PCs, consumer electronics, industrial and
enterprise storage applications will continue to drive strong overall demand for NAND flash and the controllers required to manage storage
devices using NAND flash for these devices. Separately, we expect the overall LTE market is expected to grow rapidly in 2012, which support
strong growth for Samsung LTE phones and our LTE transceivers
ITEM 6.
Executive Officers and Directors
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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
Kenneth Kuan-Ming Lin
Lien-Chun Liu
Yung-Chien Wang
Riyadh Lai
Frank Chang
Ken Chen
Nelson Duann
Sangwoo Han
John (Chun-O) Kim
Arthur Yeh
Age
Position
62 Chairman of the Board
53 President, Chief Executive Officer and Director
46 Director
63 Director
59 Director
55 Director
49 Director
43 Chief Financial Officer
46 VP of R&D, Mobile Storage
51 VP of Operations
43 VP of Product Marketing, Mobile Storage and Multimedia SoCs
43 Senior VP and General Manager, Mobile Communications
51 VP of Sales, Mobile Communications
51 VP of Sales, Mobile Storage and Multimedia SoCs
Executive Officers and Directors
James Chow, Chairman of the Board of Directors
Mr. Chow has served as the Chairman of our board of directors since April 2005. Mr. Chow has been the Chairman of Concord Financial
Co., Ltd. since 1993. Concord Financial Co., Ltd. is an investment holding company and was one of our significant shareholders. Mr. Chow
received an MBA from Columbia University.
Wallace C. Kou, President, Chief Executive Officer, Director
Mr. Kou founded Silicon Motion in 1995 and has been our President and Chief Executive Officer since our founding. Prior to founding
Silicon Motion, 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. 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.
37
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 is the Chairman of Dynapack International Technology Corp,
a leading provider of battery packs for notebook PCs and tablets. From 1985 to 2000, Mr. Chung was an audit partner at Arthur
Andersen. Mr. Chung has been a trustee and audit committee member of the Taiwan Greater China Fund, Inc., an NYSE-listed
closed-end investment company, since 2006. He is also a director at 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.
Kenneth Kuan-Ming Lin, Director
Mr. Lin joined our board of directors in September 2009. Mr. Lin is the Chairman of Premier Capital Management Corp., the
Taiwan Private Equity and Venture Capital Association, and Ruby Tech Corp., and is a member of the board of directors of the Straits
Economics & Cultural Interchange Association. He was previously Assistant Vice President of MiTAC Corporation from 1977 to
1978, Vice President of Synnex Corporation from 1978 to 1987, President of TaiDevelop Information Corp. from 1987 to 1990 and
Chairman of the board of System General Corp. from 1998 to 2001. Mr. Lin has a 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 over 20 years of working experience in the human resource
and legal services industries. 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 also an investment banker at Morgan Stanley and ABN AMRO and finance manager at PepsiCo in Hong Kong
and New York. Mr. Lai has over a decade of financial management and M&A transaction experience. He holds a BA degree in
Economics from Georgetown University and an MBA from New York University.
Frank Chang, VP of R&D, Mobile Storage
Mr. Chang has served as our Vice President of research and development since 2008. Mr. Chang is head of research and
development for our mobile storage products and has around 20 years of experience in the integrated circuit 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, Taiwan.
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, as well as assembly and testing. Mr. Chen previously served in management positions at
Faraday Technology and UMC, and 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.
38
Nelson Duann, VP of Product Marketing, Mobile Storage and Multimedia SoCs
Mr. Duann became our Vice President in charge of our mobile storage and multimedia SoC product marketing in September
2010. He joined Silicon Motion in August 2007 as a product marketing director and R&D team leader. Mr. Duann has almost 15
years of experience in the semiconductor industry in product design, development and marketing. Prior to Silicon Motion, he worked
for Sun Microsystems Inc., focusing on UltraSPARC micro Processor projects. He holds an MS in Communications Engineering
from National Chiao Tung University in Taiwan and an MS in Electrical Engineering from Stanford University.
Sangwoo Han, Senior VP and General Manager, Mobile Communications
Mr. Han became the General Manager of our Mobile Communications product line in July 2008. He was formerly the Chief
Technology Officer at FCI, a company that we acquired in April 2007. Mr. Han joined FCI in 2003 and had been in charge of product
design, development, production and marketing. In 1997, he co-founded RF Solutions Inc. in Atlanta, Georgia, which is now the
Anadigics Wireless LAN Center of Excellence. Mr. Han received a BS in Electrical Engineering from Carnegie-Mellon University,
an MS in Electrical Engineering from the University of Pennsylvania, and a PhD in Electrical Engineering from the Georgia Institute
of Technology.
John (Chun-O) Kim, VP of Sales, Mobile Communications
Mr. Kim became the Vice President of our Mobile Communications product line in July 2008. He was formerly the Vice
President of Sales at FCI, a company that we acquired in April 2007. Mr. Kim joined FCI in 2006 and had previously served in
management positions at Hewlett-Packard’s semiconductor division (now Avago Technologies) and as a CEO of a private company.
Mr. Kim has over 16 years of semiconductor sales leadership experience, including managing marketing strategies, product
promotions and sales activities. He received an MS in Electrical Engineering from Ajou University, Korea.
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 SoCs 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 and joined us in
2004. Mr. Yeh holds an MS degree in Management Business Administration from the National Chung Hsing University, Taiwan.
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. Tsung-Ming Chung, Lien-Chun Liu, and Yung-Chien Wang
are members of our audit committee. Our board of directors has determined that Mr. 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. Henry
Chen and Lien-Chun Liu are members of our compensation committee, with Mr. Chen serving as the Chairman of the 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. 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 the committee.
Our board of directors has adopted a code of ethics, which is applicable to all of our employees.
39
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 three, the number nearest to but not greater than one-third) subject to re-election 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 re-election 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, 2011, the aggregate compensation to our directors and senior executive officers was
approximately NT$62.9 million (US$2.1 million). In 2011, we granted options and restricted stock units to our executive officers as a
group to acquire an aggregate of 144,000 ordinary shares. The options and restricted stock units granted to our executive officers and
non-executive directors are subject to the same vesting conditions as those of our employees.
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 shareholders 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. In 2009, the board of directors amended the Plan to increase the authorized shares available for issuance under the
Plan to 40,000,000 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.
40
Share Reserve. The aggregate number of ordinary shares that may be issued pursuant to awards granted under the Plan will not
exceed 40,000,000 shares, 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.
Amendments to Plan in 2009 and 2010. In 2009, our board of directors amended the Plan to (i) increase the authorized shares to
40,000,000 as discussed above and (ii) allow certain unilateral amendments to outstanding options and RSU grants. Shareholder
approval for such amendments was not required under Cayman law and we used the home-country exemption for foreign private
issuers under Nasdaq rules to effect such amendments without a shareholder vote. In 2009, the Company cancelled 1,221,875 RSUs.
There were no changes to outstanding options in 2009. In 2010, the Company exchanged 4,369 thousand stock options for
3,785 thousand new stock options with a similar value.
Future amendments 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.
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,
2009
2010
2011
99
20
364
146
629
94
19
350
124
587
98
22
388
134
642
As of December 31, 2011, we had 642 total employees, including 388 in Taiwan, 26 in the United States, 111 in China, 112 in
Korea, and 5 in Japan. 493 of our total employees are engineers.
41
We do not have any collective bargaining arrangements with our employees and consider our relations with our employees to be
good.
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.
There were 129,551,704 of our ordinary shares outstanding as of March 31, 2012. The following table sets forth information
with respect to the beneficial ownership of our ordinary shares as of March 31, 2012, less 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.
(5)
Executive Officers and Directors:
James Chow
(1)
Wallace C. Kou
(2)
Henry Chen
(3)
Tsung-Ming Chung
(4)
Kenneth Kuan-Ming Lin
Lien-Chun Liu
(6)
Yung-Chien Wang
(7)
Riyadh Lai
(8)
Frank Chang
(9)
Ken Chen
Nelson Duann
Sangwoo Han
John (Chun-O) Kim
Arthur Yeh
(14)
(11)
(10)
(13)
(12)
Shares Beneficially
Owned
Number
%
2,387,546
3,804,394
56,280
56,280
30,000
156,280
770,674
1,809,900
636,640
486,049
110,000
263,276
162,436
376,624
1.84
2.94
*
*
*
*
*
1.40
*
*
*
*
*
*
Less than one percent
*
(1) Represents 2,361,266 shares owned by Mr. Chow and 26,280 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
owned 42,445 and 196,491 shares, respectively. Mr. Chow disclaims any beneficial ownership of these shares.
(2) Represents 3,249,100 shares owned by Mr. Kou, 35,094 shares owned by his spouse and 520,200 shares that Mr. Kou has the
right to acquire upon the exercise of RSUs or options.
(3) Represents 30,000 shares owned by Mr. Chen and 26,280 shares that Mr. Chen has the right to acquire within the next 60 days
upon the exercise of options.
(4) Represents 30,000 shares owned by Mr. Chung and 26,280 shares that Mr. Chung has the right to acquire within the next 60
days upon the exercise of options.
(5) Represents 30,000 shares owned by Mr. Lin.
(6) Represents 130,000 shares owned by Ms. Liu and 26,280 shares that Ms. Liu has the right to acquire within the next 60 days
upon the exercise of options.
(7) Represents 744,394 shares owned by Mr. Wang and 26,280 shares that Mr. Wang has the right to acquire within the next 60
days upon the exercise of options.
(8) Represents 356,000 shares owned by Mr. Lai, 829,600 shares owned by his spouse, 384,300 shares that Mr. Lai has the right to
acquire within the next 60 days upon the exercise of options or RSUs and 240,000 shares that his spouse has the right to acquire
within the next 60 days upon the exercise of options.
(9) Represents 636,640 shares owned by Mr. Chang.
(10) Represents 480,324 shares owned by Mr. Chen and 5,725 shares owned by his spouse.
(11) Represents 110,000 shares owned by Mr. Duann.
(12) Represents 263,276 shares owned by Mr. Han.
(13) Represents 162,436 shares owned by Mr. Kim.
(14) Represents 376,624 shares owned by Mr. Yeh.
42
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
As of March 31, 2012, there were 129,551,704 of our ordinary shares outstanding. The Bank of New York Mellon, the
depositary under our ADS deposit agreement, has advised us that as of March 31, 2012, we had 32,221,628 ADSs, representing
128,886,512 ordinary shares.
The table in Item 6 above includes information known to us regarding those shareholders that beneficially own significant
amounts of our ordinary shares. No shareholder is a “major shareholder,” owning 5% or more of our 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
No related party transactions occurred between January 1, 2011 and April 20, 2012.
ITEM 8.
FINANCIAL INFORMATION
Consolidated Financial Statements
See “Item 18. Financial Statements” and pages F-1 through F-31 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 May 1, 2005, SMI Taiwan incurred a loss on inventory in the possession of a subcontractor, Advanced Semiconductor
Engineering Inc. (“ASE”) due to a fire. On December 12, 2005, SMI Taiwan filed an action against ASE with the Taoyuan District
Court in Taiwan. SMI Taiwan alleged that ASE destroyed the wafers which SMI Taiwan had sub-contracted to ASE with the OEM
Agreement between SMI and ASE, and that ASE should pay SMI Taiwan a sum of NT$77,218 thousand for damages, an amount
exceeding the book value of lost inventory. After consultation with the Company’s outside legal counsel, the Company believed it
was 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 of inventory loss, offset by NT$41,226 thousand of fire loss reimbursement recorded as
other receivable, resulting in zero impact to the earnings for the year ended December 31, 2005. In connection with the inventory loss,
the Company also recorded NT$8,122 thousand under operating expenses for amounts paid to certain customers for delays in
shipments caused by the fire. In December 2006, the Company wrote-off other receivable related to the reimbursement of the fire loss
as the collection of which was doubtful. In April 2010, ASE settled with SMI Taiwan by paying a settlement fee of NT$35,000
thousand. On April 28, 2010, the Taoyuan District Court granted a motion to dismiss the claim filed by SMI Taiwan against ASE.
On October 23, 2007, SanDisk Corp. (“SanDisk”) filed a complaint with 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 claimed that certain Silicon Motion flash memory controllers and products containing these Silicon Motion flash
memory controllers infringed specific SanDisk patents. The complaint requested the ITC institute an investigation into the matter and
sought 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 sought a permanent cease and desist order, directing
respondents 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 December 6, 2007, the ITC instituted an investigation, identifying forty-seven companies,
including Silicon Motion, as respondents. An ITC hearing was held as scheduled from October 27 through November 5, 2008. In
post-hearing briefing, the Office of Unfair Import Investigation (“OUII”) Staff Attorney agreed with our position that none of the
Silicon Motion controllers infringed the SanDisk patents in suit. On April 10, 2009, the Administrative Judge of the ITC issued an
initial determination that Silicon Motion flash controllers and products containing these Silicon Motion flash controllers did not
infringe the patents of SanDisk. On October 23, 2009, the ITC determined that Silicon Motion was not in violation of Section 337 of
the Tariff Act of 1930 and terminated its investigation.
43
On October 24, 2007, SanDisk 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 alleged that Silicon Motion’s
flash memory controllers infringed certain SanDisk patents and sought unspecified damages, injunctive relief, a trebling of damages
for alleged willful conduct and attorneys’ fees. Both cases were stayed until SanDisk’s ITC proceeding became final. SanDisk entered
into a settlement with Silicon Motion and no settlement payments were required from Silicon Motion. On February 4, 2010, the Court
ordered the dismissal of SanDisk’s claims against Silicon Motion without prejudice pursuant to SanDisk’s requests.
All American Semiconductor, Inc. (“All American” or “AASI”) was a former distributor for the Company. On April 25, 2007,
All American filed for Chapter 11 bankruptcy protection. At the time of the filing, the Company had US$256 thousand of unpaid
accounts receivable from All American. On April 17, 2009, SMI USA and related entities were named as defendants in an adversary
proceeding filed by the AASI Creditor Liquidating Trust (“CLT”) in the bankruptcy case pending in the U.S. Bankruptcy Court for
the Southern District of Florida. The CLT was seeking the return of allegedly avoidable transfers in the amount of NT$27,977
thousand (US$854 thousand). The Company filed an answer and affirmative defenses. In March 2010, SMI USA settled with the CLT
by paying the amount of US$220 thousand and on April 1, 2010, the Bankruptcy Court granted the motion to approve stipulations to
compromise controversy. On August 23, 2010, the Court entered an order dismissing the adversary proceeding. In June 2011,
Liquidating Trustee for the CLT filed the AASI Creditor Liquidating Trustee’s Seventeenth Omnibus Objection to Claims but in
August 2011, withdrew it with respect to SMI USA’s proof of claim. According to the CLT’s letter dated September 9, 2011, it is
currently finalizing its claims review process and preparing for distribution to beneficiaries who are holders of allowed claims.
In 2006, FCI joined with other technology companies and invested in the Pangyo Silicon Park Construction Project Cooperative
(“Pangyo Cooperative”) in Korea. In July 2010, FCI, TLi Inc. (“TLI”), OCI Materials Co., Ltd (“OCI”) and other companies
withdrew from the Pangyo Cooperative and forfeited 10% of their total investment. FCI believes its loss was caused by bad will
actions taken by TLI. In December 2011, FCI and OCI together filed a complaint against TLI at the Suwon District Court in Korea
and expect court pleadings to begin in May 2012.
Policy on Dividend Distributions
Pursuant to the laws and regulations of the ROC and the Articles of Incorporation of SMI Taiwan, our subsidiary in Taiwan
must make appropriations from annual earnings to a non-distributable reserve which could affect our 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:
a.
b.
c.
d.
e.
Payment of taxes;
Recovery of prior years’ deficits, if any;
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 above a to c as
special reserve when necessary;
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.
ITEM 9.
Market and Share Price Information
THE OFFER AND LISTING
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 2007 are as follows:
Annual:
2007
2008
2009
2010
2011
Price per ADS (US$)
High
Low
29.00
20.61
4.48
6.50
21.60
15.60
1.99
1.90
2.64
4.14
44
Quarterly:
First Quarter, 2010
Second Quarter, 2010
Third Quarter, 2010
Fourth Quarter, 2010
First Quarter, 2011
Second Quarter, 2011
Third Quarter, 2011
Fourth Quarter, 2011
First Quarter, 2012
Monthly
November 2011
December 2011
January 2012
February 2012
March 2012
April 2012 (through April 19)
Price per ADS (US$)
High
Low
4.78
6.50
6.00
5.80
9.50
13.44
14.00
21.60
24.98
2.64
4.50
4.20
3.83
4.14
7.90
8.36
10.56
16.65
20.49
21.60
23.70
24.98
21.50
22.20
15.36
18.04
20.53
17.60
16.65
18.02
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) and 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 and
other than those described in Item 4, “Information on the Company” or elsewhere in this annual report.
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 (the “Code”), and U.S. Treasury regulations, rulings and
judicial decisions hereunder 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.
45
A U.S. Holder considering an investment in our ADSs or ordinary shares is urged to consult its tax advisor concerning 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 for U.S. federal income tax purposes:
•
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.
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, 2012, absent further
legislation. Subject to the exceptions discussed below, a corporation is a qualified foreign corporation if it is:
•
•
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; or
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 a 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
are 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.
46
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 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, 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 Stock 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.
47
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.
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 Form F-6 under the Securities Act of 1933,
as amended (the “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, as
amended (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 four 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 changes in interest rates is limited to 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.
48
Foreign currency risk. Although a majority of our revenues and expenses are denominated in U.S. dollars, our operational
headquarters are in Taiwan and we report our financial results in NT dollars. We are therefore exposed to adverse and beneficial
movements in foreign currency rates, which result in foreign exchange gains or losses that affect our results of operations. For the
year ended December 31, 2009, 2010 and 2011, we had foreign exchange losses of NT$88.9 million, foreign exchange losses of
NT$358.3 million, and foreign exchange gain of NT$167.4 million (US$5.5 million), respectively. As of December 31, 2011, more
than 99% of our accounts payable and other payables were denominated in currencies other than the NT dollar, primarily in
U.S. dollars. More than 88% of our accounts receivable were denominated in currencies other than the NT dollar, mainly in U.S.
dollars. In 2011, most of our sales were quoted in U.S. dollars. In 2011, approximately 72% 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 2011, our operating income would have increased or decreased, as the case may be, by approximately 9%, assuming all other
factors remained constant. We do not utilize foreign exchange derivatives contracts to protect against the changes in foreign exchange
rates. See “Risk Factors — We are subject to risks associated with international operations which may harm our business.”
Investment Risk. Prior to March 2007, we invested in equity instruments of privately held companies. We have minority stake
equity investments in Cashido and Vastview Technology, private companies related to semiconductor and other technology
industries. These investments are accounted for under the cost method because our ownership is less than 20% and we do not have the
ability to exercise significant influence over the operations of these companies. As of December 31, 2011, the aggregate carrying
value of these investments on our balance sheet was NT$5.4 million (US$0.2 million). We monitor these investments for impairment
and make appropriate reductions in carrying value when an impairment is deemed to be other than temporary and recorded
impairment loss of NT$8.6 million, NT$7.3 million, and nil in 2009, 2010 and 2011, respectively.
As of December 31, 2011, we also had NT$90.2 million (US$3.0 million) of short-term investments in bond funds that invest in
Taiwan government and Taiwan investment grade corporate bonds.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Depositary Fees and Charges. For the year-ended December 31, 2011, we received from our depositary bank a reimbursement
of US$0.5 million, net of withholding tax, for our continuing annual stock exchange listing fees and our other expenses incurred in
connection with maintaining and promoting our ADS program. In addition, the depositary bank has agreed to reimburse us annually
for a fixed number of years for our continuing annual stock exchange listing fees and our other expenses incurred in connection with
maintaining and promoting our ADS program. The amount of annual reimbursements is subject to certain limits.
49
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
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, 2011. 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 within the time periods specified in the SEC’s rules and forms. 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.
Management’s Report on Internal Control over Financial Reporting
Our management, including our CEO and CFO, 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 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 the 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, 2011 the company’s internal control over financial reporting was
effective.
Deloitte & Touche, the independent registered public accounting firm that audited our consolidated financial statements
included in this annual report has issued an attestation report regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
During 2011, 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.
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.
50
Attestation Report Of The Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the internal control over financial reporting of Silicon Motion Technology Corporation and subsidiaries (the
“Company”) as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011 based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2011 of the Company and our report dated April 25,
2012 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 25, 2012
51
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Tsung-Ming Chung, the Chairman of our audit committee and an independent
director, is a “financial expert” under Nasdaq and SEC 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 Stock 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 registered public accountants of our company and its subsidiaries for 2010 and
2011. 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.
Audit Fees
(1)
Audit-Related Fees
(2)
Tax Fees
(3)
All Other Fees
(4)
Total
2010
NT$
2011
NT$
(in thousands)
19,641
—
3,570
—
23,211
19,706
—
5,728
—
25,434
(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.” Deloitte &
Touche did not provide any services under this category in 2010 or 2011.
(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 2010 or 2011.
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
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 2011 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.
52
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands
law. In addition, because our ADSs are listed on the Nasdaq Global Select Market, we are subject to Nasdaq corporate governance
requirements. Nasdaq Listing Rule 5615(a)(3) permits foreign private issuers like us to follow “home country practice” with respect
to certain corporate governance matters. We are committed to a high standard of corporate governance. As such, we endeavor to
comply with the Nasdaq corporate governance practices and believe that we are currently in compliance with Nasdaq corporate
governance practices.
53
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-31.
ITEM 19. EXHIBITS
Exhibit
Number
Description
1.1
1.2
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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).
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 4.1 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).
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).
Second Amended and Restated Silicon Motion Technology Corporation Equity Incentive Plan 2005 (incorporated by
reference to Exhibit 2.3 of the company’s Form 20-F for the year ended December 31, 2009, filed June 25, 2010).
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).
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).
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).
4.11
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).
54
Exhibit
Number
4.12
Share Purchase Agreement dated as of April 18, 2007 among Silicon Motion Technology Corporation, Lake Tahoe
Investment Corporation, FCI, 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).
Description
8.1*
List of Subsidiaries
11.1
12.1*
12.2*
13.1*
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).
Certification of Chief Executive Officer Required by Rule 13a-14(a).
Certification of Chief Financial Officer Required by Rule 13a-14(a).
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.
23.1*
Consent of Deloitte & Touche
* Filed herewith.
55
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: April 25, 2012
56
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, 2010 and 2011
Consolidated Statements of Income for the Years Ended December 31, 2009, 2010 and 2011
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended
December 31, 2009, 2010 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2010 and 2011
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-7
F-9
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 subsidiaries (the
“Company”) as of December 31, 2011 and 2010, 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, 2011, 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 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, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
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, 2011, 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 25, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 25, 2012
F-2
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
Notes and accounts receivable, net
Inventories
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
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes and accounts payable
Income tax payable
Current portion of long-term payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term payable, net of current portion
Other long-term liabilities
Total liabilities
2010
NT$
December 31
2011
NT$
US$
(Note 3)
1,569,792 2,687,746
90,237
41,200
810,842 1,174,469
698,581 917,937
200,732 460,052
32,630
48,891
74,087
40,295
88,792
2,981
38,800
30,325
15,198
1,078
2,448
3,410,333 5,437,158 179,622
178
24,736
3,678
38,769
—
3,707
5,604,536 7,588,387 250,690
5,399
743,028 748,751
162,738 111,340
1,168,807 1,173,546
23,088
—
91,143 112,193
5,399
330,065 635,782
37,605 100,097
12,389
31,525
409,650 545,371
808,845 1,293,639
5,373
7,640
86,312
63,886
878,104 1,387,591
21,005
3,307
409
18,016
42,737
252
2,852
45,841
Commitments and Contingencies (Note 17)
Shareholders’ Equity
Ordinary Shares at US$ 0.01 par value per share
Authorized: 500,000 thousand shares
Issued and outstanding: 117,139 thousand shares in 2010 and 124,572 thousand
shares in 2011
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained Earnings (Accumulated deficit)
Total shareholders’ equity
Total liabilities and shareholders’ equity
39,647
37,191
69,216
1,310
4,775,392 5,104,881 168,645
(324)
35,218
4,726,432 6,200,796 204,849
5,604,536 7,588,387 250,690
(9,797)
(155,367) 1,066,065
The accompanying notes are an integral part of the consolidated financial statements.
F-3
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share)
Year Ended December 31
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES
Research and development
Sales and marketing
General and administrative
Amortization of intangible assets
Gain from settlement of litigation
Impairment of goodwill and long-lived assets
Total operating expenses
OPERATING INCOME (LOSS)
NON-OPERATING INCOME (EXPENSES)
Gain on sales of short-term investments
Dividend income
Interest income
Foreign exchange gain (loss), net
Impairment of long-term investments
Interest expense
Other income (loss), net
Total non-operating income (loss)
INCOME (LOSS) BEFORE INCOME TAX
INCOME TAX EXPENSE (BENEFIT)
NET INCOME (LOSS)
EARNINGS (LOSS) PER ORDINARY SHARE:
Basic
Diluted
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING
Basic (Thousands)
Diluted (Thousands)
EARNINGS (LOSS) PER ADS (one ADS equals four ordinary shares):
Basic
Diluted
WEIGHTED AVERAGE ADS OUTSTANDING
Basic (Thousands)
Diluted (Thousands)
2011
2009
NT$
2010
NT$
NT$
US$
(Note 3)
2,893,230 4,177,250 6,603,424 218,151
1,702,808 2,219,634 3,415,861 112,846
1,190,422 1,957,616 3,187,563 105,305
1,122,491 1,054,194 1,194,647
389,065 428,563
395,985
305,613 333,724
464,688
23,088
69,244
192,391
—
(46,941)
—
1,236,549
—
—
3,412,104 1,771,175 1,980,022
186,441 1,207,541
(2,221,682)
233
—
22,088
(88,949)
(8,630)
(3,486)
(1,988)
(80,732)
(2,302,414)
6,784
(2,309,198)
(7,272)
(3,103)
(3,712)
59
356
11,287
292
—
17,686
(358,292) 167,438
—
(2,217)
398
(360,677) 183,597
(174,236) 1,391,138
(18,869) 169,706
(155,367) 1,221,432
39,466
14,158
11,025
763
—
—
65,412
39,893
10
—
584
5,531
—
(73)
13
6,065
45,958
5,606
40,352
(20.86)
(20.86)
(1.34)
(1.34)
9.92
9.44
0.33
0.31
110,694
110,694
116,159 123,082 123,082
116,159 129,370 129,370
(83.45)
(83.45)
(5.35)
(5.35)
39.69
37.77
1.31
1.25
27,673
27,673
29,040
29,040
30,771
32,343
30,771
32,343
The accompanying notes are an integral part of the consolidated financial statements
F-4
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(In Thousands, Except Per Share Data)
Additional
Paid-in
Capital
NT$
Ordinary Share
Amount
Shares
(thousands)
NT$
109,049 42,352 5,546,008
—
—
— —
— —
Accumulated
Other
Comprehensive
Income (Loss)
NT$
(166,055)
—
(124)
Retained
Earnings
(accumulated
deficit)
NT$
Treasury
Stock
NT$
2,555,150 (1,687,865)
—
(2,309,198)
—
—
Total
Shareholders’
Equity
NT$
6,289,590
(2,309,198)
(124)
— —
— —
—
—
59,734
—
—
—
—
—
59,734
(2,249,588)
— —
446,463
—
—
—
446,463
BALANCE, JANUARY 1, 2009
Net loss
Deferred pension loss
Foreign currency translation
adjustments
Total comprehensive loss
Stock-based compensation
expenses
Issuance of ordinary shares
upon exercise of employee
stock options and restricted
stock units
Treasury stock retired
26,223
(977,674)
BALANCE, DECEMBER 31, 2009 112,278 35,548 5,041,020
—
—
3,229 1,054
— (7,858)
— —
— —
Net loss
Deferred pension loss
Foreign currency translation
—
—
(106,445)
—
(1,986)
—
—
(702,333) 1,687,865
—
(456,381)
—
(155,367)
—
—
27,277
—
4,513,742
(155,367)
(1,986)
— —
— —
—
—
177,647
—
—
—
—
—
177,647
20,294
— —
191,128
—
—
—
191,128
4,861 1,643
(375)
—
—
—
1,268
(456,381)
BALANCE, DECEMBER 31, 2010 117,139 37,191 4,775,392
—
—
— —
— —
— —
Net income
Deferred pension gain
Foreign currency translation
—
69,216
—
2,305
456,381
(155,367)
1,221,432
—
—
—
—
—
—
4,726,432
1,221,432
2,305
— —
— —
—
—
(81,318)
—
—
—
—
—
(81,318)
1,142,419
— —
261,031
—
—
—
261,031
upon exercise of employee
stock options and restricted
stock units
68,458
BALANCE, DECEMBER 31, 2011 124,572 39,647 5,104,881
7,433 2,456
—
(9,797)
—
1,066,065
—
—
70,914
6,200,796
F-5
adjustments
Total comprehensive income
Stock-based compensation
expenses
Issuance of ordinary shares
upon exercise of employee
stock options and restricted
stock units
Transfer of additional paid-in
capital to eliminate
accumulated deficit from
prior years
adjustments
Total comprehensive income
Stock-based compensation
expenses
Issuance of ordinary shares
BALANCE, JANUARY 1, 2011
Net income
Deferred pension gain
Foreign currency translation adjustments
Total comprehensive income
Stock-based compensation expenses
Issuance of ordinary shares upon exercise of
employee stock options and restricted stock
units
BALANCE, DECEMBER 31, 2011
Ordinary Share
Additional
Paid-in
US$
US$
Amount Capital
Shares
(thousands)
117,139 1,229 157,760
—
—
—
—
8,623
— —
— —
— —
— —
— —
7,433
2,262
124,572 1,310 168,645
81
Accumulated
Other
Comprehensive
Income (Loss)
US$
2,287
—
76
(2,687)
—
—
Retained
Earnings
(accumulated
deficit)
US$
(5,134)
40,352
—
—
—
Total
Shareholders’
Equity
US$
156,142
40,352
76
(2,687)
37,741
8,623
—
(324)
—
35,218
2,343
204,849
The accompanying notes are an integral part of the consolidated financial statements.
F-6
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization
Amortization of intangible assets
Impairment of goodwill and long-lived assets
Gain on sales of short-term investments
Impairment of long-term investments
Stock-based compensation
Loss on disposal of property and equipment
Deferred income taxes
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
Accrued expenses and other current liabilities
Income tax payable
Other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Return of capital from 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 used in investing activities
F-7
2009
NT$
Year Ended December 31
2010
NT$
2011
NT$
US$
(Note 3)
(2,309,198)
(155,367) 1,221,432
40,352
163,129 150,672 164,058
23,088
69,244
192,391
—
1,236,549
—
(292)
(59)
(233)
8,630
—
7,272
191,128 261,031
446,463
12,937
(18)
67,661
51,878
(44)
(79)
533
(4,990)
44
5,420
763
—
(10)
—
8,623
(1)
2,235
(1)
(48,745)
(19,988)
91,585
(1,610)
494,729 (300,832) (363,626) (12,013)
(7,247)
180,830 (240,845) (219,356)
(1,116)
(33,795)
57,456
(23,246)
(7,429)
(587)
(17,781)
(12,180)
5,415 305,718 10,100
(54,292)
4,484
3,185 135,719
(4,160)
2,064
62,492
(1,050)
(173,858)
17,301
157
4,797
(28,221)
323,927 (278,583) 1,562,339 51,613
25,849
—
3,017
—
—
(21,189)
(99,480) (137,087) (144,316)
28,325 (155,124) (262,578)
—
—
(700)
(4,768)
(8,674)
—
(45,299) (289,194) (428,083) (14,142)
—
7
SILICON MOTION TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares upon exercise of employee stock
options
Proceed from government grants
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
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
US$
(Note 3)
—
25,967
150
(7,646)
18,471
297,099
67,456
—
—
—
—
—
2,228
— —
— —
— —
2,228
(567,777) 1,201,712 39,699
67,456
67,544
185,985
(2,767)
1,586,941 1,951,584 1,569,792 51,860
1,951,584 1,569,792 2,687,746 88,792
(83,758)
29,507
535
129,296
4,298
20
12,999
— —
13 —
964
29,189
The accompanying notes are an integral part of the consolidated financial statements.
F-8
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. Significant parts of the Company’s operations are conducted through Silicon
Motion, Inc. (“SMI Taiwan”), a wholly-owned subsidiary of SMTC, located in Taiwan and FCI, Inc. (“FCI”), a wholly-owned
subsidiary of SMTC, located in Korea. 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. The mobile storage business is composed of
microcontrollers used in NAND flash memory storage products such as flash memory cards, USB flash drives, SSDs, and embedded
flash applications. The mobile communications business is composed of mobile TV IC solutions, and handset transceivers. The
multimedia SoC business is composed primarily of embedded graphics processors.
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, the Company acquired FCI, a
leading designer of RF ICs for mobile TV and wireless communications based in South Korea. The Company established SMI BV in the
Netherlands in 2011 with the purpose of expanding its business activities in Europe, as well as providing supervisory, financing, legal
support, accounting services and shareholding for the Company’s businesses in other parts of the world.
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 FCI which the Company owns over
99.9%. All significant intercompany balances and transactions have been eliminated upon consolidation.
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 is 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 sells semiconductor solutions to leading module makers, OEMs and ODMs worldwide. The Company provides high
performance flash memory storage controllers to companies such as Micron, Samsung, Sony, Transcend, and Netcom. The Company is
a leading supplier of controllers used in flash memory, cards, and USB flash drivers. The multimedia SoCs are used for thin clients,
office and factory automation, industrial PCs, and other applications by companies such as Advantech, Siemens, ThinNetworks, and
Toshiba-TEC. The Company provides the innovative mobile communications ICs to LG, Pantech, Samsung, and other companies. The
Company had one customer in 2009 and 2011, and two customers in 2010 that accounted for 10% or more of our sales. The Company’s
top ten customers in 2009, 2010 and 2011 accounted for approximately 54%, 56% and 64% 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 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. Long-term investments are privately-held companies where there is no readily
determinable market value and are recorded using the cost method, since the cost of obtaining verifiable fair value is unreasonably high.
The Company periodically evaluates these investments for impairment. If it is determined that an other-than-temporary decline has
occurred in the carrying value, an impairment loss is recorded for that period. The Company’s long-term liabilities approximate their fair
values as they contain interest rates that vary according to market interest rates.
F-9
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date and in the principal or most advantageous market for that assets or liability. The
fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on
assumptions specific to the Company. A three-tier fair value hierarchy is established as a basis for considering such assumptions and
for inputs used in the valuation methodologies in measuring fair value. The hierarchy prioritizes the inputs into three levels based on
the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one
of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These
levels are:
Level 1 — Use unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Use observable inputs other than Level 1 prices such as quoted prices for identical or similar instruments in markets
that are not active, quoted prices for similar instruments in active markets, and model-based valuation in which all significant inputs
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Use inputs that are generally unobservable and reflect the use of significant management judgments and estimates.
See Note 19, “Fair Value Measurement”, for the related disclosure.
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 the 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.
Allowance for Doubtful Receivables
An allowance for doubtful receivables is provided based on a review of the collectability 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,
work in process and finished goods. 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
The Company has long-term investments in companies that it does not exercise significant influence and accounts for these
investments under the cost method. Management regularly evaluates financial information related to these investments to determine
whether an other than temporary decline in their 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.
F-10
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, 2009, 2010 and 2011 was approximately NT$163,129 thousand, NT$150,672 thousand
and NT$164,058 thousand (US$5,420 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 current portion of long-term payable on its consolidated balance sheet.
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 and customer relationship, are amortized over
their estimated useful lives, of 4 years at the time of acquisition.
Impairment of Goodwill and 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. Fair value is
determined by reference to quoted market prices, if available, or discounted cash flows, as appropriate. See Note 11, “Goodwill and
Acquired Intangible Assets,” regarding impairment testing in fiscal year 2010 and 2011.
The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or
sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company conducts its
annual impairment test of goodwill on November 30. Reporting units may be operating segments as a whole or an operation one level
below an operating segment, referred to as a component. Goodwill impairment is tested using a two-step approach. The first step
compares the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater
than its carrying amount, goodwill is not considered impaired and the second step is not required. If the fair value of the reporting unit
is less than its carrying amount, the second step of the impairment test measures the amount of the impairment loss, if any, by
comparing the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value,
an impairment loss is recognized equal to that excess. The implied fair value of goodwill is calculated in the same manner that
goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit, with the excess purchases price over the amounts assigned to assets and liabilities. Estimating fair value is
performed by utilizing various valuation approaches, such as income approach or market approach. The total of all reporting unit fair
values was also compared to the Company’s market capitalization plus control premium for reasonableness. See Note 11, “Goodwill
and Acquired Intangible Assets,” regarding impairment testing in fiscal year 2010 and 2011.
Other Assets
Other assets primarily consist of intellectual property and deposits for office leases.
Restricted Assets
Restricted assets consist of deposits required for litigation and restricted cash. Restricted cash represents cash set aside as
collateral for obtaining capacity and borrowings as well as cash received from government grants with restriction on its usage.
F-11
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. Revenue on
development service orders is generally recognized upon completion and customer acceptance of contractually agreed milestones.
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$381 thousand, NT$1,490 thousand and NT$5 thousand (US$0.2 thousand) in 2009, 2010 and 2011.
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, 2009, 2010 and 2011, 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.
Income Taxes
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. The Company believes that uncertainty exists regarding the realizability
of certain deferred income tax assets and, accordingly, has established a valuation allowance for those deferred income tax assets to
the extent the realizability is not deemed to be more likely than not. Deferred income tax assets and liabilities are measured using
enacted tax rates.
The Company utilizes a two step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will
be sustained in a dispute with taxing authorities, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
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 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. 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.
F-12
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.
Functional Currency and Translation of Foreign Currency Financial Statements
The reporting currency of the Company is the New Taiwan dollars. The functional currency of each one of the Company’s
subsidiaries is the local currency of the respective entity. 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.
On January 1, 2012, the Company changed the functional currency of SMI Taiwan, its largest operating subsidiary, from the
New Taiwan dollars to the U.S. dollar based on an evaluation of economic facts and circumstances and functional currency analysis
prescribed in ASC 830. As a result of SMI Taiwan’s functional currency change, the Company changed its reporting currency from
the New Taiwan dollar to the U.S. dollar.
In 2005, at the time of the Company’s IPO, the Company determined that SMI Taiwan’s functional currency was the New
Taiwan Dollars and this determination was used consistently until the Company believed significant and permanent changes in
economic facts and circumstances warrant a change in functional currency. Since the business profile and activities of SMI Taiwan
had changed significantly and permanently, the Company re-evaluated the functional currency of SMI Taiwan based on recent
economic facts and circumstances, including analysis prescribed in ASC 830, and determined that the US Dollar had become the
functional currency of SMI Taiwan.
Comprehensive Income (Loss)
Comprehensive income and loss represents net income (loss) 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. The following table presents the
components of accumulated other comprehensive income (loss) as of December 31, 2009, 2010 and 2011:
Year Ended December 31, 2009
NT$
Defined
benefit
pension
plans
Accumulated
other
comprehensive
income (loss)
Foreign
currency
items
Beginning balance
Current-period change
Ending balance
(168,272) 2,217
(124)
59,734
(108,538) 2,093
(166,055)
59,610
(106,445)
Foreign
currency
items
Year Ended December 31, 2010
NT$
Defined
benefit
pension
plans
2,093
(1,986)
107
(108,538)
177,647
69,109
Accumulated
other
comprehensive
income (loss)
(106,445)
175,661
69,216
Year Ended December 31, 2011
NT$
Defined
benefit
Foreign
pension
currency
plans
items
69,109
107
(81,318) 2,305
(12,209) 2,412
Accumulated
other
comprehensive
income (loss)
69,216
(79,013)
(9,797)
US$ (Note 3)
Defined
benefit
pension
plans
Accumulated
other
comprehensive
income (loss)
Foreign
currency
items
2,283
(2,687)
(404)
4
76
80
2,287
(2,611)
(324)
Beginning balance
Current-period change
Ending balance
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.
F-13
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings (loss) attributable to ordinary shareholders by the
weighted average number of 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 and restricted stock units. The effect of dilutive securities including employee stock options and restricted stock units was
6,288 thousand shares (1,572 thousand ADSs) for the year ended December 31, 2011. The antidilutive employee stock options and
restricted stock units excluded were 3,044 thousand shares and 4,637 thousand shares for the years ended December 31, 2009 and
December 31, 2010, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718 Compensation — Stock Compensation. The
Company uses the Black-Scholes valuation model for the valuation of stock options and recognizes compensation expense on a
straight-line basis over the requisite service period of the award. The value of our restricted stock units is based on the closing price of
our shares on the date of grant and expensed over the vesting period.
Treasury Stock
Treasury stock is stated at cost and shown as a reduction to shareholders’ equity.
The Company retires ordinary shares repurchased under a share repurchase plan. Accordingly, upon retirement the excess of the
purchase price over par value is allocated between additional paid-in capital and retained earnings based on the average issuance price
of the shares repurchased. A repurchase of ADSs is recorded as treasury stock until the Company completes the withdrawal of the
underlying ordinary shares from the ADS program.
Recent Accounting Pronouncements
In September 2009, the FASB issued an accounting standard update which provides guidance on how to separate consideration
in multiple-deliverable arrangements and significantly expands disclosure requirements. The standard establishes a hierarchy for
determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The update is effective for
annual reporting periods beginning on or after June 15, 2010. This guidance is effective for the Company for the year ending
December 31, 2011. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial
position and cash flows.
In September 2009, the FASB issued an accounting standard update on arrangements that include software elements. Tangible
products that have software components that are essential to the functionality of the tangible product will no longer be within the
scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue
recognition guidance. The update is effective for annual reporting periods beginning on or after June 15, 2010. This guidance is
effective for the Company for the year ending December 31, 2011. The adoption of the guidance did not have a material effect on the
Company’s results of operations, financial position and cash flows.
In January 2010, the FASB issued an accounting update that amended guidance and clarified the disclosure requirements about
fair market value measurement. These amended standards require new disclosures for significant transfers of assets or liabilities
between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3
fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure
Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which are effective for the
Company as of January 1, 2011, the remaining new disclosure requirements were effective for the Company as of January 1, 2010.
The Company has included these new disclosures, as applicable, in Note 19, “Fair Value Measurement”.
In April 2010, the FASB issued an accounting update that provides guidance on defining a milestone and determining when it
may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under
this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period
in which it is achieved, only if the milestone meets all criteria to be considered substantive. This standard is effective for the
Company on a prospective basis as of January 1, 2011. The adoption of the guidance did not have a material effect on the Company’s
results of operations, financial position and cash flows.
F-14
In April 2010, the FASB issued an accounting update to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades must not be considered
to contain a market, performance, or service condition. Therefore, an entity should not classify such an award as a liability if it
otherwise qualifies for classification in equity. This guidance is effective for annual periods beginning on or after December 15, 2010,
and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment to the opening
balance of retained earnings for all awards outstanding as of the beginning of the annual period in which the guidance is adopted.
Earlier application is permitted. This guidance is effective for the Company for the year ending December 31, 2011. The adoption of
the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In December 2010, the FASB issued an accounting update to require that supplemental pro forma information disclosures
pertaining to acquisitions should be presented as if the business combination(s) occurred as of the beginning of the prior annual period
when comparative financial statements are presented. This guidance also expands the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in
periods beginning after December 15, 2010. Early adoption is permitted. This guidance is effective for the Company for the year
ending December 31, 2011. The Company has included these new disclosures, as applicable, in Note 4, “Business Acquisition”.
In December 2010, the FASB issued an accounting update to modify Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment
test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.
For public entities, this guidance is effective for impairment tests performed during entities’ fiscal years that begin after December 15,
2010. Early application will not be permitted. This guidance is effective for the Company for the year ending December 31, 2011.
The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows.
In May 2011, the FASB issued an accounting update to amend the fair value measurement guidance and include some enhanced
disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3
measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. Early
adoption is not permitted. The Company does not expect the adoption will have a material impact on the Company’s results of
operations, financial position or cash flows.
In June and December 2011, the FASB issued accounting updates to eliminate the current option to report other comprehensive
income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income
and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The new requirements
do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an
item of other comprehensive income must be reclassified to net income. This guidance must be applied retroactively and is effective
for fiscal years beginning after December 15, 2011. Earlier application is permitted. The Company is currently evaluating which
presentation option it will elect, but the adoption of these provisions will have no effect on its results of operations, financial position
or cash flows.
In September 2011, the FASB issued an accounting update, which is intended to reduce the cost and complexity of the annual
goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further
impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is
necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-
not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. Earlier adoption is permitted. The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial position or cash flows.
In December 2011, the FASB issued an accounting update, which creates new disclosure requirements regarding the nature of
an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain
disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be
required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. The
disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013 with retrospective application
required. Since this standard impacts disclosure requirements only, its adoption is not expected to have a material impact on the
Company’s results of operations, financial condition or cash flows.
F-15
3. US DOLLAR AMOUNTS
The Company used New Taiwan dollars as the reporting currency. For convenience only, U.S. dollar amounts presented in the
accompanying financial statements have been translated from New Taiwan dollars at the exchange rate set forth in the statistical
release of the Federal Reserve Board, which was NT$30.27 to US$1 on December 30, 2011. 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.
4. BUSINESS ACQUISITION
On October 25, 2011, FCI acquired the majority of the operating assets and employees of BTL System, Inc. (“BTL”), a Korea
mobile TV-related software and module company. The aggregate purchase price was NT$21,189 thousands (US$700 thousand) in
cash. Goodwill arising from the acquisition was NT$4,843 thousands (US$160 thousand).
The following table summarizes the estimated fair values of the assets acquired assumed at the date of acquisition based on
third-party asset valuations:
Property and equipment
Software
Goodwill
Total assets acquired
NT$
1,816
14,530
4,843
21,189
US$
60
480
160
700
Of the total assets acquired, NT$14,530 thousand (US$480 thousand) of software have a weighted-average useful life of
approximately 4 years.
The Company is not materially impacted by the acquisition of BTL and therefore has not presented pro forma results of
operations. The operating results of BTL have been included in the Company’s operations beginning October 25, 2011. The amounts
of net sales and net loss of BTL since the acquisition date was nil and NT$4,074 thousand (US$135 thousand) for the year ended
December 31, 2011.
5. CASH
Cash and deposits in bank
Time deposits
6. SHORT-TERM INVESTMENTS
2010
NT$
December 31
2011
NT$
US$
(Note 3)
1,005,524
894,545
29,552
564,268
1,569,792
1,793,201
2,687,746
59,240
88,792
The Company classified certain short-term investments as trading securities in 2009, 2010 and 2011. Realized gains on sales of
these short-term investments were NT$233 thousand, NT$59 thousand and NT$292 thousand (US$10 thousand) for the years ended
December 31, 2009, 2010 and 2011, respectively.
7. NOTES AND ACCOUNTS RECEIVABLE
Notes receivable
Trade accounts receivable
F-16
2010
NT$
December 31
2011
NT$
US$
(Note 3)
58,598
35,600
1,176
903,009
961,607
1,301,097
1,336,697
42,983
44,159
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
Additions (reversals) 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
8. INVENTORIES
The components of inventories are as follows:
Finished goods
Work in process
Raw materials
F-17
2010
NT$
December 31
2011
NT$
US$
(Note 3)
(90,830)
(80,190)
(2,649)
(59,935)
810,842
(82,038)
1,174,469
(2,710)
38,800
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
US$
(Note 3)
180,045
97,784
90,830
3,001
35,336
(1,518)
(10,617)
(351)
(117,597)
(5,436)
(23)
(1)
97,784
90,830
80,190
2,649
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
US$
(Note 3)
35,793
57,986
59,935
114,962
80,727
120,014
1,980
3,965
(92,769)
(78,778)
(97,911)
(3,235)
57,986
59,935
82,038
2,710
December 31
2011
2010
NT$
NT$
US$
(Note 3)
197,913 109,504 3,618
365,628 483,483 15,972
135,040 324,950 10,735
698,581 917,937 30,325
The Company wrote down NT$214,404 thousand, NT$44,180 thousand and NT$140,623 thousand (US$4,646 thousand) in 2009, 2010
and 2011, respectively, for estimated obsolete or unmarketable inventory.
9. LONG-TERM INVESTMENTS
As of December 31, 2010 and 2011, the Company held equity investments in several privately-held companies with the carrying value
as follows:
Cost method:
Cashido Corp. (Cashido)
Vastview Technology, Corp. (Vastview)
Spright Co., Ltd. (Spright)
Percentage
of
Ownership
December 31
2010
NT$
2011
NT$
2.1%
3.9%
—
3,142
2,257
—
5,399
3,142
2,257
—
5,399
US$
(Note 3)
104
74
—
178
In July 2001, the Company invested in the common stock of Cashido. At the time of our investment, Cashido manufactured flash
memory storage devices. Cashido currently focuses on the manufacture of computer accessories and ozone based sterilization devices.
In December 2005, the Company invested in the common stock of Spright. Spright, formally known as Flash Media Corp., was
established to market, distribute, and manufacture flash memory storage devices. In May 2010, the Company recognized an impairment loss
of NT$4,100 thousand relating to the liquidation of Spright. Spright distributed cash in the amount of NT$3,017 thousand as a return of
capital to the Company in 2010.
In December 2006 and February 2007, the Company invested NT$108,949 thousand in the common stock of Vastview. Vastview is a
fabless semiconductor company that develops and markets driver ICs and other ICs for the TFT-LCD industry. In September 2009, Vastview
reduced 70% of its share capital and distributed NT$25,849 thousand to the Company. In March and December 2010, the Company
recognized an impairment loss of NT$2,301 thousand and NT$871 thousand, respectively, in its investment in Vastview.
The Company accounts for these investments using the cost method. These investments are evaluated for impairment on an annual
basis or as circumstances warrant. For the years ended December 31, 2009 and 2010, we determined that our investments in Spright and
Vastview were impaired because a combination of recurring losses and reduced forecasts at Spright and Vastview indicated that the
Company’s investments were not recoverable within a reasonable period of time. Accordingly, the Company believed that the impairments
were other than temporary and recorded an impairment charge of NT$8,630 thousand, NT$7,272 thousand and nil for the years ended
December 31, 2009, 2010 and 2011, respectively.
10. PROPERTIES AND EQUIPMENT
Cost:
Land
Buildings
Machinery and equipment
Furniture and fixtures
Leasehold and buildings improvement
Software
Total
Accumulated depreciation:
Buildings
Machinery and equipment
Furniture and fixtures
Leasehold and buildings improvement
Software
Prepayment and construction in progress
F-18
2010
NT$
December 31
2011
NT$
134,118
394,881
211,364
97,670
83,711
475,591
1,397,335
29,208
152,692
72,474
54,268
345,665
654,307
—
743,028
134,118
404,659
272,277
104,473
91,926
557,510
1,564,963
37,980
191,687
81,566
67,144
440,176
818,553
2,341
748,751
US$
(Note 3)
4,431
13,368
8,995
3,451
3,037
18,418
51,700
1,255
6,332
2,694
2,218
14,542
27,041
77
24,736
In April 2006, the Company leased its land and buildings located in Taipei, Taiwan, to a third party under a three-year operating
lease. Net carrying value of the leased land and building as of December 31, 2011 was NT$18,259 thousand (US$603 thousand) and
NT$6,558 thousand (US$217 thousand), respectively. The lessee renewed the three year operating lease with the Company in March
2012. Annual rental income from the lease is about NT$1,322 thousand each year.
11. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Intangible assets: The intangible assets acquired from the Company’s acquisition of FCI and Centronix in 2007 are as follows:
2010
NT$
December 31
NT$
2011
US$ (Note 3)
Core technology
Customer relationship
Order backlog
Total
Accumu-
lated
Impair-
ment
Accumu-
lated
Amortiza-
tion
Net
Carrying
Amount Cost
Accumu-
lated
Impair-
ment
— 507,560 (171,139) (336,421)
Accumu-
lated
Amortiza-
tion
Cost
507,560 (171,139) (336,421)
(277,056)
277,056
(41,367)
41,367
825,983 (171,139) (631,756) 23,088 825,983 (171,139) (654,844)
— (253,968) 23,088 277,056
—
— 41,367
—
—
(41,367)
Net
Carrying
Amount Cost
— 16,768
— 9,153
— 1,366
— 27,287
Accumu-
lated
Impair-
ment
(5,654)
—
—
(5,654)
Accumu-
lated
Amortiza-
tion
(11,114)
(9,153)
(1,366)
(21,633)
Net
Carrying
Amount
—
—
—
—
Our fiscal 2009 impairment test included an evaluation of long-lived assets used in our mobile communication reporting unit.
These assets included customer relationships, core technology and property, plant and equipment. These assets were acquired in 2007.
The carrying value of the assets was compared to the fair value and impairment was recorded if the carrying value exceeded fair
value. The fair values of core technology and customer relationship were determined using the discounted cash flows method. The
fair value of property and equipment and other assets primarily represented replacement costs adjusted to reflect the impact of
physical deterioration as well as applicable functional or economic obsolescence. The impairment charge related to long-lived assets
totaled NT$217,189 thousand and is comprised of core technology NT$171,139 thousand, property and equipment NT$27,943
thousand and other assets NT$18,107 thousand. The impairment charge was mainly attributable to the weaker than expected financial
performance due to the economic recession in Korea, technology transitions and the push out of growth opportunities. No impairment
losses were recognized in 2010 and 2011.
Amortization expense of acquisition-related intangible assets was NT$192,391 thousand, NT$69,244 thousand and NT$23,088
thousand (US$763 thousand) for the years ended December 31, 2009, 2010 and 2011, respectively.
Goodwill: Goodwill is not amortized, but instead is reviewed and tested for impairment at least annually and whenever events
or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company’s reporting
unit level by comparing the carrying amount, including goodwill, to the fair value. In performing the analysis, the Company uses the
best information available, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting
unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any. The Company performed its annual impairment test on November 30. The goodwill that resulted from the
Company’s acquisition of FCI and Centronix in 2007 was NT$2,186,760 thousand. As a result of the goodwill impairment test
conducted on November 30, 2009, the Company determined that the carrying amounts for the mobile communication unit exceeded
its fair value and recorded a goodwill impairment charge of NT$1,019,360 thousand in the fourth quarter of 2009. The impairment
charge was mainly attributable to the reporting unit’s weaker than expected financial performance due to the economic recession in
Korea, technology transitions and the push out of growth opportunities. Our fiscal 2010 and 2011 impairment test concluded there
were no impairment. In October 2011, the Company purchased BTL’s assets and assumed NT$4,871 thousand (US$161 thousand) of
goodwill. Total goodwill was NT$1,168,807 thousand and NT$1,173,546 thousand (US$38,769 thousand) as of December 31, 2010
and 2011, respectively.
F-19
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Wages and bonus
Research and development payable
License fees and royalties
Professional fees
Accrued customer incentives
Others
December 31
2011
2010
NT$
NT$
US$
(Note 3)
126,990 286,607 9,468
76,107 79,708 2,633
64,471 41,856 1,383
39,158 38,241 1,263
65,351 4,126
136
37,573 94,833 3,133
409,650 545,371 18,016
13. 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
were maintained. The Act prescribes that the rate of contribution by an employer to employees’ pension accounts per month will not
be less than 6% of each employee’s monthly salary. The Company made monthly contributions and recognized pension costs of
NT$15,091 thousand, NT$16,205 thousand and NT$17,918 thousand (US$592 thousand) for the years ended December 31, 2009,
2010 and 2011, respectively.
The Company provides a defined benefit plan to the employees of SMI Taiwan under the Labor Standards Law that offers
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. The government is responsible for the administration of all the defined benefit plans for the companies
in Taiwan under the Labor Standards Law. The government also sets investment policies and strategies, determines investment
allocation and selects investment managers. As of December 31, 2010 and 2011, 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. However, information on how investment allocation decisions are
made, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets is not
fully made available to the Company by the government. Therefore, the Company is unable to provide the required fair value
disclosures related to pension plan assets. 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, 2012 to be NT$1,636 thousand (US$54 thousand) which was
determined based on 2% of estimated salaries in 2012.
Starting in 2010, the Company provides a defined benefit pension plan to the employees of FCI in Korea with at least one year
of service. FCI’s overall investment strategy is to avoid a negative return on plan assets and accordingly, FCI invests in principal and
interest guaranteed products. The pension plan assets as of December 31, 2011 consist primarily of insurance company guaranteed
interest contracts and bank fixed deposits.
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. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including
discount rate, expected return on plan assets, compensation increase, employee mortality and turnover rates. The Company reviewed
its actuarial assumptions at the measurement date on December 31 every year. The effect of modifications to assumptions is recorded
in accumulated other comprehensive loss and amortized to net periodic cost over future periods using the corridor method. The
company believes that assumptions utilized in recording its obligations under its plans are reasonable based on its experience and
market conditions. Independent actuaries perform the required calculations to determine expense in accordance with U.S. GAAP.
Actual results may differ from the actuarial assumptions and are generally accumulated and amortized into earnings over future
periods. The net periodic costs are recognized as employees render services necessary to earn the benefits.
F-20
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
Benefits paid
Transferred from accrued severance benefit
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
Benefits paid
Fair value of plan assets at end of year
Reconciliation of funded status
Funded status
Amounts recognized as an other asset
Amounts recognized as other long-term liabilities
Net gain
Transition obligation
Total recognized in accumulated other comprehensive income
The components of net periodic benefit cost are as follows:
2010
NT$
December 31
2011
NT$
15,601
11,088
455
3,672
(1,605)
3,020
32,231
19,842
417
10,223
(405)
30,077
(2,154)
12,279
(14,433)
(128)
21
(107)
32,231
11,771
1,190
1,537
(2,596)
—
44,133
30,077
847
12,795
(2,056)
41,663
(2,470)
23,268
(25,738)
(2,432)
20
(2,412)
US$
(Note 3)
1,065
389
39
51
(86)
—
1,458
994
28
423
(68)
1,377
(81)
769
(850)
(80)
1
(79)
Service cost
Interest cost
Projected return on plan assets
Amortization of unrecognized net transition obligation and unrecognized net
actuarial gain
Net periodic benefit cost
2009
NT$
39
346
(472)
Year Ended December 31
2010
NT$
2011
NT$
11,088
455
(414)
11,771
1,190
(882)
US$
(Note 3)
389
39
(29)
(25)
(112)
(10)
11,119
30
12,109
1
400
Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss):
Recognize the decrease (increase) in net gain
Amortization of net gain
Amortization of net transition obligation
Total recognized in accumulated other comprehensive income (loss)
F-21
2010
NT$
2011
NT$
1,976
11
(1)
1,986
(2,333)
29
(1)
(2,305)
US$
(Note 3)
(77)
1
—
(76)
The actuarial assumptions to determine the benefit obligations were as follows:
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
14. INCOME TAXES
The components of income tax expense (benefit) are as follows:
2009
2010
2011
Taiwan
Taiwan
Korea
Taiwan
Korea
2.00%
3.75%
1.75%
4.00%
6.20%
7.00%
1.75%
4.25%
5.40%
7.00%
2.00%
2.00%
3.75%
1.75%
2.00%
4.00%
6.20%
5.50%
7.00%
1.75%
2.00%
4.25%
5.40%
4.30%
7.00%
Current
Deferred
Income tax expense (benefit)
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
(45,094)
51,878
6,784
(13,879)
(4,990)
(18,869)
102,046
67,660
169,706
US$
(Note 3)
3,371
2,235
5,606
The income (loss) before income taxes for domestic and foreign entities is as follows:
Domestic
Foreign entities
SMI Taiwan
FCI
SMI USA
Others
2009
NT$
Year Ended December 31
2010
NT$
2011
NT$
(1,729,580)
(211,763)
(260,360)
US$
(Note 3)
(8,601)
(194,151)
(294,079)
(19,272)
(65,332)
(2,302,414)
170,227
(150,863)
48,870
(30,707)
(174,236)
1,252,234
369,314
26,915
3,035
1,391,138
41,369
12,201
889
100
45,958
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.
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:
Cayman statutory rate
Tax on pretax income at statutory rate
Tax-exempt income
Permanent differences
Temporary differences
Alternative minimum tax
Income tax (10%) on undistributed earnings
Net changes in income tax credit
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
—
181
—
—
(37,478)
235
—
(161,127)
—
14,449
(37,294)
7,909
79,583
27,457
5,383
(144,031)
—
228,897
(102,695)
56,202
(18,184)
82,800
67,238
8,420
US$
(Note 3)
—
7,562
(3,393)
1,857
(601)
2,735
2,221
278
(Continued)
F-22
Net changes in valuation allowance of deferred income tax assets
Net operating loss carryforwards
Liabilities related to unrealized tax benefits
Adjustment of prior years’ taxes and others
Income tax expense (benefit)
Deferred income tax assets are as follows:
Year Ended December 31
2009
NT$
256,100
(79,534)
50,424
(22,017)
6,784
2010
NT$
62,846
12,431
(49,164)
1,562
(18,869)
2011
NT$
(51,504)
10,091
(21,752)
(89,807)
169,706
US$
(1,702)
334
(719)
(2,966)
5,606
Current:
Notes and accounts receivable
Stock-based compensation
Allowance for sales return
Inventory reserve
Foreign currency translation
Investment tax credits
Others
Valuation allowance
Non-current:
Inventory reserve
Property and equipment
Investment tax credits
Net operating loss carryforwards
Others
Valuation allowance
2010
NT$
December 31
2011
NT$
43,936
11,308
5,553
49
24,245
48,218
(18,229)
(66,189)
48,891
42,085
22,298
321,182
237,940
42,334
(503,101)
162,738
42,570
20,892
7,599
21,279
2,881
75,318
9,529
(147,438)
32,630
22,114
26,488
295,062
193,822
(14,246)
(411,900)
111,340
US$
(Note 3)
1,406
690
251
703
95
2,488
315
(4,870)
1,078
731
875
9,748
6,403
(471)
(13,608)
3,678
The valuation allowance shown in the table above relates to net operating loss carryforwards, tax credits and temporary
differences for which the Company believes that realization is uncertain. The valuation allowance increased by NT$18,633 thousand
and decreased by NT$9,952 thousand (US$329 thousand) for the years ended December 31, 2010 and 2011, respectively. The
decrease in valuation allowance is primarily due to the Company being able to generate more taxable income in the future to utilize
operating loss carryforwards and research and development credits before they expire. As of December 31, 2011, SMI Taiwan had
unused research and development tax credits of NT$183,843 thousand (US$6,073 thousand) which will expire in 2012 to 2013. In
addition, profits generated from certain products are exempted from income tax for five years beginning January 1, 2006 and
January 1, 2010.
As of December 31, 2011, FCI had unused research and development tax credits of approximately NT$77,384 thousand
(US$2,556 thousand) which will expire in 2013 to 2016.
As of December 31, 2011, the Company’s United States federal net operating loss carryforwards for federal income tax purposes
were approximately NT$165,257 thousand (US$5,459 thousand). If not utilized, the federal net operating loss carryforwards will
expire in 2021.
As of December 31, 2011, the Company’s United States federal and state research and development tax credit carryforwards for
federal and state income tax purposes were approximately NT$66,227 thousand (US$2,189 thousand) and NT$42,926 thousand
(US$1,418 thousand), respectively. If not utilized, the federal tax credit carryforwards will expire starting in 2021 while the state tax
credit carryforward has no expiration date.
Current United States federal and California state laws include substantial restrictions on the utilization of net operating losses
and credits in the event of an “ownership change” of a corporation. Accordingly, the Company’s ability to utilize net operating loss
and tax credit carryforwards may be limited as a result of such “ownership change”. Such a limitation could result in the expiration of
carryforwards before they are utilized.
F-23
Unrecognized Tax Benefit
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
Balance, beginning of year
Increases in tax positions taken in current year
Decrease in tax position taken in prior year primarily related to the
resolution of tax audit
Balance, end of year
Year Ended December 31
2010
NT$
2011
NT$
US$
(Note 3)
321,164
184,067
6,081
7,729
22,830
754
(144,826)
(121,222)
(4,005)
184,067
85,675
2,830
At December 31, 2011, the Company had NT$85,675 thousand (US$2,830 thousand) of unrecognized tax benefits that if
recognized would affect the effective tax rate. For the years ended December 31, 2009, 2010 and 2011, the total amount of interest
expense and penalties related to uncertain tax positions recorded in the provision for income tax expense was approximately
NT$2,681 thousand, NT$2,579 thousand and NT$14,365 thousand (US$475 thousand), respectively. The total amount of accrued
interest and penalties recognized as of December 31, 2010 and 2011 was NT$9,079 thousand and NT$23,598 thousand (US$ 780
thousand), respectively. 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 United States and foreign jurisdictions. The following table summarizes the
Company’s major jurisdictions and tax year that remain subject to examination by tax authorities as of December 31, 2011:
Tax Jurisdiction
SMI Taiwan
FCI
SMI USA
15. SHAREHOLDERS’ EQUITY
Appropriations from Earnings
Tax Years
2006 and onward
2006 and onward
2007 onward
Pursuant to the laws and regulations of the ROC and the respective Articles of Incorporation, SMI Taiwan, the Company’s
largest subsidiary, 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. SMI Taiwan subsidiary may only distribute dividends after it has made allowances as
determined under ROC GAAP at each year-end for:
a.
b.
c.
d.
e.
Payment of taxes;
Recovery of prior years’ deficits, if any;
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 above a to c as
special reserve when necessary;
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;
F-24
Transfer of Additional Paid-in Capital
As of December 31, 2009, the accumulated deficit amounted to NT$456,381 thousand. Pursuant to Section 34 of the Cayman
Companies Law and the Articles of Incorporation of the Company, amounts standing to the credit of the Company’s share premium
account may be applied as determined by the Company and the board of the directors to pay off prior year losses. On October 20,
2010, the board of directors resolved that an amount of NT$456,381 thousand standing to the credit of the Company’s share premium
account be applied to eliminate the accumulated deficit from prior years. Accordingly, transfer of additional paid-in capital in the
amount of NT$456,381 thousand to eliminate accumulated deficit from prior years was reflected in the consolidated statement of
changes in shareholders’ equity and comprehensive income for the year ended December 31, 2010.
Share Repurchase Program
On March 12 and August 13, 2008, our Board of Directors approved share buyback plans to repurchase up to US$80 million of
the Company’s ADSs during the period from March 12, 2008 to August 14, 2010. 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. All
the treasury stock under this share repurchase program was retired in August 2009.
In the year ended December 31, 2008, the Company repurchased 6.2 million of ADSs for a total cost of US$54.3 million. The
weighted average purchase price per ADS repurchased was US$8.76. The Company did not repurchase any ADSs in the years ended
December 31, 2009 and 2010.
16. 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 options
with each option exercisable into for 1,000 shares of common stock. 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. The options were
granted at an exercise price not lower than the market value of 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. 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 an additional 15,000 thousand ordinary shares for issuance upon
exercise of stock options and restricted stock units. In 2009, the Company amended the Plan to reserve an additional 15,000 thousand
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 shares 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. The Company’s restricted stock units are considered nonvested share awards as defined under ASC
718.
At December 31, 2009, the Company’s Compensation Committee approved the acceleration of 858 thousand restricted stock
units. There is no remaining requisite service periods on these restricted stock units and as a result of modifications, the expense that
would have been recognized over the remaining vesting period was accelerated. The amount of the accelerated restricted stock units
expense was NT$ 23,132 thousand which was recorded in the Company’s fourth quarter 2009 financial results. No incremental
compensation cost resulted from this modification.
At December 31, 2009, 1,222 thousand restricted stock units were canceled by the Company. No compensation was given to the
holders of the restricted stock units for the cancelation. As a result of the modification, the expense that would have been recognized
over the remaining vesting period was accelerated. The amount of the canceled restricted stock units expense was NT$198,682
thousand which was recorded in the Company’s fourth quarter 2009 financial results. There were approximately 203 employees
affected by these modifications.
F-25
In April 2010, the Company’s Board of Directors and Compensation Committee approved an employee stock option exchange
program that required certain employees to exchange eligible stock options for a lesser number of new stock options that have
approximately the same fair values as the options surrendered. Eligible options included stock options granted between August 17,
2005 and July 31, 2008 that had an exercised price above $1.85. In 2010, 4,369 thousand eligible stock options were exchanged for
3,785 thousand new stock options granted. The new stock options have an exercise price of $1.47, which was equal to the market
price of the Company’s ordinary share on April 26, 2010, the date eligible stock options were surrendered and new stock options
granted. The new stock options were issued under the 2005 Plan and are subject to its terms and conditions. The new stock options
will continue to vest according to the original vesting schedule. Using the Black-Scholes option pricing model, we determined that the
fair value of the surrendered stock options on a grant-by-grant basis was approximately equal, as of the date of the exchange, to the
fair value of the new stock options granted, resulting in insignificant incremental share-based compensation.
Stock Option and Restricted Stock Units Activity
The following is a summary of, the 2004 Plan, and the 2005 Plan, which includes stock options and restricted stock units:
Available for grant at January 1, 2009
Authorized
Restricted stock units granted
Option and restricted stock units forfeited/canceled
Available for grant at December 31, 2009
Restricted stock units granted
Option and restricted stock units forfeited
Available for grant at December 31, 2010
Restricted stock units granted
Option and restricted stock units forfeited
Available for grant at December 31, 2011
Unit
(in Thousands)
9,695
15,000
(13,014)
2,211
13,892
(3,817)
2,244
12,319
(6,387)
574
6,506
Stock Options
A summary of the stock option activity and related information is as follows:
Outstanding at January 1, 2011
Options forfeited
Options exercised
Outstanding at December 31, 2011
Options Vested and expected to vest after
December 31, 2011
Options Exercisable at December 31, 2011
Number of
Options
Shares
(in Thousands)
3,511
(82)
(1,580)
1,849
1,849
1,849
Weighted
Average
Exercise
Price
(US$)
1.46
1.46
1.45
1.47
1.47
1.47
Weighted
Average
Remaining
Contractual
Life
(Years)
4.14
4.14
4.14
No stock options were granted in 2009, 2010 and 2011. The intrinsic value of options exercised, determined as of the date of
option exercise, was nil, nil and NT$175,476 thousand (US$5,797 thousand) in 2009, 2010 and 2011, respectively.
F-26
As of December 31, 2011, total unrecognized compensation cost related to non-vested share-based compensation awards granted
under the Company’s stock option plans, net of estimated forfeitures, was nil.
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s closing stock price on
the last trading day of fiscal year 2011 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, 2011. Intrinsic value will change
in future periods based on the fair market value of the Company’s stock and the number of shares outstanding.
The total cash received from employees as a result of employee stock option exercises were nil, nil and NT$67,456 thousand
(US$2,228 thousand) for the years ended December 31, 2009, 2010 and 2011, respectively.
The related tax effect for stock-based compensation benefit (expense) were NT$(8,306) thousand, NT$(7,170) thousand, and
NT$5,028 thousand (US$166 thousand) for 2009, 2010 and 2011, respectively. The related tax effect for stock-based compensation
expense for option and restricted stock units exercised during 2009, 2010 and 2011 was NT$51,956 thousand, NT$7,442 thousand
and NT$14,934 thousand (US$493 thousand), respectively. The related tax effect was determined using the applicable tax rates in
jurisdictions to which this expense relates.
Determining Fair Value
The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions,
including the expected stock price volatility. The Company used the following weighted-average assumptions for each year in
calculating the fair value of the options granted:
Expected dividend yield
Expected volatility
Risk free interest rate
Expected life
Year Ended December 31
2010
2009
—
—
2011
—
— 128.09%-138.10%
—
—
2.60%
—
0.0-1.26 years
—
—
Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are
determined based on historical volatilities of the stock prices of the Company. Expected life represents the periods that the
Company’s share-based awards are expected to be outstanding and was determined based on historical experience regarding similar
awards, giving consideration to the contractual term of the share based awards. The dividend yield is zero as the Company has never
declared or paid dividends on the ordinary shares or other securities and does not anticipate paying dividends in the foreseeable
future.
Restricted Stock Units
A summary of the status of restricted stock units and changes during the year ended December 31, 2011 is as follows:
Nonvested at January 1, 2011
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Nonvested at December 31, 2011
Number of
Nonvested
Stock Units
(in Thousands)
11,122
6,387
(5,853)
(492)
11,164
Weighted
Average
Grant
Date Fair
Value
(US$)
Weight
Average
Remaining
Recognition
Period
(Years)
1.00
2.78
0.97
2.18
1.99
1.67
F-27
As of December 31, 2011, there was NT$427,703 thousand (US$14,130 thousand) of total unrecognized compensation cost
related to restricted stock units granted under the 2005 Plan.
Stock-based Compensation Expense
The following table shows total stock-based compensation expense included in the Consolidated Statements of Operations for
the years ended December 31, 2009, 2010 and 2011
Year Ended December 31
Cost of sales
Research and development
Sales and marketing
General and administrative
2011
2009
NT$
2010
NT$
NT$
24,445
US$
(Note 3)
5,911 7,489 247
224,220 102,209 148,405 4,903
45,520 60,626 2,003
77,500
120,298
37,488 44,511 1,470
446,463 191,128 261,031 8,623
17. COMMITMENTS AND CONTINGENCIES
In 2000, FCI entered into a government grant agreement with Korea’s Ministry of Knowledge Economy (“MKE”) to develop
new technologies. The agreement requires FCI, in accordance with the Industrial Technology Development Operation Guideline
(“Guideline”) issued by MKE, to repay 20-30% of funds received and accordingly the Company has recorded the repayment
obligations as current and long-term payables. The remaining 70-80% of funds received in the amount of NT$127,404 thousand were
recognized in periods when costs funded by the grant are incurred. If the project is unsuccessful, the agreement requires FCI to repay
100% of the funds received. As of December 31, 2011, FCI had thus far not been required to repay grant funds under the agreement
with MKE and FCI has determined that no contingent liabilities were required as of December 31, 2010 and 2011 based on historical
experience and assessed probability of project success. In addition, if projects are not successful and FCI is deemed to have conducted
the project with due care, we believe it is reasonable that FCI will be released from its repayment obligations.
FCI provided their employees with collateral for personal loans by depositing at a designated bank NT$25,693 thousand and
NT$26,132 thousand (US$863 thousand) at December 31, 2010 and 2011. Such amounts were accounted for as restricted cash.
Operating Leases
The Company entered into various operating lease agreements for office space that expire on various dates through March 2017.
The Company recognized rent expense for the years ended December 31, 2009, 2010 and 2011 of NT$43,838 thousand, NT$31,090
thousand and NT$44,355 thousand (US$1,465 thousand), respectively. The minimum operating lease payments expected under these
leases as of December 31, 2011 were NT$26,544 thousand, NT$20,582 thousand, NT$9,773 thousand, NT$3,896 thousand, and
NT$4,005 thousand for the years ending December 31, 2012, 2013, 2014, 2015 and 2016, respectively.
Litigation
The Company is 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.
F-28
On May 1, 2005, SMI Taiwan incurred a loss on inventory in the possession of a subcontractor, Advanced Semiconductor
Engineering Inc. (“ASE”) due to a fire. On December 12, 2005, SMI Taiwan filed an action against ASE with the Taiwan Taoyuan
District Court. SMI Taiwan alleged that ASE destroyed the wafers which SMI Taiwan had sub-contracted to ASE with the OEM
Agreement between SMI and ASE, and that ASE should pay SMI Taiwan a sum of NT$77,218 thousand for damages, an amount
exceeding the book value of lost inventory. After consultation with the Company’s outside legal counsel, the Company believed it
was 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 of inventory loss, offset by NT$41,226 thousand of fire loss reimbursement recorded as
other receivable, resulting in zero impact to the earnings for the year ended December 31, 2005. In connection with the inventory loss,
the Company also recorded NT$8,122 thousand under operating expenses for amounts paid to certain customers for delays in
shipments caused by the fire. In December 2006, the Company wrote-off other receivable related to the reimbursement of the fire loss
as the collection of which was doubtful. In April 2010, ASE settled with SMI Taiwan by paying a settlement fee NT$35,000
thousand. On April 28, 2010, the Taiwan Taoyuan District Court granted a motion to dismiss the claim filed by SMI Taiwan against
ASE.
On October 23, 2007, SanDisk Corp. (“SanDisk”) filed a complaint with 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 claimed that certain Silicon Motion flash memory controllers and products containing these Silicon Motion flash
memory controllers infringed specific SanDisk patents. The complaint requested the ITC institute an investigation into the matter and
sought 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 sought a permanent cease and desist order, directing
respondents 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 December 6, 2007, the ITC instituted an investigation, identifying forty-seven companies,
including Silicon Motion, as respondents. An ITC hearing was held as scheduled from October 27 through November 5, 2008. In
post-hearing briefing, the Office of Unfair Import Investigation (“OUII”) Staff Attorney agreed with our position that none of the
Silicon Motion controllers infringed the SanDisk patents in suit. On April 10, 2009, the Administrative Judge of the ITC issued an
initial determination that Silicon Motion flash controllers and products containing these Silicon Motion flash controllers did not
infringe the patents of SanDisk. On October 23, 2009, the ITC determined that Silicon Motion was not in violation of Section 337 of
the Tariff Act of 1930 and terminated its investigation.
On October 24, 2007, SanDisk 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 alleged that Silicon Motion’s
flash memory controllers infringed certain SanDisk patents and sought unspecified damages, injunctive relief, a trebling of damages
for alleged willful conduct and attorneys’ fees. Both cases were stayed until SanDisk’s ITC proceeding became final. SanDisk entered
into a settlement with Silicon Motion and no settlement payments were required from Silicon Motion. On February 4, 2010, the Court
ordered the dismissal of SanDisk’s claims against Silicon Motion without prejudice pursuant to SanDisk’s requests.
All American Semiconductor, Inc. (“All American” or “AASI”) was a former distributor for the Company. On April 25, 2007,
All American filed for Chapter 11 bankruptcy protection. At the time of the filing, the Company had US$256 thousand of unpaid
accounts receivable from All American. On April 17, 2009, SMI USA and related entities were named as defendants in an adversary
proceeding filed by the AASI Creditor Liquidating Trust (“CLT”) in the bankruptcy case pending in the U.S. Bankruptcy Court for
the Southern District of Florida. The CLT was seeking the return of allegedly avoidable transfers in the amount of NT$27,977
thousand (US$854 thousand). The Company filed an answer and affirmative defenses. In March 2010, SMI USA settled with the CLT
by paying the amount of US$220 thousand and on April 1, 2010, the Bankruptcy Court granted the motion to approve stipulations to
compromise controversy. On August 23, 2010, the Court entered an order dismissing the adversary proceeding. In June 2011,
Liquidating Trustee for the CLT filed the AASI Creditor Liquidating Trustee’s Seventeenth Omnibus Objection to Claims but in
August 2011, withdrew it with respect to SMI USA’s proof of claim. According to the CLT’s letter dated September 9, 2011, it is
currently finalizing its claims review process and preparing for distribution to beneficiaries who are holders of allowed claims.
In 2006, FCI joined with other technology companies and invested in the Pangyo Silicon Park Construction Project Cooperative
(“Pangyo Cooperative”) in Korea. In July 2010, FCI, TLi Inc. (“TLI”), OCI Materials Co., Ltd (“OCI”) and other companies
withdrew from the Pangyo Cooperative and forfeited 10% of their total investment. FCI believes its loss was caused by bad will
actions taken by TLI. In December 2011, FCI and OCI together filed a complaint against TLI at the Suwon District Court in Korea
and expect court pleadings to begin in May 2012.
In connection with the settlements above, there is a reversal of related accounts payables of nil, NT$10,000 thousand and nil in
2009, 2010 and 2011.
F-29
18. SEGMENT INFORMATION
The Company designs, develops and markets high performance, low-power semiconductor products for the multimedia
consumer electronics market. The Company currently operates as one reportable segment. The chief operating decision maker is the
Chief Executive Officer.
Net sales by categories:
Product
Mobile Storage
Mobile Communications
Multimedia SoCs
Other products
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
US$
(Note 3)
1,802,982 2,911,576
780,012
444,366
41,296
2,893,230 4,177,250
727,798
350,822
11,628
4,513,670
1,665,284
398,524
25,946
6,603,424
149,114
55,014
13,166
857
218,151
Net sales by geographic area are presented based upon the customer’s bill-to location:
Country
Taiwan
United States
Japan
Korea
China
Others
Year Ended December 31
2009
NT$
2010
NT$
2011
NT$
1,044,315 1,585,134
433,800
73,648
946,053
949,274
189,341
2,893,230 4,177,250
211,894
40,917
927,870
474,470
193,764
1,806,379
754,101
81,789
2,319,058
1,445,743
196,354
6,603,424
US$
(Note 3)
59,676
24,912
2,702
76,612
47,762
6,487
218,151
Long-lived assets (property and equipment, net) by geographic area were as follows:
Country
Taiwan
United States
Korea
China
December 31
2009
NT$
2010
NT$
2011
NT$
US$
(Note 3)
5,934
30,690
592,933 553,875 524,358 17,323
91
2,951 2,758
59,785 90,246 2,981
143,661 126,417 131,389 4,341
773,218 743,028 748,751 24,736
19. Fair Value Measurement
The following section describes the valuation methodologies the Company uses to measure assets and liabilities at fair value.
The Company uses quoted prices in active markets for identical assets to determine fair value where applicable. This pricing
methodology applies to Level 1 investments such as bond funds. For the years ended December 31, 2010 and 2011, none of the
Company’s assets measured on a recurring basis was determined by using observable inputs other than level 1.
F-30
The following table presents our assets measured at fair value on a recurring basis as of December 31, 2010 and 2011:
December 31, 2010
Assets
Short-term investments — trading
Bond funds
December 31, 2011
Assets
Short-term investments — trading
Bond funds
Level 1
NT$
Level 2
NT$
Level 3
NT$
Total
NT$
41,200 —
—
41,200
Level 1
NT$
Level 2
NT$
Level 3
NT$
Total
NT$
90,237 —
—
90,237
The table below sets out the balances for those assets required to be measured at fair value on a nonrecurring basis and the
associated losses recognized during the year ended December 31, 2010 (nil in 2011) and please refer to Note 2, “Summary of
Significant Accounting Policy” and Note 11, “Goodwill and Acquired Intangible Assets” for the significant assumption were used.
December 31, 2010
Long-term investments cost method
December 31, 2010
Level 1
NT$
5,399
NT$
—
Level 2
NT$
—
Level 3
NT$
5,399
Total Losses
NT$
(7,272)
The Company reviews the carrying values of financial assets carried at cost when impairment indicators are present. The fair
values of assets without quoted market price are determined based on management judgment with the best available information. The
impairment charge was determined based on the difference between the Company’s carrying value and the proportionate ownership
of the investee’s net assets at year end.
F-31
Subsidiaries of Silicon Motion Technology Corporation
Lake Tahoe Investment Corporation, a corporation organized under the laws of the Cayman Islands (“Lake Tahoe”).
Silicon Motion Korea Ltd., a corporation organized under the laws of Korea (‘SMK”, a wholly-owned subsidiary of Lake Tahoe).
FCI, Inc., a corporation organized under the laws of Korea (“FCI”, a wholly-owned subsidiary of Lake Tahoe).
Silicon Motion, Inc., a corporation organized under the laws of Taiwan (“SMI Taiwan”).
Lake Ontario Investment Corporation, a corporation organized under the laws of Samoa (“Lake Ontario”).
Exhibit 8.1
Silicon Motion Hong Kong Ltd., a corporation organized under the laws of Hong Kong (“SMI HK,” a wholly-owned subsidiary of
Lake Ontario).
深圳
慧帝科技
(
, a corporation organized under the laws of the People’s Republic of China (“SMI Shenzhen”, a wholly-
有限公司
)
owned subsidiary of SMI HK).
軟件科技有限公司
慧国
(
上海
)
, a corporation organized under the laws of the People’s Republic of China (“SMI Shanghai”, a
wholly-owned subsidiary of SMI HK).
科技有限公司
慧钢
(
北京
)
, a corporation organized under the laws of the People’s Republic of China (“SMI Beijing”, a wholly-
owned subsidiary of SMI HK).
Silicon Motion International Corp. Holding Company, a corporation organized under the laws of Labuan (“SMI Holding”).
Silicon Motion International Corp. Trading Company, a corporation organized under the laws of Labuan (“SMI Trading”, a wholly-
owned subsidiary of SMI Holding).
Silicon Motion (Dutch) B.V., a corporation organized under the laws of the Netherlands (“SMI BV”).
Silicon Motion, Inc, a corporation organized under the laws of the State of California (“SMI USA,” a wholly-owned subsidiary of
SMI BV).
Silicon Motion International, Inc., a corporation organized under the laws of the State of Delaware (“SMI DE,” a wholly-owned
subsidiary of SMI USA).
Silicon Motion K.K., a corporation organized under the laws of Japan (“SMI KK”, a wholly-owned subsidiary of SMI BV).
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;
2.
3.
4.
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-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
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. 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 the 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: April 25, 2012
/s/ Wallace C. Kou
Wallace C. Kou,
President & 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;
2.
3.
4.
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-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
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and
5. 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 the 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: April 25, 2012
/s/ Riyadh Lai
Riyadh Lai,
Chief Financial Officer
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, 2011 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 periodic report
fairly presents, in all material respects, the financial condition and results of operations of Silicon Motion Technology Corporation.
Date: April 25, 2012
Exhibit 13.1
/s/ Wallace C. Kou
Wallace C. Kou,
President & Chief Executive Officer
/s/ Riyadh Lai
Riyadh Lai,
Chief Financial Officer
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.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-161599, 333-142422 and 333-131219 on Forms S-8
of our reports dated April 25, 2012, relating to (1) the consolidated financial statements of Silicon Motion Technology Corporation
and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes explanatory paragraph relating to the
convenience translation of New Taiwan dollar amounts into U.S. dollar amounts) and (2) the effectiveness of the Company’s internal
control over financial reporting, appearing in this Annual Report on Form 20-F of the Company for the year ended December 31,
2011.
Exhibit 23.1
/s/ Deloitte & Touche
Deloitte & Touche
Taipei, Taiwan
Republic of China
April 25, 2012
Board of Directors
Executive Officers
James Chow
Chairman of the Board
Silicon Motion Technology Corporation
Wallace C. Kou
President & Chief Executive Officer
Silicon Motion Technology Corporation
Tsung-Ming Chung
Chairman
Dynapack International Technology Corp.
Kenneth Kuan-Ming, Lin
Chairman
Premier Capital Management Corp.
Lien-Chun Liu
Research Fellow
Taiwan Research Institute
Yung-Chien Wang
Vice President
Professional Trust Co., Ltd.
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
Sangwoo Han
Senior VP and General Manager
Mobile Communications
Nelson Duann
VP of Product Marketing
Mobile Storage and Multimedia SoCs
John (Chun-O) Kim
VP of Sales
Mobile Communications
ADS Listing
Silicon Motion Technology Corporation's
American Depositary Share (ADS) trades on the
NASDAQ Global Select Market under the
symbol "SIMO"
Legal Counsel
Kirkpatrick & Lockhart Preston Gates Ellis LLP
Taipei, Taiwan
ADS Depositary
The Bank of New York Mellon
New York, NY
Independent Auditors
Deloitte & Touche
Taipei, Taiwan
Investor Relations
For more information about Silicon Motion, please visit our website at www.siliconmotion.com
or e-mail us at ir@siliconmotion.com