F-1/A 1 df1a.htm AMENDMENT NO. 2 TO REGISTRATION STATEMENT ON FORM F-1 Amendment No. 2 to Registration Statement on Form F-1
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As filed with the Securities and Exchange Commission on January 10, 2011

Registration No. 333-171539

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to

FORM F-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

BCD SEMICONDUCTOR MANUFACTURING LIMITED

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands   3674   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

No. 1600, ZiXing Road

Shanghai ZiZhu Science-based Industrial Park

200241

People’s Republic of China

Attn: Chieh Chang

President and Chief Executive Officer

(+86-21) 2416-2266

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

National Corporate Research, Ltd.

10 East 40th Street, 10th Floor

New York, New York 10016

(212) 947-7200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Carmen Chang, Esq.

Richard A. Kline, Esq.

Eva H. Wang, Esq.

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

Jorge del Calvo, Esq.

James J. Masetti, Esq.

Pillsbury Winthrop Shaw Pittman LLP

Suite 4201, Bund Center

222 Yan An Road East

Huangpu District, Shanghai 200002

People’s Republic of China

(+86-21) 6137-7999

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 10, 2011

Preliminary Prospectus

6,000,000 American Depositary Shares

Representing 36,000,000 Ordinary Shares

LOGO

BCD Semiconductor Manufacturing Limited

We are offering 4,333,333 American Depositary Shares, or ADSs, and the selling shareholders identified in this prospectus are offering 1,666,667 ADSs. Each ADS represents six of our ordinary shares. We will not receive any proceeds from the sale of ADSs by the selling shareholders. This is our initial public offering, and no public market currently exists for our ADSs. We expect the initial public offering price to be between $10.50 and $12.50 per ADS. We have applied to list our ADSs on the Nasdaq Global Market under the symbol “BCDS.”

Investing in our ADSs involves a high degree of risk. Please read “Risk Factors” beginning on page 10.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER ADS    TOTAL

Public Offering Price

   $            $            

Underwriting Discounts and Commissions

   $    $

Proceeds to BCD (Before Expenses)

   $    $

Proceeds to selling shareholders (Before Expenses)

   $    $

 

 

Delivery of the ADSs is expected to be made on or about                     , 2011. We have granted the underwriters an option for a period of 30 days to purchase up to an additional 900,000 ADSs to cover overallotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be                      and the total proceeds to us, before expenses, will be                     . Discounts, commissions and proceeds will be prorated between us and the selling shareholders.

 

Jefferies   Stifel Nicolaus Weisel
Oppenheimer & Co.
Baird   Raymond James


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LOGO

BCD

A Leading China-Based Analog IC Provider

Our Products

LINEAR

AC/DC

DC/DC

Integrating Design, Process Technology and Manufacturing

Target Markets and Devices

Computing

Consumer

Communications

BCD Semiconductor Manufacturing Limited does not manufacture or sell any of the devices which incorporate its products


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Table of Contents

 

     Page

Prospectus Summary

   1

Risk Factors

   10

Special Note Regarding Forward-Looking Statements

   37

Use of Proceeds

   39

Dividends and Dividend Policy

   40

Capitalization

   41

Dilution

   43

Exchange Rate Information

   45

Selected Consolidated Financial Data

   46

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   49

Business

   82

Regulation

   93

Management

   103

Principal and Selling Shareholders

   115

Related Party Transactions

   119

Description of Share Capital

   122

Description of American Depositary Shares

   132

Shares Eligible for Future Sale

   140

Taxation

   142

Enforceability of Civil Liabilities

   148

Underwriting

   150

Legal Matters

   156

Experts

   156

Expenses Relating to This Offering

   157

Where You Can Find More Information

   157

 

 

We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus. Do not rely upon any information or representations made outside of this prospectus. This prospectus is not an offer to sell, and it is not soliciting an offer to buy, (1) any securities other than our ADSs or (2) our ADSs in any circumstances in which our offer or solicitation is unlawful. The information contained in this prospectus may change after the date of this prospectus. Do not assume after the date of this prospectus that the information contained in this prospectus is still correct.

We have not taken any action that would permit a public offering to occur in any jurisdiction other than the United States. The distribution of this prospectus and any filed free writing prospectus and the offering and sale of the ADSs may be restricted by law in your jurisdiction. If you have received this prospectus and any filed free writing prospectus, you are required by us and the underwriters to inform yourself about and observe any restrictions as to the offering of the ADSs and the distribution of this prospectus.

 

 


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Conventions That Apply to this Prospectus

All references in this prospectus to “BCD,” “we,” “us” or “our” are references to BCD Semiconductor Manufacturing Limited, a Cayman Islands company, and its subsidiaries.

References in this prospectus to:

 

   

“AC/DC” are to alternating current to direct current conversions;

 

   

“BCDMOS” are to a family of mixed semiconductor processes that combine double-diffused metal-oxide semiconductors, or DMOS, with bipolar and CMOS technologies;

 

   

“BiCMOS” are to a family of mixed semiconductor processes that combine bipolar with CMOS technologies;

 

   

“Bipolar technologies” are to integrated circuit manufacturing processes, which fabricate diodes and junction transistors on a semiconductor substrate;

 

   

“China” or the “PRC” are to the People’s Republic of China, excluding for the purpose of this prospectus Hong Kong, Macau and Taiwan, except where noted;

 

   

“CMOS” are to complementary metal-oxide-semiconductor processes;

 

   

“DC/DC” are to direct current to direct current conversions;

 

   

“Fab” are to a wafer fabrication facility;

 

   

“Linear” are to electronic devices that operate in a linear amplifying range;

 

   

“ODMs” are to original design manufacturers;

 

   

“OEMs” are to original equipment manufacturers;

 

   

“Power management ICs” are to integrated circuits that control electrical power conversions;

 

   

“RMB” are to Renminbi, the currency of the PRC;

 

   

“Standard linear products” are to analog integrated circuits that operate in a linear amplifying range, which are typically offered by multiple vendors in industry standard pin-compatible designs; and

 

   

“$” are to U.S. dollars.

This prospectus contains translations of certain RMB amounts into U.S. dollars at specified rates solely for the convenience of the reader. All translations from RMB to U.S. dollars were made at the noon buying rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Except for conversions in the Consolidated Financial Statements, all translations of RMB into U.S. dollars (unless otherwise stated) have been made at the exchange rate on September 30, 2010, which was RMB6.6905 to $1.00, as certified for customs purposes by the Federal Reserve Bank of New York on September 30, 2010. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Related to Our Financial Condition and Business—The majority of our revenue is denominated in U.S. dollars and most of our expenses are denominated in RMB; therefore, appreciations in the value of the RMB may have a material adverse effect on our financial performance” for a discussion of the effects on BCD of fluctuating exchange rates. On December 30, 2010, the noon buying rate was RMB6.6000 to $1.00.

References to our current Memorandum and Articles of Association are to our Second Amended and Restated Memorandum of Association and our Third Amended and Restated Articles of Association, as amended, which are currently in effect.

References to our post-offering Memorandum and Articles of Association are to the Third Amended and Restated Memorandum of Association and Fourth Amended and Restated Articles of Association, which will become effective upon the completion of the offering.

References to “U.S. GAAP” mean generally accepted accounting principles in the United States. Our financial information presented in this prospectus has been prepared in accordance with U.S. GAAP.

Unless otherwise indicated, references to “revenue” mean our net revenue.


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Prospectus Summary

The following summary is qualified by, and should be read in conjunction with, the more detailed information and the financial statements and related notes appearing elsewhere in this prospectus. You should read the entire prospectus carefully in evaluating an investment in our securities.

Our Business

We are a leading China-based provider of analog integrated circuits, or ICs, specializing in the design, manufacture and sale of a broad range of power management semiconductors to the large, expanding Asian electronics industry. We focus on high-volume growth segments in the computing, consumer and communications markets, such as personal computers, flat panel televisions and monitors, mobile phone chargers and a wide variety of consumer and portable electronic devices. We currently offer a diversified and expanding portfolio of over 300 products, including power management ICs within the following subcategories: linear, AC/DC and DC/DC. These products are designed to enable our end customers to reduce power consumption, extend battery life, maintain system stability and decrease the form factor of their devices. Our products have been incorporated into electronic systems sold by over 2,000 Asian OEMs and ODMs including ASUSTeK Computer, Inc., Changhong Electric Co., Ltd., Chicony Power Technology Co., Ltd., or Hipro, Emerson Electric Co., Foxconn Electronics Inc., Giga-Byte Technology Co., Ltd., Guangzhou Digital Rowa Technology Company Limited, or Rowa, Konka Group Co., Ltd., LG Electronics Inc., TP-LINK Technologies Co., Ltd and TPV Technology Limited. With in-house design and manufacturing capabilities in China, we combine our analog semiconductor expertise, proprietary process technologies, cost-effective manufacturing and operating infrastructure, and local sales and support to improve the quality and performance of our products, lower our costs and accelerate our time-to-market.

We are a leading provider of power management ICs based on revenue with principal in-house design, manufacturing, sales and support operations in China. We employ a large and growing base of over 290 engineers, 83 of whom focus on analog design. We believe our manufacturing capabilities enable us to customize a broad range of semiconductor process technologies to optimize product performance and cost. Our operations in China allow us to maintain close, direct business and technical relationships with leading OEMs, ODMs and distributors in the region. Furthermore, we believe this results in cost advantages over our competitors and positions us to benefit from the growing demand for semiconductors in Asia. Gartner, an independent research firm, projects Asia will continue to be the largest market for semiconductors worldwide and will grow at an 11.3% compound annual growth rate from $135.5 billion in 2009 to $231.9 billion in 2014. We believe we are well positioned to increase our market share in this expanding market.

We were founded in 2000 and are headquartered in Shanghai, China with other offices in China, South Korea, Taiwan and the United States. In the quarter ended September 30, 2010, we shipped an average of more than 312 million units per month. For the year ended December 31, 2009 and the nine months ended September 30, 2010, our total revenue was $100.8 million and $101.3 million, respectively, and our net income was $6.9 million and $16.7 million, respectively. As of September 30, 2010, our accumulated deficit was $41.6 million.

Industry Background

As computing, consumer and communications devices continue to increase in sophistication, power management ICs play an increasingly critical role in enhancing system efficiency and performance. Power management ICs deliver power, regulate voltage and control the flow of energy across the functional areas of an electronic device and are key to reducing power consumption, extending battery life, maintaining system stability and, compared to legacy discrete solutions, reducing form factor. Relative to digital semiconductors, which process binary information, analog power

 

 

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management ICs must detect, analyze and manage real world phenomena, such as electrical currents and voltages, under a wide variety of operating specifications for particular applications. These ICs must often operate in rigorous conditions, such as high-voltage and high-current environments, and they must maintain low error levels while delivering and managing power across an electronic device.

Gartner projects that the global market for power management ICs for computing, consumer and communications applications will grow from $5.6 billion in 2009 to $9.4 billion in 2014. Characteristics of power management ICs, and the power management market in general, include the following:

 

   

Analog design complexity. The design of analog power management ICs generally involves greater variety and less repetition than digital design and does not readily lend itself to standard design tools.

 

   

Demand for increased energy efficiency. Demand for improved battery life from consumers, environmental concerns and government mandates are driving the need for increased energy efficiency in semiconductor devices.

 

   

Price sensitivity. Suppliers of power management ICs must deliver the required level of performance at the lowest cost possible to remain competitive.

 

   

Specialized manufacturing processes. Analog power management IC suppliers typically require specialized process technologies to improve performance and manufacturing cost.

 

   

System-level knowledge and support. OEMs and ODMs frequently look to their power management IC suppliers to provide system-level insight as well as design and technical support in order to reduce their time-to-market.

 

   

Importance of Asia-based operations. Asia is the largest market for semiconductor consumption, and there are currently very few analog semiconductor providers and even fewer power management IC vendors in the region.

Our Strengths

We are a leading provider of power management ICs based on revenue with principal in-house design, manufacturing, sales and support operations in China. We believe we have been able to capitalize on Asia’s central role in the global design and manufacture of electronics by providing a broad portfolio of reliable, high performance products and strong system-level technical support in the region. Our competitive strengths include the following:

 

   

Integrated design, process technology and manufacturing in China. We integrate circuit design and process technology expertise with in-house manufacturing, all based in China, to meet significant technical challenges and deliver cost-effective, reliable and differentiated power management ICs.

 

   

Broad product portfolio. We have a broad portfolio of more than 300 power management ICs, including linear ICs, AC/DC products, DC/DC products and other power management ICs. By offering a diverse product portfolio, we enable our end customers to simplify their supply chain logistics and reduce their costs, while creating additional opportunities to cross sell our products as part of a broader system design.

 

   

Analog design and system-level expertise. We have assembled a sizable engineering team with significant analog power management IC design and system-level expertise. We believe our access to high quality, low cost engineering talent in China results in significant cost advantages over our competitors. In addition, our system-level expertise helps our customers reduce design costs while improving product reliability, energy efficiency and time-to-market.

 

   

Diverse customer base and established brand with leading electronics manufacturers in Asia. We believe we have developed a recognized brand and reputation among the world’s leading electronics manufacturers as a provider of high quality, cost-competitive power management ICs. Our ICs are incorporated into products sold by the top five motherboard manufacturers and four of the top five LCD television manufacturers, as well as in chargers sold by the world’s top four mobile phone manufacturers.

 

 

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Experienced management team. We believe the domain expertise and global experience of our management team is a key competitive advantage. Our management team averages more than 20 years of experience in the semiconductor industry.

Our Strategy

Our goal is to become the largest provider of power management ICs across Asia to leading OEMs and ODMs in the computing, consumer and communications markets. Key elements of our strategy include:

 

   

Increasing market share in high volume markets. We intend to continue to focus on high volume, rapidly growing segments in the computing, consumer and communications markets, such as personal computers, flat panel televisions and monitors, mobile phone chargers and a wide variety of consumer and portable electronic devices.

 

   

Expanding our product portfolio. We plan to continue to rapidly expand our product portfolio of power management ICs. We intend to offer complete power management solutions to our customers, thereby reducing complexity within their supply chains and strengthening our position with these customers.

 

   

Advancing our analog technical expertise. We plan to continue to attract and retain highly qualified analog engineers with experience in designing power management ICs. We will continue to focus on the integration of design and process technologies to help us deliver cost-effective, reliable and high-performance products.

 

   

Expanding our manufacturing capabilities in China. We plan to continue to invest in manufacturing capacity to support our growth, accelerate our process technology innovation and further leverage the cost advantages of our China-based operations. We intend to build a second wafer fabrication facility to increase our capacity and to manufacture higher performance products at more advanced geometries.

 

   

Continuing to strengthen and promote our brand. We will continue to promote our brand through targeted sales and marketing efforts to increase our customer base and further penetrate existing customers.

Risks and Challenges

Our business is subject to numerous risks. You should carefully read “Risk Factors” for an explanation of these risks before investing in our ADSs. These risks include, among others, that:

 

   

We depend on growth in the end markets that use our products, and if these markets do not grow as we expect, our business and results of operations could be materially adversely affected.

 

   

Our future growth depends in part on expanding our market share with leading ODMs and OEMs.

 

   

The average selling prices of our products have historically decreased and will likely do so in the future, which could harm our revenue and gross margins.

 

   

Our ability to grow our revenue and improve our results of operations will be negatively impacted if we are unable to execute on our plan to build a second fab.

 

   

The majority of our revenue is denominated in U.S. dollars and most of our expenses are denominated in RMB; therefore, appreciations in the value of the RMB may have a material adverse effect on our financial performance.

 

   

Our manufacturing processes are complex and potentially vulnerable to impurities and other disruptions, which could significantly increase our costs and delay product shipments to our customers.

 

   

Uncertainties with respect to China’s economic, political and social condition, as well as government policies, could adversely affect our business and results of operations.

 

 

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Corporate Information

We were incorporated in Bermuda in September 2000 as a limited liability exempted company and changed the jurisdiction of our incorporation to the Cayman Islands in April 2004. Our principal executive offices are located at No. 1600, ZiXing Road, Shanghai ZiZhu Science-based Industrial Park, Shanghai, 200241, People’s Republic of China. Our telephone number in Shanghai is (+86-21) 2416-2266. Our website is www.bcdsemi.com. Information contained on our website does not constitute part of this prospectus.

Our Corporate Structure

We are a holding company with two wholly owned PRC direct subsidiaries and one Hong Kong direct subsidiary. Our direct PRC subsidiaries are Shanghai SIM-BCD Semiconductor Manufacturing Co. Ltd., or SIM-BCD, which is our primary operating entity, and BCD (Shanghai) Semiconductor Manufacturing Limited, or BCD Shanghai. In August 2010, we began the steps necessary to dissolve BCD Shanghai. We expect the dissolution to be completed in June 2011. Our direct Hong Kong subsidiary is BCD Semiconductor Limited, or BCD HK. We also hold five indirect subsidiaries. See “Business—Our Corporate Structure.”

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We also have a liaison office of Excel HK in South Korea.

Third-Party Data

The Gartner Report(s) described herein, or the Gartner Report(s), represent(s) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., or Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Prospectus) and the opinions expressed in the Gartner Report(s) are subject to change without notice.

 

 

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The Offering

 

ADSs offered by us

4,333,333 ADSs

 

ADSs offered by the selling shareholders

1,666,667 ADSs

 

Overallotment option

We have granted a 30-day option to the underwriters to purchase up to an aggregate of 900,000 additional ADSs to cover overallotments of ADSs.

 

The ADSs

Each ADS represents six ordinary shares, par value $0.001 per ordinary share. You will have the rights of an ADS holder as provided in a deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time. To better understand the terms of the ADSs, you should carefully read the section in this prospectus titled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

ADSs outstanding immediately after this offering

6,000,000 ADSs (or 6,900,000 ADSs if the underwriters exercise the overallotment option in full).

 

Ordinary shares outstanding immediately after this offering

106,420,562 ordinary shares (or 111,820,562 ordinary shares if the underwriters exercise the overallotment option in full) (calculated based upon the assumptions described below).

 

Depositary

Deutsche Bank Trust Company Americas

Use of proceeds

We intend to use approximately $24.5 million of the net proceeds of this offering to finance the construction of our second wafer fabrication facility. We also intend to use up to $6.0 million of the net proceeds to repay certain short-term loans. We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including marketing, research and development and other capital expenditures. In addition, we may choose to expand our current business through acquisitions of other businesses, products or technologies, although we do not have agreements or commitments for any specific acquisitions at this time.

Nasdaq Global Market listing

We have applied to list our ADSs on the Nasdaq Global Market under the symbol “BCDS.” Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

Principal Executive Office

Our principal executive offices are located at No. 1600 ZiXing Road, Shanghai ZiZhu Science-based Industrial Park, Shanghai, 200241, People’s Republic of China and our phone number is (+86-21) 2416-2266.

The pro forma number of ordinary shares to be outstanding following the offering is based on 80,420,564 shares outstanding as of September 30, 2010, which gives effect to the issuance of 63,235,289 ordinary shares upon the conversion of 27,660,000 Series A preference shares on a 1:1 basis, 10,575,289 Series B preference shares on a 1:1 basis and 20,000,000 Series C preference shares on a 1:1.25 basis.

 

 

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The number of ordinary shares to be outstanding following the offering excludes:

 

   

16,665,695 ordinary shares issuable upon the exercise of options outstanding as of September 30, 2010, with a weighted average exercise price of $0.71 per ordinary share;

 

   

202,500 ordinary shares issuable upon the exercise of warrants outstanding as of September 30, 2010, which have a weighted average exercise price of $2.27 per ordinary share;

 

   

12,276,461 ordinary shares reserved for future grants under our equity incentive plan; and

 

   

2,000,001 ordinary shares issuable upon conversion of 1,600,000 Series C preference shares issuable upon the exercise of warrants to purchase Series C preference shares outstanding as of September 30, 2010, which have a weighted average exercise price of $2.00 per share.

Except as otherwise indicated, all information contained in this prospectus assumes and reflects the following:

 

   

no exercise of the underwriters’ overallotment option;

 

   

no exercise after September 30, 2010 of options and warrants to purchase ordinary shares outstanding as of September 30, 2010; and

 

   

the effectiveness of our post-offering Amended and Restated Memorandum of Association and post-offering Amended and Restated Articles of Association immediately following the conversion of our preference shares into ordinary shares immediately prior to the completion of the offering, which increases the authorized number of ordinary shares to 1,000,000,000 and creates 50,000,000 undesignated preference shares.

 

 

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Summary Consolidated Financial Data

The following summary consolidated financial and other data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all of which are included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The summary consolidated financial data presented below for the years ended December 31, 2007, 2008 and 2009 and for the six months ended June 30, 2010 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for the six months ended June 30, 2009 and for the nine months ended September 30, 2009 and 2010 and as of September 30, 2010 is derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments, which consist only of normal recurring adjustments, that management considers necessary for the fair statement of the financial information contained in those statements. Historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

    Years ended December 31,       
 
Six months ended
June 30,
 
  
   
 
Nine months ended
September 30,
 
  
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)           (Unaudited)  

Consolidated Statements of Operations Data:

             

Net revenue

  $ 98,683      $ 88,085      $ 100,844      $  42,271      $  62,701      $ 73,175      $ 101,270   

Cost of revenue

    76,466        69,587        75,230        34,471        42,613        56,200        67,803   
                                                       

Gross profit

    22,217        18,498        25,614        7,800        20,088        16,975        33,467   
                                                       

Operating expenses:

             

Research and development

    5,947        7,013        6,244        2,850        3,692        4,406        5,611   

Selling and marketing

    3,577        4,487        5,422        2,259        3,166        3,737        5,089   

General and administrative

    11,349        10,178        7,661        3,195        3,360        5,221        5,458   
                                                       

Total operating expenses

    20,873        21,678        19,327        8,304        10,218        13,364        16,158   
                                                       

Income (loss) from operations

    1,344        (3,180     6,287        (504     9,870        3,611        17,309   

Other income (expense), net

    (41     (1,665     44        43        298        (449     289   

Income tax expense (benefit)

    697        (43     (577            516        (288     936   
                                                       

Net income (loss)

  $ 606      $ (4,802   $ 6,908      $ (461)      $ 9,652      $ 3,450      $ 16,662   
                                                       

Net income (loss) per share:

             

Basic-ordinary shares

  $ 0.01      $ (0.30   $ 0.09      $ (0.03)      $ 0.13      $ 0.05      $ 0.23   
                                                       

Basic-convertible preference shares

  $ 0.01      $      $ 0.09      $      $ 0.13      $ 0.05      $ 0.22   
                                                       

Diluted-ordinary shares

  $ 0.00      $ (0.30   $ 0.08      $ (0.03)      $ 0.08      $ 0.04      $ 0.14   
                                                       

Diluted-convertible preference shares

  $ 0.00      $      $ 0.09      $      $ 0.13      $ 0.05      $ 0.22   
                                                       

Shares used to compute net income (loss) per share

             

Basic-ordinary shares

    14,463,325        16,693,525        16,710,192        16,710,192        16,740,748        16,710,192        16,811,868   
                                                       

Basic-convertible preference shares

    58,168,622               58,235,289               58,235,289        58,235,289        58,235,289   
                                                       

Diluted-ordinary shares

    23,448,325        16,693,525        19,142,046        16,710,192        26,781,809        18,703,925        27,117,409   
                                                       

Diluted-convertible preference shares

    58,799,565               58,325,855               58,604,520        58,335,289        58,585,289   
                                                       

Pro forma net income (loss) per share (unaudited)(1)

             

Basic-ordinary shares

      $ (0.06     $ (0.03     $ 0.06   
                               

Diluted-ordinary shares

      $ (0.06     $ (0.03     $ 0.05   
                               

Basic-ADS

      $ (0.37     $ (0.16     $ 0.36   
                               

Diluted-ADS

      $ (0.37     $ (0.16     $ 0.32   
                               

Shares used to compute pro forma net income (loss) per share (unaudited)(1)

             

Basic-ordinary shares

        79,945,481          79,976,037          80,047,157   
                               
             

Diluted-ordinary shares

        79,945,481          79,976,037          90,426,534   
                               
             

 

 

(Dollars in thousands, except share and per share information)

 

 

(1)

Pro forma unaudited basic and diluted net income (loss) per ordinary share is computed using net income (loss) per weighted average ordinary share after giving effect to the conversion of all preference shares outstanding as of December 31, 2009, June 30, 2010 and September 30, 2010 into 63,235,289 ordinary shares.

 

 

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    As of September 30, 2010  
    Actual     Pro Forma
As  Adjusted(1)(2)
 
    (Unaudited)  

Consolidated Balance Sheet Data:

   

Cash and restricted cash

  $ 42,586      $ 86,231   

Working capital

    35,644        80,549   

Total assets

    127,933        171,578   

Warrant liability

    1,260          

Other liabilities

    3,466        3,466   

Convertible redeemable preference shares

    90,569          

Total shareholders’ equity (capital deficiency)

  $ (21,787   $ 113,687   

 

 

(Dollars in thousands)
(1)

On a pro forma as adjusted basis to give effect to:

   

the issuance of 63,235,289 ordinary shares upon the conversion of our preference shares outstanding as of September 30, 2010 into ordinary shares upon completion of the offering; and

   

our sale of 4,333,333 ADSs representing 25,999,998 ordinary shares in the offering at an assumed initial public offering price of $11.50 per ADS, and our receipt of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses.

(2)

A $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and restricted cash, total shareholders’ equity (deficit) and total capitalization by $4.0 million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of ADSs we are offering. Each increase (decrease) of 100,000 ADSs in the number of ADSs offered by us would increase (decrease) each of cash and restricted cash, total shareholders’ equity (deficit) and total capitalization by approximately $1.1 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and terms of this offering determined at pricing.

 

 

 

     Years ended December 31,     Six months ended
June 30,
    Nine months ended
September 30,
 
     2007     2008     2009     2009     2010     2009     2010  
                       (Unaudited)           (Unaudited)  

Other Financial Data:

              

Net cash provided by (used in) operating activities

   $ 10,548      $ 9,616      $ 18,494      $ 7,324      $ 8,341      $ 14,417      $ 14,308   

Net cash provided by (used in) investing activities

     (10,790     (12,168     (3,519     (4,354     (5,231     (1,987     (11,836

Net cash provided by (used in) financing activities

     5,016        (4,579     (3,580     (85     (2,677     (3,581     (633

Net increase (decrease) in cash

     4,774        (7,131     11,395        2,885        433        8,849        1,839   

 

 

(Dollars in thousands)

 

 

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Recent Developments

Although our audited financial statements for the year ended December 31, 2010 are not yet complete, the following information reflects our results based on currently available information.

Net revenue was approximately $31.6 million for the quarter ended December 31, 2010 which increased approximately 14.1% from the quarter ended December 31, 2009. Compared to the quarter ended September 30, 2010, fourth quarter 2010 net revenue represents a decrease of approximately 18.2%, reflecting the seasonality in our business.

We estimate gross profit for the quarter ended December 31, 2010 to be in the range of $9.9 million to $10.1 million, representing 31.4% to 32.0% of net revenue, compared to $8.6 million, or 31.2% of net revenue, for the quarter ended December 31, 2009 and $13.4 million, or 34.7% of net revenue, for the quarter ended September 30, 2010. The decrease in gross profit from the quarter ended September 30, 2010 primarily reflects the decrease in net revenue as a result of the seasonality in our business.

We estimate operating income for the quarter ended December 31, 2010 to be in the range of $4.0 million to $4.2 million, compared to $2.7 million for the quarter ended December 31, 2009 and $7.4 million for the quarter ended September 30, 2010. As a percentage of net revenue, the fourth quarter 2010 operating income is estimated to be in the range of 12.7% to 13.3% compared to 9.7% for the quarter ended December 31, 2009 and 19.3% for the quarter ended September 30, 2010.

We estimate net income attributable to shareholders for the quarter ended December 31, 2010 to be in the range of $3.2 million to $3.7 million, compared to $3.5 million for the quarter ended December 31, 2009 and $7.0 million for the quarter ended September 30, 2010, reflecting the seasonality of our business and an increase in our warrant liability. As a percentage of net revenue, the fourth quarter 2010 net income attributable to shareholders is estimated to be in the range of 10.2% to 11.7% compared to 12.5% for the quarter ended December 31, 2009 and 18.2% for the quarter ended September 30, 2010.

We estimate net income attributable to ordinary shareholders for the quarter ended December 31, 2010 to be in the range of $0.7 million to $0.8 million, compared to $1.6 million for the quarter ended September 30, 2010. As a percentage of net revenue, the fourth quarter 2010 net income attributable to ordinary shareholders is estimated to be in the range of 2.2% to 2.7%, compared to 4.2% for the quarter ended September 30, 2010.

We estimate net income per share attributable to Basic-ordinary shares, Basic-convertible preference shares, Diluted-ordinary shares and Diluted convertible preference shares for the quarter ended December 31, 2010 to be in the ranges of $0.04 to $0.05 per share, $0.04 to $0.05 per share, approximately $0.03 per share and $0.04 to $0.05 per share, respectively, compared to $0.10 per share, $0.09 per share, $0.06 per share and $0.09 per share, respectively, for the quarter ended September 30, 2010.

We estimate net income per share attributable to Basic-ordinary shares, Basic-convertible preference shares, Diluted-ordinary shares and Diluted-convertible preference shares for the year ended December 31, 2010 to be in the ranges of $0.26 to $0.27 per share, $0.26 to $0.27 per share, $0.16 to $0.17 per share and $0.26 to $0.27 per share, respectively, compared to $0.09 per share, $0.09 per share, $0.08 per share and $0.09 per share, respectively, for the year ended December 31, 2009.

Our estimates for revenue, gross profit, operating income, net income attributable to shareholders, net income attributable to ordinary shareholders and net income per share attributable to Basic-ordinary shares, Basic-convertible preference shares, Diluted-ordinary shares and Diluted-convertible preference shares are not yet final and are subject to further review. We are currently performing our annual review procedures for the year ended December 31, 2010.

 

 

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Risk Factors

An investment in our ADSs involves a high degree of risk. You should carefully consider the following information about risks, together with the other information contained in this prospectus, including our consolidated financial statements and related notes, before you decide to buy our ADSs. If any of the circumstances or events described below actually arises or occurs, our business, results of operations and financial condition would likely suffer. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risks described below and elsewhere in this prospectus.

Risks Related to Our Financial Condition and Business

We depend on growth in the end markets that use our products. If these markets do not grow as we expect, our business and results of operations could be materially adversely affected.

Our continued success will depend in large part on the growth of various industries that use power management semiconductors, including the consumer, computer and communications markets, and on general economic growth. Factors affecting these markets as a whole could have an adverse impact on our end customers and, as a result, have an adverse impact on us. These factors include:

 

   

recessionary periods or periods of reduced growth in our end customers’ markets;

 

   

the inability of our end customers to adapt to rapidly changing technology and evolving industry standards;

 

   

the possibility that our end customers’ products may become obsolete or the failure of our end customers’ products to gain widespread commercial acceptance; and

 

   

the possibility of reduced consumer demand for our end customers’ products.

The global credit and financial markets experienced extreme volatility and disruptions during the second half of 2008 and continued into 2009, including decreased consumer confidence, lower economic growth, volatile energy costs, increased unemployment rates and uncertainty about economic stability. As a result, the growth in the end markets that use our products was reduced. If our end markets do not grow as we expect, our business and results of operations would be harmed.

Our future growth depends in part on expanding our market share with leading ODMs and OEMs. If we cannot expand our market share with leading ODMs and OEMs, our ability to grow will be limited.

We intend to grow our revenue from leading computing, consumer and communications electronics ODMs and OEMs. We anticipate that these efforts will require us to make substantial investments in research and development to commercialize innovative products that address market demands. These efforts may not result in our products being incorporated into an end customer’s product. We also expect that our target end customers would place considerable pressure on us to meet their tight development schedules. In addition, these customers often require extensive support, which may require us to significantly expand our customer support organization. We may have to devote a substantial amount of our limited resources to these efforts, which could detract our focus from or delay our completion of other important projects. Delays in these projects could impair our relationships with existing customers and negatively impact sales. If we cannot continue to attract leading ODMs and OEMs in the future, our ability to grow will be limited.

The average selling prices of our products have historically decreased and will likely do so in the future, which could harm our revenue and gross margins.

As is typical in the semiconductor industry, the average selling prices of our products have historically declined. In the past, we have reduced the average selling prices of our products in anticipation of competitive pricing pressures, new product introductions by us or our competitors and other factors. For example, we compete for the sale of most of our

 

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linear products on a quarterly basis with a critical factor being price. We expect that we will have to reduce prices in the future for our products. Reductions in our average selling prices to one customer could also impact our average selling prices to other customers. Our business, results of operations, financial condition and prospects will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs or developing new or enhanced products on a timely basis with higher selling prices or gross margins.

If we are unable to execute on our plan to build a second fab, our ability to grow our revenue and improve our results of operations will be negatively impacted.

In order to support our growth, we plan to build a second fab pursuant to an investment agreement between two of our subsidiaries and Shanghai ZiZhu Science-based Industrial Park Development Company, or ZiZhu Development. We may incur cost overruns in the construction of the second fab, which may cause us to incur more expenses than we currently project. There are a number of events that could delay the development of our second fab or increase the costs of building and equipping it in accordance with our plans. Such potential events include, but are not limited to:

 

   

shortages and late delivery of building materials and facility equipment;

 

   

delays in the delivery, installation, commissioning and qualification of our manufacturing equipment;

 

   

failures or delays in securing the necessary governmental approvals;

 

   

seasonal factors, such as a long and intensive wet season that limits construction;

 

   

labor disputes;

 

   

design or construction changes with respect to building spaces or equipment layout; and

 

   

technological, capacity and other changes to our plans for our second fab necessitated by changes in market conditions.

Furthermore, delays in building and equipping our second fab or our inability to execute on our plan to build a second fab could negatively impact our ability to grow our revenue and improve our gross margins. This could also cause us to continue to increase our dependence on third-party foundries to manufacture our products, which could result in the loss or delayed receipt of earnings or an increase in financing costs, either of which would adversely affect our business and results of operations.

Delays in building and equipping our second fab or our inability to execute on our plan to build a second fab may also cause us not to meet our obligations under our investment agreement with ZiZhu Development, which would subject us to a number of significant adverse consequences including, but not limited to, loss of eligibility for all the favorable tax rebates and other incentives enjoyed by us under our investment agreement with ZiZhu Development and return of favorable tax rebates and other incentives.

We may not sustain our recent revenue growth.

We have experienced significant recent revenue growth due primarily to growth in sales of all categories of IC products that we sell across all our target markets. For example, our revenue increased from $73.2 million in the nine months ended September 30, 2009 to $101.3 million in the nine months ended September 30, 2010. However, in the future we may not continue to experience a similar rate of revenue growth, if any. Accordingly, you should not rely on the results of any prior quarterly or annual period as an indication of our future operating performance.

Our results of operations may fluctuate from quarter to quarter, which may make it difficult to predict our future performance.

Our revenue, expenses and results of operations may fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. Historically, the following factors have caused our revenue, expenses and results of operations to fluctuate:

 

   

cyclicality in the semiconductor industry;

 

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seasonality in the sales of our products, including a general tendency for slower business during the first quarter and, to a lesser extent, the fourth quarter;

 

   

our distributors’ and end customers’ sales outlook, purchasing patterns and inventory adjustments based on general economic conditions or other factors;

 

   

changes in the relative mix of our product sales, which have different average selling prices and gross margins;

 

   

the timing of expansion and development of our facilities;

 

   

the loss of our end customers or distributors or a significant reduction or postponement of orders from our end customers or distributors;

 

   

the timing of our new product introductions and the qualification of those products by our end customers;

 

   

the timing and duration associated with our planned and unplanned fab maintenance;

 

   

inventory write-downs, including write-downs due to obsolete inventory;

 

   

a high number of days sales outstanding necessitating a write-off in our accounts receivable; and

 

   

sudden declines in our average selling prices, due to competitive pressures caused by factors such as new product introductions or price reductions on competitive products.

In addition to the above factors, which may continue to cause our results of operations to fluctuate in the future, we expect that our revenue, expenses and results of operations may fluctuate in the future upon the occurrence of one or more of the following factors:

 

   

our inability to accurately forecast distributor and end customer demand and develop products that our distributors and end customers purchase in quantity;

 

   

our inability to obtain sufficient quantities of equipment and raw materials in a timely manner and at reasonable prices;

 

   

our reliance on third-party manufacturers;

 

   

the build-out of our second fab and the amount and timing of the associated payments;

 

   

changes in manufacturing yields;

 

   

our inability to develop new process technologies and achieve volume production using these technologies;

 

   

changes in exchange rates and interest rates;

 

   

changes in domestic and international tax laws; and

 

   

changes in geopolitical stability, especially changes affecting China, Taiwan, Japan, South Korea and in Asia in general.

Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may adversely affect our business and results of operations.

Our reliance on distributors to sell substantially all of our products subjects us to a number of risks.

We sell substantially all of our products to distributors, who in turn sell to our end customers. Our distributors typically offer power management semiconductors from several different companies, including our direct competitors. These distributors assume collection risk and provide logistical services to end customers, including stocking our products. We believe that our success will continue to depend upon maintaining our relationships with distributors. Our reliance on distributors subjects us to a number of risks, including:

 

   

potential reduction or discontinuation of sales of our products by our distributors;

 

   

failure by our distributors to devote resources necessary to sell our products at the prices, in the volumes and within the time frames that we expect;

 

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our distributors focusing their sales efforts on products of our competitors;

 

   

dependence upon the continued viability and financial resources of our distributors, some of which are small organizations with limited working capital and all of which depend on general economic conditions and conditions within the semiconductor industry;

 

   

dependence on the timeliness and accuracy of shipment forecasts and resale reports from our distributors;

 

   

management of relationships with our distributors, which can deteriorate as a result of conflicts with efforts to sell directly to our end customers; and

 

   

termination of our agreements with our distributors which are generally terminable by either party on short notice.

If any significant distributor becomes unable or unwilling to promote and sell our products, or if we are not able to renew our contracts with the distributors on acceptable terms, we may not be able to find a replacement distributor on reasonable terms, in a timely manner or at all and our business could be harmed.

The majority of our revenue is denominated in U.S. dollars and most of our expenses are denominated in RMB; therefore, appreciations in the value of the RMB may have a material adverse effect on our financial performance.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a managed band based on market supply and demand and by reference to a basket of certain foreign currencies. This change in policy has resulted in an approximately 19% appreciation of the RMB against the U.S. dollar between July 21, 2005 and September 30, 2010. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar. Recently, the People’s Bank of China has decided to proceed further with reform of the RMB exchange regime and to enhance the RMB exchange rate flexibility, though it is not yet clear what effect this will have on exchange rates.

Although the majority of our revenue is denominated in U.S. dollars, most of our expenses are denominated in RMB. We use the U.S. dollar as the reporting currency for our financial statements. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue, earnings and financial position. For example, based on our results of operations for the year ended December 31, 2009, a 1.0% appreciation of the RMB against the U.S. dollar will result in an estimated increase of approximately $403,000 in our costs and expenses, and a 1.0% appreciation of the U.S. dollar against the RMB will result in an estimated decrease of approximately $403,000 in costs and expenses. In addition, to the extent that we need to convert the U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB we receive from the conversion.

Claims by third parties that we have infringed their intellectual property rights could result in significant costs, reduce sales of our products and cause our results of operations to suffer.

As is typical in the semiconductor industry, we or our customers may receive claims of infringement from time to time or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties that may cover some of our technology, products and foundry services or those of our end customers. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights which has resulted in protracted and expensive arbitration and litigation for many companies. Patent litigation has increased in recent years owing to increased assertions made by intellectual property licensing entities and increasing competition and overlap of product functionality in our markets.

Any litigation or arbitration regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. We have in the past and may from time to time in the future become involved in litigation that requires our management to commit significant resources

 

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and time. For example, in 2007, Power Integrations, Inc., a San Jose, California-based analog semiconductor company, or Power Integrations, filed a lawsuit against us alleging that certain controller chips produced and sold by our subsidiaries infringed certain patents held by Power Integrations. We entered into a final court-supervised settlement with Power Integrations in February 2009 under which we were not obligated to pay Power Integrations any monetary damages, but we agreed to continue not to sell directly or indirectly in the U.S. or knowingly assist others to sell in the U.S. certain products that we did not sell in the U.S. prior to the settlement. Also, we have received letters from time to time regarding possible infringement of intellectual property by certain of our products, including a letter in August 2009 from a large contract manufacturer. In October 2009, we offered a one-time payment to this contract manufacturer in exchange for a release of any claims of infringement relating to such products. This matter has not yet been settled. Because of the complexity of the technology involved and the uncertainty of litigation generally, any intellectual property arbitration or litigation involves significant risks.

Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop selling products or using technology that contain the allegedly infringing intellectual property;

 

   

incur significant legal expenses;

 

   

pay monetary damages to the party claiming infringement;

 

   

attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; and

 

   

attempt to redesign those products that contain the allegedly infringing intellectual property.

In addition, we have agreed to indemnify our end customers and independent distributors in some circumstances against liability arising from claims that our products infringe or otherwise violate third party intellectual property rights. Any such claims or actions against our end customers or distributors could require us to incur significant expenses in responding to these claims or actions and to pay substantial damages, either of which could adversely affect our business and results of operations.

We may be unable to effectively protect our intellectual property, which would 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 currently rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. In particular, the intellectual property laws of China are relatively new and less protective of intellectual property rights than the laws of the United States. Historically, PRC courts often have not enforced the intellectual property laws of China to the same degree United States courts might enforce the intellectual property laws of the United States. In addition, some of our personnel may terminate their employment with us, join our competitors and breach their confidentiality agreements with us. We cannot be certain that we will obtain sufficient patent protection for our technology or that the patents that we do obtain will not be invalidated, circumvented, challenged or declared invalid or unenforceable. If we are unable to successfully protect our intellectual property, our ability to compete will be adversely affected.

We manufacture our products based on our estimates of customer demand, and if our estimates are incorrect our financial results could be negatively impacted.

Our sales are typically made pursuant to individual purchase orders, and we do not have long-term contracts with our distributors and other customers. In addition, our customers may cancel purchase orders or defer the shipments of our products. Due to the lead time to build a product, we manufacture our products according to our estimates of

 

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customer demand in advance of receiving specific purchase orders. This process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may manufacture products that we may not be able to sell. As a result, we would have excess inventory, which would harm our results of operations. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities, lose market share and damage our customer relationships.

If we cannot compete successfully in our industry, our results of operations and financial condition will be adversely affected.

Our markets are highly competitive and we face significant competition. We compete with global analog semiconductor providers, such as Advanced Analog Technology, Inc.; Diodes, Inc.; Fairchild Semiconductor International, Inc.; Global Mixed-Mode Technology Inc.; Micrel, Inc.; Monolithic Power Systems, Inc.; National Semiconductor Corporation; O2Micro International Limited; ON Semiconductor Corporation; Rohm Co., Ltd.; Power Integrations, Inc.; Richtek Technology Corporation; STMicroelectronics N.V. and Texas Instruments Incorporated. Some of these companies have substantially greater financial, technical, marketing and management resources than we have. As a result, these companies may be able to compete more successfully over a longer period of time than we can. Price is a crucial area of competition and intense competition can at times lead to significant pricing pressure that may cause unexpected declines in our average selling prices. In addition, our ability to compete successfully depends to some extent upon factors outside of our control, including import and export controls, exchange controls, exchange rate fluctuations, interest rate fluctuations and political developments. If we cannot compete successfully, our results of operations and financial condition will be adversely affected.

We may be adversely affected by the cyclicality of the semiconductor industry.

Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence and price erosion, evolving standards, uncertain product life cycles and wide fluctuations in product supply and demand. The industry has, from time to time, experienced significant and sometimes prolonged, downturns. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns in the semiconductor industry may reduce our revenue and result in us having excess inventory.

If we are unable to construct wafer manufacturing facilities that we are contractually committed to build or put the facilities in operation within a certain period of time, we may lose certain assets and suffer other adverse consequences, which would harm our business, results of operations and financial condition.

In August 2010, two of our wholly-owned subsidiaries, BCD Shanghai and BCD (Shanghai) ME, entered into an investment agreement with ZiZhu Development to construct wafer manufacturing facilities in the Shanghai ZiZhu Science-based Industrial Park, or ZiZhu Science Park. In accordance with the agreement, BCD (Shanghai) ME is required to start construction before the end of 2010, and finish all construction and formally put the facilities into operation by the end of 2012. Furthermore, all parties agreed that the investment scale of BCD (Shanghai) ME will be determined based on its registered capital and occupied property. We have entered into an agreement for the construction of our second fab and began construction of our second fab in November 2010.

If we fail to finish the construction of the wafer manufacturing facilities or put the facilities in operation within the timeframe mentioned above, we may be subject to a number of significant adverse consequences including, but not limited to, loss of eligibility for all favorable tax rebates and other incentives enjoyed by us under our investment agreement with ZiZhu Development and return of favorable tax rebates and other incentives. Furthermore, ZiZhu Development may repossess any land that is not developed by the end of 2012. If these consequences were to occur, our business, results of operations and financial condition would be harmed.

 

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If we fail to consistently anticipate trends in technology development, we may be unable to maintain or increase our revenue and operating margins.

If we are unable to anticipate the trends in technology development in our industry and rapidly develop and implement new and innovative technology, we may not be able to produce sufficiently advanced products at competitive prices and in a timely manner. In addition to innovation at the IC level, our business is also characterized by a requirement to innovate with respect to process technology to deliver optimal product performance at a low cost. If we are unable to keep pace with advances in process technology, our products may not perform at levels comparable to competitive offerings. As the life cycle for a technology matures, the average selling price falls. Accordingly, unless we continually produce sufficiently advanced products at competitive prices, our customers may choose to purchase products from our competitors and the average selling prices of our products may fall, either of which would adversely affect our business and operating margins.

We may be unable to make the research and development investments necessary to expand our business and meet our strategic objectives.

We must continue to make investments in research and development in order to develop and bring to market new and enhanced technologies and products and, in particular, to create more sophisticated and differentiated products which carry higher gross margins. We cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is necessary to remain competitive and deliver products to satisfy demand.

If we are unable to effectively manage our resources in anticipation of the expected seasonality of our revenue, our quarterly results of operations may suffer.

Because we provide power management ICs to the consumer electronics market, our business is subject to seasonality. We typically experience decreased revenue, fab utilization and gross margins in the first quarter and, to a lesser extent, in the fourth quarter of each year. If we or our customers are left with excess inventory due to seasonality, our business, financial condition and results of operations may suffer.

Our sales cycles can be long, which could result in uncertainty and delays in generating revenue.

Our sales cycles vary substantially and can range from three months to two years. In addition, even after we make an initial product shipment, it may take our end customer several more months to reach full production of its product. As a result of these long sales cycles, we may be required to invest substantial time and incur significant expenses in advance of the receipt of any product order and related revenue. As a result, orders ultimately received may not meet our expectations with respect to timing, product, volume, price or other terms, which could adversely affect our results of operations and cause our actual results to vary from our forecasts.

Defects and poor performance in our products could lead to an increase in our costs, a loss of customers or a delay in market acceptance of our products.

Our analog products are complex and may contain undetected errors or failures, especially when first introduced or as 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 cause significant customer relations and business reputation problems. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be adversely affected. Furthermore, errors or defects may arise from raw materials supplied by third parties that are beyond our detection or control, which could lead to additional customer returns or product warranty claims.

Defects could also lead to liability for defective products as a result of lawsuits against us or against our customers. A successful product liability claim could require us to make significant damage payments. OEMs and ODMs generally expect suppliers to provide warranties for their products and look to them for contributions when faced with product

 

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liability claims or recalls. We generally provide such warranties to our OEMs and ODMs for product defects. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have a material adverse effect on our business, results of operations and financial condition.

If we lose one or more of our key personnel or if we are unable to recruit and retain skilled personnel, our operations could be disrupted and the growth of our business could be delayed or restricted.

Our success depends on the continued service of the members of our key executive officers and our design engineering staff. We do not carry key person insurance on any of our personnel. If we lose the services of any of our key executive officers, it could be difficult to find, relocate and integrate adequate replacement personnel into our operations. Furthermore, if we lose the services of key members of our engineering staff, it could be difficult to locate, hire and integrate design and process engineers with comparable analog design and process technology experience and educational background. Any such loss of personnel could adversely affect our operations and the growth of our business.

We will need to hire an increased number of experienced executives, engineers and other skilled employees in the future to implement our growth plans. There is intense competition for the services of these personnel in the semiconductor industry. In addition, we expect demand for skilled and experienced personnel in China to increase in the future as new analog design and wafer fabrication facilities and other similar high technology businesses are established there. Furthermore, analog engineers are in great demand and short supply worldwide. If we are unable to retain our existing personnel, particularly our design engineers, or attract, assimilate and retain new experienced personnel in the future, our operations could become disrupted and the growth of our business could be delayed or restricted.

Our limited operating history makes it difficult to evaluate our business and prospects.

We were founded in September 2000 and commenced commercial production of analog semiconductors in September 2002. Because of our limited operating history, there may not be an adequate basis upon which to evaluate our business and to form a judgment as to our future results of operations and prospects. Due to our limited operating history, we have only limited insight into trends that may emerge that may adversely affect our business and results of operations.

Our rapid growth has presented significant challenges to our management and administrative systems and resources, and we may experience difficulties managing our operations, particularly as we take on additional responsibilities as a public company in the United States, which may adversely affect our business and results of operations.

Our revenue grew from $69.7 million in 2006 to $100.8 million in 2009. On December 31, 2006, we had 826 employees and on December 31, 2009 we had 1,008 employees. During this time, we enhanced and upgraded our fab, assembled our design and management teams, developed our distributor relationships and developed outsourcing relationships with foundries. This expansion has presented, and continues to present, significant challenges for our management and administrative systems and resources. If we fail to develop and maintain management and administrative systems and resources sufficient to keep pace with our planned growth or to handle the additional responsibilities associated with our becoming a public company in the United States, we may experience difficulties managing our growth and our business and results of operations could be adversely affected.

Acquisitions that we may pursue and consummate and strategic alliances that we may enter into may harm our results of operations, cause us to incur debt or assume contingent liabilities or dilute our shareholders.

We may in the future acquire, invest in, or enter into strategic alliances relating to other businesses, products or technologies. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and alignment of product offerings and manufacturing

 

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operations and coordination of selling and marketing and research and development efforts. The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and aligned and the necessity of integrating personnel with disparate business backgrounds and combining different corporate cultures. The integration and alignment of operations following an acquisition or alliance requires the dedication of management resources that may distract attention from day-to-day operations, and may disrupt key research and development, marketing or sales efforts. In addition, we may issue equity securities to pay for future acquisitions or alliances, which could be dilutive to existing shareholders. We may also incur debt or assume contingent liabilities in connection with acquisitions and alliances, which could harm our results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of operations, technologies, products and personnel of the acquired company, diversion of management’s attention from other business concerns, risks of entering markets in which we have no direct or limited prior experience, the potential loss of key employees of the acquired company, unanticipated costs and, in the case of the acquisition of financially troubled businesses, challenges as to the validity of such acquisitions from third party creditors of such businesses.

The dissolution of BCD Shanghai, one of our wholly owned subsidiaries, may result in the occurrence of material liabilities and other adverse consequences that would affect our business, results of operations and financial condition.

Because of changes in our strategy and business needs, we filed documents with the relevant PRC authorities to dissolve BCD Shanghai starting in August 2010, but the dissolution process has not been completed prior to this offering. During the process of dissolution, BCD Shanghai must pay off all of its liabilities, including but not limited to its debts, due taxes, outstanding compensation owed to employees and damages. If BCD Shanghai fails to meet the entirety of its liabilities prior to dissolution, we, BCD Shanghai’s sole shareholder, will be required to meet all of its liabilities outstanding prior to dissolution on behalf of BCD Shanghai. In September 2010, BCD Shanghai obtained the approval for its dissolution from the Shanghai Municipal Commission of Commerce, which was delegated the power to approve and manage foreign-invested enterprises, including the establishment and dissolution of semiconductor companies, by the Ministry of Commerce of the PRC under the Notice on Delegating the Examination and Approval Power for Foreign Investment promulgated on June 10, 2010. To complete the dissolution process, we must now wait to receive the formal revocation of BCD Shanghai’s business license, which we expect to receive in the second quarter of 2011. We do not believe that we will be subject to any statutory penalties, including any penalties relating to our failure to contribute the full amount of the registered capital of BCD Shanghai, or be required to contribute the unpaid portion of the registered capital of BCD Shanghai, because the Shanghai Municipal Commission of Commerce approved the dissolution of BCD Shanghai. Furthermore, we do not believe that there are any material liabilities currently owed by BCD Shanghai because no creditors made any claims against BCD Shanghai prior to the deadline to make such claims on December 15, 2010. Although we do not believe there are any material liabilities currently owed by BCD Shanghai, we may face unanticipated liabilities during the dissolution process. We are currently not aware of any unanticipated liabilities and, therefore, cannot quantify such liabilities. The risk that we may face unanticipated liabilities currently exists and will exist until the dissolution of BCD Shanghai is completed when BCD Shanghai’s business license is officially cancelled. If any unanticipated liabilities were to be identified, our business, results of operations and financial condition could be affected.

Global or regional economic, political and social conditions could adversely affect our business and results of operations.

External factors such as potential terrorist attacks, acts of war, financial crises, trade friction or geopolitical and social turmoil in those parts of the world that serve as markets for our products, such as China, Taiwan or South Korea, or elsewhere could significantly adversely affect our business and results of operations. These uncertainties could make it difficult for our customers and us to accurately plan future business activities. More generally, these geopolitical, social and economic conditions could result in increased volatility in worldwide financial markets and economies that could adversely impact our sales. We are not insured for losses or interruptions caused by terrorist acts or acts of war. The occurrence of any of these events or circumstances could adversely affect our business and results of operations.

 

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Our operations and business could be significantly harmed by natural disasters.

Our fab, and the third party foundry fab facilities that we currently make use of, are located in China and Taiwan, which is located near seismically active regions where earthquakes and other natural disasters, such as floods and typhoons may occur. We cannot be certain that the precautions we have taken will be adequate to protect our facilities in the event of a major earthquake, flood, typhoon or other natural disaster, and any resulting damage could seriously disrupt our production and result in reduced revenue. In addition, many of our customers and suppliers are also located in China and other regions susceptible to natural disasters. A natural disaster could cause production delays due to supply interruptions, or a decline in the demand for our products by our customers. Although we maintain insurance for some of the damage that may be caused by natural disasters, our insurance coverage may not be sufficient to cover all of our potential losses and would not cover us for lost business. As a result, a natural disaster in China could severely disrupt the operation of our business and have a material adverse effect on our financial condition and results of operations.

As a result of becoming a public company, we will be obligated to develop and maintain effective internal controls over financial reporting. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

We will be subject to reporting obligations under the United States securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal control over financial reporting. Neither our management nor our independent registered public accounting firm has completed a comprehensive review of our internal control over financial reporting as required under the Sarbanes-Oxley Act. These requirements will first apply to our annual report on Form 20-F for the year ending December 31, 2011.

Effective internal control over financial reporting, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business, damage our reputation and negatively impact the trading price of our ADSs.

Once we are required to report on our internal control over financial reporting, our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to the operating effectiveness of our controls, or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

Prior to this offering, we have been a privately-held company with limited accounting personnel and other resources with which to address our internal controls and procedures. We anticipate that we will incur significant expenses and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act.

We face risks related to health epidemics and outbreaks of contagious diseases, including avian flu, SARS and H1N1 flu.

There have been reports of outbreaks of avian flu and H1N1 flu, also known as swine flu, in certain regions of Asia, Europe, the Middle East and Africa in the past several years. An outbreak of avian flu or swine flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, a recurrence of SARS, similar to the occurrence in 2003, which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since substantially all of our operations and substantially all of our customers and suppliers are currently based in Asia, an outbreak of avian flu, SARS, swine flu or other contagious diseases in Asia or elsewhere, or the perception

 

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that such outbreak could occur, and the measures taken by the governments of countries affected, including China, could adversely affect our business, financial condition or results of operations.

Risks Related to Manufacturing

Our manufacturing processes are complex and potentially vulnerable to impurities and other disruptions, which could significantly increase our costs and delay product shipments to our customers.

Our manufacturing processes are complex and demand a high degree of precision. We may experience difficulties in the fabrication process, such as dust and other impurities or defects with respect to the equipment or facilities used, our yields may be lower, our product quality could suffer, production could be interrupted or we could lose products in process. If any of these events was to occur, our manufacturing capacity utilization rates may decrease, our costs may significantly increase and we may face delays in shipping our products.

We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, manufacturing capacity constraints, fab construction delays, transferring production to our other facilities, upgrading or expanding existing manufacturing facilities or changing our manufacturing technologies, any of which could result in a loss of future revenue or increased costs.

If our fab utilization declines, our business and results of operations may be adversely affected.

Our capacity utilization affects our results of operations because a certain percentage of our costs are fixed. Accordingly, if our fab is not fully utilized, we have less revenue for each fixed dollar of costs, which impacts our gross margins and harms our results of operations.

We rely on subcontractors for packaging and testing, which may adversely affect our results of operations.

The packaging and testing of semiconductors are complex processes requiring, among other things, a high degree of technical skill and advanced equipment. We primarily outsource our semiconductor packaging and testing to subcontractors, which are located in China. We depend on these subcontractors to package and test our products with acceptable quality and yield levels. If our subcontractors experience problems in packaging and testing our products or experience prolonged quality or yield problems, our results of operations would be adversely affected.

If we lose the services of a particular subcontractor that packages or tests a significant portion of our products or if that subcontractor raises prices to an unacceptable level, we will be required to qualify other subcontractors, which would be time consuming and cause us to incur additional costs. In addition, even if we qualify alternate subcontractors, those subcontractors may not be able to meet our delivery, quality or yield requirements, which could adversely affect our results of operations.

If we are unable to obtain raw materials and spare parts in a timely manner and at a reasonable cost, our production schedules could be delayed and our costs could increase.

We depend on suppliers of raw materials, such as silicon wafers, gases, chemicals and spare parts, in order to maintain our fabrication processes. To maintain operations, we must obtain from our suppliers sufficient quantities of quality raw materials and spare parts at acceptable prices and in a timely manner. The most important raw material used in our production processes is silicon in the form of raw wafers. In 2009, we purchased all of our raw wafers from seven suppliers. A significant portion of our wafers are sourced directly or indirectly from outside of China. From time to time, we may need to reject raw materials and parts that do not meet our specifications, resulting in potential delays or declines in output. Furthermore, problems with our raw materials may give rise to compatibility or performance issues in our products, which could lead to an increase in customer returns or product warranty claims. If the supply of raw materials and necessary spare parts is substantially reduced or if there are significant increases in their prices, we may incur additional costs to acquire sufficient quantities of these materials and parts to maintain our production schedules and commitments to customers.

 

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We depend on independent foundries to manufacture some of our products and plan to increase our reliance on these independent foundries until we complete construction on our second fab. Any failure to obtain sufficient foundry capacity could significantly delay our ability to ship our products and damage our customer relationships.

We depend on independent foundries to manufacture some of our products. We plan to increase our reliance on independent foundries in 2011 as we expand our business. Because we outsource a portion of our manufacturing, we face several significant risks, including:

 

   

lack of internal manufacturing capacity for certain of our products;

 

   

limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs;

 

   

the unavailability of, or potential delays in obtaining access to, key process technologies;

 

   

a lack of a guaranteed level of production capacity with our foundries; and

 

   

the inability of the independent foundries to successfully implement proprietary elements of our technology in their fabs.

We have not entered into a long-term agreement with our independent foundries and we place our orders on a purchase order basis. As a result, if our independent foundries raise their prices or are not able to meet our required capacity for various reasons, including shortages or delays in shipment of semiconductor equipment or materials used by our independent foundries to manufacture our semiconductors, or if our business relationship with our independent foundries deteriorates, we may not be able to obtain the required capacity from our independent foundries. As a result, we may be required to seek alternative foundries, which may not be available on commercially reasonable terms, or at all, or which may expose us to risks associated with qualifying new foundries. Further, these foundries are not interchangeable as we use each foundry for different manufacturing processes. Using foundries with which we have no established relationships could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. Also, qualifying new foundries would be time consuming and cause us to incur additional costs.

Our independent foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that our independent foundries may provide preferential treatment in terms of capacity allocation to their other customers with long-term contracts or who are larger than us. Reallocation of capacity by our independent foundries to their other customers could impair our ability to secure the supply of semiconductors that we need, which could significantly delay our ability to ship our products, causing a loss of revenue and damage to our customer relationships. In addition, if we do not accurately forecast our capacity needs, the independent foundries may not have available capacity to meet our immediate needs or we may be required to pay higher costs to fulfill those needs, either of which could adversely affect our business, results of operations or financial condition.

We may be unable to obtain the manufacturing equipment necessary for our business in a timely manner and at a reasonable cost and, therefore, may be unable to achieve our expansion plans or meet our customers’ orders, which could negatively impact our financial condition and results of operations.

Our business depends upon our ability to obtain required equipment in a timely manner and at acceptable prices. In addition, we have made contractual commitments with ZiZhu Development to build an additional manufacturing facility, which requires us to obtain a significant amount of equipment within a specified period of time. During times of significant demand for the types of equipment we use, lead times for delivery can be as long as one year. Shortages of equipment could result in an increase in equipment prices and longer delivery times. If we are unable to obtain equipment in a timely manner and at a reasonable cost, we may be unable to achieve our expansion plans or meet our customers’ orders, which could negatively impact our business, financial condition and results of operations.

The maintenance of our existing fab is subject to risks that could result in delays or cost overruns, which could require us to expend additional capital and adversely affect our business and results of operations.

We regularly maintain and enhance our fab to expand our manufacturing capabilities in order to meet customer and market demands. For example, we have incurred approximately $56.8 million in cumulative capital expenditures

 

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related to our existing fab. Since 2007, we have incurred between $1.3 million and $5.1 million in annual maintenance costs related to this facility. There are, however, a number of events that could delay maintenance and enhancements of our existing fab. Such potential events include, but are not limited to:

 

   

shortages and late delivery of facility equipment;

 

   

the unavailability of equipment, whether new or previously owned, at acceptable terms and prices;

 

   

delays in installation, commissioning and qualification of our manufacturing equipment;

 

   

labor disputes;

 

   

design changes with respect to equipment layout; and

 

   

delays in securing any necessary governmental approvals.

As a result, our projections relating to capacity, manufacturing technology capabilities or technology developments may significantly differ from actual capacity, manufacturing technology capabilities or technology developments. Delays in maintaining or enhancing our fab could result in the loss or delayed receipt of earnings, an increase in financing costs or the failure to meet profit and earnings projections, any of which would adversely affect our business and results of operations.

Our production may be interrupted, limited or delayed if we cannot maintain sufficient sources of fresh water and electricity, which could adversely affect our business and results of operations.

The semiconductor fabrication process requires extensive amounts of fresh water and a stable source of electricity. As our production capabilities increase and our business grows, our requirements will grow substantially. While we have not, to date, experienced any instances of lack of sufficient supplies of water or material disruptions in the electricity supply to our fab, we may not have access to sufficient supplies of water and electricity to accommodate our planned growth. Droughts, pipeline interruptions, power interruptions, electricity shortages or government intervention, particularly in the form of rationing, are factors that could restrict our access to these utilities in the areas in which our fab is located. If there is an insufficient supply of fresh water or electricity to satisfy our requirements, we may need to limit or delay our production, which could adversely affect our business and results of operations. In addition, a power outage, even of very limited duration, could result in a loss of wafers in production and a deterioration in yield.

Some of the equipment in our fab may have been purchased in violation of administrative orders related to export restrictions entered against one of our co-founders in 1988 and 1989 by the U.S. Department of Commerce. The use of this equipment without a waiver from the Department of Commerce could expose us to monetary fines and/or a denial of export privileges, which could damage our reputation and harm our business, financial condition and results of operations.

More than 20 years ago, the U.S. Department of Commerce’s Bureau of Export Administration (now known as the Bureau of Industry and Security, or BIS) issued two orders against a former executive and co-founder of BCD denying his export privileges under the Export Administration Regulations, or EAR. This co-founder was subject to the denial order through on or about November 29, 2004, including while he was an executive officer at BCD. A denial of export privileges prohibits the denied person from participating, directly or indirectly, in any manner or capacity, in any transaction involving exports from the United States (transactions subject to the EAR), including equipment that requires licenses and consumer goods or personal items that would not require a license to export, and also prohibits third persons, including employers, from dealing with or engaging in any export transactions with a denied person. The statute of limitations for violations of the EAR, including violations of a denial order, is generally five years from the date of violation, though there is uncertainty in how the BIS will apply the statute of limitations in this case.

Between 2000 and November 2004, we purchased manufacturing equipment from the United States, and this co-founder may have been involved in the purchase of some of this equipment on our behalf. The equipment that was exported from the United States during this timeframe did not require a license for export. For such manufacturing equipment that is still located at and in use in our fab, the BIS could allege that we are violating the EAR by continuing to use or store this equipment even though we purchased the equipment more than five years ago and this equipment did not require a license for export. We have begun a voluntary process with the U.S. Department of

 

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Commerce, including seeking a waiver for our continued use of this manufacturing equipment. This process is ongoing, and we cannot predict with certainty the outcome. The penalties that could be imposed against us, if we are found to have violated the EAR, could include a denial of export privileges and/or a monetary fine of $250,000 or more per violation. We are not aware of precedent cases on point and, thus, we are not sure if the BIS would view this as one violation or multiple violations.

We are subject to the risk of damage due to fires or explosions because some of the materials we use in our manufacturing processes are highly flammable. Such damage could significantly reduce our manufacturing capacity, thereby adversely affecting our business and results of operations.

We use highly flammable materials such as silane and hydrogen in our manufacturing processes and are therefore subject to the risk of loss and damages arising from explosions and fires. While we have not experienced any explosions or fires to date, the risk of explosion and fire associated with these materials cannot be eliminated. Our insurance coverage may not be sufficient to cover all of our potential losses due to an explosion or fire and would not cover any lost business we would experience. In addition, if there is a fire or explosion, our employees may be injured. If our fab were to be damaged or cease operations as a result of an explosion or fire, it would significantly reduce our manufacturing capacity and also harm our reputation, which could adversely affect our business and results of operations.

Our operations may be delayed or interrupted and our business could be adversely affected as a result of our efforts to comply with environmental regulations.

We are subject to a variety of environmental regulations relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our production processes. Any failure, or any claim that we have failed, to comply with these regulations could cause delays in our production and capacity expansion and affect our public image, either of which could harm our business. In addition, any failure to comply with these regulations could subject us to substantial fines or other liabilities or require us to suspend or adversely modify our operations.

Compliance with environmental regulations could require us to acquire expensive pollution control equipment or to incur other substantial expenses, or otherwise harm our results of operations. We could also be required to incur costs associated with the investigation and remediation of contamination at currently operated or used sites, future sites in which we conduct operations, or at sites at which our hazardous waste was disposed. Any failure by us to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities. The imposition of these liabilities could significantly harm our business and results of operations.

Risks Related to Doing Business in China

Uncertainties with respect to China’s economic, political and social condition, as well as government policies, could adversely affect our business and results of operations.

A significant portion of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various economic and political policies and laws and regulations to encourage economic development and guide the allocation of resources. Any adverse changes to these policies of the PRC government or the laws and regulations of the PRC, or other factors detrimental to China’s economic development, could have a material adverse effect on the overall economic growth of China, which could adversely affect our business. For example, from time to time, the PRC government implements monetary, credit and other policies or otherwise makes efforts to slow the pace of growth of the PRC economy, which could result in decreased capital expenditures by our end customers in China and reduce their demand for our products.

 

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In particular, our growth strategy is based in part upon the assumption that demand in China for electronics products that use semiconductors will continue to grow. Therefore, any slowdown in the growth of consumer demand in China for products that use semiconductors, such as computers, mobile phones or other consumer electronics, could have a material adverse effect on our business. In addition, our business model assumes that an increasing number of global electronics manufacturers and systems companies will establish operations in China and require the use of products developed and manufactured in China. Any decline in the rate of migration to China of companies that require semiconductors as components for their products could adversely affect our business and results of operations.

Our business is subject to government regulation and benefits from certain government incentives, and changes in these regulations or incentives could adversely affect our business and results of operations.

The PRC government has broad discretion and authority to regulate the technology industry in China. China’s government has also implemented policies from time to time to regulate economic expansion in China. In addition, the PRC government continues to play a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. New regulations or the readjustment of previously implemented regulations could require us to change our business model, increase our costs or limit our ability to sell products and conduct activities in China, which could adversely affect our business and results of operations.

In addition, the PRC government and provincial and municipal governments and other similar authorities have provided and may from time to time in the future provide various incentives to domestic companies in the semiconductor industry, including our company, in order to encourage development of the industry. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures. Any of these incentives could be reduced or eliminated by governmental authorities at any time in the future. For example, BCD (Shanghai) ME is granted tax rebates and other incentives under its investment agreement with ZiZhu Development. Any such reduction or elimination of incentives currently provided to us could adversely affect our business and results of operations. See “Regulation—Regulations and Policies that Encourage the Development of Semiconductor Companies.”

The discontinuation of any of the preferential tax treatments currently available to us in the PRC or the imposition of any additional PRC taxes on us could adversely affect our financial condition and results of operations.

On March 16, 2007, the National People’s Congress of the PRC adopted a new enterprise income tax law, or the New Tax Law, which provides a uniform Enterprise Income Tax, or EIT, rate for PRC enterprises of 25% and provides a five-year transition period starting January 1, 2008 for those enterprises which were established before the promulgation date of the New Tax Law and which were entitled to a lower tax rate or tax holiday under the then effective tax laws or regulations. According to the New Tax Law and approval by local tax authorities, SIM-BCD was entitled to a full exemption from foreign-invested enterprise, or FIE, income tax for two years starting on January 1, 2008, and a 50% reduction in FIE income tax for the three years thereafter. According to the New Tax Law, a high and new technology enterprise, or HNTE, “specially supported” by the PRC government, would be eligible to a lower income tax rate of 15%. See “Regulation—Enterprise Income Tax Regulation.” SIM-BCD was recognized as an HNTE by Shanghai Science and Technology Commission, Shanghai Finance Bureau, Shanghai State and Local Tax Bureau on November 25, 2008 and is entitled to enjoy a preferential tax rate of 15%. HNTE status is effective for three years after the date of issuance of the HNTE Certificate, and SIM-BCD must submit an application for re-examination three months prior to the expiration of such period otherwise its qualification as an HNTE will automatically expire at the end of this period. However, we cannot assure you that SIM-BCD will continue to qualify as an HNTE or that our other PRC subsidiaries will be qualified as such and be “specially supported” by the PRC government in the future. The discontinuation of any preferential tax treatments currently available to our wholly-owned subsidiaries will cause our effective tax rate to increase, which could adversely affect our financial condition and results of operations. Preferential treatment as an HNTE business will only affect the rate of enterprise income tax to which our subsidiaries are subject. It will not affect the determination of whether we are treated as a PRC resident enterprise. See “Risk Factors—We may be treated as a resident enterprise for PRC tax purposes under the Enterprise Income Tax Law, which became effective on January 1, 2008, which may subject us to PRC income tax on our

 

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worldwide income and PRC income tax withholding for any dividends we pay to our non-PRC shareholders and ADS holders.”

Uncertainties with respect to the PRC legal system could adversely affect us.

Our operations in China are governed by PRC laws and regulations. Our subsidiaries in China are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the PRC government’s experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under PRC law are severely limited, and without a means of recourse by virtue of the PRC legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

Our subsidiaries in China are subject to restrictions on dividend payments, making other payments to us or any other affiliated company and borrowing or allocating tax losses among our subsidiaries.

Current PRC regulations permit our subsidiaries in China to pay dividends only out of their accumulated distributable profits, if any, determined in accordance with PRC accounting standards and regulations and their articles of association subject to certain statutory requirements. In addition, our subsidiaries in China are required to set aside at least 10% of their after-tax profit each year, if any, to fund certain reserve funds until such reserves have reached at least 50% of their respective registered capital. These reserves are not distributable as cash loans, advances or dividends. In addition, current PRC regulations prohibit inter-company borrowings or allocation of tax losses among subsidiaries in China. Further, if one or more of our subsidiaries in China incur debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us, which would limit our access to capital from our operating subsidiaries.

Limitations on our ability to transfer funds to our PRC subsidiaries could adversely affect our ability to expand our operations, make investments that could benefit our businesses and otherwise fund and conduct our business.

The transfer of funds from us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by the PRC governmental authorities, including relevant branches of the State Administration of Foreign Exchange, or SAFE, or the relevant examination and approval authority. Our subsidiaries may also experience difficulties in converting our capital contributions made in foreign currencies into RMB due to changes in the PRC’s foreign exchange control policies. Therefore, it may be difficult to change capital expenditure plans once the relevant funds have been remitted from us to our PRC subsidiaries. These limitations and the difficulties our PRC subsidiaries may experience on the free flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market situations in a timely manner. PRC regulatory authorities may impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign

 

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exchange transactions. Existing restrictions and any additional restrictions imposed in the future could have an adverse effect on our ability to utilize the cash we generate from our operations, which could slow our growth.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC shareholders or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

SAFE issued a public notice in October 2005 requiring PRC residents to register with their local branch of SAFE before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” We may be deemed to be an offshore special purpose company. PRC residents who are beneficial owners of offshore special purpose companies that have completed round trip investments and did not make foreign exchange registrations for overseas investments before November 1, 2005 were retroactively required to register with the local branch of SAFE before March 31, 2006. PRC residents who are beneficial owners of offshore special purpose companies are also required to update their registration with the local branch of SAFE regarding any material changes with respect to their offshore company within 30 days of the occurrence of such change, including round-trip investments, changes in share capital, transfers or swaps of shares, mergers, divisions, long-term equity or debt investments or creation of any security interest. See “Regulation—Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents.”

We have notified our shareholders who are PRC residents (as determined under the SAFE regulations) to register with the local SAFE branch as required under the SAFE regulations. However, we cannot provide any assurances that all of our shareholders who are PRC residents have complied with or will comply with our request to make or obtain any applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the required PRC registration procedures may subject our PRC subsidiaries to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange denominated loans from, us.

As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject us or our PRC employees who are granted or exercise stock options to fines and other legal or administrative sanctions.

In December 2006, the People’s Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth the respective requirements for foreign exchange transactions by PRC individuals under current account transactions and capital account transactions. In January 2007, SAFE promulgated the Implementing Rules of Measures for the Administration of Individual Foreign Exchange, or the Implementation Rules. On March 2007, SAFE issued the Processing Guidance on Foreign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company. Under these rules, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options will be subject to the Implementation Rules when our company becomes a non-PRC publicly-listed company. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions and may become subject to more stringent review and approval processes with respect to our foreign exchange activities, such as receiving

 

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dividend payments from our PRC subsidiaries or obtaining foreign currency loans, all of which may adversely affect our business and financial condition. See “Regulation—Regulations on Employee Share Options.”

Several of our PRC employees have exercised their stock options prior to 2005, which is prior to our becoming an overseas publicly-listed company. Since there is not yet a clear regulation on how and whether PRC employees can exercise their stock options granted by overseas private companies, it is unclear whether such exercises are permissible by PRC laws and it is uncertain how SAFE or other government authorities will interpret or administrate such regulations. We cannot predict how such exercises will affect our business or operations, but we may be subject to more stringent review and approval processes with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may affect our results of operations and financial condition.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering; any requirement to obtain prior CSRC approval could delay this offering and a failure to obtain this approval could have a material adverse effect on our business, results of operations, reputation and trading price of our ADSs, and may also create uncertainties for this offering; the regulation also establishes more complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.

On August 8, 2006, six PRC regulatory agencies jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009, or the M&A Rule. This M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and directly or indirectly controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice, or the CSRC notice, on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.

We believe that the M&A Rule does not require us to submit an application to the CSRC for the approval of the listing and trading of our ADSs on the Nasdaq Global Market. However, it remains uncertain how the M&A Rule will be interpreted or implemented, and therefore, the relevant PRC government agency, including the CSRC, or PRC courts may reach a different conclusion than we have reached. If the CSRC or other PRC regulatory agencies subsequently determine that we need to obtain the CSRC’s approval for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus.

The M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Limits placed on exports into China by other countries could substantially harm our business and results of operations.

The growth of our business will depend on the ability of our suppliers to export, and our ability to import, equipment, materials, spare parts, process know-how and other technologies and hardware into China. Any restrictions placed on the import and export of these products and technologies could adversely impact our growth and substantially harm our

 

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business. In particular, the United States requires our suppliers and us to obtain licenses to export certain products, equipment, materials, spare parts and technologies from the United States. If we or our suppliers are unable to obtain export licenses in a timely manner, our business and results of operations could be adversely affected.

Licenses may be required for certain shipments to China as a result of the technical specifications of the item exported, the end use of the item exported, or the end user of the item exported. These licensing requirements are the result of both multilateral restrictions, such as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies, which currently has 40 participating countries, as well as unilateral sanctions imposed by the United States. To the extent that technology, equipment, materials or spare parts used in our manufacturing processes are or become subject to the restrictions of the arrangement, our ability to procure these products and technology could be impaired, which could adversely affect our business and results of operations. There could also be a change in the export license regulatory regime in the countries from which we purchase our equipment, materials and spare parts that could delay our ability to obtain export licenses for the equipment, materials, spare parts and technology we require to conduct our business.

If the PRC government determines that we failed to obtain requisite PRC governmental approvals for, or register with the PRC government, our current and past import and export of technologies, we could be subject to sanctions.

China imposes controls on technology import and export. The term “technology import and export” is broadly defined to include the transfer or license of patents, software and know-how, and the provision of services in relation to technology. Depending on the nature of the relevant technology, the import and export of technology require either approval by, or registration with, the relevant PRC governmental authorities. If any of our PRC subsidiaries are found to be, or has been, in violation of PRC laws or regulations, the relevant regulatory authorities have broad discretion in dealing with such violation, including, but not limited to, issuing a warning, levying fines, restricting us from remitting royalties or any other fees, if any, relating to these technologies outside of China, confiscating our earnings generated from the import or export of such technology or even restricting our future export and import of any technology. Even if our PRC subsidiaries successfully obtain such approval or complete such registration, if the PRC government determines that our past import and export of technology were inconsistent with, or insufficient for, the proper operation of our business, we could be subject to similar sanctions. Any of these or similar sanctions could cause significant disruption to our business operations or render us unable to conduct a substantial portion of our business operations and may adversely affect our business and results of operations.

We are obligated to withhold and pay PRC individual income tax on behalf of our employees who have exercised stock options. We have not withheld or paid such individual income tax in accordance with applicable PRC regulations and, as a result, we may be required to pay the related tax deficiencies and may be subject to penalties under PRC laws.

The State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, our employees working in China (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have the obligation to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. However, the relevant tax authority has orally advised us that due to the difficulty in determining the fair market value of our shares as a private company, we need not withhold and pay the individual income tax for the exercises until after the closing of this offering. Thus we have not withheld and paid the individual income tax for the option exercises. However, we cannot assure you that the tax authority will not act otherwise and request us to withhold and pay the individual income tax immediately and impose sanctions on us.

Relations between Taiwan and China could negatively affect our business, financial condition and results of operations and therefore the market value and liquidity of your investment.

China does not recognize the sovereignty of Taiwan and the relations between China and Taiwan have often been strained. A number of our key customers and our primary foundry service provider are located in Taiwan. Therefore, factors affecting military, political or economic conditions in Taiwan could have an adverse effect on our business, financial condition and results of operations.

 

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We may be treated as a resident enterprise for PRC tax purposes under the Enterprise Income Tax Law, which became effective on January 1, 2008, which may subject us to PRC income tax on our worldwide income and PRC income tax withholding for any dividends we pay to our non-PRC shareholders and ADS holders.

Under the Enterprise Income Tax Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC enterprises to their foreign shareholders will be subject to a withholding tax at a rate of 10%, if the foreign investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. However, under the Enterprise Income Tax Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC are treated as resident enterprises for PRC tax purposes. Under the Implementation Rules of Enterprise Income Tax Law, “de facto management body” is defined as a body that has material and overall management and control over the business, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation promulgated a circular to clarify the definition of “de facto management body” for enterprises incorporated overseas with controlling shareholders being PRC enterprises. However, since the relevant rules are relatively new and there are few precedents, it remains unclear how the tax authorities will treat for PRC tax purposes a company like us who is an overseas enterprise ultimately controlled by overseas enterprises or individuals. We are currently not treated as a PRC resident enterprise and as a result, we have not withheld PRC income taxes from our foreign investors. Nevertheless, a significant portion of our operations are currently based in the PRC and are likely to remain based in the PRC after this offering; therefore, we cannot assure you that we will not be considered a PRC resident enterprise in the future. If we are treated as a resident enterprise, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, but the dividends distributed from our PRC subsidiaries to us are exempt income. If we were considered a PRC resident enterprise, it is also possible that the Enterprise Income Tax Law and its implementation rules would cause dividends paid by us to our non-PRC shareholders to be subject to a withholding tax, and would cause foreign shareholders and ADS holders to become subject to a 10% income tax on any gains they realize from the transfer of their shares or ADSs, if such income is regarded as income from sources within the PRC.

The enforcement of the Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law established new restrictions and increased costs for employers to dismiss employees, including specific provisions related to fixed-term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work, and collective bargaining. According to the Labor Contract Law, an employer is obliged to sign a labor contract with an unlimited term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts subject to certain conditions or after the employee has worked for the employer for ten consecutive years. The employer also has to pay compensation to an employee if the employer terminates an unlimited-term labor contract. Such compensation is also required when the employer refuses to renew a labor contract that has expired, unless it is the employee who refuses to extend the expired contract. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008 and its Implementation Rules on Paid Annual Leave for Employees, which became effective on September 18, 2008, employees who have served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their length of service. Employers who fail to allow for such vacation time must compensate their employees three times their regular salaries for each vacation day disallowed, unless such employees waive their right to such vacation days in writing. See “Regulations—Regulations on Labor Protection.”

 

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We have limited business insurance coverage in China, which could harm our business.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. Our PRC subsidiaries currently have insurance policies covering losses and damages to their properties, as well as limited losses in gross profit due to such property losses or damages. Our PRC subsidiaries also have a limited amount of insurance on liabilities to the public arising from their operations. The amount we recover from these insurance policies, however, may be limited, and any business disruption, litigation or natural disaster may result in substantial costs and diversion of resources against which we will not be protected.

Risks Related to Ownership of Our ADSs, Our Trading Market and this Offering

There has been no prior market for our ADSs and the offering may not result in an active or liquid market for our ADSs, which could adversely affect the market price of our ADSs.

Prior to this offering, there has not been a public market for our ADSs. We have applied to list our ADSs on the Nasdaq Global Market. However, an active public market may not develop or be sustained after the offering. If an active market for our ADSs does not develop after the offering, the market price and liquidity of our ADSs may be adversely affected.

Substantial future sales or the perception of sales of our ADSs in the public market could cause the price of our ADSs to decline.

Prior to the offering, there has not been a public market for our ADSs. Future sales by us or our existing shareholders of substantial amounts of our ADSs in the public markets after the offering could adversely affect prevailing market prices for our ADSs. Only a limited number of our ADSs currently outstanding will be available for sale immediately after the offering due to contractual and legal restrictions on resale. Nevertheless, after these restrictions lapse or if these restrictions are waived, future sales or the possibility of future sales of substantial amounts of our ADSs, including ADSs issued upon exercise of outstanding options and warrants, in the public markets in the United States, could negatively impact the market price of our ADSs and our ability to raise equity capital in the future.

Upon completion of this offering, we will have 106,420,562 ordinary shares outstanding, including ordinary shares represented by ADSs, assuming the underwriters do not exercise the overallotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding after this offering will be eligible for conversion into ADSs and available for sale, upon the expiration of the 180-day lock-up period, or longer under certain circumstances, beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. See “Shares Eligible for Future Sale” and “Underwriting” for a detailed description of the lock-up restrictions. Any or all of these shares may be released without notice prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline. In addition, certain holders of our ordinary shares upon the expiration of the lock-up period will have rights, under certain conditions, to cause us to register under the Securities Act the sale of certain of our ordinary shares following conversion into ADSs. Registration of these shares under the Securities Act or sales of shares under an exemption to the Securities Act rules will result in these shares becoming freely tradable without restrictions under the Securities Act immediately upon the effectiveness of the registration. Sale of these shares in the public market could cause the price of our ADSs to decline.

The initial public offering price may not be indicative of prices that will prevail in the trading market and such market prices may be volatile.

The initial public offering price for our ADSs has been determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Investors may not be able to resell their ADSs at or above the initial public offering price. The financial markets in the United States and other countries have experienced significant price and volume fluctuations, and market prices of technology companies have

 

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been and continue to be extremely volatile. Volatility in the price of our ADSs may be caused by factors outside our control and may be unrelated or disproportionate to our results of operations.

The market price for our ADSs may be volatile.

The market price for our ADSs may be volatile and subject to wide fluctuations in response to factors including the following:

 

   

actual or anticipated fluctuations in our quarterly results of operations;

 

   

changes in financial estimates by securities research analysts;

 

   

announcements regarding intellectual property litigation involving us or our competitors;

 

   

conditions in the semiconductor industry;

 

   

announcements of technological or competitive developments;

 

   

regulatory developments in our target markets affecting us, our customers or our competitors;

 

   

announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

addition or departure of key personnel;

 

   

fluctuation of exchange rates between the RMB and the U.S. dollar;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares; and

 

   

general economic or political conditions as well as regulatory developments in China.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.

The initial public offering price per ADSs will be substantially higher than the net tangible book value per ADS prior to the offering. Consequently, when you purchase ADSs in the offering, you will incur an immediate dilution of $5.26 per ADS (assuming no exercise by the underwriters of options to acquire additional ADSs), representing the difference between our net tangible book value per ADS as of September 30, 2010, after giving effect to this offering and assuming that the initial public offering price is $11.50 per ADS (which is the mid-point of the estimated public offering price range).

We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders.

We believe that our current cash, anticipated cash flow from operations and the net proceeds from this offering will be sufficient to meet our anticipated cash needs, including planned capital expenditures for the building of our second fab and otherwise, for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.

Our corporate affairs are governed by our memorandum and articles of association, by the Companies Law (2010 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take

 

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action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. The Cayman Island courts are also unlikely to impose liability against us, in original actions brought in the Cayman Islands, based on certain civil liabilities provisions of U.S. securities laws.

Provisions of our articles of association and Cayman Islands corporate law may impede a takeover, which could adversely affect the value of the ADSs.

Our Memorandum and Articles of Association that will become effective upon the completion of this offering permit our board of directors to issue preference shares from time to time, with such rights and preferences as they consider appropriate. Our board of directors could authorize the issuance of preference shares with terms and conditions and under circumstances that could have the effect of discouraging a takeover or other transaction. However, any such issuance of shares would have to be for a proper purpose.

Unlike many jurisdictions in the United States, Cayman Islands law does not provide for mergers as that expression is understood under corporate law in the United States. While Cayman Islands law does have statutory provisions that provide for the reconstruction and amalgamation of companies, which are commonly referred to in the Cayman Islands as a “scheme of arrangement,” the procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement in relation to a solvent Cayman Islands company must be approved at a shareholders’ meeting by a majority of the company’s shareholders who are present and voting (either in person or by proxy) at such meeting. The shares voted in favor of the scheme of arrangement must also represent at least 75% of the value of each class of the company’s shareholders (excluding the shares owned by the parties to the scheme of arrangement) present and voting at the meeting. The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect the creditors’ interests. Furthermore, the Grand Court will only approve a scheme of arrangement if it is satisfied that:

 

   

the statutory provisions as to supermajority voting have been complied with;

 

   

the shareholders have been fairly represented at the meeting in question;

 

   

the scheme of arrangement is such as a businessman would reasonably approve; and

 

   

the scheme of arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law (2010 Revision) of the Cayman Islands.

It may be difficult for you to enforce any judgment obtained in the United States against our company, which may limit the remedies otherwise available to our shareholders.

Substantially all of our assets are located outside the United States. Almost all of our current operations are conducted in China. Several of our directors and officers reside outside the United States, and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these directors and officers in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws

 

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of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts. There is doubt as to whether the Grand Court of the Cayman Islands will, in original actions brought in the Cayman Islands, impose liabilities predicated upon the civil liability provisions of securities laws of the United States or any state of the United States, on the grounds that such provisions are penal in nature. There is uncertainty as to whether the courts of China would entertain original actions brought in China against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended, and as such we are exempt from certain provisions applicable to United States domestic public companies.

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

   

we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

 

   

we are not required to provide the same level of disclosure on certain issues, such as executive compensation;

 

   

for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;

 

   

we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and

 

   

we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

We intend to file annual reports on Form 20-F and reports on Form 6-K, including reports containing our quarterly results. As a foreign private issuer within the meaning of the rules under the Exchange Act, we do not intend to file annual reports on Form 10-K, quarterly reports on Form 10-Q, periodic reports on Form 8-K or proxy statements pursuant to Schedule 14A of the Exchange Act. As a result, our shareholders may not have access to certain information they may deem important.

As a foreign private issuer, we are permitted to, and we may, rely on exemptions from certain Nasdaq corporate governance rules applicable to United States domestic public companies, including the requirements regarding the determination of compensation for our executive officers and the nomination of our directors. If we rely on such exemptions, this may afford less protection to holders of our ordinary shares and ADSs.

As a foreign private issuer, we are permitted to, and we may, follow home country corporate governance practices instead of certain requirements of the Nasdaq corporate governance rules. The corporate governance practice in our home country, the Cayman Islands, does not require that all members of our compensation committee or our nominating and corporate governance committee of our board of directors be independent directors. We currently intend to either have the compensation of our executive officers determined by the majority of our “independent directors,” as such term is used in the Nasdaq corporate governance rules, in compliance with the Nasdaq corporate governance rules or by our compensation committee in reliance upon the relevant home country exemption in lieu of the Nasdaq corporate governance rules given our compensation committee is currently not comprised entirely of

 

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independent directors. We also currently intend to either have our directors nominated by the majority of our independent directors in compliance with the Nasdaq corporate governance rules or by our nominating and corporate governance committee in reliance upon the relevant home country exemption in lieu of the Nasdaq corporate governance rules given our nominating and corporate governance committee is currently not comprised entirely of independent directors. If we decide to have our compensation and our nominating and corporate governance committees, as currently constituted, determine the compensation of our executive officers and the nomination of our directors, respectively, the level of independent oversight over management of our company may afford less protection to holders of our ordinary shares and ADSs. We currently comply with all other Nasdaq corporate governance rules applicable to United States domestic issuers, including having a majority of independent directors serving on our board of directors and an audit committee consisting solely of independent directors.

Being a public company will increase our administrative costs, which could adversely affect our business.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, which could be a few million dollars or more. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC, require certain corporate governance practices for public companies. In addition to these rules, the Nasdaq Global Market has certain corporate governance requirements for companies that are Nasdaq-listed. We expect these rules and regulations to increase our legal and financial compliance costs, and to make some activities more time consuming and costly, though we are not currently able to estimate these additional costs. In anticipation of becoming a public company, we have created several board committees, adopted additional internal controls and disclosure controls and procedures and will have to bear all of the internal and external costs of preparing and distributing periodic public reports. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Additionally, while we currently expect to qualify as a foreign private issuer immediately following the completion of this offering, we may cease to qualify as a foreign private issuer in the future. If we do not qualify as a foreign private issuer, we will be required to comply fully with the reporting requirements of the Exchange Act and we will incur significant additional legal, accounting and other expenses that we would not incur as a foreign private issuer.

Insiders will continue to have substantial control over us after this offering, which could adversely affect the market price of our ADSs.

Upon the completion of this offering, assuming the underwriters do not exercise the overallotment option, our executive officers and directors, and their respective affiliates and our major shareholders, will beneficially own, in the aggregate, approximately 33.8% of our outstanding ordinary shares. In addition, none is contractually prevented from acquiring additional ordinary shares. As a result, these shareholders will be able to exert significant control over all matters requiring shareholder approval. These matters include the election of directors and approval of significant corporate transactions, such as a merger, consolidation, takeover or other business combination involving us. This concentration of ownership could also adversely affect the market price of our ADSs or lessen any premium over market price that an acquirer might otherwise pay.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, our share price and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

 

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We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequence to U.S. Holders.

Based on the assumed initial public offering price of our ADSs in this offering and the composition of our income and assets, we do not expect to be a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for our current taxable year ending December 31, 2010 or for the immediate future years. However, a separate determination must be made each year as to whether we are a PFIC (after the close of each taxable year) and we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2010 or any future taxable year. A non-United States corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) or least 50% of the value of its assets (generally based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. PFIC status depends on the composition of our assets and income and the value of our assets (including, among others, a pro rata portion of the income and assets of each subsidiary in which we own, directly or indirectly, at least 25% (by value) of the equity interests) from time to time. Because we currently hold, and expect to continue to hold following this offering, a substantial amount of cash, which is generally treated as passive assets for this purpose, and, because the calculation of the value of our assets may be based in part on the value of our ADSs and ordinary shares, which is likely to fluctuate after the offering (and may fluctuate considerably given that market prices of technology companies historically have been especially volatile), we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which a United States holder held an ADS or an ordinary share, certain adverse United States federal income tax consequences could apply to the United States holder. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the ordinary shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the ordinary shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, and may include an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that we do not wish such proxy given, substantial opposition exists, or such matter materially and adversely affects the rights of shareholders. If you do not instruct the depositary to vote the ordinary shares underlying your ADSs, the depositary will not exercise any related voting rights and the ordinary shares underlying your ADSs will not be voted. See “Description of American Depositary Shares” for more detailed information.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

 

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You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Our management has broad discretion to determine how to use the funds raised in the offering and may use them in ways that may not enhance our results of operations or the price of our ADSs.

We intend to use the net proceeds from this offering for working capital and other general corporate purposes that are in accordance with our respective charter documents and any applicable business license, including expanding our manufacturing capacity by building, acquiring, or otherwise arranging for additional fabrication facilities, developing new products and funding capital expenditures. We intend to use approximately $24.5 million of the net proceeds of this offering to finance the remaining construction of our second fab. In addition, we may choose to expand our current business through acquisitions of other businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. We may also choose to repay all or a portion of our $8.0 million in short-term bank loans, outstanding as of September 30, 2010, which become due in April and September 2011. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business.

Our management will have significant discretion as to the use of the net proceeds to us from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the price of our ADSs. In addition, these proceeds may not be invested in a manner that yields a favorable rate of return.

We may list our ordinary shares on a foreign stock exchange following the completion of this offering, which may increase the liquidity for our ordinary shares and could increase the volatility of the market price for our ADSs that you purchase in this offering.

After the completion of this offering, we may list our ordinary shares on a foreign stock exchange, which we do not anticipate will occur until at least six months after the completion of this offering. Our outstanding ordinary shares may become more liquid after we list our ordinary shares on a foreign exchange. After that listing becomes effective, our existing shareholders may decide to sell their ordinary shares on the foreign exchange for tax or other reasons. Any sales of our ordinary shares on a foreign exchange could increase the volatility of the market price for our ADSs that you purchase in this offering.

 

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Special Note Regarding Forward-Looking Statements

This prospectus includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “predict,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “may,” “should,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

   

out intent to increase market share in high volume markets;

 

   

our plan to continue to rapidly expand our product portfolio of power management ICs and to offer complete power management solutions to our customers;

 

   

our plan to continue to attract and retain highly-qualified analog engineers with experience in designing power management ICs;

 

   

our plan to continue to promote our brand;

 

   

our expectation that our higher performance AC/DC and DC/DC products will comprise a more significant portion of our revenue in the future;

 

   

our expectations relating to our future operating expenses;

 

   

anticipated trends and challenges in our business and the markets in which we operate;

 

   

our ability to anticipate market needs or develop new or enhanced products to meet those needs;

 

   

our ability to dissolve BCD Shanghai without incurring significant additional expenses and the timing for the completion of the dissolution;

 

   

the timing and costs associated with opening a second fab;

 

   

our ability to maintain relationships with our third party foundries and our subcontractors;

 

   

our ability to compete in our industry and against innovation by our competitors;

 

   

our ability to defend ourselves against intellectual property infringement lawsuits and threats and protect our confidential information and intellectual property rights;

 

   

our ability to build and maintain relationships and achieve additional customer wins with market-leading OEMs and ODMs;

 

   

our expectations regarding using the proceeds from this offering to finance the construction of our second fab, to repay certain loans and for working capital and other general corporate purposes;

 

   

our estimates for our results for the quarter and year ended December 31, 2010, which remain subject to adjustment as we close our books for the quarter and year;

 

   

our anticipated future tax rates;

 

   

our ability to retain senior management and key personnel;

 

   

our ability to manage growth;

 

   

our ability to recruit and retain qualified engineers and other skilled employees; and

 

   

economic and business conditions in China, Asia and worldwide.

All forward-looking statements involve risks, assumptions and uncertainties. You should not rely upon forward-looking statements as predictors of future events. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. See the section titled “Risk Factors” and elsewhere in this prospectus for a

 

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more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.

This prospectus also contains data related to the semiconductor market and the power management IC market worldwide and to the growing demand for semiconductors in Asia. These market data, including market data from Gartner, Inc., include projections that are based on a number of assumptions. The semiconductor market or the power management IC market in China and worldwide, may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, any projections or estimates relating to the growth prospects or future conditions of our market are subject to significant uncertainties due to the rapidly changing nature of customer demand for semiconductor products and technologies in the semiconductor industry. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements. Except as required by applicable securities laws, we undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Use of Proceeds

We estimate that our net proceeds from the sale of the ADSs that we are offering will be approximately $43.6 million at an assumed initial public offering price of $11.50 per ADS, which is the midpoint of the range listed on the cover page of this prospectus, assuming no exercise of the underwriters’ overallotment option and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay. A $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS would increase (decrease) the net proceeds from this offering by approximately $4.0 million, after deducting the underwriting discounts and the estimated offering expenses payable by us and assuming no exercise of the underwriters’ overallotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus. If the underwriters’ overallotment option is exercised in full, we estimate that we will receive additional net proceeds of approximately $9.6 million. We will not receive any proceeds from the sale of shares by any selling shareholder.

We intend to use approximately $24.5 million of the net proceeds of this offering to finance the remaining construction of our second fab. We also intend to use the net proceeds to repay some or all of our outstanding loan, amounting to $6.0 million, with the Agricultural Bank of China, or ABC, which bears an interest rate of 5.04% as of September 30, 2010 and is due in April 2011. We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including marketing, research and development and capital expenditures. In addition, we may choose to expand our current business through acquisitions of other businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering.

Pending use of proceeds from this offering, we intend to invest the proceeds generally in term deposits and cash.

 

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Dividends and Dividend Policy

Since our inception, we have not declared or paid any cash dividends on our ordinary shares. We intend to retain any earnings for use in our business and do not currently intend to pay cash dividends on our ordinary shares. Dividends, if any, on our outstanding ordinary shares will be declared by and subject to the discretion of our board of directors.

Our ability to pay cash dividends will also depend upon the amount of distributions, if any, received by us from our PRC subsidiaries, which must comply with the laws and regulations of the PRC and their respective articles of association in declaring and paying dividends to us. Under the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances for:

 

   

recovery of losses, if any;

 

   

allocation to reserve funds;

 

   

allocation to staff and workers’ bonus and welfare funds; and

 

   

allocation to enterprise development funds in the case of a PRC-foreign joint venture.

More specifically, these PRC subsidiaries may pay dividends only after at least 10% of their net profit has been set aside as reserve funds and a discretionary percentage of their net profit has been set aside for the staff and workers’ bonus and welfare funds. These PRC subsidiaries are not required to set aside any of their net profit as reserve funds if such reserves are at least 50% of their respective registered capital. Furthermore, if they record no net income for a year as determined in accordance with generally accepted accounting principles in the PRC, they generally may not distribute dividends for that year.

Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, to the extent permitted by applicable law and regulations, less the fees and expenses payable under the deposit agreement. Any dividend we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars. See “Description of American Depositary Shares.”

 

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Capitalization

The following table sets forth, as of September 30, 2010, our short-term borrowings and capitalization.

Our capitalization is presented on:

 

   

an actual basis;

 

   

a pro forma basis to reflect the issuance of 63,235,289 ordinary shares upon the conversion of all preference shares outstanding as of September 30, 2010 into ordinary shares upon the completion of the offering; and

 

   

an unaudited pro forma as adjusted basis to reflect (i) the issuance of 63,235,289 ordinary shares upon the conversion of all preference shares outstanding as of September 30, 2010 into ordinary shares upon the completion of the offering, (ii) to give effect to our sale of 4,333,333 ADSs in the offering at an assumed initial public offering price of $11.50 per ADS, which is the midpoint of the estimated public offering price range, and (iii) our receipt of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses.

You should read this table in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

     As of September 30, 2010  
             Actual             Pro Forma     Pro Forma
As Adjusted(2)
 
     (Unaudited)  

Short-term borrowings(1)

   $ 7,969      $ 7,969      $ 7,969   
                        

Convertible redeemable preference shares, $0.001 par value: 63,500,000 shares authorized, 58,235,289 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma; no shares authorized, issued and outstanding, pro forma as adjusted

     90,569                 
                        

Shareholders’ equity (capital deficiency):

      

Preference shares, $0.001 par value: no shares authorized, issued or outstanding, actual; 50,000,000 shares authorized, no shares issued or outstanding, pro forma or pro forma as adjusted

                     

Ordinary shares, $0.001 par value: 200,000,000 shares authorized, 17,185,275 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 80,420,564 pro forma shares issued and outstanding, pro forma; 1,000,000,000 shares authorized, 106,420,562 shares issued and outstanding, pro forma as adjusted

     17        80        106   

Additional paid-in capital

     12,518        116,084        159,703   

Accumulated other comprehensive income

     7,259        7,259        7,259   

Accumulated deficit

     (41,581     (53,381     (53,381
                        

Total shareholders’ equity (capital deficiency)

     (21,787     70,042        113,687   
                        

Total capitalization

   $ 76,751      $ 78,011      $ 121,656   
                        

 

 

(Dollars in thousands, except share amounts)

 

(1)

$6.0 million of our short-term borrowings are guaranteed by Shanghai SIMIC Electronics Co., Ltd., or SIMIC, a PRC state-owned company.

(2)

A $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of total shareholders’ equity (deficit) and total capitalization by $4.0 million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of ADSs we are offering. Each increase (decrease) of 100,000 ADSs in the number of ADSs offered by us would increase (decrease) each of total shareholders’ equity (deficit) and total capitalization by approximately $1.1 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and terms of this offering determined at pricing.

 

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The table above excludes the following shares:

 

   

16,665,695 ordinary shares issuable upon the exercise of options outstanding as of September 30, 2010, with a weighted average exercise price of $0.71 per ordinary share;

 

   

202,500 ordinary shares issuable upon the exercise of warrants to purchase ordinary shares outstanding as of September 30, 2010, which have a weighted average exercise price of $2.27 per ordinary share;

 

   

12,276,461 ordinary shares reserved for future grants under our equity incentive plan; and

 

   

2,000,001 ordinary shares issuable upon conversion of 1,600,000 Series C preference shares issuable upon the exercise of warrants to purchase Series C preference shares outstanding as of September 30, 2010, which have a weighted average exercise price of $2.00 per share.

 

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Dilution

Our pro forma net tangible book value as of September 30, 2010 was $0.83 per outstanding ordinary share on that date and $5.00 per ADS. Pro forma net tangible book value adjusts net tangible book value to give effect to the conversion of all of our outstanding preference shares into 63,235,289 ordinary shares upon the closing of this offering. Dilution is determined by subtracting net tangible book value per ordinary share from the initial public offering price per ordinary share.

Without taking into account any other changes in net tangible book value after September 30, 2010, other than to give effect to (i) the conversion of all of our outstanding preference shares into 63,235,289 ordinary shares upon the closing of this offering, (ii) our sale of 4,333,333 ADSs offered in this offering at an assumed initial public offering price of $11.50 per ADS (which is the midpoint of the estimated public offering price range) and (iii) the estimated net proceeds of $43.6 million after deduction of underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of September 30, 2010 would have been $1.04 per outstanding ordinary share, including ordinary shares underlying our ADSs, or $6.24 per ADS. This represents an immediate increase in pro forma net tangible book value of $0.21 per ordinary share, or $1.24 per ADS, to existing shareholders and an immediate dilution in pro forma net tangible book value of $0.88 per ordinary share, or $5.26 per ADS, to investors of ADSs in this offering. The following table illustrates the dilution on a per ordinary share basis and per ADS basis assuming all ordinary shares are exchanged for ADSs:

 

 

 

     Per Ordinary
Share
     Per ADS  

Assumed initial public offering price

   $ 1.92       $ 11.50   

Pro forma net tangible book value as of September 30, 2010

     0.83         5.00   

Increase attributable to this offering

     0.21         1.24   

Pro forma net tangible book value as adjusted to give effect to the automatic conversion of all of our outstanding preference shares and this offering as of September 30, 2010

     1.04         6.24   

Net tangible book value dilution to new purchasers in this offering

     0.88         5.26   

 

 

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS would increase (decrease) our net tangible book value after giving effect to this offering by $4.0 million. Consequently, the dilution in net tangible book value per ordinary share and per ADS to new investors in this offering would increase (decrease) by $0.04 per ordinary share, or $0.23 per ADS. The information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The following table summarizes, on a pro forma basis as of September 30, 2010, the differences between the shareholders as of such date and the new investors with respect to the number of ordinary shares and ADSs purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid at an assumed initial public offering price of $11.50 per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

 

 

    Ordinary Shares Purchased     Total Consideration     Average
Price per
Ordinary
      Share      
    Average
Price per
      ADS       
 
        Number             Percent             Amount             Percent          

Existing shareholders

    80,420,564        75.6   $ 92,336,297        64.9   $ 1.15      $ 6.89   

New shareholders

    25,999,998        24.4        49,833,330        35.1      $ 1.92      $ 11.50   
                                   

Total

    106,420,562        100.0   $ 142,169,627        100.0   $ 1.34      $ 8.02   
                                   

 

 

 

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Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and before deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS would increase (decrease) total consideration paid by new investors by $4.3 million, increase total consideration paid by all shareholders to $146.5 million (or decrease total consideration paid by all shareholders to $137.8 million in the event of a $1.00 decrease) and increase the average price per ordinary share and per ADS paid by all shareholders to $1.38 and $8.26, respectively, (or decrease the average price per ordinary share and per ADS paid by all shareholders to $1.30 and $7.77, respectively, in the event of a $1.00 decrease).

The discussion and tables above also assume no exercise of any outstanding options or warrants. As of September 30, 2010, there were 16,665,695 ordinary shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.71 per share, 202,500 ordinary shares issuable upon exercise of outstanding warrants to purchase ordinary shares at a weighted exercise price of $2.27 per share, and 2,000,001 ordinary shares issuable upon conversion of 1,600,000 Series C preference shares issuable upon the exercise of outstanding warrants to purchase Series C preference shares at a weighted average exercise price of $2.00 per share. If all these options and warrants had been exercised on September 30, 2010, after giving effect to the conversion of our preference shares and this offering, after deduction of underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value would have been approximately $1.01 per ordinary share and $6.08 per ADS and the dilution in net tangible book value to new investors would have been $0.90 per ordinary share, or $5.42 per ADS. In addition, our existing shareholders would hold 99,288,760 ordinary shares, which would represent 79.2% of our ordinary shares outstanding following the offering, for a total consideration paid of $108.6 million, and the average price per ordinary share paid would be $1.09. Our new shareholders who purchased ADSs in the offering would hold ADSs representing 25,999,998 ordinary shares, which would represent 20.8% of the ordinary shares outstanding following the offering.

 

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Exchange Rate Information

Our business is primarily conducted in China and substantially all of our expenses are denominated in RMB. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at RMB6.6905 to $1.00, as certified for customs purposes by the Federal Reserve Bank of New York on September 30, 2010. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On December 30, 2010, the exchange rate was RMB6.6000 to $1.00.

The following table sets forth information concerning the RMB to the U.S. dollar exchange rate for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Board.

 

 

 

     Exchange Rate  

Period

   Period End      Average(1)      Low(2)      High(2)  

2006

     7.8041         7.9579         7.8041         8.0702   

2007

     7.2946         7.5806         7.2946         7.8127   

2008

     6.8225         6.9193         6.7800         7.2946   

2009

     6.8259         6.8295         6.8176         6.8470   

2010

     6.6000         6.7603         6.6000         6.8330   

July 2010

     6.7735         6.7762         6.7709         6.7807   

August 2010

     6.8069         6.7873         6.7670         6.8069   

September 2010

     6.6905         6.7396         6.6869         6.8102   

October 2010

     6.6705         6.6675         6.6397         6.6912   

November 2010

     6.6670         6.6538         6.6330         6.6892   

December 2010

     6.6000         6.6497         6.6000         6.6745   

 

 

 

(1)

Annual averages are calculated from month-end noon buying rates in the city of New York as published by the Federal Reserve Bank. Monthly averages are calculated using the daily noon buying rates in the city of New York as set forth in the H.10 statistical release of the Federal Reserve Board during the relevant periods.

(2)

Annual and monthly lows and highs are calculated from daily noon buying rates in the city of New York as published by the Federal Reserve Bank.

 

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Selected Consolidated Financial Data

The following selected consolidated financial and other data should be read in conjunction with, and are qualified in their entirety by reference to, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all of which are included elsewhere in this prospectus. The selected consolidated statements of operations data for each of the three years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010 and the selected consolidated balance sheet data as of December 31, 2008 and 2009 and June 30, 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2005 and 2006, and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements that are not included in this prospectus. Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP. The selected consolidated statements of operations data for the six months ended June 30, 2009 and the nine months ended September 30, 2009 and 2010 and the selected consolidated balance sheet data as of September 30, 2010 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which consist only of normal recurring adjustments, that management considers necessary for the fair statement of the financial information set forth in those statements. Historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

    Years ended December 31,     Six months ended
June 30,
    Nine months ended
September 30,
 
    2005     2006     2007     2008     2009     2009     2010     2009     2010  
                                  (Unaudited)           (Unaudited)  

Consolidated Statements of Operations Data:

                 

Net revenue

  $ 44,379      $ 69,670      $ 98,683      $ 88,085      $ 100,844      $ 42,271      $ 62,701      $ 73,175      $ 101,270   

Cost of revenue(1)

    55,388        60,718        76,466        69,587        75,230        34,471        42,613        56,200        67,803   
                                                                       

Gross profit (loss)

    (11,009     8,952        22,217        18,498        25,614        7,800        20,088        16,975        33,467   
                                                                       

Operating expenses:

                 

Research and development(1)

    4,013        4,065        5,947        7,013        6,244        2,850        3,692        4,406        5,611   

Selling and marketing(1)

    2,466        2,743        3,577        4,487        5,422        2,259        3,166        3,737        5,089   

General and administrative(1)

    5,843        6,017        11,349        10,178        7,661        3,195        3,360        5,221        5,458   

Impairment loss on property, plant and equipment

    466                                                           
                                                                       

Total operating expenses

    12,788        12,825        20,873        21,678        19,327        8,304        10,218        13,364        16,158   
                                                                       

Income (loss) from operations

    (23,797     (3,873     1,344        (3,180     6,287        (504     9,870        3,611        17,309   
                                                                       

Other income (expense), net

    446        (1,460     (41     (1,665     44        43        298        (449     289   

Income tax expense (benefit)

    (578     17        698        (43     (577            516        (288     936   

Cumulative effect of changes in accounting principles

           741                                                    
                                                                       

Net income (loss)

  $ (22,773   $ (4,609   $ 605      $ (4,802   $ 6,908      $ (461   $ 9,652      $ 3,450      $ 16,662   
                                                                       

 

 

(Dollars in thousands)

 

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    Years ended December 31,     Six months ended
June 30,
    Nine months ended
September 30,
 
    2005     2006     2007     2008     2009     2009     2010     2009     2010  
                                  (Unaudited)           (Unaudited)  

Net income (loss) per share:

                 

Basic-ordinary shares

  $ (1.98   $ (0.37   $ 0.01      $ (0.30   $ 0.09      $ (0.03   $ 0.13      $ 0.05      $ 0.23   
                                                                       

Basic-convertible preference shares

  $      $      $ 0.01      $      $ 0.09      $      $ 0.13      $ 0.05      $ 0.22   
                                                                       

Diluted-ordinary shares

  $ (1.98   $ (0.37   $ 0.00      $ (0.30   $ 0.08      $ (0.03   $ 0.08      $ 0.04      $ 0.14   
                                                                       

Diluted-convertible preference shares

  $      $      $ 0.01      $      $ 0.09      $      $ 0.13      $ 0.05      $ 0.22   
                                                                       

Shares used to compute net income (loss) per share:

                 

Basic-ordinary shares

    11,589,000        13,051,542        14,463,325        16,693,525        16,710,192        16,710,192        16,740,748        16,710,192        16,811,868   
                                                                       

Basic-convertible preference shares

                  58,168,622               58,235,289               58,235,289        58,235,289        58,235,289   
                                                                       

Diluted-ordinary shares

    11,589,000        13,051,542        23,448,325        16,693,525        19,142,046        16,710,192        26,781,809        18,703,925        27,117,409   
                                                                       

Diluted-convertible preference shares

                  58,799,565               58,325,855               58,604,520        58,335,289        58,585,289   
                                                                       

Pro forma net income (loss) per share (unaudited)(2)

                 

Basic-ordinary shares

          $ (0.06     $ (0.03     $ 0.06   
                                   

Diluted-ordinary shares

          $ (0.06     $ (0.03     $ 0.05   
                                   

Basic-ADS

          $ (0.37     $ (0.16     $ 0.36   
                                   

Diluted-ADS

          $ (0.37     $ (0.16     $ 0.32   
                                   

Shares used to compute pro forma net income (loss) per share (unaudited)(2)

                 

Basic-ordinary shares

            79,945,481          79,976,037          80,047,157   
                                   

Diluted-ordinary shares

            79,945,481          79,976,037          90,426,534   
                                   

 

 

 

(1)

Amounts include share-based compensation expense as follows:

 

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     Years ended December 31,      Six months ended
June 30,
     Nine months ended
September 30,
 
     2005      2006      2007      2008      2009        2009          2010          2009          2010    
                                        (Unaudited)             (Unaudited)  

Cost of revenue

   $ 95       $ 62       $ 125       $ 132       $ 147       $ 93       $ 40       $ 120       $ 75   

Research and development

     63         67         141         182         225         119         80         168         135   

Selling and marketing

     97         123         150         164         199         115         82         154         146   

General and administrative

     376         506         961         1,728         1,087         432         434         847         841   
                                                                                

Total

   $ 631       $ 758       $ 1,377       $ 2,206       $ 1,658       $ 759       $ 636       $ 1,289       $ 1,197   
                                                                                

 

 

(Dollars in thousands)

 

 

(2)

Pro forma unaudited basic and diluted net income (loss) per ordinary share is computed using net loss per weighted average ordinary share after giving effect to the conversion for all preference shares outstanding as of December 31, 2009, June 30, 2010 and September 30, 2010 into 63,235,289 ordinary shares.

 

 

 

     As of December 31,     As of
June 30,
2010
    As of
September 30,
2010
 
     2005     2006     2007     2008     2009      
                                         (Unaudited)  

Consolidated Balance Sheet Data:

              

Cash and restricted cash

   $ 27,737      $ 28,715      $ 29,781      $ 26,664      $ 38,562      $ 41,037      $ 42,586   

Working capital

     17,518        22,440        22,798        15,718        25,103        33,179        35,644   

Total assets

     79,500        82,718        93,292        86,388        99,799        114,337        127,933   

Warrant liability

            1,898        1,230        2,156        2,011        1,477        1,260   

Other liabilities

     329        4,458        4,695        4,944        3,478        3,450        3,466   

Convertible redeemable preference shares

     89,834        90,006        90,338        90,511        90,569        90,569        90,569   

Total shareholders’ equity (capital deficiency)

     (49,723     (54,382     (49,759     (49,842     (41,274     (30,539     (21,787

 

 

(Dollars in thousands)

 

 

 

 

     Years ended December 31,     Six months ended
June  30,
    Nine months  ended
September 30,
 
     2005     2006     2007     2008     2009     2009     2010     2009     2010  
                                   (Unaudited)           (Unaudited)  

Other Financial Data:

                  

Net cash provided by (used in) operating activities

   $ (3,413   $ 7,014      $ 10,548      $ 9,616      $ 18,494      $ 7,324      $ 8,341      $ 14,417      $ 14,308   

Net cash provided by (used in) investing activities

     (11,563     (5,827     (10,790     (12,168     (3,519     (4,354     (5,231     (1,987     (11,836

Net cash provided by (used in) financing activities

     6,031        (219     5,016        (4,579     (3,580     (85     (2,677     (3,581     (633

Net increase (decrease) in cash

     (8,945     968        4,774        (7,131     11,395        2,885        433        8,849        1,839   

 

 

(Dollars in thousands)

 

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Management’s Discussion and Analysis of Financial Condition and

Results of Operations

You should read the following discussion of the financial condition and results of our operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The discussion in this prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in “Risk Factors,” as well as those discussed elsewhere. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

We are a leading China-based provider of analog ICs specializing in the design, manufacture and sale of a broad range of power management semiconductors to the large, expanding Asian electronics industry. We focus on high-volume growth segments in the computing, consumer and communications markets, such as personal computers, flat panel televisions and monitors, mobile phone chargers and a wide variety of consumer and portable electronic devices. We currently offer a diversified and expanding portfolio of over 300 products, including power management ICs within the following subcategories: linear, AC/DC and DC/DC. These products are designed to enable our end customers to reduce power consumption, extend battery life, maintain system stability and decrease the form factor of their devices. Our products have been incorporated into electronic systems sold by over 2,000 Asian OEMs and ODMs, including ASUSTeK, Changhong, Emerson, Foxconn, Giga-Byte, Hipro, Konka, LG Electronics, Rowa, TP-LINK and TPV Technology. With in-house design and manufacturing capabilities in China, we combine our analog semiconductor expertise, proprietary process technologies, cost-effective manufacturing and operating infrastructure and local sales and support to improve the quality and performance of our products, lower our costs and accelerate our time-to-market.

We were founded in September 2000, and we commenced commercial production of analog power management semiconductors at our fab in September 2002. From 2003 to 2005, we focused on the design, production and sale of standard linear products to the Asian market. These high-volume, industry-standard ICs do not require extensive customer qualification and are typically sold through distributor catalogs with minimal direct sales support. The ability to successfully compete on cost was and remains critical to the sale of these types of products. By 2005, our revenue reached $44.4 million. In that same year, we initiated development of BiCMOS process technology to augment our bipolar capabilities, and we invested in increased manufacturing capacity to meet growing customer demand. During this time, our primary objectives were to establish scale, build relationships with key customers in our target markets, build out our operating and technical infrastructure and develop our brand.

As our revenue increased, we focused on expanding our IC offerings beyond standard linear products into higher performance solutions for our target markets. In order to deliver greater volumes of more advanced devices, we continued to increase our production capacity and enhance our process capabilities with new BiCMOS and BCDMOS technologies. In 2006, we introduced our AC/DC products to target higher performance applications for power adapters and chargers for a large variety of electronic devices and appliances such as mobile phones, modems and cordless phones. In 2007, we introduced our DC/DC products to further expand our offerings in personal computers, LCD/LED televisions and monitors, mobile phones and other electronic device markets. In 2008, we began to sell higher performance linear products targeted at mobile applications such as laptops, notebooks and mobile phones. We expect our AC/DC, DC/DC and higher performance linear products to comprise a more significant portion of our revenue in the future.

As our business has grown, we have expanded our sales and marketing efforts. We opened sales offices in Taiwan and South Korea in 2004 and 2008, respectively. From 2005 to 2009, we added distribution channels in Japan, Singapore, India and the United States.

In 2007, we shipped more than a billion units for the first time and, in the quarter ended September 30, 2010, we shipped an average of more than 312 million units per month. In 2009, we achieved revenue of $100.8 million,

 

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91.3% of which was from sales of analog power management ICs. The remaining 8.7% of revenue was from sales of our wafer foundry services, which we have historically offered to selected customers as a means of increasing our fab utilization especially during economic downturns when our fab utilization rates would otherwise decline. We offer our foundry services to select customers that do not require us to make any technical development or modification of our existing processes, agree to pay cash for our services, agree to pre pay a portion of the fees (only for first-time customers) and do not compete with us directly. We set the prices for our foundry services based on market prices and the anticipated costs associated with offering these foundry services, among other factors.

Certain Factors Affecting Our Performance

A number of factors affect our performance. We consider these factors when we forecast growth, establish budgets, measure the effectiveness of selling and marketing efforts and assess operational effectiveness. These factors include:

Market conditions. We are affected by the market conditions in our target markets and also the global macroeconomic environment. Demand for power management ICs is impacted significantly by changes in the demand for computing, consumer and communications products. If we are unable to anticipate a market decline, we may not be able to decrease our costs quickly enough to offset declining revenue.

Manufacturing capacity utilization. Utilization of our manufacturing capacity affects our gross margins because we have certain fixed costs that we incur regardless of the extent to which we utilize our fab. When our fab utilization decreases, our gross margins are adversely impacted.

Product mix, pricing and margins. Our AC/DC and DC/DC products tend to command higher average selling prices and drive higher gross margins than our linear products. We tend to experience declines in average selling prices over the lifecycle of all our products, primarily due to competitive pressures. We seek to offset the negative impact of such declines in average selling prices on our gross margin by lower production costs and increased sales of higher margin products.

Material costs. A significant portion of our product costs are derived from utilization of certain materials such as packaging, raw wafers, chemicals and certain gases. Fluctuations in the prices of these material costs impact our gross margins because we are generally not able to pass along increased costs to our end customers in the short term.

Seasonality. Our results of operations are generally strongest in our third quarter as our end customers prepare for their holiday sales seasons. Our results of operations are generally the weakest in our first quarter and, to a lesser extent, in our fourth quarter related to the end of the holiday season manufacturing cycle and the impact of shutdowns related to the Chinese New Year holiday in January or February each year.

New product introductions. Our success depends on our ability to introduce new products on a timely basis that meet market requirements. Our failure to introduce products on a timely basis that meet end customers’ specifications could adversely affect our financial performance.

Foreign exchange fluctuations. The majority of our revenue is denominated in U.S. dollars and most of our expenses are denominated in RMB. Fluctuations in the value of the RMB could affect our financial performance.

Principal Statement of Operations Line Items

The following paragraphs describe the principal line items set forth in our consolidated statements of operations:

Net revenue. We generate revenue primarily from the sale of analog power management semiconductor products. We sell our analog power management ICs primarily through a regional network of independent distributors with support from our internal selling and marketing team, which stimulate demand especially for our new products or in markets into which we are beginning to sell. We also derive a limited portion of our revenue from providing foundry services. We provide our foundry services directly to selected end customers through foundry service agreements.

In 2009, sales through our network of distributors accounted for 88.5% of our total revenue. In 2009, our 10 largest distributors accounted for 63.8% of our total revenue. In 2009, no distributor or other customer accounted for more than 10% of our revenue. We do not have long-term agreements with our distributors. Our distributors may terminate their relationships with us with advance notice of up to three months.

 

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Cost of revenue. Our cost of revenue consists principally of:

 

   

direct materials, which principally consist of packaging, raw wafer costs, chemicals and certain gases;

 

   

salaries and other compensation for employees directly involved in manufacturing activities, including share-based compensation expense;

 

   

depreciation and amortization; and

 

   

overhead, including electric power, maintenance of production equipment, indirect materials, production support, quality control, and facilities and building rent.

Our cost of revenue also includes product warranty cost and impairment loss on inventories. We provide warranty for defects within two years from the date that the product is manufactured. We accrue the estimated costs of warranties based on our historical warranty expense patterns. We record adjustments to write down the cost of obsolete inventory to the estimated market value based on the aging of inventory and historical demand for our products.

Operating expenses. Our operating expenses consist of the following:

 

   

Research and development expenses. Research and development expenses consist primarily of salaries and benefits for research and development personnel, materials costs, office rent, share-based compensation expenses, depreciation and maintenance on the equipment used in our research and development efforts. Research and development expenses also include costs related to pilot production activities prior to the commencement of commercial production. As we continue our strategy of rapidly expanding our product portfolio, we expect our research and development expenses will increase in absolute dollar terms in future periods.

 

   

Selling and marketing expenses. Selling and marketing expenses consist primarily of salaries and benefits of personnel engaged in selling and marketing activities, commercial promotions and other publicity-generating events, share-based compensation expenses and costs of product samples. We expect our selling and marketing expenses to increase in absolute dollars in future periods as we undertake additional direct selling and marketing efforts to increase direct contacts with our industry-leading customers.

 

   

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits for our administrative, finance, human resource and information technology personnel, commercial insurance, fees for professional services, share-based compensation expenses and provision for doubtful accounts receivable. We expect our general and administrative expenses to increase in absolute dollar terms in future periods as we support our expanding operations, and as a result of expenses associated with becoming a public company.

Other income (expenses). Our other income (expenses) consist of:

 

   

Interest income. Interest income has been primarily derived from time deposits.

 

   

Interest expense. Interest expense has been primarily attributable to our bank loans.

 

   

Foreign exchange gain (loss). Foreign exchange gain or loss is the financial impact of fluctuations of foreign exchange rates over transactions or monetary assets and liabilities that are denominated in a currency other than the accounting functional currency.

 

   

Gain (loss) on financial instruments: We enter into forward foreign exchange contracts to mitigate risks of the possible adverse impact resulting from exchange rate fluctuations between the U.S. dollar and RMB. We record any gain or loss from financial instruments to reflect the variations in the assessment of the fair value of our unsettled forward foreign exchange contracts.

 

   

Gain (loss) on valuation of warrant liability. As a consequence of the adoption of ASC Topic 480 “Distinguishing Liabilities from Equity,” we revalue on a quarterly basis our outstanding warrants using the Black-Scholes option pricing model. The change in fair value of the warrant liability is then charged to income.

 

   

Other income, net. Other income, net principally consists of governmental subsidies and various miscellaneous income.

 

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Taxation

We are a Cayman Islands company, and we currently conduct our operations through subsidiaries located in the PRC, Hong Kong, Taiwan and the United States. As a consequence, we, either directly or through one of our subsidiaries, are subject to taxation in each of these jurisdictions. Our principal operating entities are in China, and our applicable income tax rates are primarily driven by PRC tax laws. The following discussion is an overview of Cayman Islands and PRC taxation laws and policies, to which we are subject.

Cayman Islands tax. Under the current laws of the Cayman Islands, we are not subject to tax in the Cayman Islands. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.

PRC tax. Prior to January 1, 2008, as a manufacturing wholly foreign-owned enterprise registered in Shanghai’s Caohejing Economic and Technological Development Zone, our primary operating entity, SIM-BCD, was entitled to a preferential income tax rate of 15% as well as an exemption from PRC enterprise income tax for two years commencing from the first profit-making year after utilizing all the prior year tax losses and, thereafter, to 50% relief from PRC enterprise income tax for the next three years. On January 1, 2008, the new PRC Enterprise Income Tax Law, or New Tax Law, its implementation rules and Guofa 2007 No. 39, or Circular 39, took effect simultaneously. These new rules and regulations provide an uniform EIT rate for PRC enterprises of 25% and provide a transition period for preferential lower tax rates and tax holidays under the previous tax laws, regulations and relevant regulatory documents. Pursuant to the above laws and regulations and the approval of relevant PRC local tax authorities, the applicable enterprise income tax rate for SIM-BCD, our principal operating entity, was 0% for each of the years ended December 31, 2008 and 2009 as we received the benefit of the two-year tax holiday described above. We expect our applicable tax rate for SIM-BCD to be 11%, 12% and 12.5% for the years ended December 31, 2010, 2011 and 2012, respectively, as we receive the benefit of the 50% relief from PRC enterprise income tax for the next three years.

We established BCD (Shanghai) ME in November 2009. BCD (Shanghai) ME is currently subject to a 25% uniform tax rate. We intend to qualify BCD (Shanghai) ME as an HNTE in order to lower its effective tax rate from 25% to 15%, but we may not be able to obtain this qualification.

Results of Operations

Nine months ended September 30, 2009 compared with nine months ended September 30, 2010

The following table sets forth a summary of our consolidated statements of operations, also expressed as a percentage of net revenue, for the nine months ended September 30, 2009 and 2010.

 

 

 

     Nine months ended September 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)  

Net revenue

     $73,175         100.0   $ 101,270         100.0

Cost of revenue(1)

     56,200         76.8        67,803         67.0   
                                  

Gross profit

     16,975         23.2        33,467         33.0   
                                  

Operating expenses:

          

Research and development(1)

     4,406         6.0        5,611         5.5   

Selling and marketing(1)

     3,737         5.1        5,089         5.0   

General and administrative(1)

     5,221         7.2        5,458         5.4   
                                  

Total operating expenses

     13,364         18.3        16,158         15.9   
                                  

Income from operations

     3,611         4.9        17,309         17.1   

Other income (expense), net

     (449)         (0.6     289         0.3   
                                  

Income before income tax

     3,162         4.3        17,598         17.4   

Income tax expense (benefit)

     (288)         (0.4     936         0.9   
                                  

Net income

   $ 3,450         4.7   $ 16,662         16.5
                                  

 

 

(Dollars in thousands)

 

(1)

Amounts include share-based compensation expense as described in the table immediately below.

 

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     Nine months ended September 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (dollars in thousands, unaudited)  

Cost of revenue

   $ 120         0.2   $ 75         0.1

Operating expenses:

          

Research and development

     168         0.2        135         0.1   

Selling and marketing

     154         0.2        146         0.1   

General and administrative

     847         1.2        841         0.9   
                                  

Total operating expenses

     1,169         1.6        1,122         1.1   
                                  

Total

   $ 1,289         1.8   $ 1,197         1.2
                                  

Net revenue, Cost of revenue and Gross profit

 

 

 

     Nine months ended September 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)  

Net revenue

   $ 73,175         100.0   $ 101,270         100.0

Cost of revenue

     56,200         76.8        67,803         67.0   
                                  

Gross profit

   $ 16,975         23.2   $ 33,467         33.0
                                  

 

 

(Dollars in thousands)

Net revenue. Our net revenue increased from $73.2 million in the nine months ended September 30, 2009 to $101.3 million in the nine months ended September 30, 2010. This increase was a result of growth in unit sales across all categories of our products, resulting from increased demand for existing products as the general economy recovered from the global economic downturn, which negatively affected the demand for our products in 2009. We also increased our revenue from the sale of new products that we introduced since September 30, 2009, which increased our revenue over the nine months ended September 30, 2010 by approximately $8.3 million. Our revenue growth during the first nine months of 2010 was driven by strong sales of our linear products, which increased from $51.7 million in the nine months ended September 30, 2009 to $64.3 million in the nine months ended September 30, 2010, and which comprised 63.5% of our total revenue in the first nine months of 2010. Revenue growth during the first nine months of 2010 was also driven by strong sales of our high performance products, including our AC/DC products and our DC/DC products due to an increase in sales volume from our end customers in South Korea and China. Revenue from our AC/DC products increased from $10.1 million in the nine months ended September 30, 2009 to $20.3 million in the nine months ended September 30, 2010. Revenue from our DC/DC products increased from $2.7 million in the nine months ended September 30, 2009 to $5.2 million in the nine months ended September 30, 2010. Revenue of other products, primarily our Hall effect sensors, increased from $2.3 million in the nine months ended September 30, 2009 to $4.2 million in the nine months ended September 30, 2010. Revenue from foundry services increased from $6.3 million in the nine months ended September 30, 2009 to $7.3 million in the nine months ended September 30, 2010. Increases in our revenue from other products and foundry services were mainly due to the recovery of our business from the global economic downturn, which negatively affected our revenue in 2009.

Cost of revenue. Our cost of revenue increased from $56.2 million in the nine months ended September 30, 2009 to $67.8 million in the nine months ended September 30, 2010 primarily due to increased product sales.

Gross profit. Our gross profit increased from $17.0 million in the first nine months of 2009 to $33.5 million in the first nine months of 2010. Our gross margin increased from 23.2% in the nine months ended September 30, 2009 to 33.0% in the nine months ended September 30, 2010. The increase in our gross profit was primarily due to an increase in our net revenue. The increase in our net revenue also led to an improvement in our gross margin due to higher fab capacity utilization, which significantly reduced costs related to idle capacity. Additional gross margin improvement was the result of cost reduction, including lower costs in wafer processing and IC packaging. Finally, a favorable change in our product mix also contributed to our gross margin improvement.

 

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Operating expenses

 

 

 

     Nine months ended September 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)  

Research and development

   $ 4,406         6.0   $ 5,611         5.5

Selling and marketing

     3,737         5.1        5,089         5.0   

General and administrative

     5,221         7.2        5,458         5.4   
                                  

Total operating expenses

   $ 13,364         18.3   $ 16,158         15.9
                                  

 

 

(Dollars in thousands)

Operating expenses. Our operating expenses increased from $13.4 million in the nine months ended September 30, 2009 to $16.2 million in the nine months ended September 30, 2010. This increase in operating expenses primarily reflected our increased spending on research and development as well as on sales and marketing.

Research and development. Our research and development expenses increased from $4.4 million in the nine months ended September 30, 2009 to $5.6 million in the nine months ended September 30, 2010. The increase in absolute dollar research and development expenses was attributable primarily to the costs of materials used for research and development activities, which increased by $284,000, and to higher expenses in salary and other compensation costs, which increased by $842,000, reflecting our efforts to recruit and retain engineering talent. Our research and development staff is mainly comprised of analog design and process technology engineers. The total headcount of our employees performing research and development functions increased from 152 at September 30, 2009 to 177 at September 30, 2010.

Selling and marketing. Our selling and marketing expenses increased from $3.7 million in the nine months ended September 30, 2009 to $5.1 million in the nine months ended September 30, 2010. This increase in absolute dollar selling and marketing expenses was primarily the result of increases of $1.0 million in salary and other compensation costs related to hiring and retaining additional selling, marketing and applications engineering personnel. The total headcount of our employees performing selling and marketing functions increased from 71 on September 30, 2009 to 85 on September 30, 2010.

General and administrative. Our general and administrative expenses increased from $5.2 million in the nine months ended September 30, 2009 to $5.5 million in the nine months ended September 30, 2010. Such expenses declined as a percentage of net revenue from 7.2% to 5.4%. This decrease as a percentage of revenue was primarily the result of our strategy to maintain our general and administrative expenses levels despite our revenue growth.

Income from operations

Income from operations. Our income from operations improved from $3.6 million in the nine months ended September 30, 2009 to $17.3 million in the nine months ended September 30, 2010. This improvement was primarily due to a 38.4% increase in net revenue and to gross margin growth from 23.2% in the first nine months of 2009 to 33.0% in the first nine months of 2010, partially offset by an increase in operating expenses.

Other income (expense), net and Income tax expense

 

 

 

     Nine months ended September 30,  
     2009     % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)  

Other income (expense), net

   $ (449     (0.6 )%    $ 289         0.3

Income tax expense (benefit)

     (288     (0.4     936         0.9   

 

 

(Dollars in thousands)

 

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Other income (expense), net. We recorded net other expense of $449,000 in the nine months ended September 30, 2009 and net other income of $289,000 in the nine months ended September 30, 2010. This increase was primarily due to a change in valuation of warrant liability, which resulted in loss of $350,000 in the nine months ended September 30, 2009 and income of $751,000 in the nine months ended September 30, 2010. For the nine months ended September 30, 2010, we recorded a loss of $776,000 from foreign exchange transactions, which were partially offset by a gain of $405,000 as a result of the fair value assessment of our foreign exchange forward contracts.

Income tax expense (benefit). We recorded an income tax benefit of $288,000 in the nine months ended September 30, 2009 and income tax expense of $936,000 in the nine months ended September 30, 2010. The income tax expense in the period ended September 30, 2010 was primarily the result of a change in our applicable tax rate, which increased from 0.0% in 2009 to 11.0% in 2010. See “Taxation.”

Net income

Net income. Our net income increased from $3.5 million in the nine months ended September 30, 2009 to $16.7 million in the nine months ended September 30, 2010. This increase was primarily due to a 38.4% increase in net revenue and to gross margin growth from 23.2% in the first nine months of 2009 to 33.0% in the first nine months of 2010. This effect was partially offset by operating expenses that increased at a lower rate than our growth in net revenue and gross margins and by an increase in income tax expense from a benefit of $288,000 for the first nine months of 2009 to an expense of $936,000 in the first nine months of 2010.

Six months ended June 30, 2009 compared with six months ended June 30, 2010

The following table sets forth a summary of our consolidated statements of operations, also expressed as a percentage of net revenue, for the six months ended June 30, 2009 and 2010.

 

 

 

     Six months ended June 30,  
     2009     % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)               

Net revenue

   $ 42,271        100.0   $ 62,701         100.0

Cost of revenue(1)

     34,471        81.5        42,613         68.0   
                                 

Gross profit

     7,800        18.5        20,088         32.0   
                                 

Operating expenses:

         

Research and development(1)

     2,850        6.7        3,692         5.9   

Selling and marketing(1)

     2,259        5.3        3,166         5.0   

General and administrative(1)

     3,195        7.6        3,360         5.4   
                                 

Total operating expenses

     8,304        19.6        10,218         16.3   
                                 

Income (loss) from operations

     (504     (1.2     9,870         15.7   

Other income (expense), net

     43        0.1        298         0.5   
                                 

Income (loss) before income tax

     (461     (1.1     10,168         16.2   

Income tax expense

     —          —          516         0.8   
                                 

Net income (loss)

   $ (461     (1.1 )%    $ 9,652         15.4
                                 

 

 

(Dollars in thousands)

 

(1)

Amounts include share-based compensation expense as described in the table immediately below.

 

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     Six months ended June 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)               

Cost of revenue

   $ 93         0.2   $ 40         0.1

Operating expenses:

          

Research and development

     119         0.3        80         0.1   

Selling and marketing

     115         0.3        82         0.1   

General and administrative

     432         1.0        434         0.7   
                                  

Total operating expenses

     666         1.6        596         0.9   
                                  

Total

   $ 759         1.8   $ 636         1.0
                                  

 

 

(Dollars in thousands)

Net revenue, Cost of revenue and Gross profit

 

 

 

     Six months ended June 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)               

Net revenue

   $ 42,271         100.0   $ 62,701         100.0

Cost of revenue

     34,471         81.5        42,613         68.0   
                                  

Gross profit

   $ 7,800         18.5   $ 20,088         32.0
                                  

 

 

(Dollars in thousands)

Net revenue. Our net revenue increased from $42.3 million in the six months ended June 30, 2009 to $62.7 million in the six months ended June 30, 2010. This increase was a result of growth in unit sales across all categories of our products, resulting from increased demand for existing products as the general economy recovered from the global economic downturn, which negatively affected the demand for our products in the first half of 2009. We also increased our revenue from the sale of new products that we introduced since the first half of 2009, which increased our revenue over the six months ended June 30, 2010 by approximately $4.0 million. Our revenue growth during the first six months of 2010 was driven by strong sales of our linear products, which increased from $30.2 million in the six months ended June 30, 2009 to $41.2 million in the six months ended June 30, 2010, and which comprised 65.6% of our total revenue in the first six months of 2010. Revenue growth during the first six months of 2010 was also driven by strong sales of our high performance products, including our AC/DC products and our DC/DC products due to an increase in sales volume from our end customers in South Korea and China. Revenue from our AC/DC products increased from $5.7 million in the six months ended June 30, 2009 to $11.8 million in the six months ended June 30, 2010. Revenue from our DC/DC products increased from $1.4 million in the six months ended June 30, 2009 to $3.0 million in the six months ended June 30, 2010. Revenue of other products, primarily our Hall effect sensors, increased from $1.4 million in the six months ended June 30, 2009 to $2.4 million in the six months ended June 30, 2010. Revenue from foundry services increased from $3.6 million in the six months ended June 30, 2009 to $4.3 million in the six months ended June 30, 2010. Increases in our revenue from other products and foundry services were mainly due to the recovery of our business from the global economic downturn, which negatively affected our revenue in the first half of 2009.

Cost of revenue. Our cost of revenue increased from $34.5 million in the six months ended June 30, 2009 to $42.6 million in the six months ended June 30, 2010 primarily due to increased product sales.

Gross profit. Our gross profit increased from $7.8 million in the first six months of 2009 to $20.1 million in the first six months of 2010. Our gross margin increased from 18.5% in the six months ended June 30, 2009 to 32.0% in the

 

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six months ended June 30, 2010. The increase in our gross profit was primarily due to an increase in our net revenue. The increase in our net revenue also led to an improvement in our gross margin due to higher fab capacity utilization, which significantly reduced costs related to idle capacity. Additional gross margin improvement was the result of cost reduction, including lower costs in wafer processing and IC packaging. Finally, a favorable change in our product mix also contributed to our gross margin improvement.

Operating expenses

 

 

 

     Six months ended June 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)               

Research and development

   $ 2,850         6.7   $ 3,692         5.9

Selling and marketing

     2,259         5.3        3,166         5.0   

General and administrative

     3,195         7.6        3,360         5.4   
                                  

Total operating expenses

   $ 8,304         19.6   $ 10,218         16.3
                                  

 

 

(Dollars in thousands)

Operating expenses. Our operating expenses increased from $8.3 million in the six months ended June 30, 2009 to $10.2 million in the six months ended June 30, 2010. This increase in operating expenses primarily reflected our increased spending on research and development as well as on sales and marketing.

Research and development. Our research and development expenses increased from $2.9 million in the six months ended June 30, 2009 to $3.7 million in the six months ended June 30, 2010. The increase in absolute dollar research and development expenses was attributable primarily to higher expenses in salary and other compensation costs, which increased by $679,000, reflecting our efforts to recruit and retain engineering talent. Our research and development staff is mainly comprised of analog design and process technology engineers. The total headcount of our employees performing research and development functions increased from 113 at June 30, 2009 to 132 at June 30, 2010. Costs of materials used for research and development activities increased by $152,000.

Selling and marketing. Our selling and marketing expenses increased from $2.3 million in the six months ended June 30, 2009 to $3.2 million in the six months ended June 30, 2010. This increase in absolute dollar selling and marketing expenses was primarily the result of increases of $782,000 in salary and other compensation costs related to hiring and retaining additional selling, marketing and applications engineering personnel. The total headcount of our employees performing selling and marketing functions increased from 88 on June 30, 2009 to 121 on June 30, 2010.

General and administrative. Our general and administrative expenses increased from $3.2 million in the six months ended June 30, 2009 to $3.4 million in the six months ended June 30, 2010. Such expenses declined as a percentage of net revenue from 7.6% to 5.4%. This decrease as a percentage of revenue was primarily the result of our strategy to maintain our general and administrative expenses levels despite our revenue growth.

Income (loss) from operations

Income (loss) from operations. Our income (loss) from operations improved from a loss of $504,000 in the six months ended June 30, 2009 to income of $9.9 million in the six months ended June 30, 2010. This improvement was primarily due to a 48.3% increase in net revenue and to gross margin growth from 18.5% in the first six months of 2009 to 32.0% in the first six months of 2010, partially offset by an increase in operating expenses.

Other income (expense), net and Income tax expense

 

 

 

     Six months ended June 30,  
     2009      % of Net
Revenue
    2010      % of Net
Revenue
 
     (Unaudited)               

Other income (expense), net

   $ 43         0.1   $ 298         0.5

Income tax expense

     —           —          516         0.8   

 

 

(Dollars in thousands)

 

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Other income (expense), net. We record net other income of $43,000 in the six months ended June 30, 2009 and $298,000 in the six months ended June 30, 2010. This increase was primarily due to a change in valuation of warrant liability, which resulted in income of $148,000 in the six months ended June 30, 2009 and income of $534,000 in the six months ended June 30, 2010.

Income tax expense. We recorded an income tax expense of $0 in the six months ended June 30, 2009 and $516,000 in the six months ended June 30, 2010. The income tax expense in the period ended June 30, 2010 was primarily the result of generating net income in 2010.

Net income (loss)

Net income (loss). Our net income (loss) increased from a net loss of $461,000 in the six months ended June 30, 2009 to net income of $9.7 million in the six months ended June 30, 2010. This increase was primarily due to a 48.3% increase in net revenue and to gross margin growth from 18.5% in the first six months of 2009 to 32.0% in the first six months of 2010. This effect was partially offset by operating expenses that increased at a lower rate than our growth in net revenue and gross margins and by an increase in income tax expense from $0 for the first six months of 2009 to $516,000 in the first six months of 2010.

Year ended December 31, 2008 compared with year ended December 31, 2009

The following table sets forth a summary of our consolidated statements of operations, also expressed as a percentage of net revenue, for the years ended December 31, 2008 and 2009.

 

 

 

     Years ended December 31,  
     2008     % of Net
Revenue
    2009     % of Net
Revenue
 

Net revenue

   $ 88,085        100.0   $ 100,844        100.0

Cost of revenue(1)

     69,587        79.0        75,230        74.6   
                                

Gross profit

     18,498        21.0        25,614        25.4   
                                

Operating expenses:

        

Research and development(1)

     7,013        8.0        6,244        6.2   

Selling and marketing(1)

     4,487        5.1        5,422        5.4   

General and administrative(1)

     10,178        11.5        7,661        7.6   
                                

Total operating expenses

     21,678        24.6        19,327        19.2   
                                

Income (loss) from operations

     (3,180     (3.6     6,287        6.2   

Other income (expense), net

     (1,665     (1.9     44        0.1   
                                

Income (loss) before income tax

     (4,845     (5.5     6,331        6.3   

Income tax benefit

     (43     (0.0     (577     (0.6
                                

Net income (loss)

   $ (4,802     (5.5 )%    $ 6,908        6.9
                                

 

 

(Dollars in thousands)

 

(1)

Amounts include share-based compensation expense as described in the table immediately below.

 

     Years ended December 31,  
     2008      % of Net
Revenue
    2009      % of Net
Revenue
 

Cost of revenue

   $ 132         0.1   $ 147         0.1
                                  

Operating expenses:

          

Research and development

     182         0.2        225         0.2   

Selling and marketing

     164         0.2        199         0.2   

General and administrative

     1,728         2.0        1,087         1.1   
                                  

Total operating expenses

     2,074         2.4        1,511         1.5   
                                  

Total

   $ 2,206         2.5   $ 1,658         1.6
                                  

 

 

(Dollars in thousands)

 

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Net revenue, Cost of revenue and Gross profit

 

 

 

     Years ended December 31,  
     2008      % of Net
Revenue
    2009      % of Net
Revenue
 

Net revenue

   $ 88,085         100.0   $ 100,844         100.0

Cost of revenue

     69,587         79.0        75,230         74.6   
                                  

Gross profit

   $ 18,498         21.0   $ 25,614         25.4
                                  

 

 

(Dollars in thousands)

Net revenue. Our net revenue increased from $88.1 million in 2008 to $100.8 million in 2009. This increase was primarily a result of increased demand across product lines as the general economy recovered from the global economic downturn in 2008 and the first half of 2009 and the introduction of new products. The recovery in 2009 was driven primarily by strong sales of our linear products, which increased from $55.6 million in 2008 to $69.6 million in 2009, which comprised 69.0% of our net revenue in 2009. Revenue from our AC/DC products increased from $14.2 million in 2008 to $15.2 million in 2009 as we expanded our AC/DC products to new applications, in particular to the consumer electronics market in China. Revenue from our DC/DC products increased from $2.7 million in 2008 to $4.0 million in 2009 as we increased our sales volume from our end customers in China. Revenue of other products increased from $2.6 million in 2008 to $3.3 million in 2009. Revenue from foundry services decreased from $13.0 million in 2008 to $8.7 million in 2009 as our fab utilization from the manufacturing of our own products was higher in 2009 resulting in less available capacity for our foundry services.

Cost of revenue. Our cost of revenue increased from $69.6 million in 2008 to $75.2 million in 2009 primarily due to increased shipments partially offset by a lower level of inventory write-downs in 2009.

Gross profit. Our gross profit increased from $18.5 million in 2008 to $25.6 million in 2009. Our gross margin increased from 21.0% in 2008 to 25.4% in 2009. The increase in our gross margin was mainly due to increased net revenue, cost savings in our production operations and decreased inventory write-downs in 2009 as compared to 2008. Our inventory write-downs decreased from $5.4 million in 2008 to $2.2 million in 2009. The decrease in inventory write-downs in 2009 was largely due to the recovery from the global economic downturn, which resulted in an increase in the marketability and turnover of our inventories.

Operating expenses

 

 

 

     Years ended December 31,  
     2008      % of Net
Revenue
    2009      % of Net
Revenue
 

Research and development

   $ 7,013         8.0   $ 6,244         6.2

Selling and marketing

     4,487         5.1        5,422         5.4   

General and administrative

     10,178         11.5        7,661         7.6   
                                  

Total operating expenses

   $ 21,678         24.6   $ 19,327         19.2
                                  

 

 

(Dollars in thousands)

Operating expenses. Our operating expenses decreased from $21.7 million in 2008 to $19.3 million in 2009, primarily reflecting our efforts to reduce our fixed costs in the context of a global recession as well as improvements made to the efficiency of our operations.

Research and development. Our research and development expenses decreased from $7.0 million in 2008 to $6.2 million in 2009. Research and development material expenses decreased from $1.9 million in 2008 to

 

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$1.1 million in 2009. Employment expenses, however, increased from $3.7 million in 2008 to $4.1 million in 2009 as a result of an increase in research and development employees to support our new product development efforts. The total headcount of our employees performing research and development functions increased from 113 on December 31, 2008 to 125 on December, 31, 2009.

Selling and marketing. Our selling and marketing expenses increased from $4.5 million in 2008 to $5.4 million in 2009. This increase was primarily the result of increases in salary and other compensation costs related to hiring additional selling, marketing personnel and applications engineering personnel. The total headcount of our employees performing selling and marketing functions increased from 89 on December 31, 2008 to 105 on December 31, 2009.

General and administrative. Our general and administrative expenses decreased from $10.2 million in 2008 to $7.7 million in 2009. This decrease was primarily the result of a decrease of $930,000 in litigation expense resulting from the settlement in 2009 of the patent litigation with Power Integrations that started in late 2007, savings attributable to lower salary and other compensation costs which decreased from $3.0 million in 2008 to $2.6 million in 2009 as a result of headcount reduction in response to the global economic downturn, and reduced share-based compensation charges, which decreased from $1.7 million in 2008 to $1.1 million in 2009. The total headcount of our employees performing general and administrative functions declined from 84 on December 31, 2008 to 79 on December 31, 2009.

Income (Loss) from operations

Income (loss) from operations. Our income (loss) from operations improved from a loss of $3.2 million in 2008 to income of $6.3 million in 2009. This improvement was primarily due to an increase in net revenue of 14.5%, gross margin growth from 21.0% in 2008 to 25.4% in 2009 and decreased operating expenses in 2009 versus 2008.

Other income (expense), net and Income tax expense

 

 

 

     Years ended December 31,  
     2008     % of Net
Revenue
    2009     % of Net
Revenue
 

Other income (expense), net

   $ (1,665     (1.9 )%    $ 44        0.1  % 

Income tax expense (benefit)

     (43     (0.0     (577     (0.6

 

 

(Dollars in thousands)

Other income (expense), net. In 2008, we recorded a loss of $1.7 million from net other income as compared to a gain of $44,000 in 2009. In 2009, as we decreased total bank borrowings, we were able to decrease interest expenses which were $1.0 million in 2008 and $737,000 in 2009. We revalued warrants issued in prior years, and the change in fair value of these warrants resulted in a loss of $926,000 in 2008 and a gain of $145,000 in 2009.

Income tax expense (benefit). We recorded an income tax benefit of $43,000 in 2008 as compared to $577,000 in 2009 as a result of recognition of a deferred tax asset.

Net income (loss)

Net income (loss). Our net income (loss) improved from a net loss of $4.8 million in 2008 to net income of $6.9 million in 2009. This improvement was primarily due to a 14.5% increase in net revenue, gross margin growth from 21.0% in 2008 to 25.4% in 2009, decreased operating expenses in 2009 compared to 2008 and an increase in income tax benefit from $43,000 in 2008 to $577,000 in 2009.

 

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Year ended December 31, 2007 compared with year ended December 31, 2008

The following table sets forth a summary of our consolidated statements of operations, also expressed as a percentage of net revenue, for the years ended December 31, 2007 and 2008.

 

 

 

     Years ended December 31,  
     2007     % of Net
Revenue
    2008     % of Net
Revenue
 

Net revenue

   $ 98,683        100.0   $ 88,085        100.0

Cost of revenue(1)

     76,466        77.5        69,587        79.0   
                                

Gross profit

     22,217        22.5        18,498        21.0   
                                

Operating expenses:

        

Research and development(1)

     5,947        6.0        7,013        8.0   

Selling and marketing(1)

     3,577        3.6        4,487        5.1   

General and administrative(1)

     11,349        11.5        10,178        11.5   
                                

Total operating expenses

     20,873        21.1        21,678        24.6   
                                

Income (loss) from operations

     1,344        1.4        (3,180     (3.6

Other income (expense), net

     (41     (0.1     (1,665     (1.9
                                

Income (loss) before income tax

     1,303        1.3        (4,845     (5.5

Income tax expense (benefit)

     697        0.7        (43     (0.0
                                

Net income (loss)

   $ 606