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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to Commission file number 000-50857 Volterra Semiconductor Corporation  Delaware(State or other jurisdiction of
incorporation or organization)
    
    94-3251865(I.R.S. Employer
Identification No.)
 3839 Spinnaker Court
Fremont, CA 94538
(Address of principal executive offices) Registrants telephone number, including area code: (510) 743-1200 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ As of October 26, 2004, the registrant had 23,138,004 shares of common stock
outstanding.    1




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Cautionary Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements that
involve many risks and uncertainties. These statements relate to future events
and our future performance and are based on current expectations, estimates,
forecasts and projections about the industries in which we operate and the
beliefs and assumptions of our management. In some cases, you can identify
forward-looking statements by terms such as would, could, may, will,
should, expect, intend, plan, anticipate, believe, estimate,
predict, potential, targets, seek, or continue, the negative of these
terms or other variations of such terms. In addition, any statements that refer
to projections of our future financial performance, our anticipated growth and
trends in our business and other characterizations of future events or
circumstances, are forward-looking statements. These statements are only
predictions based upon assumptions made that are believed to be reasonable at
the time, and are subject to risk and uncertainties. Therefore, actual events
or results may differ materially and adversely from those expressed in any
forward-looking statement. In evaluating these statements, you should
specifically consider the risks described under the caption Factors that May
Affect Future Operating Results and elsewhere in this Form 10-Q. These factors
may cause our actual results to differ materially from any forward-looking
statements. Except as required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. 2




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Volterra Semiconductor Corporation and Subsidiaries INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    6Condensed Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 4. Submission of Matters to Vote of Security Holders
    
    
    27Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  3




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements VOLTERRA SEMICONDUCTOR CORPORATION
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) September 30,
    
    December 31,2004
    
    2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    27,548
    
    
    $
    10,129Short-term investments
    
    
    14,896
    
    
    
    Accounts receivable, net of allowances for sales returns and doubtful accounts
of $945 and $666 as of September 30, 2004 and December 31, 2003, respectively
    
    
    4,240
    
    
    
    2,430Inventory
    
    
    4,850
    
    
    
    2,002Prepaid expenses and other current assets
    
    
    746
    
    
    
    332Total current assets
    
    
    52,280
    
    
    
    14,893Property and equipment, net
    
    
    1,520
    
    
    
    1,189Other assets
    
    
    34
    
    
    
    34Total assets
    
    $
    53,834
    
    
    $
    16,116Liabilities, Convertible Preferred Stock and Stockholders Equity (Deficit)Current liabilities:Accounts payable
    
    $
    4,263
    
    
    $
    1,621Accrued liabilities
    
    
    2,287
    
    
    
    1,109Line of credit
    
    
    
    
    
    
    1,800Total current liabilities
    
    
    6,550
    
    
    
    4,530Commitments and contingenciesConvertible preferred stock
    
    
    
    
    
    
    60,818Stockholders equity (deficit):Preferred stock
    
    
    
    
    
    
    Common stock, $0.001 par value; 23,138,004 and 5,534,598 shares issued
and outstanding at September 30, 2004 and December 31, 2003
    
    
    23
    
    
    
    6Additional paid-in capital
    
    
    94,295
    
    
    
    1,160Deferred stock-based compensation
    
    
    (592
    )
    
    
    Notes receivable from stockholders
    
    
    
    
    
    
    (1,581
    )Accumulated deficit
    
    
    (46,442
    )
    
    
    (48,817
    )Total stockholders equity (deficit)
    
    
    47,284
    
    
    
    (49,232
    )Total liabilities, convertible preferred stock and stockholders equity (deficit)
    
    $
    53,834
    
    
    $
    16,116
 The accompanying notes are an integral part of these consolidated financial statements 4




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VOLTERRA SEMICONDUCTOR CORPORATION
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net revenue
    
    $
    12,562
    
    
    $
    6,308
    
    
    $
    29,321
    
    
    $
    18,615Cost of revenue
    
    
    5,569
    
    
    
    3,365
    
    
    
    13,469
    
    
    
    11,107Gross margin
    
    
    6,993
    
    
    
    2,943
    
    
    
    15,852
    
    
    
    7,508Operating expenses:Research and development
    
    
    3,708
    
    
    
    2,751
    
    
    
    9,278
    
    
    
    7,646Selling, general and administrative
    
    
    1,525
    
    
    
    1,018
    
    
    
    3,742
    
    
    
    3,313Stock-based compensation (*)
    
    
    210
    
    
    
    
    
    
    
    483
    
    
    
    Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142Total operating expenses
    
    
    5,443
    
    
    
    3,769
    
    
    
    13,503
    
    
    
    11,101Income (loss) from operations
    
    
    1,550
    
    
    
    (826
    )
    
    
    2,349
    
    
    
    (3,593
    )Interest and other income
    
    
    107
    
    
    
    38
    
    
    
    189
    
    
    
    124Interest and other expense
    
    
    (4
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    (9
    )Income (loss) before income taxes
    
    
    1,653
    
    
    
    (791
    )
    
    
    2,529
    
    
    
    (3,478
    )Income tax expense
    
    
    113
    
    
    
    
    
    
    
    154
    
    
    
    Net income (loss)
    
    $
    1,540
    
    
    $
    (791
    )
    
    $
    2,375
    
    
    $
    (3,478
    )Basic net income (loss) per share
    
    $
    0.09
    
    
    $
    (0.14
    )
    
    $
    0.25
    
    
    $
    (0.64
    )Shares used in computing basic net
income (loss) per share
    
    
    17,253
    
    
    
    5,465
    
    
    
    9,457
    
    
    
    5,442Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.14
    )
    
    $
    0.11
    
    
    $
    (0.64
    )Shares used in computing diluted net
income (loss) per share
    
    
    24,067
    
    
    
    5,465
    
    
    
    21,923
    
    
    
    5,442(*) Stock-based compensation
consists of:Cost of revenue
    
    $
    8
    
    
    
    
    
    
    $
    21
    
    
    
    Research and development
    
    
    134
    
    
    
    
    
    
    
    276
    
    
    
    Selling, general and administrative
    
    
    68
    
    
    
    
    
    
    
    186
    
    
    
    Total
    
    $
    210
    
    
    
    
    
    
    $
    483
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements 5




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VOLTERRA SEMICONDUCTOR CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Nine MonthsEnded September 30,2004
    
    2003(Unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    2,375
    
    
    $
    (3,478
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    384
    
    
    
    377Provision for doubtful accounts and sales returns
    
    
    390
    
    
    
    278Interest income on stockholders notes receivable
    
    
    (54
    )
    
    
    (65
    )Stock-based compensation
    
    
    483
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,200
    )
    
    
    (288
    )Inventory
    
    
    (2,848
    )
    
    
    1,061Prepaid expenses and other current assets
    
    
    (414
    )
    
    
    (369
    )Accounts payable
    
    
    2,642
    
    
    
    (229
    )Accrued liabilities
    
    
    1,178
    
    
    
    12Net cash provided by (used in) operating activities
    
    
    1,936
    
    
    
    (2,701
    )Cash flows from investing activities:Acquisitions of property and equipment
    
    
    (715
    )
    
    
    (264
    )Purchase of short-term investments
    
    
    (14,896
    )
    
    
    Other assets
    
    
    
    
    
    
    15Net cash used in investing activities
    
    
    (15,611
    )
    
    
    (249
    )Cash flows from financing activities:Borrowings under line of credit
    
    
    3,350
    
    
    
    6,356Payments on line of credit
    
    
    (5,150
    )
    
    
    (4,040
    )Proceeds from initial public offering, net of offering expenses
    
    
    31,906
    
    
    
    Proceeds from issuance of common stock, net
    
    
    988
    
    
    
    179Proceeds from issuance of preferred stock, net
    
    
    
    
    
    
    494Net cash provided by financing activities
    
    
    31,094
    
    
    
    2,989Net increase in cash and cash equivalents
    
    
    17,419
    
    
    
    39Cash and cash equivalents, beginning of period
    
    
    10,129
    
    
    
    10,148Cash and cash equivalents, end of period
    
    $
    27,548
    
    
    $
    10,187Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    9
    
    
    
    9Supplemental disclosure of non-cash investing and financing activities:Deferred stock-based compensation
    
    $
    935
    
    
    $
    Decrease in liability for early option exercises, net
    
    $
    (131
    )
    
    $
    Cancellation of notes receivable from stockholders in connection with stock repurchase
    
    $
    1,635
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements 6




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VOLTERRA SEMICONDUCTOR CORPORATION
AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Unaudited) Note 1  The Company and Summary of Significant Accounting Policies The Company Volterra Semiconductor Corporation (the Company or Volterra) was
incorporated in Delaware in 1996, and its principal offices are located in
Fremont, California. The Company designs, develops and markets proprietary,
high-performance analog and mixed-signal power management semiconductors for
the computing, storage, networking and consumer markets. Basis of Presentation The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. The functional
currency of foreign subsidiaries is the U.S. dollar and foreign currency
transaction gains and losses are recorded in income. The Companys accompanying condensed consolidated financial statements
have been prepared without audit in accordance with the rules and regulations
of the Securities and Exchange Commission (the SEC). Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted in accordance with these rules and regulations. The
information in this report should be read in conjunction with the Companys
audited consolidated financial statements and notes thereto included in its
Registration Statement on Form S-1 (File No. 333-115614) filed with the SEC in
connection with the Companys initial public offering. On July 8, 2004, Volterra filed an amendment to its Amended and Restated
Certificate of Incorporation to effect a 1-for-2 reverse split of its common
and preferred stock. All information related to common stock, preferred stock,
options and warrants to purchase preferred stock and earnings per share
included in the accompanying condensed consolidated financial statements has
been retroactively adjusted to give effect to the stock split. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the Companys
financial position, results of operations and cash flows for the interim
periods presented. The operating results for the three-month and nine-month
periods ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004 or for any other
future period. The consolidated balance sheet as of December 31, 2003 is
derived from the audited consolidated financial statements as of and for the
year then ended. Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Revenue Recognition Revenue from the sale of semiconductor products is recognized upon
shipment when title transfers to the customer provided that persuasive evidence
of an arrangement exists, the price is fixed or determinable, and collection of
the resulting receivable is reasonably assured. An allowance is recorded at the
time of sale to provide for estimated future returns and allowances. The
allowance is based upon historical experience, current trends and the Companys
expectations regarding future experience. Sales returns must be authorized by
Volterra and are generally limited to instances of potential product failure
under the Companys standard warranty that provides that products will be free
from defects for a period of one year from shipment. The Company has made no sales to U.S. distributors. Volterras sales to
international distributors are made under agreements that do not provide for
price adjustments after purchase and provide limited return rights under the
Companys standard warranty. Revenue on these sales is recognized upon shipment
when title passes to the distributor. Volterra estimates future international
distributor sales returns and allowances based on historical data and current
business expectations and reduces revenue for estimated future returns and
allowances through the allowance for sales returns. Sales returns from
distributors must be authorized by the Company and are
generally limited to instances of potential product failure under the same
standard warranty described above. 7




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Financial Instruments and Concentrations of Credit Risk Financial instruments consist of cash equivalents, short-term investments,
accounts receivable, accounts payable, a line of credit and convertible
preferred stock. The carrying value of the Companys cash equivalents,
short-term investments, accounts receivable and accounts payable approximates
their respective fair value due to the relatively short maturities of these
instruments. The carrying value of the line of credit approximates fair value
based on the terms and interest rates in relation to current market rates for
similar instruments. The carrying value of convertible preferred stock
approximates its fair value in a liquidation scenario. Short-term investments are comprised of government agency debt securities
with remaining contractual maturities on the date of purchase greater than 90
days but less than one year. Investments are classified as held-to-maturity
and carried at amortized cost. Significant customers are those customers accounting for more than 10% of
the Companys total net revenue or accounts receivable. For each significant
customer, net revenue as a percentage of total net revenue and accounts
receivable as a percentage of total accounts receivable are as follows: Revenue
    
    Accounts ReceivableThree Months Ended
    
    Three Months Ended
    
    Nine Months Ended
    
    Nine Months Ended
    
    As ofCustomer
    
    Sept. 30, 2004
    
    Sept. 30, 2003
    
    Sept. 30, 2004
    
    Sept. 30, 2003
    
    Sept. 30, 2004
    
    Dec. 31, 2003A
    
    
    20
    %
    
    
    *
    
    
    
    13
    %
    
    
    *
    
    
    
    34
    %
    
    
    *B
    
    
    19
    %
    
    
    21
    %
    
    
    19
    %
    
    
    19
    %
    
    
    19
    %
    
    
    37
    %C
    
    
    16
    %
    
    
    14
    %
    
    
    22
    %
    
    
    *
    
    
    
    14
    %
    
    
    23
    %D
    
    
    15
    %
    
    
    *
    
    
    
    13
    %
    
    
    *
    
    
    
    14
    %
    
    
    *E
    
    
    *
    
    
    
    15
    %
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    14
    %F
    
    
    *
    
    
    
    14
    %
    
    
    *
    
    
    
    14
    %
    
    
    *
    
    
    
    13
    %G
    
    
    *
    
    
    
    18
    %
    
    
    *
    
    
    
    38
    %
    
    
    *
    
    
    
    *
   *
    
    Less than 10% The Company reports its net revenue in geographic areas according to the
destination to which the product was shipped. Net revenue by geographic area
was as follows: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Hong Kong
    
    
    32
    %
    
    
    
    
    
    
    27
    %
    
    
    Singapore
    
    
    27
    %
    
    
    40
    %
    
    
    38
    %
    
    
    28
    %Taiwan
    
    
    21
    %
    
    
    30
    %
    
    
    16
    %
    
    
    43
    %United States
    
    
    9
    %
    
    
    12
    %
    
    
    9
    %
    
    
    13
    %Other
    
    
    11
    %
    
    
    18
    %
    
    
    10
    %
    
    
    16
    %
 The geographic area to which a product was shipped is not necessarily the same
location in which the product is ultimately used. Substantially all of the
Companys net revenue has been denominated in U.S. dollars. Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares of common stock outstanding during the
period less weighted average shares of restricted common stock subject to
repurchase during the period. Diluted net income (loss) per share is calculated
by dividing the net income (loss) by the weighted average shares of common
stock and dilutive potential common shares outstanding during the period.
Dilutive potential common shares consist of dilutive shares issuable upon the
exercise of outstanding stock options and warrants, computed using the treasury
stock method, and conversion of convertible preferred stock. The following table sets forth for all periods presented the computation
of basic and diluted net income (loss) per share, including the reconciliation
of the numerator and denominator used in the calculation: 8




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income (loss)
    
    $
    1,540
    
    
    $
    (791
    )
    
    $
    2,375
    
    
    $
    (3,478
    )Denominator:Weighted average common shares  Basic.
    
    
    17,253,214
    
    
    
    5,464,542
    
    
    
    9,457,015
    
    
    
    5,441,660Effect of dilutive securities:Stock options
    
    
    2,398,626
    
    
    
    
    
    
    
    2,204,092
    
    
    
    Convertible preferred stock
    
    
    4,346,040
    
    
    
    
    
    
    
    10,140,769
    
    
    
    Convertible preferred warrants
    
    
    69,550
    
    
    
    
    
    
    
    121,564
    
    
    
    Weighted average common shares  Diluted
    
    
    24,067,430
    
    
    
    5,464,542
    
    
    
    21,923,440
    
    
    
    5,441,660Net income (loss) per share  Basic
    
    $
    0.09
    
    
    $
    (0.14
    )
    
    $
    0.25
    
    
    $
    (0.64
    )Net income (loss) per share  Diluted
    
    $
    0.06
    
    
    $
    (0.14
    )
    
    $
    0.11
    
    
    $
    (0.64
    )
 The following securities outstanding as of September 30, 2004 and
September 30, 2003 were excluded from the calculation of diluted net income
(loss) per share for the three months ended September 30, 2004 and September
30, 2003 because their effect was antidilutive: Weighted
    
    
    
    
    
    WeightedSeptember 30,
    
    Average
    
    September 30,
    
    Average2004
    
    Exercise Price
    
    2003
    
    Exercise PriceStock options
    
    
    57,000
    
    
    $
    14.14
    
    
    
    3,342,477
    
    
    $
    2.77Convertible preferred stock
    
    
    
    
    
    
    n/a
    
    
    
    13,038,120
    
    
    
    n/aConvertible preferred warrants
    
    
    
    
    
    
    n/a
    
    
    
    181,692
    
    
    $
    1.4357,000
    
    
    
    
    
    
    
    16,562,289
 The securities outstanding as of September 30, 2004 could dilute net income per
share in the future. Accounting for Stock-Based Compensation The Company applies the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including Financial
Accounting Standards Board (FASB) Interpretation (FIN) No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25, to account for the Companys fixed plan stock options. Under
this method, compensation expense has been recorded only if the deemed fair
value of the underlying stock exceeded the exercise price on the date of grant.
Deferred stock-based compensation expense is amortized on an accelerated basis
over the vesting period of each grant using the method prescribed by FASB FIN
28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Awards Plans. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation,and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of FASB Statement No.
123, established accounting and disclosure requirements using a fair value
based method of accounting for stock-based employee compensation plans. As
permitted by existing accounting standards, the Company has elected to continue
to apply the intrinsic value based method of accounting described above, and
has adopted only the disclosure requirements of SFAS No. 123, as amended. The
following table illustrates the effect on net income (loss) if the fair value
based method had been used in each period: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    1,540
    
    
    $
    (791
    )
    
    $
    2,375
    
    
    $
    (3,478
    )Add: stock-based compensation for
employee awards included in the
determination of net income (loss),
net of tax
    
    
    120
    
    
    
    
    
    
    
    380
    
    
    
    Less: stock-based compensation for
employee awards determined under the
fair-value method, net of tax
    
    
    (309
    )
    
    
    (82
    )
    
    
    (777
    )
    
    
    (263
    )Pro forma net income (loss)
    
    $
    1,351
    
    
    $
    (873
    )
    
    $
    1,978
    
    
    $
    (3,741
    )Basic net income (loss) per share:As reported
    
    $
    0.09
    
    
    $
    (0.14
    )
    
    $
    0.25
    
    
    $
    (0.64
    )Pro forma
    
    $
    0.08
    
    
    $
    (0.16
    )
    
    $
    0.21
    
    
    $
    (0.69
    )Diluted net income (loss) per share:As reported
    
    $
    0.06
    
    
    $
    (0.14
    )
    
    $
    0.11
    
    
    $
    (0.64
    )Pro forma
    
    $
    0.06
    
    
    $
    (0.16
    )
    
    $
    0.09
    
    
    $
    (0.69
    )
 9




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##### Table of Contents



Note 2  Inventory Inventory as of September 30, 2004 and December 31, 2003 consisted of the
following: September 30,
    
    December 31,2004
    
    2003Work-in-process
    
    $
    2,722
    
    
    $
    1,415Finished goods
    
    
    2,128
    
    
    
    587$
    4,850
    
    
    $
    2,002
 Note 3  Property and Equipment Property and equipment as of September 30, 2004 and December 31, 2003
consisted of the following: September 30,
    
    December 31,2004
    
    2003Computer hardware
    
    $
    961
    
    
    $
    889Computer software
    
    
    1,979
    
    
    
    1,977Equipment and furniture
    
    
    2,088
    
    
    
    1,475Leasehold improvements
    
    
    626
    
    
    
    5985,654
    
    
    
    4,939Less accumulated depreciation and amortization
    
    
    (4,134
    )
    
    
    (3,750
    )$
    1,520
    
    
    $
    1,189
 Note 4  Initial Public Offering In August 2004, Volterra sold 4,558,601 shares of its common stock in its
initial public offering at an offering price of $8.00 per share. The Company
received total proceeds of $31.9 million, net of related issuance fees and
estimated offering costs. In connection with the initial public offering,
13,038,120 shares of preferred stock were converted into the same number of
common shares and the carrying value of convertible preferred stock was
reclassified to additional paid-in capital. Note 5  Commitments The Company leases its facilities under operating lease agreements
expiring between 2004 and 2007. Rent expense for the nine months ended
September 30, 2004 was $360. The following table sets forth the Companys contractual obligations as of
September 30, 2004: 20082004
    
    2005
    
    2006
    
    2007
    
    and after
    
    TotalFuture minimum lease commitments
    
    $
    112
    
    
    $
    455
    
    
    $
    446
    
    
    $
    270
    
    
    $
    
    
    
    $
    1,283Inventory purchase commitments
    
    
    1,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,664$
    1,776
    
    
    $
    455
    
    
    $
    446
    
    
    $
    270
    
    
    $
    
    
    
    $
    2,947
 Inventory purchase commitments are comprised of the estimated obligation
for in-process silicon wafers. 10




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion should be read in conjunction with our consolidated
financial statements and the related notes contained elsewhere in this
quarterly report on Form 10-Q. All statements in the following discussion that
are not reports of historical information or descriptions of current accounting
policy are forward-looking statements. Please note the Cautionary Note
Regarding Forward-Looking Statements at the beginning of this quarterly report
and consider our forward-looking statements in light of the factors that may
affect operating results set forth herein. Overview We design, develop and market proprietary, high-performance analog and
mixed-signal power management semiconductors. We commenced operations in 1996.
From 1996 to 2000, we were primarily involved in developing our technology,
recruiting personnel and raising capital. We made our first commercial
shipments of products in 2000 and began to recognize revenue in the first
quarter of 2001. As of September 30, 2004, we had an accumulated deficit of
$46.4 million. We have been profitable for the past three quarters and have
generated net revenue of $29.3 million and net income of $2.4 million in the
nine months ended September 30, 2004, compared to $18.6 million in net revenue
and a net loss of $3.5 million for the nine months ended September 30, 2003. We sell integrated voltage regulator semiconductors and scalable voltage
regulator semiconductor chipsets in the computing, storage, networking and
consumer markets. In 2003 and the first nine months of 2004, most of our
revenue was derived from sales into high-performance systems in the computing
and storage markets. From our first generation of products to our third, we
have significantly reduced system cost and size, while enhancing performance
and features, thus enabling us to expand our presence in our existing markets
and to address the needs of more cost-sensitive, higher-volume markets. In reviewing our performance, we focus on the following key non-financial
factors: customers and market penetration; product introduction and
performance. We evaluate our performance as to these non-financial factors
against our operating plans and internally developed goals. We also focus on
the following key financial factors: net revenue, and gross margin and income
from operations as a percentage of net revenue. The following table summarizes
those key financial factors over the last five quarters: Three Months EndedSept. 30,
    
    June 30,
    
    Mar. 31,
    
    Dec. 31,
    
    Sept. 30,2004
    
    2004
    
    2004
    
    2003
    
    2003Net revenue (in thousands)
    
    $
    12,562
    
    
    $
    9,144
    
    
    $
    7,615
    
    
    $
    6,504
    
    
    $
    6,308As a percent of net revenue:Gross margin
    
    
    56
    %
    
    
    54
    %
    
    
    52
    %
    
    
    47
    %
    
    
    47
    %Income (loss) from operations
    
    
    12
    %
    
    
    6
    %
    
    
    3
    %
    
    
    (9
    %)
    
    
    (13
    %)
 While our business will be influenced by factors affecting the
semiconductor industry generally and by conditions in each of the markets we
serve, because of our small scale relative to our markets, we believe our
business will be influenced principally by company-specific factors such as our
execution in design engineering, sales and operations. We expect any future net
revenue growth to be driven principally by our penetration of, and our
expansion within, new and existing customers and markets. Our lengthy sales cycles make forecasting the volume and timing of orders
difficult. The design phase of our sales cycle can take up to 12 months to
complete. The commercial introduction of systems that use our products can take
an additional six to 12 months or longer to occur, if they are introduced at
all. The sales of our products are generally made pursuant to standard purchase
orders rather than long-term agreements. Purchase orders are frequently revised
prior to shipment, to reflect changes in the customers requirements. Product
deliveries are scheduled upon our receipt of purchase orders. Generally, these
orders allow customers to reschedule delivery dates and cancel orders on
relatively short notice. In addition, in circumstances where we have achieved
our financial objectives in a period or if we have limited or insufficient
inventory available, we may delay shipment of orders. For these reasons, we
believe that backlog is not necessarily a reliable indicator of future revenue,
and therefore we do not report backlog. While our limited operating history and recent rapid growth make it
difficult for us to assess the impact of seasonal factors on our business, we
expect our business to be subject to varying order patterns. In particular, our
operating results have been negatively impacted during the first quarter of
each year due to the lunar new year holidays in Asia during late January and
early February, during which time many of our customers, manufacturers and
subcontractors cease or significantly reduce their operations. We have recently
begun to focus on higher-volume applications across multiple markets. In these
markets, we expect a disproportionate amount of our net revenue to be generated
during the second half of the year as a result of the year-end and the December
holiday season. Our gross margins have historically varied significantly, and are expected
to continue to vary significantly, based on a variety of factors, including
changes in the relative mix of the products we sell, the markets and
geographies in which we sell, and the size and 11




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##### Table of Contents



nature of our customers in these markets. In addition, we estimate that
the average selling prices for power management solutions have typically
declined 5 to 10% per year from initial introduction. As a result, consistent
with the overall market for power management solutions, we expect to face price
pressure over time. In order to maintain or improve our gross margins, we need
to introduce new, lower cost products, increase volumes, reduce unit costs or
achieve a combination of these objectives. Our products have typically sold for between approximately $0.50 and $5.00
per unit. With such a relatively wide range of unit prices, changes in average
selling prices, or ASPs, can result merely from a change in product mix,
reducing the effectiveness of ASP as an indicator of gross margin. In addition,
successive generations of our products historically have had lower unit prices
than prior generations, which reduces overall ASP, but have had a neutral or
positive effect on gross margin due to their decreased manufacturing unit
costs. We expect operating expenses generally to grow in absolute dollars but
decline as a percentage of net revenue. Our research and development expenses
fluctuate as a result of long design cycles and the timing of major
expenditures for prototypes and product development and will increase with
increased headcount. To date, we have not typically compensated our employees
with sales commissions, but expect to do so in the future. If we do so, we
expect selling costs to increase in relation to any increase in net revenue.
Our general and administrative expenses are expected to grow reflecting the
costs associated with being a publicly-traded company. The electronics manufacturing industry is complex and disaggregated, with
many electronic system designers relying upon a few distributors and outsourced
suppliers to provide procurement, manufacturing, design and other supply chain
related services within the industry. We sell our products primarily to
original equipment manufacturers, or OEMs, original design manufacturers, or
ODMs, contract equipment manufacturers, or CEMs, and power supply
manufacturers. Electronic system designers incorporate our products in a number
of different electronic systems. These system designers obtain our products
directly from us, or indirectly through distributors and outsourced suppliers.
Outsourced suppliers are ODMs, CEMs and power supply manufacturers that
manufacture for system designers to which we market our products. As a result,
our sales and accounts receivable are concentrated in a small number of
distributors and outsourced suppliers which in turn supply other electronics
companies. For the nine months ended September 30, 2004, our top five
customers accounted for 22%, 19%, 13%, 13% and 12% of our net revenue,
respectively. Of these customers, two are system designers, one is a
power-supply manufacturer and two are distributors. Our sales through
distributors typically result in lower gross margins, but also result in lower
selling and collections expenses than are associated with direct sales. We typically sell directly through our internal sales force to customers
in North America, and indirectly through distributors and outsourced suppliers
in other locations, though we do sell directly to some of our customers in Asia
and Europe. As most of the systems that use our products are manufactured
outside of the United States, the percentage of our net revenue generated
outside the United States was 91% and 87% for the nine months ended September
30, 2004 and 2003, respectively. To date, substantially all of our net revenue
has been denominated in U.S. dollars and we expect to continue this practice.
We report our net revenue by geographic areas according to the destination to
which we shipped our product. Because we use third-party subcontractors to manufacture, assemble and
test our products, our business has relatively low capital requirements. We
purchase our inventory pursuant to standard purchase orders. As lead-times at
our manufacturing partners can be up to three months or more, we typically
build inventory based on our sales forecasts rather than customers orders,
subjecting us to potential inventory risk. Net Revenue.Net revenue consists primarily of sales of our power
management semiconductor products. We have made no sales to U.S. distributors.
Our sales to international distributors are made under agreements that do not
provide for price adjustments after purchase and provide limited return rights
in the event of product failure. We recognize revenue on our sales upon
shipment with a provision for estimated sales returns and allowances. Cost of Revenue.Our cost of revenue consists primarily of purchases of
silicon wafers and related costs of assembly, test and shipment of our
products, and compensation and related costs of personnel and equipment
associated with production management and quality assurance. Cost of revenue as
a percentage of net revenue has varied from quarter to quarter based on our
average selling prices, mix of product sales, product ramps and manufacturing
volumes, yields and inventory and overhead costs. Research and Development.Research and development expenses consist
primarily of compensation and related costs for employees involved in the
design and development of our products, prototyping and other development
expense, and the depreciation costs related to equipment being used for
research and development. All research and development costs are expensed as
incurred. Selling, General and Administrative.Selling, general and administrative
expenses consist primarily of compensation and related costs for employees
involved in general management, sales and marketing, finance and information
technology, travel and entertainment expenses, professional services expenses,
and finance and insurance expenses. Stock-Based Compensation.In connection with grants of stock options we
recorded $0.9 million and $0 of deferred stock-based compensation for the nine
months ended September 30, 2004 and 2003, respectively. These options are
considered compensatory 12




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##### Table of Contents



because the fair value of our stock determined for financial reporting
purposes was greater than the fair value determined by our board of directors
on the date of grant. The deferred stock-based compensation is amortized over
the vesting period of the related options. As of September 30, 2004, we had an
aggregate of $0.6 million of deferred stock-based compensation remaining to be
amortized. We report employee stock-based compensation separately, rather than
including it in each expense classification, as we believe this allows for more
meaningful comparison of operating expenses between periods and more consistent
comparison of our financial results with other companies. Income Taxes.Our effective tax rate is based on our annual effective
tax rate in accordance with SFAS No. 109 Accounting for Income Taxes. We
recorded provisions for income taxes of approximately $0.2 million for the nine
months ended September 30, 2004 and $0 for the nine months ended September 30,
2003, resulting in an effective tax rate of 6.1% and 0% for the respective
periods. The increase in our effective tax rates was due to the commencement
of profitable operations. Our annual effective tax rate is based on the mix of
income between domestic and international operations, as well as the
utilization of available net operating loss carry-forwards to offset taxable
income in the U.S. Critical Accounting Policies
Management believes there have been no significant changes to our critical
accounting policies during the quarter ended September 30, 2004 as compared to
the previous disclosures in Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our prospectus dated July 28,
2004, filed with the SEC on July 29, 2004 in connection with our initial public
offering. Results of Operations The following table sets forth our results of operations as a percentage
of net revenue for the periods indicated: Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,Percentage of Net Revenue:
    
    2004
    
    2003
    
    2004
    
    2003Net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenue
    
    
    44
    
    
    
    53
    
    
    
    46
    
    
    
    60Gross margin
    
    
    56
    
    
    
    47
    
    
    
    54
    
    
    
    40Operating expenses:Research and development
    
    
    30
    
    
    
    44
    
    
    
    32
    
    
    
    41Selling, general and administrative.
    
    
    12
    
    
    
    16
    
    
    
    13
    
    
    
    18Stock-based compensation
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Restructuring charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total operating expenses
    
    
    44
    
    
    
    60
    
    
    
    46
    
    
    
    60Income (loss) from operations
    
    
    12
    
    
    
    (13
    )
    
    
    8
    
    
    
    (20
    )Interest and other income, net
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1Income (loss) before income taxes
    
    
    13
    
    
    
    (13
    )
    
    
    9
    
    
    
    (19
    )Income tax expense
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Net income (loss)
    
    
    12
    %
    
    
    (13
    )%
    
    
    8
    %
    
    
    (19
    )%
 Comparison of Quarter Ended September 30, 2004 to Quarter Ended September 30, 2003 Net Revenue.Net revenue was $12.6 million in the three months ended
September 30, 2004 and $6.3 million in the three months ended September 30,
2003, an increase of 99%. Volume of shipments increased 92% in the third
quarter of 2004 as compared to the third quarter of 2003, primarily due to
higher sales in the computing and storage markets. For the three months ended September 30, 2004, we had no revenue from
Weikeng, an international distributor, compared to 18% of net revenue for the
three months ended September 30, 2003. We began to reduce our activity with
Weikeng in mid-2003 and terminated our relationship in October 2003. Our
operations were not impacted as the affected customers either established
direct relationships with us or began purchasing from our other distributors.
As a result, our sales to two of these distributors increased such that each
represented more than 10% of our net revenue for the three months ended
September 30, 2004. Cost of Revenue and Gross Margin.Cost of revenue was $5.6 million for
the three months ended September 30, 2004 and $3.4 million for the three months
ended September 30, 2003. Cost of revenue increased primarily due to the
increased volume of shipments. Gross margin was $7.0 million for the three
months ended September 30, 2004 as compared to $2.9 million for the three
months ended September 30, 2003, an increase of 138%. Gross margin as a percent
of net revenue increased to 56% for the three months ended September 30, 2004
as compared to 47% for the three months ended September 30, 2003. The increase
in gross margin was due primarily to changing sales mix resulting from a lower
proportion of our first generation products, which had lower gross 13




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##### Table of Contents



margin than our newer products. We expect our gross margin to fluctuate as
we introduce new products, our sales mix changes and our selling prices and
costs per unit change over time. Research and Development.Research and development expenses were $3.7
million for the three months ended September 30, 2004 as compared to $2.8
million for the three months ended September 30, 2003, an increase of 35%. The
increase was primarily associated with increased prototype development
spending. While likely declining as a percentage of net revenue in the near
future, we intend to invest a significant amount of resources into research and
development activities and therefore expect these expenses to increase in
absolute dollars and to fluctuate due to periodic additional expenditures for
product prototypes and qualification. Selling, General and Administrative.Selling, general and administrative
expenses were $1.5 million for the three months ended September 30, 2004 as
compared to $1.0 million for the three months ended September 30, 2003, an
increase of 50%. The increase was primarily associated with increased headcount
and professional services associated with being a publicly traded company. We
anticipate our sales, general and administrative expenses to increase in
absolute dollars as we hire additional sales and administrative personnel and
incur additional costs associated with being a publicly traded company. Stock-based Compensation.Stock-based compensation expense was $0.2
million for the three months ended September 30, 2004 and $0 for the three
months ended September 30, 2003. Options granted during the first two quarters
of 2004 were considered compensatory because the fair market value of our stock
determined for financial reporting purposes was greater than the fair value
determined by the board of directors on the date of grant of the options. Income Tax Expense.Income tax expense was $0.1 million for the three
months ended September 30, 2004 and $0 for the three months ended September 30,
2003. Income tax expense in 2004 is based on our estimated annual effective
tax rate of 6.1%. We recorded no income tax expense or benefit in 2003 because
of pre-tax losses and a full valuation allowance recorded against net operating
losses. Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003 Net Revenue.Net revenue was $29.3 million in the nine months ended
September 30, 2004 and $18.6 million in the nine months ended September 30,
2003, an increase of 58%. Volume of shipments increased 62% in the first three
quarters of 2004 as compared to the same period in 2003, primarily due to
higher sales in the computing and storage markets. For the nine months ended September 30, 2004, we had no revenue from
Weikeng, an international distributor, compared to 38% of net revenue for the
nine months ended September 30, 2003. Our operations were not impacted as the
affected customers either established direct relationships with us or began
purchasing from our other distributors. As a result, our sales to two of these
distributors increased such that each represented more than 10% of our net
revenue for the nine months ended September 30, 2004. Cost of Revenue and Gross Margin.Cost of revenue was $13.5 million for
the nine months ended September 30, 2004 and $11.1 million for the nine months
ended September 30, 2003. Cost of revenue increased primarily due to the
increased volume of shipments. Gross margin was $15.9 million for the nine
months ended September 30, 2004 as compared to $7.5 million for the nine months
ended September 30, 2003, an increase of 111%. Gross margin as a percent of net
revenue increased to 54% for the nine months ended September 30, 2004 as
compared to 40% for the nine months ended September 30, 2003. The increase in
gross margin was due primarily to changing sales mix resulting from a lower
proportion of our first generation products, which had lower gross margins than
our newer products. Research and Development.Research and development expenses were $9.3
million for the nine months ended September 30, 2004 as compared to $7.6
million for the nine months ended September 30, 2003, an increase of 21%. The
increase was largely associated with increased prototype development spending. Selling, General and Administrative.Selling, general and administrative
expenses were $3.7 million for the nine months ended September 30, 2004 as
compared to $3.3 million for the nine months ended September 30, 2003, an
increase of 13%. The increase was due to additional headcount and professional
services associated with being a publicly traded company. Stock-based Compensation.Stock-based compensation expense was $0.5
million for the nine months ended September 30, 2004 and $0 for the nine months
ended September 30, 2003. Options granted during the first two quarters of 2004
were considered compensatory because the fair market value of our stock
determined for financial reporting purposes was greater than the fair value
determined by the board of directors on the date of grant of the options. Income Tax Expense.Income tax expense was $0.2 million for the nine
months ended September 30, 2004 and $0 for the nine months ended September 30,
2003. Income tax expense in 2004 is based on our estimated annual effective
tax rate of 6.1%. We recorded no income tax expense or benefit in 2003 because
of pre-tax losses and a full valuation allowance recorded against net operating
losses. 14




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##### Table of Contents



Liquidity and Capital Resources As of September 30, 2004, we had working capital of $45.7 million,
including cash and cash equivalents of $27.5 million, compared to working
capital of $10.4 million, including cash and cash equivalents of $10.1 million,
as of December 31, 2003. Since our inception, we have financed our operations
primarily through private sales of equity securities totaling $60.8 million. We
have also funded operations with debt financing under our bank credit facility
and with capital leases. In August 2004, we received total proceeds of $31.9
million, net of related issuance fees and estimated offering costs, from our
initial public offering. We believe that our current cash, cash equivalents
and investments as well as cash flows from operations will be sufficient to
continue our operations and meet our capital needs for the foreseeable future. Net cash of $1.9 million was provided by operating activities in the nine
months ended September 30, 2004 compared to net cash used by operating
activities of $2.7 million in the nine months ended September 30, 2003. The
change is primarily due to increases of $5.9 million, $2.9 million and $1.2
million in net income, accounts payable and accrued liabilities, respectively,
in the nine months ended September 30, 2004, offset in part by increases in
inventory and accounts receivable of $3.9 million and $1.9 million,
respectively. In 2004, the inventory and accounts receivable increases were
related to increasing sales volumes. Similarly, increased accounts payable
balances reflected higher inventory purchases, while increased accrued
liabilities were due to costs associated with our initial public offering. Our investing activities used net cash in the amounts of $15.6 million and
$0.2 million for the nine months ended September 30, 2004 and 2003,
respectively. In 2004, we purchased $14.9 million of short-term investments
using the proceeds of our initial public offering. Other cash used in
investing activities during these periods was for the acquisition of property
and equipment. Our financing activities provided $31.1 million and $3.0 million, for the
nine months ended September 30, 2004 and 2003, respectively. During the nine
months ended September 30, 2004, we received net proceeds of $31.9 million from
our initial public offering. In addition, proceeds of $0.9 million were
received from the issuance of common stock in connection with employee
exercises of stock options, partially offset by net payments on our line of
credit of $1.8 million. During the nine months ended September 30, 2003, the
net cash provided by financing activities was primarily due to net borrowings
of $2.3 million under our line of credit and $0.5 million from the issuance of
preferred stock. In the first nine months of 2004, we used our bank line of credit to
generate an additional $3.4 million of debt financing which was repaid in full
within the same period. Our bank line of credit allows us to borrow based on
eligible accounts receivable up to a maximum of $3.5 million, which can be
increased to a maximum of $5.0 million at our option. As of September 30,
2004, we had no outstanding amounts under the bank line of credit, and $3.3
million remained available based on eligible accounts receivable. Interest on
borrowings under this line of credit accrues at the prime rate plus 0.5%. This
line of credit expires on June 24, 2005. Contractual Obligations We depend entirely upon third party foundries to manufacture our silicon
wafers. Due to lengthy foundry lead times, we must order these materials well
in advance of required delivery dates, and we are obligated to pay for the
materials in accordance with their payment terms, which typically require
payment within three months. The following table sets forth our contractual obligations as of September
30, 2004 (in thousands): 20082004
    
    2005
    
    2006
    
    2007
    
    and after
    
    TotalFuture minimum lease commitments
    
    $
    112
    
    
    $
    455
    
    
    $
    446
    
    
    $
    270
    
    
    $
    
    
    
    $
    1,283Inventory purchase commitments
    
    
    1,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,664$
    1,776
    
    
    $
    455
    
    
    $
    446
    
    
    $
    270
    
    
    $
    
    
    
    $
    2,947
 Inventory purchase commitments are comprised of the estimated obligation
for in-process silicon wafers. Factors that May Affect Future Operating Results You should carefully consider the risks described below and elsewhere in this
report, which could materially and adversely affect our business, results of
operations or financial condition. In those cases, the trading price of our
common stock could decline and you may lose all or part of your investment. We are an early stage semiconductor company with a limited operating history,
which makes it difficult to evaluate our current business and future prospects
and may increase the risk of your investment. 15




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##### Table of Contents



We have a limited operating history. While our commercial operations began
in August 1996, our first products were not shipped until the first quarter of
2000 and most of our current products have been sold in significant quantities
for only a short time. You should consider our business and prospects in light
of the risks and difficulties we encounter as an early stage company. These
risks and difficulties include the following:  
    
    we have limited historical financial data from which to predict our future revenue and operating results;  
    
    we are subject to the highly cyclical nature of, and downturns in, the semiconductor industry;  
    
    we depend on a small number of customers for substantially all of our net revenue;  
    
    we have a limited number of products; and  
    
    we may face difficulties in managing growth in personnel and operations. We may not be able to successfully address any of these risks or others,
including the other risks related to our business and industry described below.
Failure to adequately do so could seriously harm our business and cause our
operating results to suffer. Our operating results have fluctuated in the past, and we expect a number of
factors to cause our operating results to fluctuate in the future, making it
difficult for us to accurately forecast our operating results. In the past, our net revenue and operating results have fluctuated from
quarter to quarter and year to year, and we expect them to continue to do so in
the future. As a result, it is difficult to predict our future revenue and
operating results. A number of factors, many of which are beyond our control,
are likely to cause our net revenue and operating results to fluctuate. These
factors include:  
    
    changes in the level of our expenses, including the cost of materials used to manufacture our products;  
    
    the cyclical nature of the semiconductor industry;  
    
    the loss of one or more key customers, or a significant reduction in sales to one or more key customers;  
    
    the loss of one or more key distributors, or a significant reduction in orders from one or more key distributors;  
    
    demand for our products or the electronic systems into which our products are incorporated;  
    
    our ability to develop new products or new generations and versions of our existing products that achieve market
acceptance in a timely manner;  
    
    the timing of introductions of competing products or technologies;  
    
    our ability to adequately support our future growth;  
    
    disputes regarding intellectual property rights;  
    
    litigation involving us or our products;  
    
    our ability to obtain sufficient capacity from foundries and other third-party subcontractors to manufacture,
assemble and test our products on a timely and cost-effective basis;  
    
    the ability of our manufacturing subcontractors to obtain an adequate supply of the raw materials used in the
manufacture of our products on a timely and cost-effective basis;  
    
    changes in the prices of our products or the electronic systems into which our products are incorporated;  
    
    our ability to fulfill orders for our products in a timely manner, or at all;  
    
    customers failure to pay us on a timely basis; 16




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
    
    varying order patterns in the markets in which we sell our products;  
    
    changes in foreign currency rates; and  
    
    changes in accounting principles or policies, including an election by us, or a requirement, to treat stock
option grants as an operating expense. Due to these and other factors discussed in this report, you should not
rely upon the results of any prior quarter or year as an indication of our
future operating performance. We have a history of losses, have only recently experienced revenue growth and
become profitable and may not maintain profitability on a quarterly basis or
achieve profitability on an annual basis. We experienced profitability for the first time in the first quarter of
2004. We incurred net losses of approximately $13.3 million, $9.2 million and
$4.0 million in 2001, 2002 and 2003, respectively, and as of September 30,
2004, we had an accumulated deficit of $46.4 million. We have recently
experienced revenue growth. Specifically, our annual net revenue increased 60%
from $15.7 million in 2002 to $25.1 million in 2003. Revenue increased 58%
from $18.6 million for the first nine months of 2003 to $29.3 million for the
first nine months in 2004. However, we do not expect to maintain similar
revenue growth rates in future periods. We may also incur losses in future
periods. Accordingly, you should not rely on the results of any prior quarterly
or annual periods as an indication of our future revenue growth or financial
results. Our ability to maintain profitability on a quarterly basis or achieve
profitability on an annual basis depends in part on the rate of growth of our
target markets, the continued acceptance of our and our customers products,
the competitive position of our products, our ability to develop new products,
our ability to secure adequate manufacturing capacity and our ability to manage
expenses. We may not maintain profitability on a quarterly basis or achieve
profitability on an annual basis. We are subject to the highly cyclical nature of the semiconductor industry and
any future downturns could significantly harm our business. Our business is heavily influenced by the cyclical nature of the
semiconductor industry. The semiconductor industry has experienced significant
downturns, often in connection with, or in anticipation of, maturing product
cycles of both semiconductor companies and their customers and declines in
general economic conditions. These downturns have been characterized by
production overcapacity, high inventory levels and accelerated erosion of
average selling prices. Any future downturns could significantly harm our
business or reduce our revenue from one period to the next or for a prolonged
period of time. From time to time, the semiconductor industry also has
experienced periods of increased demand and production capacity constraints. We
may experience substantial changes in future operating results due to factors
that affect the semiconductor industry generally. We depend on a small number of customers for substantially all of our net
revenue and the loss of, or a significant reduction in orders from, any of them
would significantly reduce our net revenue and adversely affect our operating
results. We sell our products primarily to original equipment manufacturers, or
OEMs, original design manufacturers, or ODMs, contract equipment manufacturers,
or CEMs, and power supply manufacturers, either directly through our internal
sales force or indirectly through distributors and outsourced suppliers. In
2003, four customers each accounted for more than 10% of our net revenue and
collectively accounted for 78% of our net revenue. In the first nine months of
2004, five customers each accounted for more than 10% of our net revenue and
collectively accounted for 79% of our net revenue, and we expect sales to a
small number of customers to continue to account for a substantial portion of
our net revenue during the remainder of 2004. Consolidation among our customers
may increase our customer concentration. The loss of any of our major customers
would have a substantial negative impact on our business. In addition, our
operating results will be adversely affected if the electronic systems into
which our relatively few customers incorporate our products are not
commercially successful. We rely primarily on a small number of distributors to market and distribute
our products, and if we fail to maintain or expand these relationships, our net
revenue would likely decline. While we sell some of our products directly to certain of our customers,
many purchases of our products are made through a concentrated group of
distributors. Sales to these distributors account for a significant portion of
our net revenue. Our sales to distributors accounted for 56% of our net revenue
for 2003 and 40% of our net revenue for the nine months ended September 30,
2004. In particular, our sales to Weikeng Industrial, an international
distributor, accounted for approximately 28% of our net revenue in 2003, and 0%
in the nine months ended September 30, 2004. In October 2003, we terminated our
relationship with Weikeng and established direct relationships with certain of
the affected customers while others began purchasing from our other
distributors. If we are unable to effectively serve customers who previously
purchased products from Weikeng, or our other distributors materially reduce
their purchases from us, our operating results would suffer. None of our distributors are required to purchase a specified minimum
level of products from us. Our sales to distributors are made pursuant to
standard purchase orders rather than long-term contracts and their orders may
be cancelled or changed more readily 17




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than if we had long-term purchase commitments. In the event of a cancellation,
reduction or delay of an order, we may not have enough time to reduce operating
expenses to minimize the effect of the lost revenue on our business. We also
rely on our distributors to accurately and timely report to us their sales of
our products. Our inability to obtain accurate and timely reports from our
distributors would limit our visibility into demand for our products. We also
rely on our distributors to provide certain engineering support and other
customer service to our customers. If they fail to provide appropriate levels
of support and service to our customers on a timely basis, our relationships
with our customers will suffer. We need to maintain and expand our relationships with distributors,
develop additional channels for the distribution and sale of our products and
effectively manage these relationships. If we fail to do so, our distributors
may decide not to include our products among those that they sell or they may
not make marketing and selling our products a priority. In addition, our
distributors may sell product lines that are competitive with ours. If we fail
to successfully manage our relationships with distributors, our business would
be harmed. We depend on a limited number of markets, and in these markets we have
experienced varying order patterns, and if demand for our products in these
markets declines, or if we are unable to adjust to the varying order patterns
in these markets or expand into new markets, our business would be harmed. In the first nine months of 2004, most of our net revenue was derived from
the sale of our products in the high-performance computing and storage markets.
If the demand for our products in these markets declines, we would need to
attempt to diversify our markets and our inability to do so in a timely and
cost-effective manner would harm our business. In addition, we expect our business in these markets to be subject to
varying order patterns. In particular, our operating results have been
negatively impacted during the first quarter of each year due to the lunar New
Year holidays in Asia during late January or early February, during which time
many of our customers, manufacturers and subcontractors cease or significantly
reduce their operations. We have recently begun to focus on higher-volume
applications across multiple markets such as desktop and notebook computers,
digital cameras, graphics cards, hard disk drives, mobile phones, optical
drives, printers, wireless local area network cards and wireless personal
digital assistants. In these higher-volume markets, we expect a
disproportionate amount of our net revenue to be generated during the second
half of the year as a result of the December holiday season. If we are unable
to adjust production of our products to address changes in demand, our
operating results would be harmed. We sell a limited number of products and a reduction in demand for these
products would harm our business and operating results. We derive substantially all of our net revenue from the sale of integrated
voltage regulator semiconductors and scalable voltage regulator semiconductor
chipsets, and we expect to continue to derive substantially all of our net
revenue from these products for the foreseeable future. If demand for these
products declines or does not grow, we may be forced to diversify our product
offerings. Factors that could cause the demand for our products to decline
include downturns in the semiconductor industry, the introduction of competing
products, our pricing strategies and the pricing strategies of our competitors,
or a decline in demand for the electronic systems into which our products are
incorporated. Our inability to diversify our products in a timely and
cost-effective manner would harm our business and operating results. If we are unable to timely develop new products or new generations and versions
of our existing products that achieve market acceptance, our operating results
and competitive position could be harmed. Our industry is characterized by intense competition, rapidly evolving
technology and continually changing requirements. These factors could render
our existing products obsolete. Accordingly, our ability to compete in the
future will depend in large part on our ability to identify and develop new
products or new generations and versions of our existing products that achieve
market acceptance on a timely and cost-effective basis, and to respond to
changing requirements. If we are unable to do so, our business, operating
results and financial condition could be negatively affected. The successful development and market acceptance of our products depend on
a number of factors, including:  
    
    our accurate prediction of changing customer requirements;  
    
    timely development of new designs;  
    
    timely qualification and certification of our products for use in electronic systems;  
    
    commercial acceptance and production of the electronic systems into which our products are incorporated;  
    
    availability, quality, price, performance and size of our products relative to competing products and technologies; 18




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
    
    our customer service and support capabilities and responsiveness;  
    
    successful development of relationships with existing and potential new customers;  
    
    successful development of relationships with key developers of advanced digital semiconductors; and  
    
    changes in technology, industry standards or consumer preferences. Products we have recently developed and which we are currently developing,
such as the fourth generation of our products, may not achieve market
acceptance. If these products fail to achieve market acceptance, or if we fail
to timely develop new products that achieve market acceptance, our business,
operating results and competitive position could be adversely affected. We have experienced, and may in the future experience, delays in the
development and introduction of our products, which may harm our business and
operating results. The development of our products is highly complex, costly and inherently
risky. We have experienced, and may in the future experience, delays in the
development and introduction of new products or new generations and versions of
our existing products. In the past, we have experienced delays in the design
and development of our products due to longer than anticipated development
time, design errors and specification changes. While we have implemented
procedures designed to minimize these delays, we cannot assure you that these
procedures will be effective or that delays may not occur in the future. Any
delay in the introduction of new products or new generations or versions of our
existing products could harm our business and operating results. The nature of the design process requires us to incur expenses prior to earning
revenue associated with those expenses, and we will have difficulty selling our
products and generating profits if system designers do not design our products
into their electronic systems. We devote significant time and resources in working with system designers
to get our products designed into their systems. If the system designer chooses
a competitors product for its electronic system, it becomes significantly more
difficult for us to sell our products for use in that electronic system because
changing suppliers involves significant cost, time, effort and risk for system
designers. If system designers do not design our products into their electronic
systems, our business would be materially and adversely affected. We often incur significant expenditures in the development of a new
product without any assurance that system designers will select our product for
use in their electronic systems. If we incur such expenditures and fail to be
selected, our operating results will be adversely affected. Furthermore, even
if system designers use our products in their electronic systems, we cannot be
assured that these systems will be commercially successful or that we will
receive any associated revenue. Even if our products are selected to be designed into a particular
electronic system, a substantial period of time will elapse before we generate
revenue related to the significant expenses we have incurred. The reasons for
this delay generally include the following:  
    
    it can take up to 12 months from the time our products are selected to complete the design process;  
    
    it can take an additional six to 12 months or longer to complete commercial introduction of the electronic systems
that use our products, if they are introduced at all;  
    
    our customers usually require a comprehensive technical evaluation of our products before they incorporate them into
their electronic systems;  
    
    OEMs typically limit the initial release of their electronic systems to evaluate performance and consumer demand; and  
    
    the development and commercial introduction of products incorporating new technology are frequently delayed. As a result, we are unable to accurately forecast the volume and timing of
our orders and revenue. In addition, incurring expenses prior to generating
revenue may cause our operating results to fluctuate significantly from period
to period. Our products are highly complex and may require modifications to resolve
undetected errors or failures and meet our customers specifications, which
could lead to an increase in our costs, a loss of customers, a delay in market
acceptance of our products or product liability claims. 19




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Our power management products are highly complex and may contain
undetected errors or failures when first introduced or as
new revisions are released. If we deliver products with errors or defects, we
may incur additional development, repair or replacement costs, and our
credibility and the market acceptance of our products could be harmed. In 2002
and 2003, we incurred costs in connection with the replacement of products due
to a manufacturing defect in our products. Defects could also lead to liability
for defective products as a result of lawsuits against us or our customers. We
have agreed to indemnify our customers in some circumstances against liability
from defects in our products. Although we maintain insurance coverage
consistent with customary industry practice to defray potential costs from
lawsuits, including lawsuits arising from product liability, if liabilities
arise that are not effectively limited or covered by such insurance, a
successful product liability claim could require us to pay a significant amount
of damages, which could have a material adverse impact on our financial results
and financial position. Our products comprise only part of the complex electronic systems in which
they are used. As a result, our products must operate according to
specifications with the other components in the electronic system. If other
components of the electronic system fail to operate properly with our products,
we may be required to incur additional development time and costs to enable
interoperability of our products with these other components. We face significant competition and many of our competitors have greater
resources than we have, and thus we may be unsuccessful in competing against
current and future competitors. The markets for semiconductors generally, and power management
semiconductors in particular, are intensely competitive, and we expect
competition to increase and intensify in the future. Increased competition may
result in price pressure, reduced profitability and loss of market share, any
of which could seriously harm our business, revenue and operating results. Our
ability to compete effectively and to expand our business will depend on a
number of factors, including:  
    
    our ability to continue to recruit and retain engineering talent;  
    
    our ability to introduce new products in a timely manner;  
    
    the pricing of components used in competing solutions;  
    
    the pace at which our customers incorporate our products into their systems;  
    
    the availability of foundry, assembly and test capacity for our products;  
    
    protection of our products by effective utilization of intellectual property laws; and  
    
    general economic conditions. We consider our primary competitors to include Analog Devices,
International Rectifier, Intersil, Linear Technology, Maxim Integrated
Products, Semtech and Texas Instruments. In addition, we compete with a number
of other companies, some of which may become significant competitors. We may
also face competition from new and emerging companies that may enter our
existing or future markets. Many of our competitors and potential competitors have longer operating
histories, greater name recognition, complementary product offerings, a larger
customer base, longer relationships with customers and distributors, and
significantly greater financial, sales, marketing, manufacturing, distribution,
technical and other resources than we do. As a result, they may be able to
respond more quickly to customer requirements, to devote greater resources to
the development, promotion and sales of their products and to influence
industry acceptance of their products better than we can. These competitors may
also be able to adapt more quickly to new or emerging technologies or standards
and may be able to deliver products with performance comparable or superior to
that of our products at a lower cost. In addition, in the event of a
manufacturing capacity shortage, these competitors may have or be able to
obtain silicon wafer fabrication capacity when we are unable to. We expect our competitors to continue to improve the performance of their
current products, reduce their prices and introduce new or enhanced
technologies that may offer greater performance and improved pricing, any of
which could cause our products to become obsolete or uncompetitive and harm our
operating results. Our dependence on third-party semiconductor manufacturers reduces our control
over the manufacture of our products, which could harm our business. We are a fabless semiconductor company and, as such, we rely on third
parties to manufacture our products. Our principal third-party semiconductor
manufacturers, or foundries, are Taiwan Semiconductor Manufacturing
Corporation, Chartered Semiconductor Corporation and Samsung Electronics. The
ability of these foundries to provide silicon wafers to us is limited by their
available capacity. Moreover, the price of our silicon wafers has in the past
fluctuated and is expected to continue to fluctuate, based on changes in
available industry capacity. We do not have long-term supply contracts with any
of our foundries. Therefore, our manufacturers 20




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could choose to prioritize capacity for other customers, particularly larger
customers, reduce or eliminate deliveries to us on short notice or increase the
prices they charge us. There are significant risks associated with our reliance
on these third-party manufacturers, including:  
    
    inability to increase production and achieve acceptable yields on a timely basis;  
    
    reduced control over delivery schedules and product quality;  
    
    inability of our foundries to obtain an adequate supply of the raw materials used in the manufacturing of our
products on a timely and cost-effective basis;  
    
    increased exposure to potential misappropriation of our intellectual property;  
    
    limited warranties on silicon wafers or products supplied to us;  
    
    labor shortages or labor strikes;  
    
    natural disasters affecting countries in which we conduct our business or in which our products are manufactured; and  
    
    political instability in countries where our products are manufactured. In addition, because we work with foundries to make specified
modifications to their standard process technologies, transitioning the
manufacturing of our products to other foundries can require substantial lead
time. Any such delay resulting from such transition could negatively affect
product performance, delivery and yields or increase manufacturing costs. If we
are not able to obtain
foundry capacity as required, our relationships with our customers would be
harmed and our net revenue would likely decline. If our foundries fail to achieve satisfactory yields or quality, our revenue
and operating results could decrease, and our relationships with our customers
and our reputation may be harmed. The manufacturing process of our products is technically challenging. In
2002 and 2003, we experienced lower than expected yield and quality levels at
one of our foundries, which caused us to incur costs in connection with the
replacement of products. Minor deviations in the manufacturing process can
cause substantial decreases in yields, and in some cases, cause production to
be suspended. When our products are qualified with our foundries, minimum
acceptable yields are established. If actual yields are above the minimum, we
incur the cost of the silicon wafers. Manufacturing yields for our new products
tend to be lower initially and increase as we achieve full production. Poor
yields from our foundries or defects, integration issues or other performance
problems in our products could cause us significant customer relations and
business reputation problems, resulting in potential loss of revenue and lower
profitability. We rely on third-party subcontractors to assemble and test our products and our
failure to successfully manage our relationships with these subcontractors
could damage our relationships with our customers, decrease our net revenue and
limit our growth. We rely on third-party subcontractors, such as Amkor Technology, Advanced
Semiconductor Engineering and ST Assembly Test Services, to assemble and test
our products. None of these third-party vendors are obligated to perform
services or supply products to us for any specific period, or in any specific
quantities, except as may be provided in a particular purchase order. Moreover,
none of our assembly and test subcontractors has provided contractual
assurances to us that adequate capacity will be available to us to meet future
demand for our products. We are subject to many of the same risks with these
vendors as with our foundries. If we do not successfully manage these
relationships, the quality of products shipped to our customers may decline,
which would damage our relationships with customers, decrease our net revenue
and negatively impact our growth. Any disruption to our operations or the operations of our foundries or assembly
and test subcontractors resulting from earthquakes, droughts or other natural
disasters or any additional outbreak of SARS or other public health issues
could significantly delay the production or shipment of our products. Our principal offices are located in California. In addition, we rely on
foundries in Taiwan, Singapore and South Korea, and assembly and test
subcontractors in Singapore, South Korea, the Philippines and Taiwan. The risk
of an earthquake in these Pacific Rim locations is significant. The occurrence
of an earthquake, drought or other natural disaster near our principal offices
or our subcontractors locations could result in damage, power outages and
other disruptions that impair our design, manufacturing and assembly capacity
and otherwise interfere with our ability to conduct our business. In addition,
additional outbreaks of SARS or other public health issues could significantly
delay the production or shipment of our products. Any disruption resulting from
such events could cause significant delays in the shipment of our products
until we are able to shift our fabrication, assembling, testing or other
operations from the affected subcontractor to another third-party vendor. 21




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The average selling prices of our products could decrease rapidly, which may
negatively impact our net revenue and operating results. The average selling prices for power management solutions have
historically declined over time. Factors that we expect to cause downward
pressure on the average selling price for our products include competitive
pricing pressures, the cost sensitivity of our customers, particularly in the
higher-volume markets, new product introductions by us or our competitors and
other factors. To maintain acceptable operating results, we will need to offset
any reduction in the average selling prices of our products by developing and
introducing new products and developing new generations and versions of
existing products on a timely basis, increasing sales volume and reducing
costs. If the average selling prices for our products decline and we are unable
to offset those reductions, our operating results will suffer. We are subject to inventory risks and manufacturing costs that could negatively
impact our operating results. To ensure availability of our products for our customers, in some cases we
start the manufacturing of our products based on forecasts provided by these
customers in advance of receiving purchase orders. However, these forecasts do
not represent binding purchase commitments, and we do not recognize revenue
from these products until they are shipped to the customer. In addition,
because we primarily sell our products to distributors and not directly to
system designers, we have more limited visibility into ultimate product demand,
which makes forecasting more difficult for us. We incur inventory and
manufacturing costs in advance of anticipated revenue. Because demand for our
products may not materialize, manufacturing based on forecasts subjects us to
risks of high inventory carrying costs and obsolescence and may increase our
costs. If we overestimate customer demand for our products, if product changes
occur or if purchase orders are cancelled or shipments delayed, we may end up
with excess inventory that we cannot sell, which could result in the loss of
anticipated revenue without allowing us sufficient time to reduce our inventory
and operating expenses. Similarly, if we underestimate demand, we may not have
sufficient product inventory and may lose market share and damage customer
relationships, which also could harm our business. We have significant international activities and customers, and plan to
continue such efforts, which subjects us to additional business risks including
increased logistical complexity, political instability and currency
fluctuations. In 2003 and the first nine months of 2004, 87% and 91%, respectively, of
our net revenue was attributable to customers located outside of the United
States, primarily in Asia, and we anticipate that a significant portion of our
future revenue will be generated by sales to customers in Asia. We have
engineering, sales and operations personnel in Taiwan and Singapore. Our
foundries, assembly and test subcontractors and distributors are also primarily
located in Asia. Our international operations and sales are subject to a number
of risks, including:  
    
    cultural and language barriers;  
    
    increased complexity and costs of managing international operations;  
    
    protectionist laws and business practices that favor local competition in some countries;  
    
    multiple, conflicting and changing laws and regulatory and tax environments;  
    
    potentially longer and more difficult collection periods;  
    
    political instability, international terrorism and anti-American sentiment, particularly in emerging markets;  
    
    highly volatile economies in Asia;  
    
    difficulty in hiring qualified management, technical sales and applications engineers; and  
    
    less effective protection of intellectual property than is afforded to us in the United States. Substantially all sales to international customers and purchases of
production materials and manufacturing services from international suppliers in
2003 and the first nine months of 2004 were denominated in U.S. dollars. An
increase in the value of the U.S. dollar relative to foreign currencies could
make our products more expensive for our international customers to purchase,
thus rendering the prices of our products less competitive. Our inability to overcome these risks could adversely affect our foreign
operations, and some of our customers and suppliers, and could harm our
business and operating results. 22




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We rely on the services of our key personnel, and if we are unable to retain
our current personnel and hire additional personnel, our ability to develop and
successfully market our products could be harmed. We rely upon the continued service and performance of a relatively small
number of key technical and senior management personnel. If we lose any of our
key technical or senior management personnel, such as Jeffrey Staszak, our
President and Chief Executive Officer, or are unable to fill key positions, our
business could be harmed. As a result, our future success depends on retaining
our management team and other key employees. We rely on these individuals for
the management of our company, development of our products and business
strategy and management of our strategic relationships. In addition, we rely on
a relatively small number of analog and mixed-signal design engineers who have
the training and experience to design our products. Any of these employees
could leave our company with little or no prior notice and would be free to
work with a competitor. We do not have key person life insurance policies
covering any of our employees. Additionally, there is a limited number of
qualified technical personnel with significant experience in the design,
development, manufacture and sale of power management semiconductors, and we
may face challenges in hiring and retaining these types of employees. If we do not effectively manage our growth, our resources, systems and controls
may be strained and our operating results may suffer. In recent periods, we have significantly increased the scope of our
operations and the size of our workforce. This growth has placed, and any
future growth of our operations will continue to place, a significant strain on
our management personnel, systems and resources. We anticipate that we will
need to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including the improvement of our accounting
and other internal management systems. We also will need to continue to expand,
train, manage and motivate our workforce, and manage our customer and
distributor relationships, develop our internal sales force, and manage our
foundry and assembly and test subcontractors. All of these endeavors will
require substantial management effort and skill, and we anticipate that we will
require additional personnel and internal processes to manage these efforts. We
plan to fund the costs of our operational and financial systems, additional
personnel and internal processes from current cash balances and funds generated
from operations. If we are unable to effectively manage our expanding
operations, our revenue and operating results could be materially and adversely
affected. Our ability to compete will be harmed if we are unable to adequately protect
our intellectual property. We rely primarily on a combination of patent, trademark, trade secret and
copyright law and contractual restrictions to protect our intellectual
property. These afford only limited protection. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to obtain, copy or use
information that we regard as proprietary, such as product design and
manufacturing process expertise. As of September 30, 2004, we had 28 issued
patents and 14 patent applications pending in the United States. These U.S.
patents have expiration dates ranging from December 2017 to June 2023. Our
pending patent applications and any future applications may not result in
issued patents or may not be sufficiently broad to protect our proprietary
technologies. Moreover, policing any unauthorized use of our products is
difficult and costly, and we cannot be certain that the measures we have
implemented will prevent misappropriation or unauthorized use of our
technologies, particularly in foreign jurisdictions where the laws may not
protect our proprietary rights as fully as the laws of the United States. The
enforcement of patents by others may harm our ability to conduct our business.
Others may independently develop substantially equivalent intellectual property
or otherwise gain access to our trade secrets or intellectual property. Our
failure to effectively protect our intellectual property could harm our
business. Assertions by third parties of infringement by us of their intellectual
property rights could result in significant costs and cause our operating
results to suffer. The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights and positions, which has resulted in
protracted and expensive litigation for many companies. In the future we may
receive communications from various industry participants alleging infringement
of patents, trade secrets or other intellectual property rights. Any lawsuits
resulting from such allegations could subject us to significant liability for
damages and invalidate our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and
would divert managements time and attention. 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;  
    
    pay 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. 23




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We may also initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. We have agreed to indemnify customers for certain claims of
infringement arising out of the use of our products. Any potential dispute involving our patents or other intellectual property
could also include our customers, which could trigger our indemnification
obligations to them and result in substantial expense to us. In any potential dispute involving our patents or other intellectual
property, our customers could also become the target of litigation. Because we
indemnify our customers against claims made against them based on allegations
that our products infringe intellectual property rights, such litigation could
result in substantial expense for us. In addition to the time and expense
required for us to indemnify our customers, any such litigation could hurt our
relations with our customers and cause our operating results to be harmed. We may need to raise additional capital, which might not be available or which,
if available, may be on terms that are not favorable to us. We believe our existing cash balances and cash expected to be generated
from our operating activities will be sufficient to meet our working capital,
capital expenditures and other cash needs for at least the next 12 months. In
the future, we may need to raise additional funds, and we cannot be certain
that we will be able to obtain additional financing on favorable terms, if at
all. If we issue equity securities to raise additional funds, the ownership
percentage of our stockholders would be reduced, and the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of our common stock. If we borrow money, we may incur significant interest
charges, which could harm our profitability. Holders of debt would also have
rights, preferences or privileges senior to those of existing holders of our
common stock. If we cannot raise needed funds on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, operating results and
financial condition. We may undertake acquisitions to expand our business that may pose risks to our
business and dilute the ownership of our existing stockholders. We will evaluate opportunities to acquire other businesses, products or
technologies that would complement our current offerings, expand the breadth of
markets we can address or enhance our technical capabilities. Acquisitions that
we may potentially make in the future entail a number of risks that could
materially and adversely affect our business, operating and financial results,
including:  
    
    our lack of experience acquiring other businesses;  
    
    problems integrating the acquired operations, technologies or products with our existing business and products;  
    
    diversion of managements time and attention from our core business;  
    
    the need for financial resources above our planned investment levels;  
    
    overestimation of potential synergies or a delay in realizing those synergies;  
    
    difficulties in retaining business relationships with suppliers and customers of the acquired company;  
    
    risks associated with entering markets in which we lack prior experience; and  
    
    the potential loss of key employees of the acquired company. Future acquisitions also could cause us to incur debt or contingent
liabilities or cause us to issue equity securities that would reduce the
ownership percentages of existing stockholders. Furthermore, acquisitions could
result in adverse tax consequences, substantial depreciation, deferred
compensation charges, in-process research and development charges, impairment
of goodwill or the amortization of amounts related to deferred compensation and
to identifiable purchased intangible assets, any of which would negatively
affect our operating results. Our stock price will fluctuate and may be volatile, which could result in
substantial losses for investors and significant costs related to litigation. Investors may be unable to resell their shares at or above the purchase
price and this could result in substantial losses for those investors. The
market price of our common stock may fluctuate significantly in response to a
number of factors, some of which are beyond our control. These factors include: 24




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
    
    actual or anticipated fluctuations in our revenue, operating results or growth rate;
    
    failure to meet the expectations of securities analysts or investors with respect to our financial performance;
    
    actual or anticipated fluctuations in our competitors operating results or changes in their growth rates;
    
    sales of our common stock or other securities in the future;
    
    stock market price and trading volume fluctuations of publicly-traded companies in general and semiconductor
companies in particular;
    
    the trading volume of our common stock;
    
    changes in financial estimates and ratings by securities analysts for us, our competitors or companies in the
semiconductor industry generally;
    
    changes in the condition of the financial markets, the economy as a whole, the semiconductor industry, our
customers or our competitors;
    
    publicity about the semiconductor industry, our competitors or our customers; and
    
    additions or departures of key personnel. The stock market in general, and the Nasdaq National Market in particular,
have experienced extreme price and volume fluctuations in recent years that
have often been unrelated or disproportionate to the operating performance of
the listed companies. Broad market and industry factors may materially harm the
market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been brought
against companies following periods of volatility and decline in the market
price of their securities. Technology companies have experienced stock price
volatility that is greater than that experienced by many other industries in
recent years and as a result have been subject to a greater number of
securities class action claims. If our stock price is volatile or declines, we
may be the target of similar litigation in the future. Securities litigation
could result in significant costs and divert managements attention and
resources, which could seriously harm our business and operating results. If securities or industry analysts do not publish research or reports about our
business, or publish negative reports about our business, our stock price and
trading volume could decline. The trading market for our common stock will depend on the research and
reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. If one or more of the analysts
who cover us downgrade our stock, our stock price would likely decline. If one
or more of these analysts cease coverage of our company or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which
could cause our stock price or trading volume to decline. Our principal stockholders have significant voting power and may take actions
that may not be in the best interests of our other stockholders. We believe that our executive officers, directors and principal
stockholders, in the aggregate, beneficially own a majority of our outstanding
common stock. As a result, these stockholders, acting together, will have the
ability to exert substantial influence over all matters requiring approval of
our stockholders, including the election and removal of directors and the
approval of mergers or other business combinations. This concentration of
control could be disadvantageous to other stockholders whose interests are
different from those of our executive officers, directors and principal
stockholders. For example, our executive officers, directors and principal
stockholders could delay or prevent an acquisition or merger even if the
transaction would benefit other stockholders. In addition, this significant
concentration of share ownership may adversely affect the trading price for our
common stock because investors may perceive disadvantages in owning stock in
companies with controlling stockholders. 25




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Being a public company will increase our expenses and administrative burden. We completed our initial public offering in August 2004. As a public
company, we will incur significant legal, accounting and other expenses that we
did not incur as a private company. In addition, our administrative staff will
be required to perform additional tasks. For example, in 2004, we created or
revised the roles and duties of our board committees, adopted additional
internal controls and disclosure controls and procedures, retained a transfer
agent and a financial printer, adopted an insider trading policy and will have
all of the internal and external costs of preparing and distributing periodic
public reports in compliance with our obligations under the securities laws. In addition, changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002 and related regulations implemented by the Securities and Exchange
Commission and the National Association of Securities Dealers, are creating
uncertainty for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. We are currently
evaluating and monitoring developments with respect to new and proposed rules
and cannot predict or estimate the amount of the additional costs we may incur
or the timing of such costs. These laws, regulations and standards are subject
to varying interpretations, in many cases due to their lack of specificity,
and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We
intend to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and
administrative expenses and a diversion of managements time and attention from
revenue-generating activities to compliance activities. If our efforts to
comply with new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings against us and
our business may be harmed. We also expect that being a public company and
these new rules and regulations will make it 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
factors 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. Anti-takeover provisions of our charter documents and Delaware law could
prevent or delay transactions resulting in a change in control. Our certificate of incorporation and our bylaws may make more difficult or
discourage, delay or prevent a change in the ownership of our company or a
change in our management or our board of directors. The following are examples
of provisions that are included in our certificate of incorporation and bylaws
that might have those effects:  
    
    our board of directors is classified so that not all members of our board may be elected at one time;
    
    directors may only be removed for cause and only with the approval of stockholders holding a
majority of our outstanding voting stock;
    
    the ability of our stockholders to call a special meeting of stockholders is prohibited;
    
    advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted upon at stockholder meetings;
    
    stockholder action by written consent is prohibited, thereby requiring all stockholder actions to be
taken at a meeting of our stockholders; and
    
    our board of directors may designate the terms of and issue new series of preferred stock, commonly
referred to as blank check preferred stock, with rights senior to those of common stock without
stockholder approval. In addition, we are also subject to Section 203 of the Delaware General
Corporation Law, which provides, subject to enumerated exceptions, that if a
person acquires 15% or more of our voting stock, the person is an interested
stockholder and may not engage in business combinations with us for a period
of three years from the time the person acquired 15% or more of our voting
stock. These provisions may have the effect of entrenching our management team
and may deprive you of the opportunity to sell your shares to potential
acquirors at a premium over prevailing prices. This potential inability to
obtain a premium could reduce the price of our common stock. 26




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Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve principal
while maximizing income without significantly increasing risk. Some of the
securities in which we invest may be subject to market risk. This means that a
change in prevailing interest rates may cause the market value of the
investment to fluctuate. To minimize this risk, we may maintain our portfolio
of cash equivalents and short-term investments in a variety of securities,
including commercial paper, money market funds, debt securities and
certificates of deposit. The risk associated with fluctuating interest rates is
limited to our investment portfolio and we do not believe that a 10% change in
interest rates would have a significant impact on our interest income. As of
September 30, 2004, all of our short-term investments were government agency
securities and our cash equivalents were held in checking accounts, money
market accounts and government agency securities. Our exposure to market risk also relates to the increase or decrease in the
amount of interest expense we must pay on our outstanding debt instruments,
primarily certain borrowings under our bank line of credit. The advances under
this line of credit bear a variable rate of interest based on the prime rate.
The risk associated with fluctuating interest expense is limited to this debt
instrument and we do not believe that a 10% change in the prime rate would have
a significant impact on our interest expense. As of September 30, 2004, we
had no outstanding amounts under the bank line of credit, and $3.3 million
remained available based on eligible accounts receivable. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer (collectively, our
certifying officers), of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on their evaluation, our certifying
officers concluded that these disclosure controls and procedures are effective
in providing reasonable assurance that the information required to be disclosed
by us in our periodic reports filed with the Securities and Exchange Commission
(SEC) is recorded, processed, summarized and reported within the time periods
specified by the SECs rules and SEC reports. We believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the likelihood of future events,
and therefore can only provide reasonable, not absolute, assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. In addition, we have reviewed our internal controls over financial reporting
and have made no changes during the quarter ended September 30, 2004, that our
certifying officers concluded materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We are not currently involved in any legal proceedings. However, from time to
time we may be subject to legal proceedings and claims in the ordinary course
of business. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) During the quarter ended September 30, 2004, we sold and issued the
following securities which were not registered under the Securities Act of
1933: (1) From July 1, 2004 to August 5, 2004, we sold an aggregate of 39,462
shares of our common stock (after giving effect to the one-for-two reverse
split of our common and preferred stock that took place on July 8, 2004) to
employees for cash consideration in the aggregate amount of $131,020 upon the
exercise of stock options granted under our 1996 Stock Option Plan. (2) On July 28, 2004, we granted stock options to employees under our 1996
Stock Option Plan covering an aggregate of 372,068 shares of common stock, at
an exercise price of $8.00 per share. One quarter of the shares subject to
each option vest one year after the date of grant and the remaining shares vest
quarterly thereafter over three years. The issuances described in paragraphs (1) and (2) above in this Item 2 were
deemed exempt from registration under the Securities Act of 1933 in reliance on
Rule 701 promulgated under the Securities Act of 1933 as offers and sales of
securities pursuant to certain compensatory benefit plans and contracts
relating to compensation in compliance with Rule 701. 27




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(b) On July 28, 2004, our registration statement on Form S-1 (Registration No.
333-115614) was declared effective for our initial public offering. As of
October 26, 2004, we had invested the $31.9 million in net proceeds from the
offering in government securities. We intend to use these proceeds for general
corporate purposes, including working capital, research and development,
general and administrative expenses and capital expenditures. We may also use
a portion of the net proceeds to fund possible investments in, or acquisitions
of, complementary businesses, products or technologies or in establishing joint
ventures, although none is currently contemplated. 
 Item 4. Submission of Matters to a Vote of Security Holders In July 2004, prior to our initial public offering, we submitted to our
stockholders for their approval an amendment and restatement of our Certificate
of Incorporation to implement a one-for-two reverse split of our common and
preferred stock. On July 6, 2004, our stockholders approved this matter by
written consent. As of the record date for taking such action, we had
37,049,904 shares of our common stock outstanding (on an as-if-converted to
common stock basis), without giving effect to the one-for-two reverse stock
split that took place on July 8, 2004. Stockholders holding an aggregate of
30,424,072 approved this matter. 
 Item 6. Exhibits Exhibit No.
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation of Volterra Semiconductor Corporation.3.2(2)
    
    Amended and Restated Bylaws of Volterra Semiconductor Corporation.4.1
    
    Reference is made to Exhibits 3.1 and 3.2.4.2(3)
    
    Specimen stock certificate.31.1
    
    Certification of Chief Executive Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer required under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.32.2*
    
    Certification of Chief Financial Officer required under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.
  (1)
    
    Previously filed as Exhibit 3.1 to Volterra Semiconductor Corporations
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2004, as filed with the Securities and Exchange Commission on September 9,
2004, and incorporated by reference herein.(2)
    
    Previously filed as Exhibit 3.4 to Volterra Semiconductor Corporations
Registration Statement on Form S-1 (No. 333-115614), as filed with the
Securities and Exchange Commission on May 19, 2004, as amended, and
incorporated by reference herein.(3)
    
    Previously filed as Exhibit 4.2 to Volterra Semiconductor Corporations
Registration Statement on Form S-1/A (No. 333-115614), as filed with the
Securities and Exchange Commission on July 9, 2004, as amended, and
incorporated by reference herein.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly Report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Volterra
Semiconductor Corporation for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.   28




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Signatures Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. Dated: October 28, 2004
    VOLTERRA SEMICONDUCTOR CORPORATIONBy:
    /s/ Greg HildebrandGreg HildebrandChief Financial Officer
(Principal Financial and Accounting and
Duly Authorized Officer) 29




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EXHIBIT INDEX Exhibit No.
    
    Description3.1(1)
    
    Amended and Restated Certificate of Incorporation of Volterra Semiconductor Corporation.3.2(2)
    
    Amended and Restated Bylaws of Volterra Semiconductor Corporation.4.1
    
    Reference is made to Exhibits 3.1 and 3.2.4.2(3)
    
    Specimen stock certificate.31.1
    
    Certification of Chief Executive Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer required under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.32.2*
    
    Certification of Chief Financial Officer required under Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section
1350.
  (1)
    
    Previously filed as Exhibit 3.1 to Volterra Semiconductor Corporations
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2004, as filed with the Securities and Exchange Commission on September 9,
2004, and incorporated by reference herein.(2)
    
    Previously filed as Exhibit 3.4 to Volterra Semiconductor Corporations
Registration Statement on Form S-1 (No. 333-115614), as filed with the
Securities and Exchange Commission on May 19, 2004, as amended, and
incorporated by reference herein.(3)
    
    Previously filed as Exhibit 4.2 to Volterra Semiconductor Corporations
Registration Statement on Form S-1/A (No. 333-115614), as filed with the
Securities and Exchange Commission on July 9, 2004, as amended, and
incorporated by reference herein.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly Report on Form 10-Q pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Volterra
Semiconductor Corporation for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended. 30