UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[_] Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
or
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2007
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
or
[_] Shell company report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Date of event requiring this shell company report
Commission file number: 0-30910
O2MICRO INTERNATIONAL LIMITED
(Exact Name of Registrant as Specified in Its Charter)
The Cayman Islands
(Jurisdiction of Incorporation or Organization)
Grand Pavilion Commercial Centre, West Bay Road
P.O. Box 32331 Grand Cayman KY1-1209, Cayman Islands
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On Which
Title of Each Class Registered
------------------- -----------------------------------------
American Depositary Shares Nasdaq Global Select Market
Ordinary Shares, par value $0.00002 per The Stock Exchange of Hong Kong Limited
share Cayman Islands Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
As of December 31, 2007, there were 1,911,868,150 ordinary shares, par value
US$0.00002 per share, outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [_] No [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes [_] No [X]
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
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 [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated
filer [_]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [_] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisors........................... 3
Item 2. Offer Statistics and Expected Timetable......................................... 4
Item 3. Key Information................................................................. 4
Item 4. Information on the Company...................................................... 13
Item 4A. Unresolved Staff Comments....................................................... 20
Item 5. Operating and Financial Review and Prospects.................................... 20
Item 6. Directors, Senior Management and Employees...................................... 27
Item 7. Major Shareholders and Related Party Transactions............................... 32
Item 8. Financial Information........................................................... 33
Item 9. The Offer and Listing........................................................... 33
Item 10. Additional Information.......................................................... 35
Item 11. Quantitative and Qualitative Disclosures About Market Risk...................... 42
Item 12. Description of Securities Other Than Equity Securities.......................... 43
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies................................. 43
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.... 43
Item 15. Controls and Procedures......................................................... 43
Item 16. Reserved........................................................................ 45
Item 16A Audit Committee Financial Expert................................................ 45
Item 16B Code of Ethics.................................................................. 45
Item 16C Principal Accountant Fees and Services.......................................... 45
Item 16D Exemption from the Listing Standards for Audit Committee........................ 46
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.......... 46
PART III
Item 17. Financial Statements............................................................ 47
Item 18. Financial Statements............................................................ 47
Item 19. Exhibits........................................................................ 47
Index to Consolidated Financial Statements
Signatures................................................................................ 48
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2
Certain Definitions and Conventions
In this annual report on Form 20-F ("Annual Report"), references to "$" and
"dollars" are to United States dollars. Percentages and certain amounts
contained herein have been rounded for ease of presentation. Any discrepancies
in any table between totals and the sums of amounts listed are due to rounding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements of a forward-looking nature. These
statements are made under the "safe harbor" provisions of the U.S. Private
Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by terminology such as "may," "will," "expects,"
"should," "could," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms and other
comparable terminology. These forward-looking statements include, without
limitation, statements regarding our expectation to increase expenses for
personnel, new product development, to protect our technology and to expand our
product offerings, our anticipation that sales to a relatively small number of
customers will continue to account for significant portion of net sales, our
expectation that non-U.S. operations and sales will continue to grow and
account for a substantial percentage of our net sales, our statements regarding
the growing popularity of thinner displays, mobile computing and portable
devices, and the emergence and continued development of the Internet and
wireless communications networks, our belief that we participate in large and
growing markets, our belief that potential future growth in the LCD television
market, especially units with larger-size panels, represents an attractive
growth opportunity for us, our belief that manufacturers are turning to
innovative new semiconductor technologies to manage the available power source
capacity more efficiently, our belief that there is an increasing need for
higher levels of system integration, our belief in the need for mixed-signal
and analog integrated circuits specifically designed to optimize the power
system usage in devices, our belief in the need to use advanced design
methodologies to allow manufacturers to achieve rapid time-to-market with their
new products, our expectation that our markets will be dominated by a small
number of major brand name companies, our expectation that we will experience
the highest sales volume in the third and fourth quarter of each year, our
ability to develop and introduce products in a timely manner to meet customer
demands, our expectation that analog and mixed-signal circuits have
substantially longer life-cycles than digital integrated circuits, our ability
to take advantage of cost-efficiencies associated with the "fabless"
semiconductor business model, our future gross profit, our expectation that
gross margin on products we sell will typically decline over the life of the
products, our expectation that gross profit as a percentage of net sales will
continue to fluctuate, our expectation that research and development expenses
as a percentage of net sales will continue to fluctuate, our expectation to
continue development of innovative technologies and processes, and continued
expansion and investment of our engineering, research and development
resources, our expectation to continue to invest significant resources into
research and development in the future, our expectation that selling, general
and administrative expenses will continue to increase in absolute dollars,, our
expectations regarding the outcome of litigation matters, our belief that cash
balances will be sufficient to meet our capital requirements for at least the
next 12 months, our belief that our research and development staffing will
increase in the next 12 months primarily due to expansion of existing design
centers, our intention to continue expanding research and development
operations, our intention to expand the scope of our international operations,
our expectation that semiconductor companies will increasingly be subject to
infringement claims as the number of products and competitors in the
semiconductor industry grows, our belief that we operate in compliance with all
applicable transfer pricing laws in all of the jurisdictions in which we
operate, our belief regarding our efforts to remediate concerns relating to our
internal controls, our anticipation that we will not declare any dividend in
the foreseeable future, our belief that our system-level expertise and
extensive experience with power management systems allow us to develop
proprietary solutions and foster long-term relationships with our customers,
our intention to continue to evaluate additional investment opportunities in
our supply chain, our belief that our current facilities are adequate for our
needs for the foreseeable future, and that any additional space required will
be available to us on commercially reasonable terms, our expectation that our
results of operations or cash flows will not be affected to any significant
degree by a sudden short-term change in market interest rates, and our
statements regarding the effect of adoption of certain accounting policies.
These forward-looking statements are based on our current assumptions and
beliefs in light of the information currently available to us. Actual results,
levels of activity, performance or achievements may differ materially from
those expressed or implied in these forward-looking statements for a variety of
reasons, including: changes in demand for devices that use our products; market
conditions in the semiconductor industry and the economy as a whole; the stages
of our products in their life cycles, variations, expansions or reductions in
the mix of our product offerings, the timing of our product introductions,
specific product manufacturing costs, increased competition, introduction of
new competing technologies and the increase of unexpected expenses, and such
other factors discussed under "Key Information--Risk Factors," "Operating and
Financial Review and Prospects" and elsewhere in this Annual Report. We assume
no obligation to update or revise any forward-looking information, whether as a
result of new information, future events or otherwise. You are cautioned not to
place undue reliance on these forward-looking statements which apply only as of
the date of this Annual Report.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
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ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
2005, 2006 and 2007, and the selected consolidated financial data as of
December 31, 2006 and 2007, set forth below, are derived from our audited
consolidated financial statements included herein, and should be read in
conjunction with, and are qualified in their entirety by reference to, these
consolidated financial statements, including the notes to these consolidated
financial statements and "Item 5. Operating and Financial Review and Prospects"
included elsewhere in this Annual Report. The selected consolidated financial
data for the years ended December 31, 2003 and 2004 and the selected
consolidated financial data as of December 31, 2003, 2004 and 2005, set forth
below, are derived from our audited consolidated financial statements and
related notes which do not appear in this Annual Report. Our consolidated
financial statements are prepared and presented in accordance with generally
accepted accounting principles in the United States of America.
Year Ended December 31,
-------------------------------------------------------
2003 2004 2005 2006 2007
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net sales........................................................ $ 88,599 $ 92,196 $ 105,552 $ 124,915 $ 165,540
Cost of sales.................................................... 38,314 37,403 40,741 56,772 71,099
---------- ---------- ---------- ---------- ----------
Gross profit..................................................... 50,285 54,793 64,811 68,143 94,441
Operating expenses (income):
Research and development...................................... 19,219 20,260 25,421 31,751 34,624
Selling, general and administrative........................... 13,522 16,348 20,279 29,209 34,712
Patent related litigation..................................... 3,954 5,334 10,174 10,962 10,848
Litigation income............................................. -- -- -- -- (9,364)
Stock Exchange of Hong Kong listing expenses.................. -- -- 2,460 786 --
Total operating expenses.................................. 36,695 41,942 58,334 72,708 70,820
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.................................... 13,590 12,851 6,477 (4,565) 23,621
Non-operating income - net....................................... 1,437 2,705 2,704 2,858 2,819
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax.................................. 15,027 15,556 9,181 (1,707) 26,440
Income tax expense (benefit)..................................... 1,826 1,472 1,034 (2,450) 1,456
---------- ---------- ---------- ---------- ----------
Net income....................................................... 13,201 14,084 8,147 743 24,984
========== ========== ========== ========== ==========
Earnings per share(1):
Basic..................................................... 0.0069 0.0072 0.0042 0.0004 0.0131
Diluted................................................... 0.0066 0.0070 0.0041 0.0004 0.0129
Shares used to compute basic earnings per share(1):.............. 1,918,700 1,957,800 1,961,168 1,932,575 1,905,725
========== ========== ========== ========== ==========
Shares used to compute diluted earnings per share(1):............ 1,986,800 2,005,100 1,997,459 1,946,896 1,943,785
========== ========== ========== ========== ==========
Earnings per ADS(2):
Basic..................................................... 0.34 0.36 0.21 0.02 0.66
Diluted................................................... 0.33 0.35 0.20 0.02 0.64
ADS equivalents used to compute basic earnings per ADS(2):....... 38,374 39,156 39,223 38,652 38,115
========== ========== ========== ========== ==========
ADS equivalents used to compute diluted earnings per ADS(2):..... 39,736 40,102 39,949 38,938 38,876
========== ========== ========== ========== ==========
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December 31,
--------------------------------------------
2003 2004 2005 2006 2007
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $ 66,489 $ 56,320 $ 46,375 $ 45,438 $ 52,597
Short-term investments............. 53,923 63,768 55,653 19,697 28,650
Working capital.................... 130,510 132,713 117,942 90,865 118,777
Total assets....................... 169,293 185,196 199,655 197,020 228,412
Long-term liabilities, excluding
current portion.................. -- -- -- 455 730
Net assets......................... 154,727 170,781 175,896 173,511 204,179
Ordinary shares and additional
paid-in capital.................. 137,115 139,620 138,275 140,262 144,982
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(1) All share information has been adjusted retroactively to reflect the
50-for-1 share split effected on November 25, 2005.
(2) Fifty ordinary shares equal one American Depositary Share ("ADS").
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
RISK FACTORS
We wish to caution readers that the following important factors, and those
important factors described in other reports submitted to, or filed with, the
Securities and Exchange Commission, among other factors, could affect our
actual results and could cause our actual results to differ materially from
those expressed in any forward-looking statements made by us or on our behalf
and that such factors may adversely affect our business and financial status
and therefore the value of your investment:
If the markets for consumer electronics, computers, industrial or
communications products do not grow substantially or even decrease, our net
sales may be harmed.
Our business focuses on designing, developing and marketing high performance
integrated circuits for manufacturers of products for the consumer electronics,
computer, industrial and communications markets. As many of the leading sellers
of these products have an intermediary manufacture their products or those
portions of their products containing our components, we currently derive
substantially all of our product revenues from sales to these intermediaries or
their suppliers. We also have targeted and are designing products for
applications such as LCD monitors, LCD televisions, notebook computers,
Internet security, mobile phones, GPS and portable media players, such as
portable DVD players. We believe that the important factors driving growth in
these markets have been the growing popularity of thinner displays, mobile
computing and portable devices, and the emergence and continued development of
the Internet and wireless communications networks. If demand for products using
LCDs or other devices using our products declines, or does not grow as quickly
as we anticipate, our customers may experience lower demand for their products
that use our products, which may cause our net sales to suffer. We cannot be
certain that the markets for these products will continue to grow as rapidly as
they have in the past or that a significant slowdown in these markets will not
occur.
Fluctuations in our quarterly operating results due to factors such as changes
in the demand for electronic devices that utilize our products could adversely
affect the trading price of our ordinary shares and/or our ADSs.
We believe that quarter-to-quarter comparisons of our financial results are
not necessarily meaningful indicators of our future results of operations, and
they should not be relied upon as an indication of our future performance. If
our quarterly operating results fail to meet the expectations of securities
analysts, the trading price of our ordinary shares and/or our ADSs could be
adversely affected. Our quarterly operating results have varied substantially
in the past and may vary substantially in the future depending upon a number of
factors described below and elsewhere in this Risk Factors section, including
many factors that are beyond our control. These factors include changes in
demand for devices that use our products; market conditions in the highly
cyclical semiconductor industry and the economy as a whole; the timing and
cancellation of customer orders; the level of orders received that can be
shipped in a quarter; the availability of third party semiconductor foundry,
assembly and test capacities; fluctuations in manufacturing yields; delays in
the introduction of new products; changes in the mix of sales of higher margin
products and lower margin products; seasonal changes in demand during the
year-end holiday season for devices that use our products; and the amount of
legal and other expenses incurred in a particular quarter. For example, the
level of legal
5
expenses is not entirely within our control as we may need to respond to legal
actions by opposing parties or scheduling decisions by the judges. It is
difficult for us to forecast our legal expenses for any given quarter, which
adversely affects our ability to forecast our expected results of operations in
general.
In addition, the trading price of our ordinary shares and/or our ADSs may be
affected by factors such as: significant price and volume fluctuations in our
ordinary shares and/or our ADSs and financial markets in the U.S. and other
countries, as well as relatively thin trading volume of our ordinary shares
and/or our ADSs on Nasdaq and the SEHK, respectively. Further, the trading
markets for our ordinary shares and/or our ADSs are affected by the research
reports that securities or industry analysts publish about us or our business.
We do not have control over such coverage. If one or more analysts were to
downgrade our ordinary shares and/or our ADSs, the price of our ordinary shares
and/or our ADSs may decline. If one or more analysts cease coverage of our
company or does not regularly publish reports on us, we may lose visibility in
the financial markets, which could cause the price of our ordinary shares
and/or our ADSs or trading volume to decline.
If orders for our products are cancelled or deferred, our net sales, operating
margins and net income could be substantially reduced.
Orders for our products can be cancelled or deferred with little notice from
and without significant penalty to our customers. A significant portion of our
net sales in any financial reporting period depends on orders booked and
shipped in that period. If a large amount of orders placed is cancelled or
deferred, our net sales in that period could be substantially reduced. Since we
do not have significant non-cancellable backlog, we typically plan our
production and inventory expenses based on internal forecasts of customer
demand, which are highly unpredictable and can fluctuate substantially. In
particular, in response to anticipated lengthy lead times, which in the past
have been as much as ten weeks or more, to obtain inventory and materials from
our suppliers, we place orders with these suppliers in advance of anticipated
customer demand, which can result in excess inventory if the expected orders
fail to materialize. We also expect to increase our expenses for personnel and
new product development. It is difficult for us to reduce our production,
inventory, personnel and new product development expenses quickly in response
to any shortfalls in net sales resulting from cancelled or deferred orders. As
a result, any cancellation or deferral of orders would not only harm our net
sales, it would also likely have a disproportionately adverse effect on our
operating margins and net income.
We depend on third parties to manufacture, assemble and test our products and,
if they are unable to do so, our ability to ship products and our business and
results of operations will be harmed.
We do not own or operate the integrated circuit fabrication facilities that
manufacture the products we design. Four foundries, X-FAB, SinoMos, SMIC and
CSMC, manufactured most of the integrated circuit products that we sold in
2007. These foundries manufacture integrated circuit products for us according
to purchase orders. We do not have a guaranteed level of production capacity at
any of these foundries, and any one or more could raise prices without notice.
Although we provide the foundries with rolling forecasts of our production
requirements, the ability of each foundry to provide wafers to us is limited by
the foundry's available capacity. The term "wafers" refers to slices of silicon
used to manufacture integrated circuits, and it is one of the principal raw
materials in our products. These foundries 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.
Accordingly, we cannot be certain that these foundries will allocate sufficient
capacity, if any, to satisfy our requirements particularly during any
industry-wide capacity shortages. In addition, if any of these foundries were
unable to continue manufacturing our products in the required volumes at
acceptable quality, yields and costs or in a timely manner, our business and
results of operations would be seriously harmed.
There are other significant risks associated with our reliance on these
foundries, including the disruption in our ability to ship products caused by
the length of time, as much as 12-to-18 months, required for us to find
alternative foundries for existing or new products; the reduction or
elimination of deliveries to us by these outside foundries caused by a sudden
increase in demand for semiconductor devices or a sudden reduction or
elimination of manufacturing capacity by any existing manufacturers of
semiconductor devices; the unavailability of, or delays in obtaining access to,
key process technologies used by these foundries; and the susceptibility of our
outside foundries to production interruptions resulting from natural disasters,
such as the interruptions experienced in Taiwan in the past due to earthquake
activity. Any of these events could cause these foundries to reduce or
eliminate deliveries to us and cause disruption in our ability to ship products
to our customers which could negatively affect our business and results of
operations.
We also rely on independent subcontractors to assemble and test most of our
integrated circuit products. We do not have long-term agreements with any of
these subcontractors but obtain services from them primarily on a purchase
order basis. Our reliance on these subcontractors involves risks such as
reduced control over delivery schedules, quality assurance and costs. These
risks could result in product shortages or increase our costs of manufacturing,
assembling or testing our products. If these subcontractors were unable or
unwilling to continue to provide assembly and test services and deliver
products at acceptable quality, yields and costs or in a timely manner, our
business would be seriously harmed. We would also have to identify and qualify
substitute subcontractors, which would be time consuming and costly and could
result in unforeseen operational difficulties.
6
If we cannot compete effectively against new and existing competitors, our net
sales and gross margins could be harmed.
Our ability to compete successfully in the market for integrated circuit
products depends on factors both within and outside our control, including: our
success in designing and subcontracting the manufacture of new products that
implement new technologies and satisfy our customers' needs; the performance of
our products across a variety of parameters such as reliability and cost
efficiency; the price of our products and those of our competitors; our ability
to control production costs; and the features of our competitors' products.
We believe our principal competitors include Intersil Corporation, Linear
Technology Corporation, Maxim Integrated Products, Inc., Microsemi Corporation,
Monolithic Power Systems, Inc., Ricoh Company, Ltd., Rohm Co., Ltd and Texas
Instruments Incorporated. There is also competition from the internal
integrated circuit design and manufacturing capabilities of some of our
existing and potential customers, such as Toshiba and Fujitsu. In addition to
these competitors, other integrated circuit companies may decide to enter the
market with mixed-signal integrated circuit products that compete with our
products or incorporate functions similar to those provided by our products.
Some of our competitors, such as Texas Instruments, have greater name
recognition, their own manufacturing capabilities, significantly greater
financial and technical resources, and the sales, marketing and distribution
strengths that are normally associated with large multinational companies.
These competitors may also have pre-existing relationships with our customers
or potential customers. These competitors may be able to introduce new
technologies more quickly, address customer requirements more rapidly and
devote greater resources to the promotion and sale of their products than we
do. Further, in the event of a manufacturing capacity shortage, these
competitors may be able to manufacture products themselves or obtain
third-party manufacturing capability when we are unable to do so.
If we do not develop and introduce new products in a timely manner, our net
sales and gross margins could be harmed.
Our success depends upon our ability to develop and introduce new products
selected for design into products for the consumer electronics, computer,
industrial and communications markets. If we are unable to develop new products
in a timely manner, our net sales will suffer. In addition, because our gross
margins typically decline over the life cycle of our products as a result of
competitive pressures and voluntary pricing arrangements, any failure to
develop new products in a timely manner will likely cause our gross margins to
decline. The development of our new products is highly complex, and from time
to time we have experienced delays in the introduction of new products of as
much as eight-to-twelve weeks or more. Successful product development and
introduction of new products depend on a number of factors, including accurate
new product definition; timely completion of new product designs; achievement
of manufacturing yields; timely and cost-effective production of new products;
and timely delivery of new third-party supplied products used as key components
in devices that incorporate our products. We often incur significant
expenditures in the development of a new product without any assurance that it
will be selected for design into our customers' products. If we incur such
expenditures but fail to be selected, our results of operations will be
adversely affected and may fluctuate significantly from period to period.
Furthermore, even if our products were selected for design into our customers'
products, we cannot be certain that these products will be commercially
successful or that we will benefit from any associated sales.
It is difficult to evaluate our future prospects, and we cannot assure you that
we will not incur future losses.
Our past results cannot be relied upon to predict our future performance. We
incurred net losses in each year prior to the year ended December 31, 1999. We
then experienced significant quarter-to-quarter sales growth in each of the
years ended December 31, 2001, 2002 and 2003. However, since the first quarter
ended March 31, 2004, we have experienced fluctuations in net sales compared to
the previous quarter. Our net sales are subject to fluctuation from quarter to
quarter, our previous overall growth may not continue, and we may not be able
to sustain or increase profitability in the future. Our expenses may increase
in the foreseeable future as we continue to develop our technology, protect our
technology, expand our product offerings and expand our capabilities. These
efforts may prove more expensive than we currently anticipate, and we may not
succeed in increasing our net sales sufficiently to offset our increased
expenses. If we fail to increase our net sales to keep pace with our increased
expenses, we may again experience net losses in future periods, which could
cause the trading price of our ordinary shares and/or our ADSs to decline.
If we fail to protect our intellectual property rights, competitors may be able
to use our technology or trademarks, and this could weaken our competitive
position, increase our costs, reduce our margins and reduce our net sales.
Our success is heavily dependent upon our proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology and prevent competitors from using our technology in
their products. These laws and procedures provide only limited protection. Our
patents may not provide sufficiently broad protection or they may not prove to
be enforceable in actions against alleged infringement.
Our ability to sell our products and prevent competitors from
misappropriating our proprietary technology and trade names is dependent upon
protecting our intellectual property. Despite the precautions we take,
unauthorized third parties may copy aspects of our current or future products
or obtain and use information that we regard as proprietary. Additionally, our
competitors may independently develop similar or superior technology. Policing
unauthorized use of software, circuit design or
7
semiconductor design is difficult and some countries' laws do not protect our
proprietary rights to the same extent as the laws of the United States, Hong
Kong and other developed countries. We have in the past and currently have
initiated litigation to protect our intellectual property rights. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of resources, and could also result in a decision that our
intellectual property is invalid or unenforceable and, could adversely affect
our business, future results of operations and financial condition. See the
section headed "Business Overview--Intellectual Property."
We have substantial operations outside of the United States that expose us to
risks specific to our international operations that could harm our net sales
and net income.
As of December 31, 2007, a substantial portion of our operations, most of
our employees, and most of the third parties we use to manufacture, assemble
and test our products were located in Japan, Korea, China, Singapore and
Taiwan. In addition, sales outside the United States as a percentage of net
sales accounted for almost all of our sales in the years ended December 31,
2003, 2004, 2005, 2006 and 2007. We expect our non-U.S. operations to grow and
non-U.S. sales to continue to account for a substantial percentage of our net
sales.
We are subject to risks specific to our international business operations,
including: the risk of supply disruption, production disruption or other
disruption arising from natural disasters such as the earthquake in China
affecting our offices in Chengdu, the outbreak of any severe communicable
disease or other widespread health problems; the risk of potential conflict and
further instability in the relationship between Taiwan and China; risks related
to international political instability and to the recent global economic
turbulence and adverse economic circumstances in Asia, such as in Japan and
Korea; unpredictable consequences on the economic conditions in the U.S. and
the rest of the world arising from terrorist attacks, such as the attacks of
September 11, 2001 in the U.S. and other military or security operations,
unexpected changes in regulatory requirements or legal uncertainties regarding
tax regimes, such as the change to the tax code of Taiwan in 2001 that resulted
in a higher income tax rate on our retained earnings; tariffs and other trade
barriers, including current and future import and export restrictions;
difficulties in staffing and managing international operations; adverse effects
of changes in foreign currency exchange rates on our results of operations;
limited ability to enforce agreements and other rights in foreign countries;
changes in labor conditions; longer payment cycles and greater difficulty in
collecting accounts receivables; burdens and costs of compliance with a variety
of foreign laws; expropriation of private enterprises; and reversal of the
current policies (including favorable tax and lending policies) encouraging
foreign investment or foreign trade by our host countries. In addition, the
geographical distances between Asia, the U.S., the Cayman Islands and Europe
also create a number of logistical and communication challenges. Although we
have not experienced any serious harm in connection with our international
operations, we cannot assure you that such problems will not arise in the
future.
In addition, our reporting currency is the U.S. dollar. However, a
significant portion of our operating expenses is denominated in currencies
other than the U.S. dollar, primarily the New Taiwan dollar and the Chinese
Renminbi. As a result, appreciation or depreciation of other currencies in
relation to the U.S. dollar could result in material transaction or translation
gains or losses that could adversely affect, or cause fluctuations in, our
results of operations. We do not currently engage in currency hedging
activities.
If we cannot adapt our product offerings to respond to rapid technological
changes, our net sales will be harmed.
The markets for consumer electronics, computer, industrial and
communications products, and the components used in these products, are
characterized by rapidly changing technology and very frequent new product
introductions by our direct customers and our competitors. For example, the
microprocessor, display and battery technologies with which our products
inter-operate change very rapidly. Although our products integrate analog and
mixed-signal circuits and therefore may have substantially longer life-cycles
than digital integrated circuits, we must still update our products or
introduce new ones on a regular basis. If we do not respond in a timely manner
to technological changes and new product introductions by our direct customers
and competitors, we will be unable to maintain and grow our product sales. In
addition, the emergence of significantly more efficient or cost-effective
microprocessor, display and battery technologies could lessen the need for the
power management functionality of our products, which would harm our net sales.
We will need to recruit and retain qualified personnel to grow our business
successfully.
Our future success will depend on our ability to attract and retain
experienced sales, research and development, marketing, customer support and
management personnel. If we do not attract and retain these personnel, our
ability to grow our business, sell our products, enter new markets and increase
our share of existing markets could be harmed. There can be no assurance that
we will be successful in hiring for these positions in the near future. Our
sales strategy requires that we hire additional direct sales persons and
independent sales representatives in our major markets. Moreover, our
independent sales representatives and direct sales personnel must market our
products effectively and be qualified to provide timely and cost-effective
customer support and service. If they are unable to do so or if we are unable
to expand these organizations, this could harm our ability to increase our net
sales and limit our ability to sell our products or expand our market share.
Competition for qualified personnel in digital, analog and mixed-signal
integrated circuit design is intense. In the past, we have experienced
difficulty in recruiting qualified personnel, especially technical and sales
personnel. As we intend to expand the scope of our international operations,
this will require us to attract experienced management, research and
development, marketing, sales and
8
customer support personnel for our international offices. We expect competition
for qualified personnel to remain intense, and we may not succeed in attracting
or retaining such personnel. In addition, new employees generally require
substantial training in our design methodology, design flow and technology,
which in turn requires significant resources and management attention. There is
a risk that, even if we invest significant resources in attempting to attract,
train and retain qualified personnel, we will not be successful in our efforts.
In that event, our costs of doing business would increase without a
corresponding increase in net sales.
Our success will depend to a significant extent on the continued service of
our executive officers, including Sterling Du, our chief executive officer and
chairman of our board, and other key employees, including key sales,
consulting, technical, marketing and legal personnel. If we lose the services
of one or more of our executives or key employees, our business and ability to
implement our business objectives successfully could be harmed, particularly if
one or more of our executives or key employees decide to join a competitor or
otherwise compete directly or indirectly with us.
Defects in our products could result in significant costs and could impair our
ability to sell our products.
Detection of any significant defects in our products may result in, among
other things, loss of or delay in market acceptance and sales of our products,
diversion of development resources, injury to our reputation and increased
service and warranty costs. Because our products are complex, they may contain
defects that can be detected at any point in a product's life cycle. These
defects could harm our reputation, which could result in significant costs to
us and could impair our ability to sell our products. The costs we may incur in
correcting any product defects may be substantial and could materially
adversely affect our results of operations. While we continually test our
products for defects and work with customers through our customer support
services to identify and correct problems, defects in our products may be found
in the future. Testing for defects is complicated in part because it is
difficult to simulate the highly complex environments in which our customers
may use our products. In the past, we have discovered defects in our products
and have experienced delays in the shipment of our products. These delays have
principally related to new product update releases. To date, none of these
delays has materially affected our business. However, product defects or delays
in the future could be material, and could adversely affect our reputation and
our ability to sell our products.
A substantial portion of our net sales is generated by a small number of
customers. If any of these customers delays or reduces its orders, our net
sales and earnings may be harmed.
Historically, a relatively small number of customers has accounted for a
significant portion of our net sales in any particular period. We have no
long-term volume purchase commitments from any of our significant customers. We
cannot be certain that our current customers will continue to place orders with
us, that orders by existing customers will continue at the levels of previous
periods or that we will be able to obtain orders from new customers. In
addition, some of our customers, acting as intermediary manufacturers, supply
products to end-market purchasers, and any of these end-market purchasers could
choose to reduce or eliminate orders for our customers' products. This would in
turn lower our customers' orders for our products.
In 2007, one customer accounted for 11.1% of our net sales and no other
single customer accounted for more than 10% of our net sales. In 2006 and 2005,
no customer accounted for 10% or more of net sales. The changes in sales to
this customer as a percentage of our total net sales have been caused by a
number of factors, some of which were outside our control. We anticipate that
sales of our products to a relatively small number of customers will continue
to account for a significant portion of our net sales. The reduction, delay or
cancellation of orders from one or more of our significant customers would have
a disproportionately negative impact on our results of operations.
Our ability to manage growth will affect our ability to achieve and maintain
profitability.
Our ability to maintain profitability will depend in part on our ability to
implement and expand operational, customer support and financial control
systems and to train and manage our employees. We may not be able to augment or
improve existing systems and controls or implement new systems and controls in
response to future growth, if any. In addition, we will need to expand our
facilities to accommodate the growth in our personnel. Any failure to manage
growth could divert management attention from executing our business plan and
adversely affect our ability to expand our business successfully. Our
historical growth has placed, and any further growth is likely to continue to
place, a significant strain on our resources. In order to grow successfully, we
will need to maintain close coordination among our executive, engineering,
accounting, finance, marketing, sales, operations and customer support
organizations, particularly in light of the internationally dispersed nature of
our operations.
Third parties have asserted, and in the future could assert, that our products
infringe their intellectual property rights. These claims could harm our
ability to sell our products and expose us to litigation.
As is typical in the semiconductor industry, we have from time to time
received communications from third parties asserting patents that cover certain
of our technologies or products and alleging infringement of certain of their
intellectual property rights. We may receive similar communications in the
future. In the event any third party were to make a valid claim against us or
our customers, we could be enjoined from selling selected products such as our
inverter or power products or could be required to pay royalties to third
parties. Third-party infringement claims, with or without merit, have been and
could continue to be time consuming, result in substantial diversion of our
resources and potentially significant litigation costs, including costs related
to any fines and/or damages we may owe, cause product shipment delays, prevent
us and/or our customers from selling
9
some or all of our products, cause our customers or end-users not to use our
products or require us to enter into license agreements. Such license
agreements may not be available on acceptable terms, or at all. Any such event
could seriously harm our business and our results of operations. We expect that
semiconductor companies will increasingly be subject to infringement claims as
the number of products and competitors in the semiconductor industry grows. See
the section headed "Business Overview--Intellectual Property."
From time to time, in the normal course of business, we agree to indemnify
third parties with whom we enter into contractual relationships, including
customers and parties to other transactions with us, with respect to certain
matters. We have agreed, under certain conditions, to hold these third parties
harmless against specified losses, such as those arising from a breach of
representations or covenants, other third-party claims that our products when
used for their intended purposes infringe the intellectual property rights of
such other third parties or other claims made against certain parties. It is
not possible to determine the maximum potential amount of liability under these
indemnification obligations due to our limited history of prior indemnification
claims and the unique facts and circumstances that are likely to be involved in
each particular claim. To date, we have not made any payments under these
obligations.
Until all outstanding litigation is resolved, we will continue to incur
substantial legal expenses that vary with the level of activity in the legal
proceedings. This level of activity is not entirely within our control as we
may need to respond to legal actions. Consequently, we may find it difficult to
predict the legal expenses for any given period, which will impair our ability
to forecast our results of operations for that period.
Given the inherent uncertainties in litigation, there cannot be any
assurance that we will prevail in any particular litigation matter, and we
cannot predict the outcome of any such litigation. If any party were to prevail
in its claims against us, our rights to certain patents and results of
operations could be materially adversely affected. In any litigation arising
from claims that we infringe on the intellectual property rights of others, an
adverse result could involve an injunction to prevent the sales of a material
portion of our products, and a reduction or the elimination of the value of
related inventories, any of which could have a material adverse effect on our
net sales, results of operations and financial condition. See the section
headed "Business Overview--Intellectual Property."
We may be subject to lawsuits from third parties, which could harm our earnings
and expose us to additional uncertainties.
We are a defendant or plaintiff in actions that arise in the normal course
of business as well as actions that arose as counterclaims in response to our
patent infringement actions, including actions for antitrust, unfair
competition and interference. While we currently believe the amount of ultimate
liability, if any, with respect to these actions will not materially affect our
financial position, overall trends in results of operations, or liquidity, the
ultimate outcome of any litigation or claim is uncertain, and the impact of an
unfavorable outcome could be material to us.
If we fail to maintain an effective system of internal controls, we may not be
able to report our financial results accurately. As a result, we may fail to
meet our reporting obligations and current and potential holders of ADSs and/or
ordinary shares could lose confidence in our financial reporting, which could
adversely affect the trading price of our ADS and/or ordinary shares.
Effective internal controls are necessary for us to provide reliable
financial reports. If we cannot provide reliable financial reports or prevent
fraud, our results of operations could be misstated, our reputation may be
harmed and the trading price of our ADSs and/or ordinary shares could be
adversely affected. In connection with the restatement of our audited financial
statements for the years ended December 31, 2002, 2003 and 2004, in May 2005
our independent registered public accounting firm reported to our audit
committee a matter that was a "reportable condition" in our internal controls
as defined in standards established by the American Institute of Certified
Public Accountants at that time. In general, reportable conditions are
significant deficiencies in a company's internal controls that, in the
auditor's judgment, could adversely affect the ability to record, process and
report financial data consistent with the assertions of management in the
financial statements. During 2005, we devoted significant resources to
remediate deficiencies and improve our internal controls. We believe that these
efforts have remediated the concerns that gave rise to the "reportable
condition." However, we cannot be certain that our controls over our financial
processes and reporting will continue to be adequate in the future. Any failure
of our internal controls over financial reporting could result in a material
misstatement in financial statements.
In addition, under Section 404 of the Sarbanes-Oxley Act, beginning with our
annual report on Form 20-F for the fiscal year ended December 31, 2006, we are
required to furnish a report by our management on our internal control over
financial reporting. Such a report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial
reporting as of the end of our fiscal year, including a statement as to whether
or not our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in our internal
control over financial reporting identified by management. In addition,
beginning with our annual report on Form 20-F for the fiscal year ended
December 31, 2007, our independent registered public accountants must attest to
and report on the design and operating effectiveness of our internal control
over financial reporting.
During this process, if our management or our independent auditors
identifies one or more material weaknesses in our internal control over
financial reporting, we may be unable to assert that such internal control is
effective. If we or our
10
independent auditors were unable to assert that our internal control over
financial reporting is effective (or if our independent auditors were unable to
attest that our management's report is fairly stated or they are unable to
express an opinion on the effectiveness of our internal controls), we could
lose investor confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on the price of our ordinary shares
and/or our ADSs.
We have incurred, and continue to incur, significant costs with respect to
corporate governance and financial reporting compliance.
The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as new
rules subsequently implemented by the Securities and Exchange Commission, or
the SEC, and adopted by the Nasdaq in response to the Sarbanes-Oxley Act, have
increased and will continue to increase the scope, complexity and costs of our
financial reporting, securities disclosure and corporate governance practices.
These new or revised rules, regulations, and listing requirements are subject
to varying interpretations in many cases and their application in practice may
evolve over time as new guidance is provided by regulatory and governing
bodies. As a result, we may incur further legal and financial compliance costs
and be required to make unanticipated changes to our reporting, disclosure and
governance practices. In particular, the Sarbanes-Oxley Act requires that,
among other things: our chief executive officer and chief financial officer
personally certify our annual report on Form 20-F which is filed with the SEC
each year, which certification includes statements as to the accuracy and fair
presentation of the report's disclosure, the establishment and maintenance of
controls and procedures related to our disclosure and issues regarding our
internal accounting controls; we refrain from making most types of loans to our
officers and directors after the adoption of the Sarbanes-Oxley Act or from
making any material modifications to loans that existed prior to the adoption
of the Sarbanes-Oxley Act; we furnish a report in certain SEC filings pursuant
to Section 404 of the Sarbanes-Oxley Act, and our audit committee pre-approves
all audit and non-audit services provided by our independent registered public
accounting firm except for de minimis services; be directly responsible for the
appointment, compensation and oversight of the work of our independent
registered public accounting firm; establish procedures for the receipt and
treatment of complaints received by us regarding accounting, controls or
auditing matters and any confidential submissions by our employees regarding
questionable accounting or auditing; comprise independent directors, as defined
under the Sarbanes-Oxley Act and applicable Nasdaq rules. If we fail to comply
with new or revised rules, regulations, and listing requirements in a timely
manner, we may be exposed to liability and public perception of our financial
reporting, securities disclosure and corporate governance practices could be
negatively affected. As a result, the price of our ordinary shares and/or our
ADSs could decline.
Sales of our products could decline if our products fail to support evolving
industry standards or environmental requirements.
Our net sales are derived from sales of integrated circuit products that are
components of electronic devices built to industry standards and widely
accepted specifications. For example, the bus interconnect specifications of
most notebook computers for attaching integrated peripherals are currently
Peripheral Component Interconnect (PCI), Universal Serial Bus (USB) and Low Pin
Count (LPC) and the software used to control the power management functions of
many notebook computers conforms to the industry's Advanced Configuration Power
Interface specification. Our products must be designed to conform to these
standards and specifications in order to achieve market acceptance. Technology
standards and specifications continually evolve, and we may not be able to
successfully design and manufacture new products in a timely manner that
conform to these new standards or specifications. Additionally, new products we
develop to conform to new specifications may not be accepted in the market.
In addition, a large percentage of our business is based on products that
are used in systems that contain cold cathode fluorescent lamps (CCFL). CCFL
tubes contain mercury, which is the subject of environmental concerns,
particularly in Europe. Environmental issues may affect the use of our
CCFL-based products and our business and results of operations could be
adversely affected. Many customers are also requiring that we offer our
products in lead-free packages. Governmental regulations in certain countries
and customers' intention to produce products that are less harmful to the
environment has resulted in a requirement from many of our customers to
purchase integrated circuits that do not contain lead. The transition to
lead-free products may produce sudden changes in demand depending on the
packaging method used, which may result in excess inventory of products
packaged using traditional methods. This may adversely affect our results of
operations. In addition, the quality, cost and manufacturing yields of the
lead-free products may be less favorable compared to products packaged using
more traditional materials which may result in higher costs to us.
Our transfer pricing procedures may be challenged, which may subject us to
higher taxes and adversely affect our earnings.
Transfer pricing refers to the prices that one member of a group of
affiliated corporations charges to another member of the group for goods,
services or the use of intellectual property. If two or more affiliated
corporations are located in different countries, the laws or regulations of
each country generally will require that transfer prices be the same as those
charged by unrelated corporations dealing with each other at arm's length. If
one or more of the countries in which our affiliated corporations are located
believe that transfer prices were manipulated by our affiliated corporations in
a way that distorts the true taxable income of the corporations, the laws of
such countries could require us to redetermine transfer prices and thereby
reallocate the
11
income of our affiliate corporations in order to reflect such income clearly.
Any reallocation of income from one of our corporations in a lower tax
jurisdiction to an affiliated corporation in a higher tax jurisdiction would
result in a higher overall tax liability to us. Moreover, if the country from
which the income is being reallocated does not agree to the reallocation, the
same income could be subject to taxation by both countries.
We have adopted transfer pricing agreements with our subsidiaries located in
the United States, China, Taiwan, Japan and Singapore to regulate inter-company
transfers. A transfer pricing agreement is a contract for the transfer of
goods, services or intellectual property from one corporation to a related
corporation that sets forth the prices that the related parties believe are
those charged by unrelated corporations dealing with each other at arm's
length. We have entered into these types of agreements because a portion of our
assets, such as intellectual property developed in our U.S. and foreign
subsidiaries, is transferred among our affiliated corporations. In such
agreements, we have determined transfer prices that we believe are the same as
the prices that would be charged by unrelated parties dealing with each other
at arm's length. In this regard, we are subject to risks not faced by other
companies with international operations that do not create inter-company
transfers. If the taxing authorities of any jurisdiction, including Taiwan and
the United States, were to challenge these agreements successfully or require
changes in our transfer pricing practices, we could become subject to higher
taxes and our earnings would be adversely affected. There can be no assurance
that we will continue to be found to be operating in compliance with transfer
pricing laws, or that such laws will not be modified, which, as a result, may
require changes to our transfer pricing practices or operating procedures. Any
determination of income reallocation or modification of transfer pricing laws
could result in an income tax assessment of the portion of income deemed to be
derived from the taxing jurisdiction that so reallocates the income or modifies
its transfer pricing laws.
Provisions in our Memorandum and Articles of Association may discourage
potential acquisition bids for us and prevent changes in our management that
our shareholders may favor.
Provisions in our Memorandum and Articles of Association could discourage
potential acquisition proposals and could delay or prevent a change in control
transaction that our shareholders favor. These provisions could have the effect
of discouraging others from making offers for our ordinary shares. As a result,
these provisions may prevent the market price of our ordinary shares or ADSs
from reflecting the effects of actual or rumored takeover attempts and may
prevent shareholders from reselling their ordinary shares or ADSs at or above
the price at which they purchased their ordinary shares or ADSs. These
provisions may also prevent changes in our management that our shareholders may
favor. Our Memorandum and Articles do not permit shareholders to act by written
consent, do not permit shareholders to call a general meeting and provide for a
classified board of directors, which means shareholders can only elect a
limited number of our directors in any given year. Furthermore, our board has
the authority to issue up to 250,000,000 preference shares in one or more
series. Our board can fix the price, rights, preferences, privileges and
restrictions of such preference shares without any further vote or action by
our shareholders but subject to any direction that may be given by the
shareholders in a general meeting. The issuance of preference shares may delay
or prevent a change in control transaction without further action by our
shareholders or make removal of management more difficult.
As we are a Cayman Islands company, it could be difficult for investors to
effect service of process on and recover against us or our directors and
officers and our shareholders may face difficulties in protecting their
interest.
We are a Cayman Islands company, and many of our officers and directors are
residents of various jurisdictions outside the United States. A substantial
portion of our assets and the assets of our officers and directors, at any one
time, are and may be located in jurisdictions outside the United States.
Although we have irrevocably agreed that we may be served with process in Santa
Clara, California with respect to actions arising out of or in connection with
United States federal securities laws relating to offers and sales of our
ordinary shares and/or our ADSs, it could be difficult for investors to effect
service of process within the United States on our directors and officers who
reside outside the United States or to recover against us or our directors and
officers on judgments of the United States courts predicated upon the civil
liability provisions of the United States federal securities laws.
Our corporate affairs are governed by our charter documents, consisting of
our Memorandum and Articles of Association, and by the companies law and common
law of the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors are governed by Cayman Islands law, which are
not as clearly established as under statutes or judicial precedent in
jurisdictions such as the United States. While there is some case law in the
Cayman Islands on these matters, it is not as developed as, for example, in the
United States. In addition, the laws of the Cayman Islands relating to the
protection of the interests of minority shareholders differ in some respects
from those established under statutes or judicial precedent in existence in the
United States. Such differences may mean that our minority shareholders may
have less protection than they would have under the laws of the United States.
Due to the less protective nature of such laws in the Cayman Islands, our
shareholders may have more difficulty in protecting their interests in the face
of actions by our management or directors than would shareholders of a
corporation incorporated in some other jurisdictions.
We may become a passive foreign investment company, which could result in
adverse U.S. tax consequences to U.S. investors.
We may be classified as a passive foreign investment company by the U.S.
Internal Revenue Service for U.S. federal income tax purposes. Such
characterization could result in adverse U.S. tax consequences to you if you
are a U.S. investor. For example, if we are a passive foreign investment
company, our U.S. investors will become subject to increased tax liabilities
under
12
U.S. tax laws and regulations and will become subject to burdensome reporting
requirements. The determination of whether or not we are a passive foreign
investment company will be made on an annual basis and will depend on the
composition of our income and assets, including goodwill, from time to time.
Specifically, we will be classified as a passive foreign investment company for
U.S. tax purposes if, after the application of look-through rules, either
(a) 75% or more of our gross income in a taxable year is passive income, or
(b) the average percentage of our assets (by value) in a taxable year that
produce or are held for production of passive income is at least 50%. Our
judgment is not binding on the Internal Revenue Service. In the future, the
valuation of our intangible assets will be based in part on the then market
value of our ADSs and ordinary shares which is subject to change. We cannot
assure you that we will not be a passive foreign investment company for the
current or any future taxable year. See "Taxation--United States Federal Income
Taxation--Passive Foreign Investment Company."
Holders of ADSs may not be able to exercise their right to vote.
Holders of our ADSs may instruct the depositary of our ADSs to vote the
ordinary shares underlying their ADSs but only if we ask the depositary to ask
for instructions. Otherwise, they will not be able to exercise their right to
vote unless they withdraw the ordinary shares underlying the ADSs they hold.
However, they may not know about the meeting sufficiently enough in advance to
withdraw those ordinary shares. If we ask for instructions, the depositary will
notify the holders of the upcoming vote and arrange to deliver our voting
materials to them. We cannot assure you that holders will receive the voting
materials in time to ensure that they can instruct the depositary to vote their
ordinary shares. In addition, the depositary and its agents are not responsible
for failing to carry out voting instructions or for the manner of carrying out
voting instructions. This means that holders may not be able to exercise their
right to vote, and there is no guarantee that the ordinary shares underlying
your ADSs would be voted as requested.
The depositary for our ADSs may give us a discretionary proxy to vote the
ordinary shares underlying your ADSs if holders of ADSs do not vote at
shareholders' meetings which could adversely affect their interests.
Under the deposit agreement for the ADSs, the depositary will give us a
discretionary proxy to vote the ordinary shares underlying ADSs at
shareholders' meetings if the holder of the ADSs did not vote, unless we notify
the depositary that we do not wish to receive a discretionary proxy, we think
there is substantial shareholder opposition to the particular question, or we
think the particular question would have a material adverse impact on our
shareholders.
The effect of this discretionary proxy is that holders of ADSs cannot
prevent the ordinary shares underlying their ADSs from being voted, absent the
situation described above, and it may make it more difficult for shareholders
to influence the management of our company. Holders of our ordinary shares are
not subject to a discretionary proxy.
Holders of ADSs may not receive distributions on ordinary shares or any value
for them if it is illegal or impractical to make them available.
The depositary of our ADSs has agreed to pay to ADS holders the cash
dividends or other distributions it or the custodian for our ADSs receives on
ordinary shares or other deposited securities after deducting its fees and
expenses. Holders of our ADSs will receive these distributions in proportion to
the number of ordinary shares the ADSs represent. However, the depositary is
not responsible if it decides that it is unlawful or impractical to make a
distribution available to any holders of ADSs. We have no obligation to take
any other action to permit the distribution of our ADSs, ordinary shares,
rights or anything else to holders of our ADSs. This means that ADS holders may
not receive the distributions we make on ordinary shares or any value for them
if it is illegal or impractical for us to make them available. These
restrictions may have a material adverse effect on the value of the ADSs.
Holders of ADSs may be subject to limitations on transfer of ADSs.
ADSs represented by American Depositary Receipts, or ADRs, are transferable
on the books of the depositary. However, the depositary may close its books at
any time or from time to time when it deems expedient in connection with the
performance of its duties. The depositary may refuse to deliver, transfer or
register transfers of our ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary thinks it is
advisable to do so because of any requirement of law or any government or
governmental body, or under any provision of the deposit agreement, or for any
other reason.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal name is O2Micro International Limited. We are incorporated in
Cayman Islands. Our registered office is located at Maples Corporate Services
Limited, Ugland House, P.O. Box 309, South Church Street, Grand Cayman
KY1-1104, Cayman Islands. Our principal executive offices are located at Grand
Pavilion Commercial Centre, West Bay Road, P.O. Box 32331 Grand Cayman
KY1-1209, Cayman Islands. Our telephone number is (345) 945-1110. We have a
subsidiary, O2Micro, Inc., which was incorporated as a California
corporation in March 1995. In March 1997, O2Micro International Limited was
incorporated as a Cayman Islands company. In March 1997, we exchanged our
ordinary shares and preference shares for common stock and preferred stock of
O2 Micro, Inc. After the exchange, we held all of the outstanding capital
stock of O2 Micro,
13
Inc., our wholly owned subsidiary in the United States. Our shares were
initially listed on the Nasdaq on August 23, 2000 and on the Cayman Islands
stock Exchange on February 1, 2001. On November 25, 2005, we effected a
50-for-1 share split of our ordinary shares and created an ADS program for our
ADSs to be quoted on Nasdaq, with each ADS representing 50 ordinary shares. We
delisted our ordinary shares from Nasdaq on November 25, 2005 and listed our
ADSs on Nasdaq on November 28, 2005, the next trading day. We subsequently
listed our ordinary shares on the Main Board of the Stock Exchange of Hong Kong
Limited (the "SEHK") on March 2, 2006 by way of introduction.
Our agent for service of process in the U.S. for the purpose of our
securities filings is our chief executive officer, Sterling Du, c/o
O2Micro, Inc., 3118 Patrick Henry Drive, Santa Clara, CA 95054.
Since January 1, 2005, our principal capital expenditures were investments
in various private companies of approximately $13.9 million in the aggregate,
and $47.2 million in the purchase of property and equipment.
BUSINESS OVERVIEW
We design, develop and market high performance integrated circuits for power
management and security applications, as well as systems security solutions. We
focus our product design efforts on integrated circuits for consumer
electronics, computer, industrial and communications products, including LCD
computer monitors, LCD televisions, notebook computers, Internet security
devices, GPS, mobile phones and portable DVD players. Our integrated circuit
products manage and provide power for lighting of LCDs, provide connections
between notebook computers and external plug-in cards, provide Internet
security, control and monitor battery charging and discharging, and select and
switch between power sources.
We believe that our focus on these products provides us with an opportunity
to participate in large and growing markets. Potential future growth in the LCD
television market, especially units with larger-size panels, represents an
attractive growth opportunity for us because larger LCD panels require more of
our inverters for cold cathode fluorescent lamps, or CCFLs.
Our integrated circuit products use analog, digital or mixed-signal designs
that combine analog and digital circuits on a single chip, reducing the number
of components needed and allowing our customers to reduce the size, weight,
power requirements or cost of their products. We offer a wide range of
proprietary application specific standard products as well as customized
products. We work closely with our customers to identify their product needs
and establish engineering priorities for new product designs and development.
We believe that our system-level expertise and extensive experience with power
management systems allow us to develop proprietary solutions and foster
long-term relationships with our customers.
We sell our products to OEMs, ODMs and module makers. Our integrated
circuits have been incorporated into products sold by Acer, Apple Computer,
Dell, Fujitsu, Hewlett-Packard, Lenovo, LG Electronics, NEC, Samsung
Electronics, Sharp, Sony and Toshiba, among others. We sell our products
through our direct sales force, independent sales representatives and
distributors in China, Hong Kong, Japan, Korea, Singapore, Taiwan and the
United States. We also have design centers in many of our key markets to
provide design and engineering support to our customers. We outsource the
fabrication of our products to standard, high volume semiconductor foundries.
This "fabless" approach allows us to focus on product development, minimize
fixed costs and capital expenditures, and access diverse manufacturing
technologies.
Our net sales have grown from $105.6 million in 2005 to $124.9 million in
2006 and $165.5 million in 2007. As disclosed in our press release dated
April 30, 2008, in the three months ended March 31, 2008, our unaudited net
sales were $37.6 million, an increase of 7.2% as compared with our unaudited
net sales of $35.0 million in the same period in 2007.
Industry Background
The markets for consumer electronics, mobile computing and communications
products, such as LCD monitors, LCD televisions, notebook computers, mobile
handsets and portable entertainment devices, are large and growing as
functionality increases and prices decrease. One of the most significant
challenges in these markets remains the efficient management of power. As the
number of applications and features available for these products has increased,
the number and variety of power loads, or individual subsystems requiring
voltage or current regulation, has also grown. Each additional application or
feature can require multiple functions and circuits that, in turn, require more
individually-regulated and managed power sources. Increasingly, manufacturers
are turning to innovative new semiconductor technologies to manage the
available power source capacity more efficiently.
Power management integrated circuits deliver power and regulate voltage,
controlling the flow of electrical energy among the various power loads and
energy sources in a product or system. Power management requires a combination
of two distinct technological disciplines: digital integrated circuit design
and analog integrated circuit design. Digital circuits, such as microprocessor
and memory semiconductors, provide most of the functionality of computer
processing. However, digital circuits generally cannot handle significant
amounts of current or multiple voltage levels. In contrast, analog circuits use
and manipulate continuously varying voltage and current levels. Battery power
systems, which have relatively high and continuously varying power levels, are
inherently analog systems.
Digital integrated circuit technology can be used to manage power systems
more intelligently and efficiently and help to prolong battery life in mobile
applications. However, since battery power systems are analog by nature,
mixed-signal integrated circuits, or circuits that incorporate both digital and
analog technologies, are necessary in order to harness the
14
intelligence provided by digital technology. Designing mixed-signal integrated
circuits poses a number of difficulties: analog circuits are more sensitive
than digital circuits to the physical layout and electrical characteristics of
the circuit; analog circuit designers must have a very high level of circuit
design experience; and basic differences in the technologies used in digital
and analog circuit design make combining the technologies problematic.
In addition, mixed-signal integrated circuits comprise both digital and
analog components, and the trend toward more complex devices has increased the
number of components substantially. Integrating the functions of those
components on a single chip, known as a system-on-a-chip, can enable
manufacturers to make products smaller, lighter and more reliable. Thus, as
mobile computing and communications devices grow in complexity and
functionality, there is an increasing need for higher levels of systems
integration. In addition, variances in battery designs among manufacturers make
it more difficult to design intelligent systems that are optimized for
particular power systems.
Most consumer electronics, mobile computing and communications product
manufacturers need mixed-signal and analog integrated circuits specifically
designed to optimize the power system usage in their devices to enable them to
offer new devices with richer functionality and longer battery lives. These
semiconductors should also be highly integrated and standards-based to help
manufacturers create products that are smaller, lighter, easier to use, more
reliable and more cost-efficient to design and produce. In addition, in mobile
device markets where product life cycles can be less than one year, these
solutions typically need to be developed using advanced design methodologies to
allow manufacturers to achieve rapid time-to-market with their new products.
Several different process technologies are available for designing and
fabricating analog and digital integrated circuits. Of these, complementary
metal oxide semiconductor, or CMOS, is the most widely used process technology,
especially for purely digital integrated circuits. CMOS processes are described
in terms of feature size, or geometry, and are measured in microns. One micron
equals one millionth of a meter. Currently, the most advanced process
technologies achieve feature sizes of 0.13 micron, 0.09 micron, 0.065 micron
and smaller. However, small feature size circuits can become damaged when
exposed to high voltages and therefore power management integrated circuits are
typically fabricated using larger feature sizes. For this reason, older
manufacturing facilities, or fabs, having feature sizes of 0.25 micron and 0.80
micron or greater, have traditionally been used in fabricating power management
integrated circuits, while the most advanced, and most expensive fabs are used
for digital and non-power management analog integrated circuits.
Products
We market power management and cardbus controller components for the
Consumer, Computer, Industrial and Communications markets and also market
system security solutions. Our power management and cardbus controller products
include ICs to provide power for lighting of LCDs and LEDs, control and monitor
battery charging and discharging, DC / DC conversion, and provide connections
between notebook computers and external plug-in cards including product to
select and switch between power sources. Our system security solutions products
include VPNs and firewalls which provide security functions for communications
between computer systems and networks, including the transmission of data
across the Internet. Our system security products are designed to provide
high-speed and comprehensive security protection. In particular, our core
technologies in the Application Specific Integrated Circuit ("ASIC") chips are
exclusive to us and deliver enhanced performance and service to our customers.
We sell our products into the following four end-markets:
. Consumer electronics market, including desktop monitors, LCD
televisions, digital cameras and camcorders and portable media players;
. Computer market, including notebook computers, desktop computers and
desktop servers;
. Industrial market, including any product that is specified to operate
over an extended temperature range, for instance, beyond the standard
commercial operating temperature range of standard semiconductor
products of zero degrees to 70 degrees centigrade. Products that operate
over an extended temperature range include industrial tools, automobile
GPS systems, and other automobile systems; and
. Communications market, including portable GPS systems, data
communications security and networking systems, Internet and Internet
related systems and mobile phone handsets.
The majority of our revenue is derived from the sale of our products in the
consumer and computer markets. Additionally, we have increased our efforts to
expand our product portfolio addressing opportunities in the communications and
industrial markets.
Marketing, Sales, and Customer Support
Our marketing strategy is focused on the sale of proprietary analog and
mixed-signal integrated circuits to customers in the consumer electronics,
computer, industrial and communications markets. These markets tend to be
dominated by a small number of major brand name companies. As a result, we
focus our resources on the major vendors in each market.
We primarily sell proprietary application specific products to our customers
and work with them on new product development. We also design customized
products for our customers. We work directly with our customers to create
demand for our products by
15
providing them with application specific product information for their system
design, engineering and procurement groups. We actively participate in their
design processes to introduce them to our products and the target applications
our products address. We endeavor to design products that will meet
increasingly complex and specific design requirements, but which will also
support widespread demand for these future products. We typically undertake a
four-to-eight month development process with our customers. If successful, this
process culminates in a customer deciding to use our product in its system,
which we refer to as a design win. Volume production generally takes an
additional three-to-six months after the initial design win confirmation. Once
our products are accepted and designed into an application, the customer is
likely to continue to use the same power architecture and derivative products
in a number of its models, which tends to extend our product life cycles.
We sell our products to OEMs, ODMs and module makers. We market and sell
these products through a combination of our direct sales force, independent
sales representatives and distributors in Asia, Europe and North America. We
sell most of our products through direct sales. We maintain direct sales
offices in most of our major markets which include Texas, California, China,
Taiwan, Korea and Japan. Additionally, we have sales representatives in China,
Hong Kong, Singapore, Taiwan and the United States, as well as two distributors
in Japan.
We pay our direct sales force on a salary and performance bonus basis only.
Our independent sales representatives are paid on a commission basis, based on
a percentage of the actual sales referred by them. For sales through sales
representatives, we invoice and deliver our products directly to the customers.
We have entered into distributorship arrangements with distributors on a
non-exclusive basis for the sale of our products in Japan as a principal at the
request of certain of our major end-customers in Japan. For our other customers
in Japan, sales are made through our direct sales offices in Japan. In Japan,
it is customary practice for OEMs, ODMs and module makers to purchase products
like ours through distributors because of the ancillary services provided by
them such as inventory storage, payment terms and conditions and just-in-time
delivery. We may provide a discount on the prices of the products we sell to
our distributors (as compared to the prices we offer to end customers),
depending on the term and conditions of the individual purchases. We defer
recognition of such sales until the product is sold by the distributors to its
end customers. In addition, products held by the distributors are considered
part of our inventory and included in our inventory balance. Sales to the
distributors are recognized and inventory is adjusted upon shipment to its
end-customers as title to inventories generally transfers upon shipment. We
receive monthly inventory and sales reports from the distributors in Japan,
which we use as part of our overall inventory control. We evaluate our
inventory on a quarterly basis and full provision is made for inventory which
is over six months old and for which there is no end customer demand based on
forecasted product demand and market conditions.
Our marketing efforts include market analysis, participation in industry
trade shows and technical conferences, sales training, publication of technical
articles, maintenance of our web site and advertising. In addition, we maintain
customer support staff in the United States, Taiwan, China, Japan and Korea for
post order servicing and applications support.
Seasonality
The consumer electronics and computer markets are characterized by seasonal
volume increases in the latter part of the year primarily driven by increased
consumer spending during the holiday season. We normally experience the highest
sales volume to our customers in these markets in the third and fourth quarter
of each year, when such customers increase their inventories in anticipation of
increased seasonal demand. Our customers in the industrial and communications
markets are to a lesser extent subject to seasonal consumer demand. As a
result, our sales volume to those customers has been largely consistent from
quarter-to-quarter.
Customers
We focus on the major OEMs (or brand owners) in the consumer electronics,
computer, industrial and communications markets. Many of these major OEMs use
third-party providers, such as ODMs, module makers or other intermediaries, to
produce their products or portions of their products containing our components.
Hence, the majority of our direct sales are to these third-party providers.
We have no long-term volume purchase contracts with any of our major
customers. The majority of our sales to customers are conducted on the basis of
purchase orders, which set out the specific terms for a particular sale. We
price our products primarily with reference to the prevailing market
conditions, taking into consideration the complexity, technology and features
of the product, the order size and the relationship with the customer.
The table below sets forth, for the periods indicated, the dollar amount of
our net sales derived from Asia, North America and other regions:
Years Ended December 31
(In Thousands)
Location of customers 2005 2006 2007
--------------------- -------- -------- --------
Asia............... $105,517 $124,761 $165,391
North America...... 29 32 130
Other regions...... 6 122 19
-------- -------- --------
|
$105,552 $124,915 $165,540
16
We generally extend to our customers credit terms varying from 45 to 60
days. We may adjust our usual credit terms according to each customer's credit
history as well as local market practice. Our customers generally pay us either
by direct wire transfer or under letter of credit arrangement. To date, we have
not experienced any material problems relating to customer payments or material
write-offs of accounts receivable due to uncollectibility.
Manufacturing
We subcontract the manufacture of our products and most of the testing for
our products to semiconductor foundries, assembly and testing service
providers. This "fabless" approach allows us to focus on product development,
reduce fixed costs and capital expenditures, and access diverse manufacturing
technologies.
We use established mainstream processes for the manufacture of our products.
This approach reduces our technical risks and minimizes the risks related to
production capacity constraints.
Wafer Manufacturing
Wafer manufacturing is a capital intensive and complex operation which takes
place at dedicated facilities of semiconductor foundries. After we have
designed our integrated circuits, we place orders with a semiconductor foundry
to fabricate wafers with our integrated circuits embedded in them. The
semiconductor foundry purchases raw unprocessed wafers, or silicon substrates,
and processes them according to our specifications to fabricate the wafers used
in our products. Currently, the majority of our wafers are fabricated using
0.25 to 0.80 micron CMOS semiconductor processes, which are the standard
semiconductor processes used by semiconductor foundries. The wafer fabrication
process generally takes six to 10 weeks. Fabricated wafers are then shipped by
the semiconductor foundry, according to our instructions, to either an assembly
service provider for electrical wafer sort and assembly or to an electrical
wafer sort service provider for electrical wafer sort only.
Our major semiconductor foundry providers are X-FAB, SinoMos, SMIC and CSMC.
We do not enter into long-term contracts with our semiconductor foundry
providers. They manufacture our products on a purchase-order basis in
accordance with our specifications and requirements. In general, the cost
charged to us for the foundry services depends on prevailing wafer costs,
which, in turn, depends on industry capacity and the state of manufacturing
process technologies as well as on the complexity of our product designs, order
size, cycle time and foundry capacity utilization.
Assembly and Testing
After the fabricated wafers have been electrically sorted, they are ready
for assembly and are either sent to an assembly service provider for assembly
or held at our warehouse facilities, or an "inventory hub," for assembly at a
later date. An inventory hub is a provider of warehousing services. We often
hold inventory of our semi-finished products in the form of electrically sorted
wafers because it is at this manufacturing stage that most time has been
invested, with the least costs, and we then have the flexibility of choosing
the type of packaging into which they are to be assembled. The wafer sort and
assembly process generally takes three to six weeks.
Once our integrated circuits are assembled and packaged, they are ready for
final electrical testing. We instruct the assembly service provider to send our
packaged integrated circuits to either a testing service provider or our
testing facilities for final testing or our warehouse facilities (or an
inventory hub) for testing at a later date. The electrical testing process
generally takes a few days. Once our products have been tested, they are ready
for use by our customers.
Finished products may be sent to our customers or their designees such as
third party service providers that manufacture their products or a portion of
their products containing our integrated circuits. Our customers may request
for our integrated circuits to be shipped in plastic tubes, several to a tube,
or use a form of packaging called "tape and reel" that more readily provides
for automated assembly of our integrated circuits into their products. If a
customer orders "tape and reel" packaging, this is done either at a testing
service provider or a "tape and reel" service provider prior to shipment of our
products to the customer.
We utilize several assembly and testing service providers in Taiwan and
other parts of Asia on a purchase order basis. They assemble and test our
products based on our specifications and requirements. In general, the cost
charged to us for these assembly and testing services depends on prevailing
market rates for these services and our relationship with the service provider.
Typically analog and mixed-signal products have a greater portion of their
product cost associated with product testing than digital products. We operate
a semiconductor testing facility to test a portion of our products prior to
shipment. In July 2007, we signed a Memorandum of Understanding with Sigurd
Microelectronics (Cayman) Co., Ltd, a subsidiary of Sigurd Microelectronics
Corporation. They are a leading provider of semiconductor assembly and test
services in Taiwan. Under the Memorandum of Understanding, we will divest our
investment in our semiconductor testing facility by selling 100% ownership of
our wholly owned subsidiary holding the facility to them, invest up to $10.3
million in them to become their strategic partner and offer them favorable
supplier treatment for 36 months. The transaction has not been completed as
they are still in the process of obtaining approval from the Taiwan government.
Our current credit terms with our foundry, assembly and testing service
providers vary from 30 to 45 days, depending on our relationships with each of
them. We generally pay our service providers by direct wire transfer.
We also have made investments in certain of our current suppliers and
potential future suppliers, including software developers, foundries and
testing service providers. These investments enable us to enhance our business
relationships with these suppliers to ensure the adequacy of foundry capacity
allocation and quality of services provided to us. We plan to continue to
evaluate additional investment opportunities in our supply chain.
17
Competition
We compete in the market for analog and mixed-signal integrated circuits
based on such factors as product performance, power efficiency, new
technologies, functional innovation, reliability, price and availability. We
believe our principal competitors include Intersil Corporation, Linear
Technology Corporation, Maxim Integrated Products, Inc., Microsemi Corporation,
Monolithic Power Systems, Inc., Ricoh Company, Ltd., Rohm Co., Ltd and Texas
Instruments Incorporated. There is also competition from internal integrated
circuit design and manufacturing capabilities of some of our existing and
potential customers, such as Toshiba and Fujitsu. In addition to these
competitors, other integrated circuit companies may decide to enter the market
with analog and mixed signal integrated products that compete with our products
or incorporate functions similar to those provided by our products.
Intellectual Property
Our intellectual property is primarily developed in-house. We do, from time
to time, acquire intellectual property from third parties which we believe is
instrumental or complementary to our business. We also on occasion license our
intellectual property to third parties in exchange for royalties or other
consideration. From time to time, we may seek acquisitions to acquire
businesses or technologies where synergies exist. For example, in March 2008,
we acquired all of their right, title and interest in, to and under the assets,
goodwill and rights used in the conduct of the software security business of
360 Degree Web Ltd. in exchange for $6.5 million and all of shares of 360
Degree Web Ltd held by us including 1,583,333 shares of Series B preferred
stock, 500,000 shares of Series B2 Preferred Stock and 180,769 shares of Series
D preferred Stock totally valued at $1.6 million.
Our success depends significantly upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Competitors may recruit our
employees who have access to our proprietary technologies, processes and
operations.
We rely in part on patents to protect our intellectual property. As of
December 31, 2007, we had approximately 127 patents issued in the United States
and approximately 280 patents issued in other countries. In addition, we had
approximately 217 patent applications pending in the United States Patent and
Trademark Office. We also had approximately 409 patent applications pending in
various countries other than the United States. These patents may never be
issued. Even if these patents are issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove to be unenforceable. To protect our proprietary rights, we
also rely on a combination of copyrights, trademarks, trade secret laws,
contractual provisions, licenses and maskwork protection under the Federal
Semiconductor Chip Protection Act of 1984 and similar laws in other
jurisdictions. We also enter into confidentiality agreements with our
employees, consultants and customers and seek to control access to, and
distribution of, our proprietary information.
We may from time to time grant rights to third parties for our patents and
other intellectual property. In March 2003, we granted a limited non-exclusive
license to Ricoh Company, Ltd. for our patents entitled "Integrated PC Card
Host Controller for the Detection and Operation of a Plurality of Expansion
Cards" (U.S. Patent No. 6,470,284 and Taiwan Patent No. 155891) and their
foreign counterparts. In April 2007, we entered into a Memorandum of Agreement
with Samsung Electronics Co., Ltd. and its subsidiaries pursuant to which we
agreed not to bring a patent infringement claim against Samsung or its
customers during a specified term. In September 2007, we granted a
non-exclusive license to Sony Corporation for certain U.S. inverter patents. In
October 2007, we granted a covenant not to sue to Hon Hai Precision Industries,
Ltd. for certain U.S. inverter patents. In November 2007, we granted a covenant
not to sue or assert any claims of U.S. Patent Numbers 6,259,615, 6,396,722,
6,804,129 and their reissues to Microsemi Corporation. In March 2008, we
granted a non-exclusive license to Rohm Co., Ltd. for certain U.S. inverter
controller patents.
The laws of some foreign countries do not protect our proprietary rights to
the same extent as do the laws of the United States, and many companies have
encountered substantial infringement problems in these countries, including
countries in which we have sold and continue to sell a significant portion of
our products. There is a risk that our means of protecting our proprietary
rights may not be adequate. For example, our competitors may independently
develop similar technology, duplicate our products or design around our patents
or our other intellectual property rights. If we fail to protect our
intellectual property adequately, it would make it easier for our competitors
to sell competing products.
We are involved in a variety of litigation matters involving intellectual
property. For example, we have initiated and are pursuing certain patent
infringement actions in Taiwan. We have obtained preliminary injunctions and
provisional attachment orders against numerous competitors, their customers and
users. As of December 31, 2007, we have deposited an amount of New Taiwan
dollars equivalent to approximately $12.4 million with the Taiwan courts for
court bonds in connection with the preliminary injunction actions and related
provisional attachment actions. The court bonds provide security for the
enjoined party to claim damages incurred from the preliminary injunctions,
provisional attachments or the provision of a countersecurity against us in the
event we do not ultimately succeed in the underlying infringement actions.
However, these preliminary injunctions or provisional attachments may be
rescinded if the relevant court allows the opposing party to make its own
deposit or countersecurity with the court. In February 2007, Monolithic Power
Systems, Inc. amended its complaint in the Intermediate People's Court in
Chengdu, China alleging that two of our customers infringe Chinese Patent
Number ZL03140709.9. In May 2007, a jury in the United States District Court in
the Northern District of California found Claims 1, 2, 9, 12, 14 and 18 of our
U.S. Patent Number 6,396,722 to be invalid. In April 2008, the United States
Court of Appeals for the Federal Circuit vacated the jury verdict, the final
judgment of infringement and the permanent injunction we obtained against
Beyond Innovation
18
Technology Co., Ltd., FSP Group, SPI Electronic Co., Ltd. and Lien Chang
Electronic Enterprise Co., Ltd. and remanded to the district court for further
proceedings. We have filed a petition for rehearing with the court. We are also
involved in several other patent litigation matters in the United States.
Given the inherent uncertainties in litigation, there cannot be any
assurance that we will prevail in any of the pending litigation, and we cannot
predict the outcome of any such litigation. Litigation is costly, time
consuming, and may distract management from other important tasks and, in
patent litigation where we are the plaintiff, there is a risk that our patents
may be held invalid or unenforceable. In addition, in any litigation arising
from claims that we infringe on the intellectual property rights of others, an
adverse result could involve an injunction to prevent the sales of a material
portion of our products, a reduction or the elimination of the value of related
inventories, and the assessment of a substantial monetary award for damages
related to past sales, any of which could have a material adverse effect on our
result of operations and financial condition.
ORGANIZATIONAL STRUCTURE
We are incorporated under the laws of the Cayman Islands and we are the
parent company for the various subsidiaries that conduct our business on a
worldwide basis. Our significant subsidiaries, all of which are wholly-owned,
are:
Significant Subsidiary Country of Incorporation Date of Incorporation
---------------------- ------------------------ ---------------------
O2 Micro, Inc. U.S.A. March 1995
O2 Micro Electronics, Inc. Taiwan March 1999
O2 Micro International Japan
Limited Japan August 1999
O2 Micro PTE Limited-Singapore Singapore September 1999
Aotu Micro (Wuhan) Co., Ltd. China January 2001
O2 Micro (Beijing) Co., Ltd. China February 2001
O2 Micro (China) Co., Ltd. China April 2001
O2 Micro (Chengdu) Co., Ltd. China July 2004
OceanOne Semiconductor (Ningbo)
Limited China August 2005
|
PROPERTY, PLANT AND EQUIPMENT
The table below describes our headquarters and the facilities where the
above subsidiaries are located as of December 31, 2007:
Approx. Available
Location Square Feet Lease Expiration
-------- ----------------- ----------------
California, USA................................... 37,180 not applicable
Taipei, Taiwan.................................... 33,786 2011
Hsin-Chu, Taiwan.................................. 26,246 2008
Singapore......................................... 7,104 2008
Shanghai, China................................... 30,448 not applicable
Beijing, China.................................... 26,286 2010
Wuhan, China...................................... 21,290 2010
Chengdu, China.................................... 26,372 2008
Grand Cayman, Cayman Islands...................... 600 2008
Tokyo, Japan...................................... 1,302 2008
Ningbo, China..................................... 7,944 2008
|
We maintain our Cayman Islands office to process invoices and receive
amounts payable. Research and development, marketing, applications and
administrative staff are located in California. We also have sales offices in
Pfluggerville, Texas and Houston, Texas. Marketing, sales, applications,
design, worldwide production support, final inspection and shipping, and
general and administrative staff are located in Taiwan. We have offices in
Japan, Singapore, Korea and China for marketing, sales, design, warehousing and
applications. We believe our current facilities are adequate for our needs for
the foreseeable future, and that any additional space required will be
available to us on commercially reasonable terms.
In May 2004, we purchased a 37,180 square foot building in Santa Clara,
California housing our California operations. The purchase price was
approximately $4.6 million. In October 2005, we purchased a 30,448 square foot
facility in
19
Shanghai, China for approximately $7.1 million. In April 2006, we purchased
29,935 square feet of land in Hsin-Chu, Taiwan for approximately $8.8 million.
ITEM 4A.UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
We design, develop and market high performance integrated circuits for power
management and security applications, as well as systems security solutions. We
also license a limited portion of our proprietary intellectual property from
and to third parties. Our net sales have been derived primarily from the sale
of analog and mixed-signal integrated circuit products to customers in the
consumer electronics, computer, industrial and communications markets.
Our net sales have grown from $105.6 million in 2005 to $124.9 million in
2006 and $165.5 million in 2007. This increase in net sales was due primarily
to higher unit shipments of our existing products, expansion of our customer
base and the introduction of new products. We have continued to diversify our
customer base and market focus by providing new products that are used in
consumer electronics, computer, industrial and communications markets. Our
overall gross margin has fluctuated in the past and is likely to fluctuate in
the future due to the stages of our products in their life cycles, variations
in our product mix, the timing of our product introductions and specific
product manufacturing costs. New products typically have higher gross margins
than products that are more mature. Gross margins on the products we sell will
typically decline over the life of these products due to competitive pressures
and volume pricing agreements.
Operating expenses grew from $58.3 million in 2005 to $72.7 million in 2006
and decreased to $70.8 million in 2007. Our operating expenses increased
primarily from new product development efforts, hiring additional personnel and
expanding our operations and recognized stock-based compensation due to
adoption of Statement of Financial Accounting Standards ("SFAS") No. 123 (R),
"Share-Based Payment." Our operating expenses decreased primarily due to the
offset from litigation income received in 2007.
Our net income was $8.1 million in 2005, $743,000 in 2006 and $25.0 million
in 2007. We have been profitable in each quarter since the quarter ended
September 30, 1999 except for the quarter ended June 30, 2006. We believe this
profitability has been the result of our strategy to make investments to
develop new products and grow net sales, while maintaining a high level of
fiscal control, product quality and customer satisfaction as well as recent
litigation income from certain litigation matters. Our profitability resulted
in retained earnings of $56.8 million as of December 31, 2007.
We utilize a fabless semiconductor business model, which means we focus on
designing, developing and marketing products, while having these products
manufactured by large independent semiconductor foundries. As a fabless
semiconductor company, we do not need to invest significant capital to
manufacture semiconductor devices, and can take advantage of some of the
cost-efficiencies of third-party foundries. We place purchase orders for
specific quantities of packaged semiconductor devices or wafers at set prices.
We currently use third parties to test and assemble most of our products, which
reduces the capital we need to invest in these activities. We also use
independent assembly suppliers for the production of our systems security
solutions products.
We sell our products through a combination of direct sales offices, sales
representatives and distributors. We have sales representatives in China, Hong
Kong, Singapore, Taiwan and the United States, as well as two distributors in
Japan.
Revenue from product sales to customers, other than distributors, is
recognized at the time of shipment, including revenue that has been realized
and earned. Sales through distributors are recognized when the distributors
make a sale. Under certain conditions, customers may return defective products.
Allowances for sales returns are provided on the basis of past experience.
These provisions are deducted from sales.
Critical Accounting Policies--
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
net sales and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an on-going basis, including those
related to valuation allowance for deferred tax assets, allowance for doubtful
accounts, inventory valuation, useful lives for property and equipment,
impairment on long-lived assets, accruals for sales adjustments, other
liabilities, contingencies and stock-based compensation. We base our estimates
and judgments on our historical experience, knowledge of current conditions and
our beliefs of what could occur in the future considering available
information. Because our estimates may vary in each situation, our actual
results may differ from our estimates under different assumptions and
conditions.
20
Our management considers the following factors in reviewing our financial
statements:
. the selection of critical accounting policies; and
. the judgments and other uncertainties affecting the application of those
critical accounting policies.
The selection of critical accounting policies, the judgments and other
uncertainties affecting the application of those policies and the sensitivity
of reported results to changes in conditions and assumptions are factors to be
considered when reviewing our financial statements. Our principal accounting
policies are set forth in detail in Note 2 to our consolidated financial
statements included elsewhere in this annual report.
We believe the following critical accounting policies affect our more
significant judgments used in the preparation of our financial statements.
Revenue Recognition and Accounts Receivable Allowances
We recognize revenue on sales to direct customers in accordance with SEC
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB 104"). SAB 104 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an agreement
exists, (2) delivery has occurred or services have been rendered, (3) the fee
is fixed and determinable, and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) is based on management's judgments
regarding the ability to estimate returns and the collectibility of those fees.
For sales made through distributors, we defer recognition of such sales
until the product is sold by the distributors to their end customers. Since we
have limited control over these distributors' sales to third parties, we
recognize revenues on these sales only when the distributors sell the products.
In addition, products held by distributors are included in our inventory
balance. Accounts receivable from distributors are recognized and inventory is
relieved upon shipment to end customers as title to inventories generally
transfers upon shipment.
We make allowances for future product returns at the time revenue is
recognized. We analyze historical returns, changes in current demand and
acceptance of products when evaluating the adequacy of such allowances.
Estimates may differ from actual product returns and allowances and these
differences may materially affect our reported revenue and amounts ultimately
collected on accounts receivable. In addition, we monitor collectibility of
accounts receivable primarily through review of the accounts receivable aging.
When facts and circumstances indicate the collection of specific amounts or
from specific customers is at risk, we assess the impact on amounts recorded
for bad debts and, if necessary, will record a charge in the period such
determination is made. To date, we have not experienced material write-offs of
accounts receivable due to uncollectibility.
Inventories
Our inventories are stated at the lower of standard cost or market value.
Cost is determined on a currently adjusted standard basis, which approximates
actual cost on a first-in first-out basis. Because of the cyclicality of the
market, inventory levels, obsolescence of technology and product life cycles,
we write down inventories to net realizable value based on backlog, forecasted
product demand and historical sales levels. Backlog is subject to revisions,
cancellations and rescheduling. Actual demand and market conditions may be
lower than those projected by us. This difference could have a material adverse
effect on our gross margin should additional inventory write downs become
necessary.
Long-Lived Assets
We evaluate the recoverability of property and equipment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We perform periodic reviews to determine whether facts and circumstances exist
that would indicate that the carrying amounts of property and equipment might
not be fully recoverable. If facts and circumstances indicate that the carrying
amount of property and equipment might not be fully recoverable, we compare
projected undiscounted net cash flows associated with the related assets over
their estimated remaining useful life against their respective carrying
amounts. In the event that the projected undiscounted cash flows are not
sufficient to recover the carrying value of the assets, the assets are written
down to their estimated fair values based on the expected discounted future
cash flows attributable to the assets. Evaluation of impairment of property and
equipment requires estimates in the forecast of future operating results that
are used in the preparation of the expected future undiscounted cash flows.
Actual operating results and remaining economic lives of the property and
equipment could differ from the estimates used in assessing the recoverability
of these assets. These differences could result in additional impairment
charges, which could have a material adverse impact on the results of
operations.
Income Taxes
Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN
48"), "Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109," establishes financial accounting and reporting standards
for the effect of income taxes and was adopted by us on January 1, 2007. The
interpretation contains a two step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No.109. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not that the
position
21
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount which is more than 50% likely of being realized upon
ultimate settlement.
Our income taxes are accounted in accordance with SFAS No. 109, "Accounting
for Income Taxes". The provision for income tax represents income tax paid and
payable for the current year plus the changes in the deferred income tax assets
and liabilities during the year. Deferred income tax assets are primarily the
tax effects of the operating loss carry-forwards, research and development
credit carry-forwards and temporary differences. On a periodic basis we
evaluate the deferred tax assets balance for realizability. To the extent we
believe it is more likely than not that some portion of deferred tax assets
will not be recognized, we will increase the valuation allowance against the
deferred tax assets. Realization of the deferred tax assets is dependent
primarily upon future taxable income, changes in tax laws and other factors.
These changes, if any, may require possible material adjustment to the deferred
tax assets, resulting in a reduction in net income in the period when such
determinations are made. In addition, we recognize liabilities for potential
income tax contingencies based on the estimate of whether, and the extent to
which, additional taxes may be due. If we determine that payment of these
amounts is unnecessary or if the recorded tax liability is less than its
current assessment, we may be required to recognize an income tax benefit or
additional income tax expense in its financial statements, accordingly.
Legal Contingencies
We are currently involved in various claims and legal proceedings. We
periodically assess each matter in order to determine if a contingent liability
in accordance with SFAS No. 5, "Accounting for Contingencies," should be
recorded. In making the determination, we may, depending on the nature of the
matter, consult with external counsel and technical experts. Based on the
information obtained combined with our judgment regarding all the facts and
circumstances of each matter, we determine whether it is probable that a
contingent loss may be incurred and whether the amount of such loss can be
estimated. Should a loss be probable and estimable, we record a contingent loss
in accordance with SFAS No. 5. In determining the amount of a contingent loss,
we take into consideration advice received from experts in the specific matter,
current status of legal proceedings, prior case history and other factors.
Should the judgments and estimates be incorrect, we may need to record
additional contingent losses that could materially adversely impact our results
of operations.
Stock-based compensation
We grant stock options and other awards to our employees and certain
non-employees. Prior to January 1, 2006, we elected to follow Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and complied with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" for our employee stock options. Under
APB No. 25, compensation expense is measured based on the difference, if any,
on the date of the grant, between the fair value of our ordinary shares and the
exercise price of the stock option.
Effective January 1, 2006, we adopted the fair value recognition provisions
of SFAS No. 123 (R), "Share-Based Payments," using the modified prospective
application method. Under this transition method, compensation cost recognized
for the year ended December 31, 2006, includes the applicable amounts of:
(a) compensation cost of all stock-based payments granted prior to, but not yet
vested as of, December 31, 2005 (based on the grant-date fair value estimated
in accordance with the original provisions of SFAS No. 123 and previously
presented in pro forma footnote disclosures), and (b) compensation cost for all
stock-based payments granted subsequent to January 1, 2006 (based on the
grant-date fair value estimated in accordance with the new provisions of SFAS
No. 123 (R)). Results for periods prior to January 1, 2006, have not been
restated.
We calculated the fair value of each option grant on the date of grant using
the Black-Scholes option pricing model that use the following assumptions.
Risk-free interest rate is based on the US Treasury yield curve in effect at
the time of grant. We use the simplified method as provided by Staff Accounting
Bulletin No. 107 by average vesting term and contractual term of the options as
their expected term. Expected volatilities are based on historical volatility
of stock prices for a period equal to the options' expected term. The dividend
yield is zero as we have never declared or paid dividends on the ordinary
shares or other securities and do not anticipate paying dividends in the
foreseeable future.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and enhances fair value
measurement disclosure. In February 2008, the FASB issued FASB Staff Position
(FSP) 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13" (FSP 157-1)
and FSP 157-2, "Effective Date of FASB Statement No.157" (FSP 157-2). FSP 157-1
amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP
157-2 delays the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until the beginning of the first quarter of fiscal 2009. The
measurement and disclosure requirements related to financial assets and
financial liabilities are effective for the Company beginning in the first
quarter of fiscal 2008. The adoption of SFAS No. 157 for financial assets and
financial liabilities will not have a significant impact on the consolidated
financial statements. However, the resulting fair values calculated under SFAS
No. 157 after adoption may be different from the fair values that would have
been calculated under
22
previous guidance. We are currently evaluating the impact that SFAS No. 157
will have on the consolidated financial statements when it is applied to
non-financial assets and non-financial liabilities beginning in the first
quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands the use of
fair value accounting but does not affect existing standards, which require
assets and financial liabilities, on an instrument-by-instrument basis. If the
fair value option is elected, unrealized gains and losses on existing items for
which fair value has been elected are reported as a cumulative adjustment to
beginning retained earnings. Subsequent to the adoption of SFAS No. 159,
changes in fair value are recognized in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We chose not to elect the fair
value option under SFAS No. 159 to measure our financial assets and financial
liabilities at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required
to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. In addition, acquired in-process research and
development (IPR&D) is capitalized as an intangible asset and amortized over
its estimated useful life. SFAS No. 141(R) is effective on a prospective basis
for business combinations with an acquisition date beginning in the first
quarter of fiscal year 2009. We are in the process of evaluating the provisions
of this standard and is currently unable to estimate the impact.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" (SFAS No.160).
SFAS No. 160 changes the accounting and reporting for minority interests, which
will be recharacterized as non-controlling interests and classified as a
component of equity. SFAS No. 160 is effective on a prospective basis for
business combinations with an acquisition date beginning in the first quarter
of fiscal year 2009. As of December 31, 2007, the Company did not have any
minority interests. The adoption of SFAS No. 160 will not impact the our
consolidated financial statements.
Operating Results
The following table summarizes historical results of operations as a
percentage of net sales for the periods shown.
Year Ended December 31,
----------------------
2005 2006 2007
----- ----- -----
Consolidated Statement of Income Data:
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 38.6 45.4 42.9
----- ----- -----
Gross margin................................................ 61.4 54.6 57.1
Operating expenses (income):
Research and development................................. 24.1 25.4 20.9
Selling, general and administrative...................... 19.2 23.4 21.0
Patent related litigation................................ 9.6 8.8 6.6
Litigation income........................................ -- -- (5.7)
Stock Exchange of Hong Kong listing expenses............. 2.3 0.6 0.0
----- ----- -----
Total operating expenses............................. 55.2 58.2 42.8
----- ----- -----
Income (loss) from operations............................... 6.2 (3.6) 14.3
Non-operating income-net.................................... 2.5 2.2 1.7
Income tax expenses (benefit)............................... 1.0 (2.0) 0.9
----- ----- -----
Net income.................................................. 7.7% 0.6% 15.1%
===== ===== =====
|
Years Ended December 31, 2007 and 2006
Net Sales. Net sales consisted of product revenues generated principally by
sales of our integrated circuit products. Net sales for the year ended
December 31, 2007 were $165.5 million, an increase of $40.6 million or 32.5%
from $124.9 million for the year ended December 31, 2006. The increase in net
sales resulted primarily from increased unit shipments to our existing
customers, expansion of our customer base and the introduction of new products.
Gross Profit. Gross profit represents net sales less cost of sales. Cost of
sales primarily consists of the cost of purchasing packaged integrated circuit
products manufactured and assembled for us by independent foundries and
packaging vendors and other costs associated with the procurement, storage and
shipment of these products. Gross profit for the year ended December 31, 2007
was $94.4 million, an increase of $26.3 million or 38.6% from $68.1 million for
the year ended December 31, 2006. This increase was primarily due to increased
sales of our integrated circuit products. Gross profit as a percentage of net
sales for the year ended December 31, 2007 increased to 57.1% from 54.6% for
the year ended December 31,
23
2006 primarily due to increased sales of our higher margin products and the
decline of manufacturing unit prices from third-party foundries and assembly
and testing service providers. We expect that our gross profit as a percentage
of net sales will continue to fluctuate in the future as a result of the stages
of our products in their life cycles, variations in our product mix, the timing
of our product introductions and specific product manufacturing costs.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related costs of employees engaged in research,
design and development activities and, to a lesser extent, expenses for outside
engineering consultants. Research and development expenses for the year ended
December 31, 2007 were $34.6 million, an increase of $2.9 million or 9.0% from
$31.8 million for the year ended December 31, 2006. The increase primarily
resulted from increased hiring of design engineers and increased consultancy
fees paid to outside consultants in respect of certain research and development
projects. As a percentage of net sales, research and development expenses were
20.9% for the year ended December 31, 2007, a decrease from 25.4% for the year
ended December 31, 2006. Research and development expenses as a percentage of
net sales will fluctuate from quarter to quarter depending on the amount of net
sales and the success of new product development efforts, which we view as
critical to our future growth. At any point in time, we may also have internal
research and development projects underway, which may or may not lead to new
product designs. We expect to continue the development of innovative
technologies and processes for new products and we believe that a continued
commitment to research and development is essential in order to maintain the
competitiveness of our existing products and to provide innovative new product
offerings. Therefore, we expect to continue to invest significant resources in
research and development in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of employee-related expenses,
professional fees paid to external auditors, consulting fees, travel and other
promotional expenses. Selling, general and administrative expenses for the year
ended December 31, 2007 were $34.7 million, an increase of $5.5 million or
18.8% from $29.2 million for the year ended December 31, 2006. This increase
was primarily due to increased consulting fees, increased professional fees
paid to external auditors due to the audit of our internal control over
financial reporting, additional hiring of personnel and increased promotional
expense. As a percentage of net sales, selling, general and administrative
expenses were 21.0% for the year ended December 31, 2007, a decrease from 23.4%
for the year ended December 31, 2006. We expect that selling, general and
administrative expenses will continue to increase in absolute dollar terms for
the foreseeable future.
Patent Related Litigation Expenses. Patent related litigation expenses
consist primarily of fees paid to outside counsel and consultants engaged by
outside counsel. Patent related litigation expenses for the year ended
December 31, 2007 were $10.8 million, a decrease of $114,000 or 1.0% from
$11.0 million for the year ended December 31, 2006. As a percentage of net
sales, patent related litigation expenses were 6.6% for the year ended
December 31, 2007, a decrease from 8.8% for the year ended December 31, 2006.
We expect that patent related litigation expenses will continue to fluctuate
for the foreseeable future. (Please see also, "Business Overview - Intellectual
Property.")
Litigation Income. Litigation income consist primarily of amounts received
from settlement, damage awards, award of costs and related interest. Litigation
income for the year ended December 31, 2007 was $9.4 million, an increase of
$9.4 million or 100% from none for the year ended December 31, 2006. This
increase was due to payments received from the MPS case which went to trial in
2005, the Sony US case and the Samsung US case since the quarter ended June 30,
2007. We expect that litigation income will continue to fluctuate for the
foreseeable future.
Stock Exchange of Hong Kong Listing Expenses. The SEHK listing expenses
consist primarily of expenses incurred in relation to our SEHK listing
activities commencing in 2005. SEHK listing expenses for the year ended
December 31, 2007 was none, a decrease of $786,000 or 100.0% from $786,000 for
the year ended December 31, 2006.
Non-operating Income-net. Non-operating income-net reflects primarily
interest earned on cash and cash equivalents and short-term investments,
impairment loss on long-term investments and foreign exchange transaction
losses. Non-operating income-net was $2.8 million for the year ended
December 31, 2007 decreasing from $2.9 million for the year ended December 31,
2006 primarily due to decreased interest income, increased net foreign exchange
loss and decreased other net income offset by the absence of impairment loss on
long-term investments.
Income Tax Expense (benefit). Income tax expense was approximately $1.5
million for the year ended December 31, 2007, compared to an income tax benefit
of $2.5 million for the year ended December 31, 2006. This increase in income
tax expense was primarily due to increased income before income tax and a
reversal of an accrual of income tax payable upon the completion of the
examination of our tax filing for 2001 by the Taiwan Tax Authority in 2006.
Years Ended December 31, 2006 and 2005
Net Sales. Net sales consisted of product revenues generated principally by
sales of our integrated circuit products. Net sales for the year ended
December 31, 2006 were $124.9 million, an increase of $19.4 million or 18.3%
from $105.6 million for the year ended December 31, 2005. The increase in net
sales resulted primarily from increased unit shipments to our existing
customers, expansion of our customer base and the introduction of new products.
Gross Profit. Gross profit represents net sales less cost of sales. Cost of
sales primarily consists of the cost of purchasing packaged integrated circuit
products manufactured and assembled for us by independent foundries and
packaging
24
vendors and other costs associated with the procurement, storage and shipment
of these products. Gross profit for the year ended December 31, 2006 was $68.1
million, an increase of $3.3 million or 5.1% from $64.8 million for the year
ended December 31, 2005. This increase was primarily due to increased sales of
our integrated circuit products. Gross profit as a percentage of net sales for
the year ended December 31, 2006 decreased to 54.6% from 61.4% for the year
ended December 31, 2005 primarily due to increased sales of our lower margin
products. We expect that our gross profit as a percentage of net sales will
continue to fluctuate in the future as a result of the stages of our products
in their life cycles, variations in our product mix, the timing of our product
introductions and specific product manufacturing costs.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related costs of employees engaged in research,
design and development activities and, to a lesser extent, expenses for outside
engineering consultants. Research and development expenses for the year ended
December 31, 2006 were $31.8 million, an increase of $6.3 million or 24.9% from
$25.4 million for the year ended December 31, 2005. This increase primarily
resulted from increased hiring of design engineers, increased consultancy fees
paid to outside consultants in respect of certain research and development
projects and the stock-based compensation expense recognized due to adoption of
SFAS No, 123 (R). As a percentage of net sales, research and development
expenses were 25.4% for the year ended December 31, 2006, an increase from
24.1% for the year ended December 31, 2005. Research and development expenses
as a percentage of net sales will fluctuate from quarter to quarter depending
on the amount of net sales and the success of new product development efforts,
which we view as critical to our future growth. At any point in time, we may
also have internal research and development projects underway, which may or may
not lead to new product designs. We expect to continue the development of
innovative technologies and processes for new products and we believe that a
continued commitment to research and development is essential in order to
maintain the competitiveness of our existing products and to provide innovative
new product offerings. Therefore, we expect to continue to invest significant
resources in research and development in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of employee-related expenses, sales
commissions to agents, professional fees, travel and other promotional
expenses. Selling, general and administrative expenses for the year ended
December 31, 2006 were $29.2 million, an increase of $8.9 million or 44.0% from
$20.3 million for the year ended December 31, 2005. This increase was primarily
due to additional hiring of sales, operations and administrative personnel,
increased promotional expense, increased traveling expense and the stock-based
compensation expense recognized due to adoption of SFAS No. 123 (R). As a
percentage of net sales, selling, general and administrative expenses were
23.4% for the year ended December 31, 2006, an increase from 19.2% for the year
ended December 31, 2005. We expect that selling, general and administrative
expenses will continue to increase in absolute dollar terms for the foreseeable
future.
Patent Related Litigation Expenses. Patent related litigation expenses
consist primarily of fees paid to outside counsel and consultants engaged by
outside counsel. Patent related litigation expenses for the year ended
December 31, 2006 were $11.0 million, an increase of $788,000 or 7.7% from
$10.2 million for the year ended December 31, 2005. This increase was primarily
due to increased activity in various litigation matters. As a percentage of net
sales, patent related litigation expenses were 8.8% for the year ended
December 31, 2006, a decrease from 9.6% for the year ended December 31, 2005.
We expect that patent related litigation expenses will continue to fluctuate
for the foreseeable future. (Please see also, "Business Overview - Intellectual
Property.")
Stock Exchange of Hong Kong Listing Expenses. The SEHK listing expenses
consist primarily of expenses incurred in relation to our SEHK listing
activities commencing in 2005. SEHK listing expenses for the year ended
December 31, 2006 was $786,000, a decrease of $1.7 million or 68.0% from $2.5
million for the year ended December 31, 2005.
Non-operating Income-net. Non-operating income-net reflects primarily
interest earned on cash and cash equivalents and short-term investments,
impairment loss on long-term investments and foreign exchange transaction
losses. Non-operating income-net was $2.9 million for the year ended
December 31, 2006 increasing from $2.7 million for the year ended December 31,
2005, reflecting increased interest earned on cash and cash equivalents, and
short term investments.
Income Tax Expense (benefit). Income tax benefit was approximately $2.5
million for the year ended December 31, 2006, compared to an income tax expense
of $1.0 million for the year ended December 31, 2005. This difference was
primarily due to a reversal of an accrual of income tax payable upon the
completion of examination of our 2001 tax filing by the Taiwan Tax Authority in
2006.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private sales of securities and through our initial public offering in August
2000 and our public offering in November 2001 as well as cash provided by
operating activities in recent years. Cash, cash equivalents and short-term
investments were $81.2 million at December 31, 2007 as compared to $65.1
million at December 31, 2006. Our operating activities provided cash in the
amount of $21.4 million in the year ended December 31, 2007, $3.3 million in
the year ended December 31, 2006, and $11.0 million in the year ended
December 31, 2005.
Non-cash charges primarily consist of depreciation of property and
equipment, impairment loss of long-term investments, changes of deferred income
tax assets, reversal of income tax payable, and amortization of stock-based
compensation from stock options. The working capital components that have a
significant impact on our cash flows are accounts
25
receivable, inventories, notes and accounts payable, prepaid expenses and other
current assets, income tax payable and accrued expense and other current
liabilities.
Net cash inflows from operations resulted from net income adjusted by
changes in inventory, accounts receivable, notes and accounts payable, accrued
expenses and other current liabilities and income tax payable.
In 2007, we had a net cash outflow from investing activities of $14.3
million as compared to a net cash inflow of $1.7 million in 2006. This increase
in net cash used by investing activities between 2006 and 2007 was principally
due to a net purchase of short-term investments of $8.9 million in 2007 as
compared to net sales of short-term investments of $35.5 million in 2006 offset
by a decrease of $15.2 million in acquisition of property and equipment and a
decrease in acquisition of long-term investments of $8.1 million.
In 2006, we had a net cash inflow from investing activities of $1.7 million
as compared to a net cash outflow of $19.3 million in 2005. This increase in
net cash provided by investing activities between 2005 and 2006 was principally
due to an increase of $29.0 million in net sales of short-term investments.
This increase was partially offset by an increase of $8.5 million in net
acquisitions of property and equipment.
Net cash outflow from our financing activities in 2005 was $2.1 million,
primarily due to the repurchase of our shares and ADSs under a share repurchase
program, which was partially offset by proceeds from the exercise of stock
options and warrants and issuance of shares under our Employee Stock Purchase
Plan. Net cash outflow from our financing activities in 2006 was $6.2 million,
primarily due to the repurchase of $7.6 million of our ordinary shares and
American depositary shares under a share repurchase program in 2006 which was
partially offset by proceeds from the exercise of stock options and issuance of
shares under our existing Employee Stock Purchase Plan for the year. Net cash
outflow from our financing activities in 2007 was $956,000 which was primarily
due to the repurchase of $4.3 million of our Shares and American depositary
shares under a share repurchase program which was partially offset by proceeds
from the exercise of stock options and issuance of shares under our existing
employee stock purchase plan for the year. The listing of our ordinary shares
on the Main Board of the SEHK may or may not enhance our ability to obtain
additional financing in the future.
We believe our cash balances will be sufficient to meet our capital
requirements for at least the next 12 months. Our future capital requirements
will depend on many factors, including the inventory levels we maintain, the
level of investments we make in new technology and improvements to existing
technology, the levels of promotion and advertising required to launch new
products and attain a competitive position in the marketplace, and the market
acceptance of our products. Thereafter, we may need to raise additional funds
through public or private financing. No assurance can be given that additional
funds will be available or that we can obtain additional funds on terms
favorable to us.
Research and Development, Patents and Licenses, etc.
We believe that the continued introduction of new products in our target
markets is essential to our growth. As of December 31, 2007, we had
approximately 627 full-time employees world-wide engaged in research and
development efforts. Our total expenditures for research and development were
$34.6 million for the year ended December 31, 2007, $31.8 million for the year
ended December 31, 2006, and $25.4 million for the year ended December 31,
2005. We believe that our research and development staffing will increase in
the next 12 months primarily due to the expansion of our existing design
centers. We intend to continue to expand our research and development
operations, including increasing the number of design engineers.
We employ designers who are experienced in system architecture, analog,
digital, mixed signal and software design and development. We also utilize
independent contractors from time-to-time for specific research and development
projects. Our internal research and development personnel thoroughly review the
external development processes and the design of these products as part of our
quality assurance process. All development is carried out using ISO 9001
certified design processes, and our design tools are continuously enhanced to
improve design, fabrication and verification of our products.
Our research and development activities are a constantly evolving process
which reflects the results of our ongoing projects, our expectations regarding
market developments and changes in customer demand and industry specifications.
We commence new projects or alter the scope or direction of existing projects
on a regular basis under the guidance of our management and senior research
personnel.
26
We work with our customers to monitor the performance of our product designs
and to provide support at each stage of customer product development. Due to
the complexity of our products, we maintain a significant direct applications
support staff for customer technical support in our key markets including in
Japan, Taiwan, China, Korea and the United States. These direct applications
engineering personnel assist with supporting existing products at key
customers. Additionally, we work closely with our customers to develop highly
efficient power management products for specific applications.
Trend Information
See "Risk Factors" and "Operating and Financial Review and Prospects" above.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Tabular Disclosure of Contractual Obligations
The table below describes our contractual obligations as of December 31,
2007:
Payments due by period
----------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Contractual Obligations ------ --------- --------- --------- ---------
(in thousands)
Operating Lease Obligations....................... $3,858 $2,274 $1,522 $62 $ --
Purchase Obligations.............................. 537 537 -- -- --
Licenses, Maintenance and Support................. 1,178 1,078 100 -- --
Pension........................................... 520 -- -- -- 520
Total............................................. 6,093 3,889 1,622 62 520
|
We recognized long-term taxes payable of $210,000 related to uncertain tax
positions as of December 31, 2007. At this time, we are unable to make a
reasonably reliable estimate of the timing of payments in individual years
beyond 12 months due to uncertainties in the timing of tax audit outcomes.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Our executive officers and directors and their ages as of December 31, 2007,
were as follows:
Name Age Position
---- --- --------
Sterling Du................... 48 Chief Executive Officer, Class I Director and Chairman of
the Board
Chuan Chiung "Perry" Kuo...... 48 Chief Financial Officer, Joint Secretary and Class I Director
James Keim.................... 63 Class II Director and Head of Marketing and Sales
Michael Austin................ 72 Independent Non-executive Director, Class III Director and
member of Compensation Committee
Lawrence Lin.................. 57 Independent Non-executive Director, Class II Director and
member of Audit Committee and Compensation Committee
Ji Liu........................ 72 Independent Non-executive Director, Class II Director
Teik Seng Tan................. 53 Independent Non-executive Director, Class I Director and
member of Audit Committee
Keisuke Yawata................ 73 Independent Non-executive Director, Class III Director and
Chairman of Audit Committee
Xiaolang Yan.................. 61 Independent Non-executive Director and Class III Director
Ivan Chang.................... 45 Vice-President, Finance
Johnny Chiang................. 50 Vice-President, Logistics and Backend
Jane Liang.................... 39 Qualified Accountant
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27
Our Class I Directors have held office from the date of the annual general
meeting in 2008 for a three year term until 2011; our Class II Directors have
held office from the date of the annual general meeting in 2006 for a three
year term until 2009; and our Class III Directors have held office from the
date of the annual general meeting in 2007 for a three year term until 2010.
Executive Directors
Sterling Du has served as our chief executive officer and chairman of our
board of directors since March 1997 and as a Class I Director since June 2001.
He also served as our chief financial officer from March 1997 to March 1999.
From May 1995 to March 1997, Mr. Du was president and chief executive officer
of O2Micro, Inc., our predecessor entity. From October 1993 to April 1995,
Mr. Du was vice president of engineering at GreenLogic, Inc., a semiconductor
design company, which he co-founded. Mr. Du received a B.S. in chemical
engineering from National Taiwan University and an M.S. in electrical
engineering from the University of California, Santa Barbara.
Chuan Chiung "Perry" Kuo has served as our general manager of Taiwan
operations since January 1997, as chief financial officer and a director since
March 1999, as secretary since October 1999 and as a Class I director since
June 2001. From February 1992 to December 1996, he was executive vice president
of Pac Net Group, a holding company with investments in chemicals, electronics
and real estate. From July 1983 to February 1992, he held various positions at
Formosan Rubber Group, a rubber manufacturer, including product design
engineer, plant manager, research and development director, and vice president.
Mr. Kuo received a B.S. in chemical engineering from National Taiwan University
and an M.B.A. from the Rotterdam School of Management, Erasmus University in
The Netherlands.
James Keim has served as a director since March 1999 and as Head of
Marketing and Sales since December 2001 and a Class II director since June
2001. He also served as our chief operating officer from June 1998 to June
2001. From March 1995 to June 1998, Mr. Keim was a principal in Global
Marketing Associates, an international consulting firm. Prior to March 1995, he
had been vice president of sales at Alliance Semiconductor Corporation, vice
president of marketing at Performance Semiconductor Corporation and worldwide
linear marketing manager at Fairchild Semiconductor Corporation. Mr. Keim
received a B.S. in engineering from Iowa State University, an M.S. in
electrical engineering and an M.B.A. from the University of Illinois.
Independent Non-Executive Directors
Michael Austin has served as a director since October 1997 and as a Class
III director since June 2001. He currently serves on the compensation committee
and nominating committee. Mr. Austin is a resident of the Cayman Islands and is
a Chartered Accountant. Mr. Austin was admitted as an Associate of the
Institute of Chartered Accountants in England and Wales in 1964 and as a Fellow
in 1974. Mr. Austin is also an Associate Member of The Chartered Institute of
Taxation, a Member of the Society of Trust and Estate Practitioners, and a
Notary Public of the Cayman Islands. Mr. Austin served as the managing partner
of the Cayman Islands office of KPMG Peat Marwick, an international accounting
firm, for 23 years. Since retiring in July 1992, Mr. Austin has been a
consultant and currently serves as a non-executive director on several company
boards, including those of a number of mutual funds, trust and insurance
companies. Mr. Austin served as a director of the Cayman Islands Monetary
Authority from January 1997, and was appointed Chairman of the Board in January
2003, a position he held until his retirement on July 31, 2004. He has also
served on a variety of other government committees and government related
boards, including the Cayman Islands Agricultural and Industrial Development
Board, as Chairman; the Stock Exchange Committee; and the Government/Private
Sector Consultative Committee. In 1990 Mr. Austin was awarded an M.B.E. by Her
Majesty the Queen in recognition of services to the public and business
community.
Lawrence Lin has served as a Class II Director and a member of the audit
committee since June 2003. He currently also serves as Chairman of the
Compensation Committee. He is a Certified Public Accountant in Taiwan. Since
1990, Mr. Lin has been a partner of L&C Company, Certified Public Accountants,
which is a member firm of Urbach Hacker Young International, and a director of
Urbach Hacker Young International from October 1994 to October 1998. Prior to
L&C Company, he was a partner at T N Soong & Co. Mr. Lin serves as an
independent non-executive director and chairman of the audit committee for
Yageo Corporation and corporate supervisor for Tex Year Industries Inc., both
of which are Taiwan public companies. He graduated from Taipei Vocational
Commercial School in 1969.
Ji Liu has served as a Class II Director since June 2007. Mr. Liu has been
an Honorary President of the China Europe International Business School since
2005. From 1999 to 2004, Mr. Liu was Executive President and President of the
China Europe International Business School. From 1993 to 1999, Mr. Liu was a
Research Fellow, Member of the Academic Board, Graduate Supervisor and Deputy
Chairman of the Chinese Academy of Social Sciences. He received a B.S. in power
mechanical engineering from Tsinghua University in China.
Teik Seng Tan was recently elected as a Class I Director in the annual
general meeting in June 2008. He was also recently appointed to the Audit
Committee in June 2008. Mr. Tan was previously employed by AMD Singapore Pte
Ltd. from 1984 to 2007 where he held various positions, the last position being
Senior Executive Managing Director. Mr. Tan currently serves as a director of
HMC Associates Pte Ltd. He also has been Chairman of the Board of Directors for
Bizlink Centre
28
Singapore Ltd. since 2001 and a member of the Board of Directors since
1999. Mr. Tan is a member of the Advisory Council for the Singapore Human
Resource Institute and a member of the Advisory Council of the School of
Engineering at Temasek Polytechnic. Mr. Tan received a B.S. in Electrical
Engineering from the University of Singapore and an M.S. in Industrial
Engineering from the National University of Singapore.
Keisuke Yawata has served as a director since October 1999, as a member of
the audit committee since August 2000, as Chairman of the audit committee since
July 2001 and as a Class III director since June 2001. Mr. Yawata has been a
partner and director of Start-up101, a venture capital firm, since 1999 and is
the Chief Executive Officer of The Future International, a consulting firm he
founded in 1997. From 1995 to 1997, he was the president and chief executive
officer of Applied Materials Japan and a senior vice president of Applied
Materials, Inc. From 1985 to 1994, he was at LSI Logic KK, serving as president
and chief executive officer from 1985 to 1992, and as chairman of the board
from 1993 to 1994. From 1958 to 1984, he was employed by NEC Corporation and
its subsidiaries where he held various positions, the last position being
president and chief executive officer of NEC Electronics, Inc. from 1981 to
1984. In addition, Mr. Yawata was a vice president of the Semiconductor
Industry Association Japan Chapter from 1989 to 1994. Mr. Yawata serves as a
director on the boards of U10 Networks, DigiPub Japan, Sequence Design KK and
NanoGeometry Research. He received a B.S. in electrical engineering from Osaka
University in Osaka, Japan and an M.S. in electrical engineering from Syracuse
University.
Xiaolang Yan has served as a Class III Director since July 2005 and
currently serves on the nominating committee. Mr. Yan is a professor and Dean
of the Electrical Engineering College, Dean of the Information Science &
Engineering College and Director of Institute of VLSI Design at Zhejiang
University in China. He is also the Director of China's National Integrated
Circuit Talent Education Program and Vice President of China Semiconductor
Industry Association. From May 2002 to October 2006, he was the Director of the
Strategic Expert Committee for VLSI Design of the China State High Technology
Program (863 Program). From May 1994 to March 1999, he was Professor and Dean
of Hangzhou Institute of Electronic Engineering and Director of its ICCAD
Research Institute. From September 1993 to May 1994, he was a visiting scholar
at Stanford University. From March 1990 to September 1993, he was Executive
Vice-President and Chief Engineer at Beijing IC Design Center in Beijing,
China. Mr. Yan received his bachelor of science and master of science degrees
in electrical engineering from Zhejiang University in Hangzhou, China.
Senior Management
Ivan Chang has served as our Vice-President, Finance since February 2003. He
also served as our Controller from July 1999 until February 2003. From August
1996 to July 1999, he was Finance Manager at Siemens Limited in Taiwan.
Mr. Chang received a B.S. in Accounting from Soochow University and an M.S. in
Accounting Information from University of Maryland, College Park.
Johnny Chiang has served as our Vice-President, Logistics and Backend since
February 2003. He also served as our Director of Operations from March 1999 to
February 2003 and our Operations Manager from November 1997 to March 1999.
Mr. Chiang received a B.S. in Industrial Engineering from Chung Yung University.
Jane Liang has served as our Qualified Accountant since November 2005. She
is a fellow of the Association of Chartered Certified Accountants and a member
of the Chinese Institute of Certified Public Accountants. From July 2000 to
October 2003, she was senior finance manager at Bausch & Lomb (Shanghai)
Trading Co. From August 1999 to June 2000, she was an accounting supervisor at
Exxon Chemical (Shanghai) Trading Co. Ms. Liang received her bachelors and
masters degree in Philosophy from Fudan University.
There are no family relationships among any of our directors or executive
officers. There are no arrangements or understandings with major shareholders,
customers, suppliers or others, pursuant to which any person referred to above
was selected as a director or member of senior management.
Compensation
We paid an aggregate amount of compensation during 2007 to our directors and
members of our administrative, supervisory or management bodies as a group
equal to approximately $3,480,593. All of our officers and directors are
eligible to participate in our employee benefit plans except non-employee
directors are not eligible to participate in our ESPP plan.
Share Ownership of Directors and Senior Management
As of December 31, 2007, the aggregate number of ordinary shares
beneficially owned by our directors and members of our administrative,
supervisory or management bodies was 220,248,750. This number includes options
to purchase an aggregate of 118,934,150 ordinary shares under our 1997 Stock
Plan, 1999 Stock Plan and 2005 Share Option Plan exercisable within 60 days of
December 31, 2007.
Employee Benefit Plans
1997 Stock Plan. Our 1997 stock plan was adopted by our board of directors
and approved by our shareholders in 1997. The 1997 stock plan provides for the
granting to our employees of incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code, and for the granting to
employees and independent contractors of nonstatutory stock options and stock
purchase rights. Our board of directors and our shareholders authorized a total
of 3,700,000 ordinary
29
shares for issuance pursuant to the 1997 stock plan, as amended or 185,000,000
ordinary shares after taking into account the 50-to-1 stock split on
November 25, 2005. As of December 31, 2007, options outstanding and exercisable
under the 1997 stock plan were 15,041,650. No more grants have been made under
this plan after the consummation of our initial public offering on August 23,
2000. Our 1997 stock plan was terminated effective on March 2, 2006, the date
of the listing of our ordinary shares on the Hong Kong Stock Exchange; provided
that options granted under the plan remain outstanding in accordance with their
terms.
1999 Stock Incentive Plan. Our 1999 stock plan was adopted by our board of
directors in October 1999 and was approved by our shareholders prior to the
consummation of our initial public offering in August 2000. The 1999 stock plan
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code and the granting of
nonstatutory stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, performance units, performance shares and other
equity-based rights to our employees, directors and consultants. Initially, we
have reserved 3,000,000 ordinary shares for issuance under the 1999 stock plan
or 150,000,000 ordinary shares after taking into account the 50-to-1 stock
split on November 25, 2005. Commencing January 1, 2001, the number of ordinary
shares of stock reserved for issuance under the 1999 stock plan will be
increased annually by a number equal to 4% of the fully-diluted number of
ordinary shares outstanding as of December 31 of the immediately preceding
calendar year or a lesser number determined by the administrator. However, the
maximum number of ordinary shares available for issuance as incentive stock
options will be increased by the least of 4% of the fully-diluted number of
ordinary shares outstanding on December 31 of the immediately preceding
calendar year, 1,500,000 ordinary shares (or 75,000,000 ordinary shares after
taking into account the 50-to-1 stock split on November 25, 2005) or a smaller
number as determined by the administrator. In the year ended December 31, 2007,
the number of shares reserved under the 1999 stock plan was not increased.
Where an award agreement permits the exercise or purchase of the award for a
specified period of time following the recipient's termination of service with
us, or the recipient's disability or death, the award will terminate to the
extent not exercised or purchased on the last day of the specified period or
the last day of the original term of the award, whichever occurs first. As of
December 31, 2007, options outstanding under the 1999 stock plan were
247,296,700, of which 221,273,550 were exercisable. Our 1999 stock plan was
terminated effective on March 2, 2006, the date of the listing of our ordinary
shares on the Hong Kong Stock Exchange; provided that options granted under the
plan remain outstanding in accordance with their terms.
1999 Employee Stock Purchase Plan. Our 1999 purchase plan was approved by
our board of directors in October 1999, was approved by our shareholders prior
to the consummation of our initial public offering in August 2000 and is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code and to provide our employees with an opportunity to
purchase ordinary shares or ADSs through payroll deductions. In May 2005, our
board of directors adopted certain amendments to the 1999 purchase plan and in
October 2005 our board of directors adopted and approved an amendment and
restatement of 1999 purchase plan to amend various administrative terms in
anticipation of our listing on the Hong Kong Stock exchange. We have reserved
50,000,000 ordinary shares for issuance under our 1999 purchase plan, subject
to adjustment upon certain changes in our capitalization. The number of
ordinary shares which shall be made available for sale under the 1999 purchase
plan, any share options granted pursuant to our 2005 share option plan and any
other plan (but not including our 2005 share incentive plan) will not exceed
10% of the number of ordinary shares to be issued and outstanding immediately
following the listing of our ordinary shares on the Hong Kong Stock Exchange.
In no event may an option be granted under our 1999 purchase plan if such grant
would result in the total aggregate number of ordinary shares subject to all
then outstanding purchase rights granted by us pursuant to our 1999 purchase
plan, any share option granted pursuant to our 2005 share option plan or any
other plan (but not including our 2005 share incentive plan) to exceed 30% of
the issued and outstanding ordinary shares from time to time. At the annual
general meeting in June 2008, the shareholders approved, adopted and ratified
an amendment to the 1999 purchase plan to increase the number of shares
issuable pursuant to the 1999 purchase plan from 50,000,000 to 70,000,000
shares. As of December 31, 2007, 39,208,350 shares had been issued under the
1999 purchase plan.
Our board of directors or a committee designated by our board of directors,
referred to as the "plan administrator", administers our 1999 purchase plan.
All of our employees who are regularly employed for more than five months in
any calendar year and work more than 20 hours per week are eligible to
participate in our 1999 purchase plan, subject to a 10 day waiting period after
hiring. Non-employee directors, consultants and employees subject to the rules
or laws of a non-U.S. jurisdiction that prohibit or make impractical their
participation in the plan will not be eligible to participate. Our 1999
purchase plan designates offer periods, purchase periods and exercise dates.
Offer periods are periods of three months commencing in February, May, August
and November. Purchase periods will generally be three month periods. Exercise
dates are the last day of each purchase period. In the event of a corporate
transaction, the plan administrator may elect to shorten the offer periods then
in progress and set a new exercise date for the purchase of ordinary shares or
ADSs.
On the first day of each offer period, a participating employee will be
granted a purchase right. A purchase right is a form of option to be
automatically exercised on the forthcoming exercise dates within the offer
period during which authorized deductions are to be made from the pay of
participants and credited to their accounts under our 1999 purchase plan. When
the purchase right is exercised, the participant's withheld salary is used to
purchase the ordinary shares or ADSs. The price per share at which the ordinary
shares or ADSs are to be purchased under our 1999 purchase plan during any
purchase period will be expressed as a percentage not less than the lower of
(a) 90% of the fair market value of the ordinary shares or ADSs on the date of
grant of the purchase right (which is the commencement of the offer period) or
(b) 90% of the fair market value of the ordinary
30
shares or ADSs on the date the purchase right is exercised. Purchase rights may
not be assigned, transferred, pledged or otherwise disposed of in any way by
the participant, other than by will or the laws of descent and distribution.
Payroll deductions may range from 1% to 10% in whole percentage increments
of a participant's regular base pay. The maximum number of ordinary shares or
ADSs that any employee may purchase under our 1999 purchase plan during a
purchase period is 100,000 ordinary shares or 2,000 ADSs. In addition,
Section 423 of the U.S. Internal Revenue Code imposes a US$25,000 limit on the
maximum amount of ordinary shares or ADSs that may be purchased under a
tax-qualified employee stock purchase plan during any calendar year. The
US$25,000 limit is determined at the fair market value of the ordinary shares
or ADSs at the time such option is granted for each calendar year in which such
option is outstanding.
The plan administrator has the authority to amend or terminate our 1999
purchase plan. The plan administrator may terminate any offer period on any
exercise date if the plan administrator determines that the termination of the
offer period is in the best interests of our company and its shareholders.
2005 Share Option Plan. Our 2005 share option plan was adopted by our board
of directors in August 2005, was approved by our shareholders in November 2005
and took effect on March 2, 2006. The 2005 share option plan provides for the
granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and the granting of nonstatutory stock
options to our employees, directors and consultants. Initially, the maximum
aggregate number of shares reserved for issuance pursuant to all options
(including incentive stock options) under the 2005 share option plan is
100,000,000 ordinary shares after taking into account the 50-to-1 stock split
on November 25, 2005 and such number of shares shall not, when added to the
remaining number of ordinary shares available for the grant of options under
any other plan or employee share purchase plan, be greater than 10% of the
number of ordinary shares outstanding as of the date of adoption of the 2005
share option plan. The maximum number of shares that may be issued upon
exercise of all outstanding (and unexercised) options under the 2005 share
option plan and any other plan of ours and any purchase rights granted by us
pursuant to any employee share repurchase plan must not, in aggregate, exceed
30% of the number of ordinary shares outstanding from time to time. Where an
award agreement permits the exercise or purchase of the award for a specified
period of time following the recipient's termination of service with us, or the
recipient's disability or death, the award will terminate to the extent not
exercised or purchased on the last day of the specified period or the last day
of the original term of the award, whichever occurs first. As of December 31,
2007, 45,169,900 options were outstanding under the 2005 share option plan.
2005 Share Incentive Plan. Our 2005 share incentive plan was adopted by our
board of directors in August 2005, was approved by our shareholders in November
2005 and took effect on March 2, 2006. The 2005 share incentive plan provides
for the granting to our employees, directors and consultants of restricted
shares, cash dividend equivalent rights, restricted share units or stock
appreciation rights or similar right with a fixed or variable price related to
the fair market value of our ordinary shares and with an exercise or conversion
privilege related to the passage of time, the occurrence of one or more events,
or the satisfaction of performance criteria or other conditions. Initially, the
maximum aggregate number of shares which may be issued pursuant the 2005 share
incentive plan is 75,000,000 ordinary shares after taking into account the
50-to-1 stock split on November 25, 2005. In addition, a right entitling a
grantee to compensation measured by dividends paid with respect to ordinary
shares shall be payable solely in cash and shall not be deemed to reduce the
maximum aggregate number of shares which may be issued under our 2005 share
incentive plan. Where an award agreement permits the exercise or purchase of
the award for a specified period of time following the recipient's termination
of service with us, or the recipient's disability or death, the award will
terminate to the extent not exercised or purchased on the last day of the
specified period or the last day of the original term of the award, whichever
occurs first. As of December 31, 2007, 14,327,550 shares were outstanding under
the 2005 share incentive plan.
Board Practices
Duties of Directors
Under Cayman Islands law, our directors have a duty of loyalty to act
honestly in good faith with a view to promoting our best interests. Our
directors also have a duty of care to exercise the care, diligence and skills
that a reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with
our memorandum and articles of association and the class rights vested under
our memorandum and articles of association in the holders of the shares.
Terms of Directors and Officers
Our articles of association provide for not less than five nor more than
nine directors although the holders of a majority of our shares may increase or
reduce such limits. Our articles of association provide for our board of
directors to be divided into three classes, designated Class I, Class II and
Class III, with each class consisting of an equal number of directors or as
nearly equal in number as the then total number of directors permits. The
directors of each class have been elected for terms of three years ending in
consecutive years. At each annual general meeting, successors to the class of
directors whose terms expire at that annual general meeting are elected for new
three year terms. If the number of directors is changed, any increase or
decrease is apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible and any additional
directors of any class elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of directors
shorten the term of
31
any incumbent directors. The term of executive officers is determined by our
board of directors. There are no provisions of Cayman Islands law which require
the term of executive officers to be for a particular period.
Our board of directors has the power at any time and from time to time to
appoint any person to be a director, either to fill a casual vacancy or as an
additional to the existing directors provided that the appointment does not
cause the number of directors to exceed any number fixed by or in accordance
with the articles of association as a maximum number of directors. Any director
so appointed shall hold office only until one next annual general meeting and
is then eligible for re-election at that meeting.
Our shareholders may by special resolution remove any directors before the
expiration of his period of office notwithstanding anything in the articles of
association or in any agreement we have entered into with such director (but
without prejudice to any claim for damages under any such agreement).
There is no shareholding qualification for directors. Subject to any
retirement rules, statutes or provisions provided by applicable law, any
individual who reaches the age of seventy-five (75) years or older at the time
of election or re-election will not be eligible for recommendation for
nomination to our board. Subject to any retirement rules, statutes or
provisions provided by applicable law, upon reaching seventy-five (75) years of
age, any existing director will be allowed to complete his or her term in
office but will not be eligible for recommendation for nomination to our board
for a subsequent term.
Committees of the Board of Directors
We have an audit committee, a compensation committee and a nominating
committee. Each of our audit committee members qualifies as an "independent"
director for purposes of the rules and regulations of Nasdaq. The audit
committee is established by the Board primarily for the purpose of overseeing
the accounting and financial reporting processes of the Company and audits of
the financial statements of the Company. The Committee's responsibilities
include (1) the appointment, retention, compensation and oversight of the work
of our independent auditors, and for review of its qualifications, and
(2) review of our system of internal controls. The Committee also maintains
procedures for the receipt, retention and treatment of complaints received by
the Company regarding accounting, internal controls, or auditing matters and
for the confidential, anonymous submission by employees of the company of
concerns regarding accounting or auditing matters. The audit committee meets at
least four times per year, and also meets separately with the representatives
of management at least annually. The audit committee held seven meetings in
2007. Currently, Messrs. Lin, Tan and Yawata serve on the audit committee.
The compensation committee establishes remuneration levels for our officers,
performs the functions that are provided under our employee benefit programs
and administers our long-term incentive, compensation and equity plans
including our 1999 stock incentive plan, our 1999 employee stock purchase plan,
our 2005 share incentive plan and 2005 share option plan. Currently,
Messrs. Lin and Austin serve on the compensation committee.
The nominating committee assists our board of directors in selecting
nominees for election to our board of directors and makes recommendations to
our board of directors from time to time, or whenever it shall be called upon
to do so, regarding nominees for our board of directors. Currently, Messrs.
Austin and Yan serve on the nominating committee.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee serves as a member of the board of
directors or the compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or our
compensation committee.
Employees
As of December 31, 2007, we had 1,107 full-time employees, 115 of which were
based in the United States, 957 in Asia, 31 in Europe and 4 in Cayman Islands.
Our employees are not represented by any collective bargaining agreements, and
we have never experienced a work stoppage. We believe our employee relations
are good.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our ordinary shares, as of March 31, 2008, by each
shareholder known by us to own beneficially more than 5% of our ordinary shares
based on SEC filings as of March 31, 2008.
32
Shares Beneficially Owned
------------------------
Name of Beneficial Owner Number Percent
------------------------ ----------- -------
Wasatch Advisors, Inc............................. 314,431,750 16.43%
Trivium Capital Management LLC.................... 206,250,000 10.77%
RS Investment Management Co....................... 137,929,800 7.21%
Directors and members of our administrative,
supervisory or management bodies................ 101,909,050 5.32%
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Based on SEC filings as of March 31, 2007, Wasatch Advisors, Inc.
beneficially owned 356,712,650 of our ordinary shares or 18.73%, Wellington
Management Co. LLP beneficially owned 187,601,500 of our ordinary shares or
9.85%, Capital Research & Management Co. beneficially owned 152,750,000 of our
ordinary shares or 8.02% and RS Investment Management Co. beneficially owned
116,456,350 of our ordinary shares or 6.11%.
Based on SEC filings as of March 31, 2006, Wasatch Advisors, Inc.
beneficially owned 342,407,750 of our ordinary shares or 17.4%, Fidelity
Management & Research Company beneficially owned 249,053,900 of our ordinary
shares or 12.7%,RS Investment Management LP beneficially owned 200,665,550 of
our ordinary shares or 10.2% and Capital Research & Management Co. beneficially
owned 194,750,000 of our ordinary shares or 9.9%.
None of the major shareholders listed above have differing voting rights
with respect to the ordinary shares of the Company. We do not know of any
arrangements the operation of which may at a subsequent date result in a change
in control of the Company. To our knowledge, we are not directly or indirectly
owned or controlled by another corporation, by a foreign government or any
other natural or legal person.
RELATED PARTY TRANSACTIONS
Executive Severance and Change of Control Agreements
In April 2007, we entered into an Executive Severance and Change of Control
Agreement with Sterling Du, our chief executive officer and chairman of our
board, pursuant to which Mr. Du would be entitled to, among other things, two
times his base salary and annual target bonus and immediate vesting of 50% of
his unvested equity awards if terminated under certain circumstances. In
addition, Mr. Du would be entitled to, among other things, three times his base
salary and annual target bonus and immediate vesting of 100% of his unvested
equity awards if terminated under certain circumstances within twenty-four
months of a change of control of our company.
In April 2007, we entered into an Executive Severance and Change of Control
Agreement with Chuan Chiung "Perry" Kuo, our chief financial officer, pursuant
to which Mr. Kuo would be entitled to, among other things, one times his base
salary and annual target bonus and immediate vesting of 50% of his unvested
equity awards if terminated under certain circumstances. In addition, Mr. Kuo
would be entitled to, among other things, one and a half times his base salary
and annual target bonus and immediate vesting of 50% of his unvested equity
awards if terminated under certain circumstances within twelve months of a
change of control of our company.
In April 2007, we entered into an Executive Severance and Change of Control
Agreement with James Keim, our head of marketing and sales, pursuant to which
Mr. Keim would be entitled to, among other things, one times his base salary
and annual target bonus and immediate vesting of 50% of his unvested equity
awards if terminated under certain circumstances. In addition, Mr. Keim would
be entitled to, among other things, one and a half times his base salary and
annual target bonus and immediate vesting of 50% of his unvested equity awards
if terminated under certain circumstances within twelve months of a change of
control of our company.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
Our financial statements set forth in the accompanying index to Consolidated
Financial Statements included in this Annual Report following Part IV beginning
on page F-1 are hereby incorporated in this Annual Report. Our Consolidated
Financial Statements are filed as part of this Annual Report.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our ordinary shares or
other securities and do not anticipate paying cash dividends in the foreseeable
future.
ITEM 9. THE OFFER AND LISTING
ADS AND ORDINARY SHARE PRICES AND RELATED MATTERS
33
Our ADSs are quoted and traded on the Nasdaq Global Select Market and the
Cayman Islands Stock Exchange. Our ordinary shares are listed on the SEHK and
the Cayman Islands Stock Exchange.
Ordinary Shares Prior to Close of Trading on November 25, 2005 and ADSs After
Commencement of Trading on November 28, 2005
The following information set forth for the periods indicated the high and
low last reported sales prices per ordinary share prior to the close of trading
on November 25, 2005 and the high and low last reported sales prices per ADS
after the commencement of trading on November 28, 2005 as furnished by the
Nasdaq Global Select Market.
(a)Annual high and low market prices
High Low
------ -----
January 1, 2003 through December 31, 2003.... $25.29 $8.01
January 1, 2004 through December 31, 2004.... $24.98 $9.04
January 1, 2005 through December 31, 2005.... $17.72 $8.74
January 1, 2006 through December 31, 2006.... $13.55 $5.07
January 1, 2007 through December 31, 2007.... $18.00 $7.06
(b)Quarterly high and low market prices
First Quarter 2006........................... $13.55 $ 9.95
Second Quarter 2006.......................... $10.98 $ 7.20
Third Quarter 2006........................... $ 7.87 $ 5.07
Fourth Quarter 2006.......................... $ 8.64 $ 6.40
First Quarter 2007........................... $ 8.90 $ 7.06
Second Quarter 2007.......................... $11.53 $ 7.61
Third Quarter 2007........................... $15.86 $11.18
Fourth Quarter 2007.......................... $18.00 $11.30
First Quarter 2008........................... $11.60 $ 7.59
(c)Monthly high and low market prices
December 2007................................ $14.54 $11.30
January 2008................................. $11.60 $ 7.97
February 2008................................ $ 9.09 $ 8.00
March 2008................................... $ 8.84 $ 7.59
April 2008................................... $ 8.35 $ 7.30
May 2008..................................... $ 9.75 $ 8.56
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Ordinary Shares After Commencement of Trading On March 2, 2006
The following tables set forth for the periods indicated the high and low last
reported sales prices per ordinary share in Hong Kong dollars (HK$) as
furnished by the Hong Kong Stock Exchange. Our ordinary shares commenced
trading on the Hong Kong Stock Exchange on March 2, 2006
(a)Annual high and low market prices
High Low
January 1, 2007 through December 31, 2007.... HK$2.66 HK$1.00
(b)Quarterly high and low market prices
High Low
------- -------
Second Quarter 2006.......................... HK$1.70 HK$1.11
Third Quarter 2006........................... HK$1.16 HK$0.84
Fourth Quarter 2006.......................... HK$1.31 HK$0.94
First Quarter 2007........................... HK$1.32 HK$1.05
Second Quarter 2007.......................... HK$1.65 HK$1.16
Third Quarter 2007........................... HK$2.35 HK$1.72
Fourth Quarter 2007.......................... HK$2.66 HK$1.00
First Quarter 2008........................... HK$2.25 HK$1.01
|
34
(c)Monthly high and low market prices
December 2007................................ HK$2.40 HK$1.00
January 2008................................. HK$2.25 HK$1.09
February 2008................................ HK$2.20 HK$1.24
March 2008................................... HK$1.39 HK$1.01
April 2008................................... HK$1.40 HK$1.00
May 2008..................................... HK$1.60 HK$1.18
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ITEM 10. ADDITIONAL INFORMATION
The following are summaries of material provisions of our memorandum and
articles of association and the Companies Law (2004 Revision). The summary is
qualified in its entirety by reference to our memorandum and articles of
association (see Item 19-Exhibit 1).
Registered Office
The Company has been assigned registration number CR-72204 by the registrar
of companies in the Cayman Islands. The registered office is located at the
offices of Maples Corporate Services Limited, Ugland House, P.O. Box 309, South
Church Street, Grand Cayman KY1-1104, Cayman Islands. The telephone number at
that location is (345) 949-8066.
Objects and Purposes
Paragraph 3 of the memorandum of association provides that the objects and
purposes of the Company are unlimited and the Company may perform all corporate
activities not prohibited by any law as provided by the Companies Law.
Directors
Article 117 of the articles of association of the Company provides that a
director will not be disqualified by his office from contracting with the
Company notwithstanding such director's interest and that such an interested
director will not be liable to the Company for any profit realized through such
contract or arrangement, provided, the interested director declares such
interest at the earliest meeting of the board. Article 127 provides that
directors' compensation shall from time to time be determined by the Company in
general meeting or by the board in accordance with the articles of association.
Article 136 provides that the directors may exercise all the powers of the
Company to borrow money and to mortgage or charge its undertaking, property and
uncalled capital or any part thereof and to issue debentures, debenture stock
and other securities whether outright or as security for any debt, liability or
obligation of the Company or of any third party.
Ordinary Shares
General. The Company's articles of association authorize the issuance of
4,750,000,000 ordinary shares with a par value of US $0.00002. All the
outstanding ordinary shares are fully paid and nonassessable and accordingly no
further capital may be called for by the Company from any holder of the
ordinary shares outstanding. Certificates representing the ordinary shares are
issued in registered form. The ordinary shares are not entitled to any sinking
fund or pre-emptive or redemption rights. Under Cayman Islands Law,
non-residents may freely hold, vote and transfer ordinary shares in the same
manner as Cayman Islands residents, subject to the provisions of the Companies
Law and the articles of association. No Cayman Islands laws or regulations
restrict the export or import of capital or affect the payment of dividends to
non-residents holders of the ordinary shares.
Dividends. The holders of our ordinary shares are entitled to receive the
dividends that are declared by the board of directors. Dividends may be paid
only out of profits, which include net earnings and retained earnings
undistributed in prior years, and out of share premium, a concept analogous to
paid-in-surplus in the United States, subject to a statutory solvency test.
Voting Rights. Each ordinary share is entitled to one vote on all matters
upon which the ordinary shares are entitled to vote, including the election of
directors. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of the meeting or any
shareholder present in person or by proxy, before or on the declaration of the
result of the show of hands.
A quorum required for a meeting of shareholders consists of at least a
number of shareholders present in person or by proxy and entitled to vote
representing the holders of not less than a majority of our issued voting share
capital. Shareholders' meetings are held annually and may be convened by the
board of directors on its own initiative. Advanced notice of at least
twenty-one days in the case of annual general meetings or any meeting at which
the passing of a special resolution is to be considered and fourteen days in
all other cases is required for the convening of shareholders' meetings.
Any ordinary resolution to be made by the shareholders requires the
affirmative vote of a simple majority of the votes attaching to the ordinary
shares and preference shares, if any, cast in a general meeting, while a
special resolution requires the affirmative vote of two-thirds of the votes
cast attaching to the ordinary shares and preference shares, if any. Holders of
ordinary shares, which are currently the only shares, carrying the right to
vote at our general meetings, have the power, among other things, to elect
directors, appoint auditors and make changes in the amount of our authorized
share capital.
35
Material issues that require a special resolution of the shareholders under
the Companies Law include resolutions to alter the memorandum of association
with respect to any objects, powers or other matters specified therein, any
alteration of the articles of association, any reduction of capital, any change
of name, the appointment of an inspector for examining into the affairs of the
company, requiring the company to be wound up by a court, any voluntary winding
up, delegating to creditors the power of appointing liquidators, making binding
arrangements between the company and its creditors, and sanctioning the
transfer of the business or property of the company being wound up to another
company whether established in the Cayman Islands or in any other jurisdiction.
Liquidation. If we are to be liquidated, the liquidator may, with the
approval of the shareholders, divide among the shareholders in cash or in kind
the whole or any part of our assets, in a manner proportionate to their
shareholdings, and may vest the whole or any part of those assets in trustees
of those trusts for the benefit of the shareholders that the liquidator, with
the approval of the shareholders, thinks fit, provided that, in practice, a
shareholder may not be compelled to accept any shares or other assets that
would subject that shareholder to liability.
Preference Shares
The articles of association authorizes the issuance of 250,000,000
preference shares with a par value of $0.00002 per share. Pursuant to our
articles of association, the board of directors has the authority, without
further action by the shareholders, to issue preference shares in one or more
series. It also has the authority to fix the designations, powers, preferences,
privileges and relative participating, optional or special rights and the
qualifications, limitations or restrictions of those shares, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the ordinary
shares. The board of directors, without shareholder approval, can issue
preference shares with voting, conversion or other rights that could harm the
voting power and other rights of the holders of ordinary shares. Subject to the
directors' duty of acting in our best interest, preference shares can be issued
quickly with terms calculated to delay or prevent a change in control or make
removal of management more difficult. Additionally, the issuance of preference
shares may have the effect of decreasing the market price of the ordinary
shares, and may harm the voting and other rights of the holders of ordinary
shares. We have confirmed that as long as our ordinary shares or preference
shares are listed on the SEHK, we will comply with the listing rules of the
SEHK and any preference shares issued or to be issued shall carry the same
voting rights as the ordinary shares.
Anti-takeover Effects of Provisions in Our Charter Documents
Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
shareholders favor. These provisions could have the effect of discouraging
others from making tender offers for our shares. As a result, these provisions
may prevent the market price of our ordinary shares from reflecting the effects
of actual or rumored takeover attempts and may prevent shareholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
shareholders may favor. Our charter documents do not permit shareholders to act
by written consent, do not permit shareholders to call a general meeting and
provide for a classified board of directors, which means shareholders can only
elect, or remove, a limited number of our directors in any given year.
Furthermore, as discussed above, our board of directors have the authority to
issue up to 250,000,000 preference shares in one or more series. Our board of
directors can fix the price, rights, preferences, privileges and restrictions
of such preference shares without any further vote or action by our
shareholders. The issuance of preference shares may delay or prevent a change
in control transaction without further action by our shareholders or make
removal of management more difficult.
Differences in Corporate Law
The Companies Law of the Cayman Islands is modeled after that of England but
does not follow recent United Kingdom statutory enactments and differs from
laws applicable to United States corporations and their shareholders. The
following paragraphs are a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws applicable to
companies incorporated in the United States and to their shareholders.
Mergers and Similar Arrangements. Cayman Islands law does not provide for
mergers as that expression is understood under United States corporate law.
However, there are statutory provisions that facilitate the reconstruction and
amalgamation of companies, provided that the arrangement in question is
approved by a majority in number of each class of shareholders and creditors
with whom the arrangement is to be made, and who must in addition represent
three-fourths in value of each class of shareholders or creditors, as the case
may be, that are present and voting either in person or by proxy at a meeting
or meetings convened for that purpose. The convening of the meetings and
subsequently the arrangement must be sanctioned by the Grand Court of the
Cayman Islands. While a dissenting shareholder would have the right to express
to the court the view that the transaction ought not to be approved, the court
can be expected to approve the arrangement if it satisfies itself that:
. the parties have complied with the statutory provisions regarding
majority vote;
. the shareholders have been fairly represented at the meeting in question;
. the arrangement is one that a businessman would reasonably approve; and
36
. the arrangement is not one that would more properly be sanctioned under
some other provision of the Companies Law.
When a take-over offer is made and accepted by holders of 90% of the shares
within four months, the offeror may, within a two-month period require the
holders of the remaining shares to transfer these shares on the terms of the
offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion.
If the arrangement and reconstruction is approved, the dissenting
shareholder would have no rights comparable to appraisal rights, which would
otherwise ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
Shareholders' Suits. Maples and Calder has advised us that no significant or
major reported class action or derivative action has been brought in a Cayman
Islands court. In principle, we will normally be the proper plaintiff and a
derivative action may not be brought by a minority shareholder. However, based
on English authorities, which would in all likelihood be of persuasive
authority in the Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:
. a company is acting or proposing to act illegally or outside of its
powers;
. the act complained of, although not outside of its powers, could be
effected only if authorized by more than a simple majority vote;
. the individual rights of the plaintiff shareholders have been infringed
or are about to be infringed; or
. those who control the company are perpetrating a "fraud on the minority."
Indemnification
Cayman Islands law does not limit the extent to which a company's articles
of association may provide for indemnification of officers and directors,
except to the extent that a provision may be held by the Cayman Islands courts
to be contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime. Our articles of
association provide for indemnification of officers and directors for losses,
damages, costs and expenses incurred in their capacities as such, except if
they acted in a willfully negligent manner or defaulted in any action against
them.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or persons controlling us pursuant
to these provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.
Enforceability of Civil Liabilities
We are a Cayman Islands company. We incorporated in the Cayman Islands
because of the following benefits associated with being a Cayman Islands
company:
. political and economic stability;
. an effective judicial system;
. unlike some jurisdictions which impose taxes on worldwide income, no
taxation of companies based upon profits, income, gains or appreciation;
. the absence of exchange control or currency restrictions; and
. the availability of professional and support services.
However, the Cayman Islands has a less developed body of securities laws
than the United States and provides less protection for investors. For example,
the remedies of shareholders and fiduciary responsibilities of our directors
are governed by Cayman Islands law and are not as clearly established as under
statutes or judicial precedent in existence in jurisdictions in the United
States. While there is some case law in the Cayman Islands on these matters, it
is not as developed as, for example, English law. However, we believe that
English case law, although not binding in the courts of the Cayman Islands,
would be regarded as persuasive. Based on English case law, we believe under
Cayman Islands law, our directors have a duty of loyalty to act honestly in
good faith with a view to promoting our best interests. Our directors also have
a duty of care to exercise the care, diligence and skills that a reasonably
prudent person would exercise in comparable circumstances. In fulfilling their
duty of care to us, our directors must ensure compliance with our memorandum
and articles of association and the class rights vested under our memorandum
and articles of association in the holders of the shares.
37
A substantial majority of our assets are located outside the United States.
In addition, a majority of our directors and officers are nationals and/or
residents of countries other than the United States, and all or a substantial
portion of our assets and the assets of our directors and officers are located
outside the United States. As a result, it may be difficult to effect service
of process within the United States upon us or our directors and officers or to
enforce against us or against them judgments obtained in United States courts,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof.
Maples and Calder, our counsel as to Cayman Islands law, has advised us that
there is uncertainty regarding whether the courts of the Cayman Islands would
(1) recognize or enforce judgments of United States courts obtained against us
or our officers and directors predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof or (2) be
competent to hear original actions brought in their jurisdiction against us or
our officers and directors predicated upon the securities laws of the United
States or any state thereof.
There is no statutory enforcement in the Cayman Islands of judgments
obtained in the United States. Instead, such a judgment must be enforced by
action at common law. Maples and Calder have advised us that a final and
conclusive judgment in a federal or state court of the United States under
which a sum of money is payable, other than a sum payable in respect of taxes,
fines, penalties or similar charges, may be subject to enforcement proceedings
as a debt in the Courts of the Cayman Islands under the common law doctrine of
obligation.
Material Contracts
Other than the contracts listed under Item 19--Exhibits and the Executive
Severance and Change of Control Agreements described in "Related Party
Transactions - Executive Severance and Change of Control Agreements", in the
past two years we have not entered into any material contracts other than
contracts entered into in the ordinary course of business.
Exchange Control
Our articles of association authorize us to issue an aggregate of
4,750,000,000 ordinary shares with a par value of $0.00002 per share. Of those
4,750,000,000 authorized ordinary shares, 1,911,868,150 shares were issued and
outstanding as of December 31, 2007, all of which are fully paid or credited as
fully paid. We may not call for any further capital from any holder of ordinary
shares outstanding. Under Cayman Islands law, non-residents of the Cayman
Islands may freely hold, vote and transfer ordinary shares in the same manner
as Cayman Islands residents, subject to the provisions of the Companies Law and
our articles of association. No Cayman Islands laws or regulations restrict the
export or import of capital, or affect the payment of dividends to non-resident
holders of ordinary shares.
TAXATION
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations
based upon profits, income, gains or appreciation and there is no taxation in
the nature of inheritance tax or estate duty. There are no other taxes likely
to be material to us levied by the Government of the Cayman Islands except for
stamp duties that may be applicable on instruments executed in, or after
execution brought within, the jurisdiction of the Cayman Islands. The Cayman
Islands are not party to any double tax treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
No stamp duties are payable on the issue or transfer of shares. An agreement
to transfer shares may be subject to stamp duty if the agreement is executed in
the Cayman Islands or, if executed outside the Cayman Islands, subsequently
brought into the Cayman Islands. The Stamp Duty Law (2005 Revision) does not
provide who is liable to pay stamp duty on any document but, in practice, the
person who seeks to rely on the document in any civil court proceedings will be
required to pay stamp duty in order to have the document admitted in evidence.
United States Federal Income Taxation
The following discussion addresses the material United States federal income
tax consequences of the ownership and disposition of ordinary shares or ADSs
held as a capital asset by a "U.S. Investor" (as defined below). This summary
does not provide a complete analysis of all potential tax consequences. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary and proposed Treasury Regulations thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof, and all of which are subject to change at any time (possibly on a
retroactive basis) by legislative, judicial or administrative action, and to
differing interpretations. There can be no assurance that the Internal Revenue
Service (the "IRS") will not take a contrary view. This summary does not
discuss state, local or foreign tax consequences of the ownership and
disposition of ordinary shares or ADSs.
This summary is directed solely to U.S Investors that hold ordinary shares
or ADSs as capital assets within the meaning of Section 1221 of the Code, which
generally means as property held for investment. For purposes of this
discussion, a "U.S. Investor" means a beneficial owner of ordinary shares or
ADSs who is any of the following:
. a citizen or resident of the United States or someone treated as a U.S.
citizen or resident for U.S. federal income tax purposes;
38
. a corporation or other entity taxable as a corporation for U.S. federal
income tax purposes created or organized in or under the laws of the
United States or any political subdivision thereof, including the
District of Columbia;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
. a trust that is subject to the primary supervision of a court within the
United States and one or more U.S. persons have the authority to control
all of its substantial decisions;
. a trust in existence on August 20, 1996 that has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a
U.S. person; or
. a person that is otherwise subject to U.S. federal income taxation on
its net income.
If a partnership (including for this purpose any entity treated as a
partnership for U.S. federal income tax purposes) is a beneficial owner of
ordinary shares or ADSs, the U.S. federal income tax consequences to a partner
in the partnership will generally depend on the status of the partner and the
activities of the partnership. A holder of ordinary shares or ADSs that is a
partnership and partners in such partnership should consult their individual
tax advisors about the U.S. federal income tax consequences of holding or
disposing of the ordinary shares or ADSs.
This summary does not address the United States federal income tax treatment
of investors having a special legal status, including without limitation the
following types of investors, who may be subject to tax rules that differ
significantly from those summarized below:
. life insurance companies;
. tax-exempt investors;
. banks and financial institutions;
. dealers in securities or foreign currencies;
. traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings;
. persons liable for alternative minimum tax;
. U.S. investors who or that actually or constructively hold 10% or more
of our voting shares or ADSs;
. investors who hold our ordinary shares or ADSs as part of straddles,
hedging or integrated or conversion transactions; or
. persons whose "functional currency" is not the U.S. dollar.
This summary is not a comprehensive description of all of the tax
considerations that may be relevant with respect to your ownership of ordinary
shares or ADSs. You are advised to consult your own tax adviser with respect to
your particular circumstances and with respect to the effects of federal,
state, local or foreign tax laws to which you may be subject. The United States
does not have an income tax treaty with the Cayman Islands.
As relates to the ADSs, this discussion is based in part upon the
representations of the depositary and the assumption that each obligation in
the deposit agreement and any related agreement will be performed in accordance
to its terms.
Generally, a holder of ADSs will be treated as the owner of the underlying
ordinary shares represented by those ADSs for U.S. federal income tax purposes.
Accordingly, no gain or loss will be recognized if the holder exchanges ADSs
for the underlying ordinary shares represented by those ADSs. The holder's
adjusted tax basis in the ordinary shares will be the same as the adjusted tax
basis of the ADSs surrendered in exchange therefor, and the holding period for
the ordinary shares will include the holding period for the surrendered ADSs.
Dividends and Other Distribution on Ordinary Shares or ADSs. Subject to the
discussion in "Passive Foreign Investment Company Status" below, in the event
that a U.S. Investor receives a distribution on the ordinary shares or ADSs,
the U.S. Investor will be required to include the distribution in gross income
as a taxable dividend on the date of receipt by the depositary, in the case of
ADSs, or by the U.S. Investor, in the case of ordinary shares, but only to the
extent that a distribution is paid from our current or accumulated earnings and
profits as determined for United States federal income tax principles.
Dividends paid by us will not be eligible for the corporate dividends received
deduction. For taxable years beginning before January 1, 2011, "qualified
dividend income" paid to a noncorporate U.S. Investor will be subject to tax at
the rates applicable to long-term capital gains (which are currently taxed at
the maximum rate of 15%) if (1) our ordinary shares or ADSs are readily
tradable on an established securities market in the United States, (2) we are
not a passive foreign investment company (as discussed below) for either our
taxable year in which the dividend was paid or the preceding taxable year and
(3) certain holding period requirements must be met. It is expected that our
ADSs will satisfy the "readily tradable" requirement as a result of being
traded on the Nasdaq Global Select Market. However, any U.S. Investor that
exchanges its ADSs for ordinary shares, or that holds only ordinary shares, may
not be eligible for the reduced rate of taxation on dividends if the ordinary
shares are not readily tradable on an established securities market in the
United States. In order for dividends to constitute "qualified dividend
39
income," a U.S. Investor generally must have held the ADSs for more than 60
days during the 121-day period beginning 60 days before the ex-dividend date;
however, because the holding period rules are intricate and because an owner's
holding period is reduced for periods during which the risk of loss is
diminished, U.S. Investors should consult their own advisors concerning the
calculation of their holding periods. Moreover, a dividend will not be treated
as a qualified dividend income to the extent that the taxpayer is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related
property. U.S. Investors should consult their own tax advisers regarding the
availability of the lower rate for dividends paid with respect to our ADSs or
ordinary shares.
The Company has the right to pay dividends in any currency. If dividends are
paid in a currency other than the U.S. dollar, the dividends will be included
in a U.S. Investor's income as a U.S. dollar amount based on the exchange rate
in effect on the date that the U.S. Investor receives the dividend, regardless
of whether the payment is in fact converted into U.S. dollars. If the U.S.
Investor does not receive U.S. dollars on the date the dividend is distributed,
the U.S. Investor will be required to include either gain or loss in income
when the U.S. Investor later exchanges the foreign currency for U.S. dollars.
The gain or loss will be equal to the difference between the U.S. dollar value
of the amount that the U.S. Investor includes in income when the dividend is
received and the amount that the US. Investor receives on the exchange of the
foreign currency for U.S. dollars. The gain or loss generally will be ordinary
income or loss from U.S. sources. If we distribute as a dividend non-cash
property, the U.S. Investor will generally include in income an amount equal to
the U.S. dollar equivalent of the fair market value of the property on the date
that it is distributed.
Dividends will constitute foreign source income for foreign tax credit
limitation purposes. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. Under current
law, for taxable years beginning after December 31, 2006, dividends distributed
by us with respect to ordinary shares or ADSs would generally constitute
"passive category income" but could, in the case of certain U.S. Investors,
constitute "general category income." Special rules apply to individuals whose
foreign source income during the taxable year consists entirely of "qualified
passive income" and whose creditable foreign taxes paid or accrued during the
taxable year do not exceed $300 ($600 in the case of a joint return). Further,
in particular circumstances, a U.S. Investor that (i) has held the ordinary
shares or ADSs for less than a specified minimum period during which it is not
protected from risk of loss, (ii) is obligated to make payments related to the
dividends, or (iii) holds the ordinary shares or ADSs in arrangements in which
the U.S. Investor's expected economic profit, after non-U.S. taxes, is
insubstantial, will not be allowed a foreign tax credit for foreign taxes
imposed on dividends paid on the ordinary shares or ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
pre-released may be taking actions that are inconsistent with the claiming of
foreign tax credits by U.S. Investors of ADSs. Such actions would also be
inconsistent with the claiming of the preferential tax rates applicable to
qualified dividend income, as defined above. Accordingly, the creditability of
foreign withholding taxes and the availability of such preferential tax rates
could be affected by future actions that may be taken by the U.S. Treasury or
parties to whom ADSs are pre-released.
Distributions in excess of our current and accumulated earnings and profits
will be treated as a nontaxable return of capital to the extent of the U.S.
Investor's basis in the ordinary shares or ADSs and thereafter as gain from the
sale or exchange of a capital asset. We do not generally intend to calculate
our earnings and profits under U.S. federal income tax principles. Therefore a
U.S. Investor should expect that a distribution will generally be treated as a
dividend even if that distribution would otherwise be treated as a nontaxable
return of capital or as capital gain under the rules described above.
Distributions to a U.S. Investor of new ordinary shares or ADSs or rights to
subscribe for new ordinary shares or ADSs that are received as part of a pro
rata distribution to all our shareholders will not be subject to U.S. federal
income tax. The adjusted tax basis of the new ordinary shares or ADSs or rights
so received will be determined by allocating the U.S. investor's adjusted tax
basis in the old ordinary shares or ADSs between the old ordinary shares or
ADSs and the new ordinary shares or ADSs or rights received, based on their
relative fair market values on the date of distribution. However, the adjusted
tax basis of the new ordinary shares or ADSs or rights will be zero if the fair
market value of the new rights is less than 15% of the fair market value of the
old ordinary shares or ADSs at the time of distribution and the U.S. Investor
does not make an election to determine the adjusted tax basis of the rights by
allocation as described above. A U.S. Investor's holding period in the new
ordinary shares or ADSs or rights will generally include the holding period of
the old ordinary shares or ADSs on which the distribution was made.
Dispositions of ordinary shares or ADSs. Subject to the discussion in
"Passive Foreign Investment Company Status" below, gain or loss realized by a
U.S. Investor on the sale or other disposition of the ordinary shares or ADSs
will be subject to United States federal income tax as capital gain or loss in
an amount equal to the difference between the amount realized on the
disposition and that U.S. Investor's basis in the ordinary shares or ADSs. The
capital gain or loss will be long-term capital gain or loss if the U.S.
Investor has held the ordinary shares or ADSs for more than one year at the
time of the sale or exchange. A noncorporate U.S. investor will be eligible for
reduced rates of taxation (currently, at a maximum rate of 15% for sales
occurring in taxable years beginning before January 1, 2011) on long-term
capital gain. The deductibility of capital losses is subject to limitations.
Any gain or loss recognized by a U.S. Investor will generally be treated as
U.S. source income or loss for U.S. foreign tax credit purposes.
40
U.S. Investors should consult their own tax advisor regarding the U.S.
federal income tax consequences if the U.S. Investor receives currency other
than U.S. dollars upon the disposition of ordinary shares or ADSs.
Passive Foreign Investment Company Status. We believe that we are not a
passive foreign investment company and do not expect to become a passive
foreign investment company in the future. We will be classified as a passive
foreign investment company if for a taxable year, after the application of
"look through" rules, either (a) 75% or more of the gross income of the company
in a taxable year is passive income, or (b) the average percentage of assets by
value of the company in a taxable year that produce or are held for the
production of passive income (which includes cash) is at least 50%, the income
or assets test. Whether or not we are a passive foreign investment company will
be determined annually based upon the composition of our income and assets
including goodwill, from time to time. In determining that we are not a passive
foreign investment company, we are relying on the current valuation of our
assets, including goodwill. In calculating goodwill, we have valued our total
assets based on our total market value determined using the then market price
of our ordinary shares and ADSs and have made a number of assumptions regarding
the amount of this value allocable to goodwill. Because the determination of
goodwill will be based on the price of our ordinary shares and ADSs, it is
subject to change. We believe our valuation approach is reasonable. However, it
is possible that the Internal Revenue Service will challenge the valuation of
our goodwill, which may result in our being classified as a passive foreign
investment company. In addition, the composition of our income and assets will
be affected by how we spend the cash we have raised, which is a passive asset
for purposes of the passive foreign investment company asset test discussed
above. We intend to use the cash we have raised in the past and conduct our
business activities in an effort to reduce the risk of our classification as a
passive foreign investment company. Because the passive foreign investment
company determination is made at the end of each taxable year, we cannot
determine in advance whether we will be considered a passive foreign investment
company for any future taxable year. If we determine that we have become a
passive foreign investment company, we will notify the Bank of New York and all
U.S. investors who have been record holders of our ordinary shares or ADSs
during any period in which we determine that we are a passive foreign
investment company, within 60 days of the end of our taxable year for which we
make such determination. If we are a passive foreign investment company for any
year during which a U.S. Investor holds ordinary shares or ADSs, we generally
will continue to be treated as a passive foreign investment company for all
succeeding years during which the U.S. Investor holds ordinary shares or ADSs.
Special U.S. tax rules apply to U.S. Investors of interests in a passive
foreign investment company. Subject to the discussion of the market-to-market
election and qualified electing fund election below, if we were a passive
foreign investment company for any taxable year during which a U.S. Investor
held ordinary shares or ADSs, the U.S. Investor would be subject to special tax
rules regardless of whether we meet the income or assets test for any other
year with respect to:
. any "excess distribution" by us to the U.S. Investor, which means any
distributions received by the U.S. Investor on the ordinary shares or
ADSs in a taxable year that are greater than 125% of the average annual
distributions received by the U.S. Investor in the three preceding
taxable years, or, if shorter, the U.S. Investor's holding period for
the ordinary shares or ADSs; and
. any gain realized on the sale or other disposition, including a pledge,
of ordinary shares or ADSs.
Under these special tax rules:
. the excess distribution or gain would be allocated ratably over the U.S.
Investor's holding period for the ordinary shares or ADSs;
. the amount allocated to the current taxable year and any taxable year
prior to the first taxable year in which we are a passive foreign
investment company would be treated as ordinary income;
. the amount allocated to each of the other years would be taxed as
ordinary income at the highest tax rate in effect for that year; and
. the interest charge applicable to underpayments of tax would be imposed
with respect to the resulting tax attributable to each prior year in
which we were a passive foreign investment company to recover the deemed
benefit from the deferred payment of the tax attributable to each prior
year.
In addition, dividends that a U.S. Investor receives from us will not be
eligible for the special tax rates applicable to "qualified dividend income"
(see "-- United States Federal Income Taxation -- Dividends") if we are a
passive foreign investment company either in the taxable year of the
distribution or the preceding taxable year, but will instead be taxable at
rates applicable to ordinary income.
If we are a passive foreign investment company in any year, a U.S. Investor
would be required to file an annual return on Internal Revenue Service Form
8621 regarding distributions received with respect to the ordinary shares or
ADSs and any gain realized on the disposition of the ordinary shares or ADSs.
A U.S. Investor in a passive foreign investment company is allowed to make a
mark-to-market election with respect to the stock of the passive foreign
investment company, provided that the stock of the passive foreign investment
company is "marketable" within the meaning of the Code. The ordinary shares
will be "marketable" as long as they remain listed on the Nasdaq Global Select
Market and are "regularly traded." The ordinary shares or ADSs will be
considered "regularly traded" for
41
any calendar year during which the ordinary shares or ADSs are traded, other
than in de minimis quantities, on at least fifteen days during each calendar
quarter. If the election is made, a U.S. Investor would be required to mark the
ordinary shares or ADSs to market each taxable year and recognize ordinary
income for any increase in market value for that taxable year and would be
allowed to recognize an ordinary loss for any decrease in that market value to
the extent that prior gains exceed prior losses. The adjusted basis in the
ordinary shares or ADSs would be adjusted to reflect that gain or loss. The
mark-to-market election will be effective for the taxable year for which the
election is made and all subsequent taxable years, unless the ordinary shares
cease to be marketable or the Internal Revenue Service consents to the
revocation of the election.
Alternatively, for each year we meet the income or assets test, a U.S.
Investor can make an election to include in income annually its pro rata share
of our earnings and net capital gains. This election is referred to as a
qualified electing fund election. To make a qualified electing fund election, a
U.S. Investor will need to have an annual information statement from us
documenting the earnings and capital gain for the year. If we were to become a
passive foreign investment company, we would furnish the passive foreign
investment company annual information statement to any shareholder or former
shareholder who requested it. In general, a U.S. Investor must make a qualified
electing fund election on or before the due date for filing its income tax
return for the first year to which the qualified electing fund election will
apply. U.S. Investors are permitted to make retroactive elections in particular
circumstances, including if the U.S. Investor had a reasonable belief that the
foreign corporation was not a passive foreign investment company and filed a
protective election. As discussed above, we will notify investors if we
determine that we have become a passive foreign investment company. This notice
will provide U.S. Investors on a calendar tax year with sufficient time to make
the qualified electing fund election. U.S. Investors (in particular those with
a tax year other than the calendar year) should consult their own tax advisors
as to the consequences of making a protective qualified electing fund election
or other consequences of the qualified electing fund election.
If we are a passive foreign investment company in any year, U.S. Investors
should consult with their tax advisers regarding whether to make a
mark-to-market or qualified electing fund election.
Information Reporting and Backup Withholding. In general, information
reporting requirements will apply to dividends in respect of our ordinary
shares or ADSs or the proceeds received on the sale, exchange or redemption of
our ordinary shares or ADSs paid within the United States (and, in certain
cases, outside the United States) to U.S. Investors other than certain exempt
recipients, such as corporations, and a backup withholding tax (currently at a
rate of 28%) may apply to such amounts if the U.S. Investor fails to provide an
accurate taxpayer identification number or to report interest and dividends
required to be shown on its U.S. federal income tax returns. U.S. Investors who
are required to establish their exempt status generally must provide such
certification on IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld as backup
withholding from a payment to a U.S. Investor may be allowed as a credit
against the U.S. Investor's U.S. federal income tax liability and the U.S.
Investor may obtain a refund of any excess amounts withheld by filing the
appropriate claim for refund with the IRS and furnishing any required
information in a timely manner.
DOCUMENTS ON DISPLAY
We file annual reports on Form 20-F and furnish current reports on Form 6-K
with the SEC. You may read and copy this information at the SEC's Public
Reference Room at Judiciary Plaza, 100 F Street N.E., Washington, D.C. 20549,
and at the regional offices of the SEC located at 233 Broadway, New York, New
York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can also request copies of the documents, upon payment of a
duplicating fee, by writing to the Public Reference Section of the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. Certain of our SEC filings are also available to the
public from the SEC's website at http://www.sec.gov.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss related to adverse changes in market prices,
including interest rates and foreign exchange rates, of financial instruments.
In the normal course of business, our financial position is routinely subject
to a variety of risks, including market risk associated with interest rate
movements and currency rate movements on non-U.S. dollar denominated assets and
liabilities, as well as collectibility of accounts receivable.
We regularly assess these financial instruments and their ability to address
market risk and have established policies and business practices to protect
against the adverse effects of these and other potential exposures.
Interest Rate Risk
Our major market risk exposure is changing interest rates. Our exposure to
market risk for changes in interest rates relates primarily to our investments
in government and corporate bonds.
We maintain an investment portfolio consisting mainly of fixed income
securities, including time deposits and government bonds. These securities are
subject to interest rate risk and will fall in value if market interest rates
increase. If market rates were to increase immediately and uniformly by 10.0%
from the levels at December 31, 2007, the fair value of our investment
portfolio would decline by an immaterial amount. We presently intend to treat
our fixed income investments as
42
available for sale, and therefore we do not expect our results of operations or
cash flows to be affected to any significant degree by a sudden short-term
change in market interest rates. We have not purchased and do not currently
hold any derivative financial instruments for hedging or trading purposes.
The table below provides information about our financial instruments whose
maturity dates are greater than three months as of December 31, 2007.
Fair
2008 2009 2010 2011 2012 Thereafter Total Value
------ ------ ---- ---- ---- ---------- ------ ------
(In Thousands)
Time Deposit:
Fixed rate (US$)........... $9,803 -- -- -- -- -- $9,803 $9,803
Government Bonds
Fixed rate (US$)........... -- $1,567 -- -- -- -- $1,567 $1,555
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Foreign currency risk
Fluctuations in exchange rates may adversely affect our financial results.
The functional currency for each of our foreign subsidiaries is the local
currency. As a result, certain of our assets and liabilities, including certain
bank accounts, accounts receivable, restricted assets, short-term investments
and accounts payable, exist in non-US dollar-denominated currencies, which are
sensitive to foreign currency exchange rate fluctuations. If exchange rates
were to change immediately and uniformly from the levels at December 31, 2007,
the fair value of such assets and liabilities would change by an immaterial
amount beyond the change reflected by the exchange rates. As of December 31,
2007, we held approximately $24.1 million in government bonds, certificates of
deposits and bank demand accounts denominated in foreign currencies.
We have not engaged in hedging techniques to mitigate foreign currency
exposures and may experience economic losses as a result of foreign currency
exchange rate fluctuations. We will monitor currency exchange fluctuations
periodically. For the year ended December 31, 2007, we experienced a foreign
exchange loss of approximately $548,000 due to foreign currency exchange
fluctuations, which are reflected in our results of operations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There are no defaults, dividend arrearages or delinquencies that are
required to be disclosed.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
RIGHTS OF SECURITY HOLDERS
Effective March 2, 2006, upon the listing of our ordinary shares on the
Stock Exchange of Hong Kong, certain amendments to our Memorandum and Articles
of Association became effective. A summary of material provisions of our
Memorandum and Articles of Association is included in Item 10 above.
USE OF PROCEEDS
As of December 31, 2007, the net proceeds from our initial public offering
in August 2000 and our public offering in November 2001 were primarily used for
general working capital and investment in interest income producing financial
instruments. None of the net proceeds from our initial public offering were
paid, directly or indirectly, to any of our directors, officers or general
partners or any of their associates, or to any person owning ten percent or
more of any class of our equity securities, or any of our affiliates.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed pursuant to the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that
43
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
In addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events. Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives.
As of December 31, 2007, we carried out an evaluation, under the supervision
and with the participation of the management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
Management's Annual report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Our company's
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of our company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States
of America, and that receipts and expenditures of our company are being made
only in accordance with authorizations of management and directors of our
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our company's
assets that could have a material effect on the financial statements. Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Management
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that our company's
internal control over financial reporting was effective as of December 31,
2007.This Annual Report includes an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
that occurred during our fiscal year 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Attestation Report Of The Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of O2Micro International Limited:
We have audited the internal control over financial reporting of O2Micro
International Limited and subsidiaries (the "Company") as of December 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made
44
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2007 of the Company, and
our report dated April 14, 2008 expressed an unqualified opinion on those
financial statements and included explanatory paragraphs relating to the
adoption of Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" and Financial Accounting Standards Board Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes--An interpretation of FASB
Statement No. 109."
/s/ Deloitte & Touche
----------------------------------------
Taipei, Taiwan
Republic of China
April 14, 2008
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ITEM 16. Not applicable.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have at least one audit committee financial expert serving on the audit
committee. The Board of Directors has determined that Mr. Lawrence Lin is the
"audit committee financial expert" as defined in Item 16A of Form 20-F. We
believe Mr. Lin is "independent" as defined in Rule 4200(a)(15) of the
Marketplace Rules of the Nasdaq Stock Market.
ITEM 16B. CODE OF ETHICS
We have adopted the O2Micro International Limited Code of Business Conduct
and Ethics ("Code of Conduct"), a code of business conduct and ethics that
applies to our employees, officers and non-employee directors, including our
principal executive officer, principal financial officer, principal accounting
officer or controller and persons performing similar functions. It is publicly
available on our website at www.o2micro.com. If we make any substantive
amendments or grant any waiver from a provision of the Code of Conduct to our
directors or executive officers, we will disclose the nature of such amendment
or waiver on that website or in a report on Form 6-K or in the next annual
report on Form 20-F.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte & Touche has served as the Company's independent registered public
accounting firm for each of the fiscal years in the two-year period ended
December 31, 2007. The appointment of the independent registered public
accounting firm is subject to approval and ratification by the Company's
shareholders at the annual general meeting of shareholders. The following table
presents the aggregate fees for professional services and other services
rendered by Deloitte & Touche in each of the years ended December 31, 2006 and
2007.
Year ended Year ended
December 31, 2006 December 31, 2007
----------------- -----------------
Audit Fees.................... $436,200 $867,400
Audit-related Fees............ 10,002 66,697
Tax Fees...................... 74,066 20,545
All Other Fees................ 463,766 64
Total......................... $984,034 $954,706
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Audit Fees. This category includes the audit of our annual financial
statements, review of quarterly financial statements, audit of our internal
control over financial reporting and services that are normally provided by
Deloitte & Touche in connection with statutory and regulatory filings or
engagements for those fiscal years.
45
Audit-related Fees. This category consists of assurance and related services by
Deloitte & Touche that are related to the performance of audit or review of our
financial statements and are reported above under "Audit Fees."
Tax Fees. This category consists of professional services rendered by
Deloitte & Touche for tax compliance and tax consultation. The services for
fees disclosed under this category include tax return preparation advice and
technical tax consultation.
All Other Fees: This category consists primarily of fees in connection with the
Stock Exchange of Hong Kong listing and Sarbanes-Oxley Act readiness
preparation.
The audit committee pre-approves all audit and permissible non-audit services
provided by the independent registered public accounting firm. These services
may include audit services, audit-related services, tax services and other
services. During the year ended December 31, 2007, the audit committee
pre-approved all audit and non-audit-fees of Deloitte & Touche.
ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Total Number of
Shares Maximum
Purchased as Number of Shares
Part of Publicly that May Yet Be
Total Number of Average Announced Purchased Under
Shares Price Paid Plans or the Plans or
Period Purchased (2) per Share (2) Programs (1) (2) (3) Programs (1) (2) (3)
------ --------------- ------------- -------------------- --------------------
February 13, 2007............................ 755,000 $0.15040 755,000 139,441,985(4)
March 13, 2007 to March 14, 2007............. 3,300,000 $0.14559 3,300,000 136,141,985(4)
June 14, 2007 to June 15, 2007............... 11,594,000 $0.21047 11,594,000 124,547,985(4)
December 10, 2007 to December 14, 2007....... 5,000,000 $0.25925 5,000,000 185,859,415(4)
February 5, 2008 to February 29, 2008........ 17,037,450 $0.17152 17,037,450 168,821,965(4)
March 3, 2008 to March 14, 2008.............. 9,550,100 $0.16153 9,550,100 159,271,865(4)
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(1) In May 2002, we announced a share repurchase program to repurchase up to
3,000,000 shares of our ordinary shares or 150,000,000 shares after taking into
account the 50-to-1 stock split on November 25, 2005. There is no expiration
date for the share repurchase program.
(2) All share and price per share numbers reflect the 50-for-1 stock split
which occurred on November 25, 2005
(3) On November 14, 2005, our shareholders adopted a general mandate (the
"Repurchase Mandate") to exercise all the powers of our company to repurchase
such number of Ordinary Shares not exceeding 10% of the total nominal amount of
the share capital of our company in issue and to be issued. The Repurchase
Mandate was to only become effective if and when our Ordinary Shares were
listed for trading on the SEHK, which occurred on March 2, 2006. On March 2,
2006, the maximum number of shares that may yet be purchased was 198,049,435
shares.
(4) On June 15, 2006 and June 21, 2007, our shareholders renewed the Repurchase
Mandate to exercise all the powers of the Company to repurchase such number of
Ordinary Shares not exceeding 10% of the total nominal amount of the share
capital of the Company in issue and to be issued. On June 21, 2007, the maximum
number of shares that may yet be purchased was 190,859,415 shares.
46
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements have been prepared in
accordance with Item 18 hereof.
ITEM 18. FINANCIAL STATEMENTS
The Company's financial statements set forth in the accompanying Index to
Consolidated Financial Statements included in this Annual Report on Form 20-F
following Part IV beginning on page F-1 are hereby incorporated herein by this
reference. Such consolidated financial statements are filed as part of this
Annual Report on Form 20-F.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2007
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 2005, 2006 and 2007
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2005, 2006 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2006 and 2007
Notes to Consolidated Financial Statements
ITEM 19. EXHIBITS
1. Memorandum and Articles of Association, as amended, of the registrant
(incorporated by reference to Exhibit 1 to the Annual Report on Form
20-F filed by the registrant on June 19, 2007)
4.1 Standard NNN Lease dated July 29, 1999 by and between Limir Realty Corp.
#17 as landlord and O2Micro, Inc. as tenant (incorporated by
reference from Exhibit 10.5 to the Registration Statement on Form F-1
(File No. 333-12386) filed by the registrant)
4.2 Lease dated October 16, 1997 by and between Hung Kuo Development Corp.
as landlord and O2Micro, Inc. as tenant (incorporated by reference
from Exhibit 10.6 to the Registration Statement on Form F-1 (File
No. 333-12386) filed by the registrant)
4.3 Agreement dated October 1, 1999 by and between PSA Corporation Limited
as landlord and O2Micro, Inc. as tenant (incorporated by reference
from Exhibit 10.8 to the Registration Statement on Form F-1 (File
No. 333-12386) filed by the registrant)
8.1 List of registrant's subsidiaries
12.1 Certification of Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act
12.2 Certification of Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act
13. Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
15.1 Consent of Deloitte & Touche, independent registered public accounting
firm
|
47
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
O2MICRO INTERNATIONAL LIMITED
Date: June 24, 2008 By: /s/ STERLING DU
-----------------------------------
Name: Sterling Du
Title: Chief Executive Officer
|
48
O2MICRO INTERNATIONAL LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm................... F-1
Consolidated Balance Sheets............................................... F-2
Consolidated Statements of Income and Comprehensive Income................ F-3
Consolidated Statements of Shareholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-8
|
O2Micro International Limited and Subsidiaries
Consolidated Financial Statements as of
December 31, 2006 and 2007 and
Report of Independent Registered Public
Accounting Firm
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of
O2Micro International Limited:
|
We have audited the accompanying consolidated balance sheets of O2Micro
International Limited and subsidiaries (the "Company") as of December 31, 2006
and 2007, and the related consolidated statements of income and comprehensive
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2007 (expressed in United States dollars). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of O2Micro International Limited
and subsidiaries as of December 31, 2006 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2007, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated April 14, 2008
expressed an unqualified opinion on the Company's internal control over
financial reporting.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation in accordance
with Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment." Effective January 1, 2007, the Company also changed its method of
accounting for uncertainties in income taxes in accordance with Financial
Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes-An interpretation of FASB Statement No. 109."
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 14, 2008
|
F-1
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand US Dollars, Except Per Share Amounts)
December 31
------------------
2006 2007
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) $ 45,438 $ 52,597
Restricted cash 8,342 6,830
Short-term investments (Note 4) 19,697 28,650
Accounts receivable, net (Note 5) 18,987 24,600
Inventories (Note 6) 14,076 22,127
Prepaid expenses and other current assets (Note 7) 7,379 7,476
-------- --------
Total current assets 113,919 142,280
-------- --------
LONG-TERM INVESTMENTS (Note 8) 24,059 26,715
-------- --------
PROPERTY AND EQUIPMENT, NET (Note 9) 41,427 43,148
-------- --------
RESTRICTED ASSETS 14,540 12,393
-------- --------
OTHER ASSETS (Note 10) 3,075 3,876
-------- --------
TOTAL $197,020 $228,412
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 9,851 $ 10,841
Income tax payable 991 1,065
Accrued expenses and other current liabilities
(Note 11) 12,212 11,597
-------- --------
Total current liabilities 23,054 23,503
-------- --------
OTHER LONG-TERM LIABILITIES
Accrued pension liabilities 455 520
-------- --------
FIN 48 tax liabilities -- 210
-------- --------
Total liabilities 23,509 24,233
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preference shares at $0.00002 par value per share;
Authorized--250,000,000 shares;
Ordinary shares at $0.00002 par value per share;
Authorized--4,750,000,000 shares; Issued -
1,906,969,950 shares and 1,911,868,150 shares as
of December 31, 2006 and 2007, respectively 38 38
Additional paid-in capital 140,224 144,944
Retained earnings 33,877 56,847
Accumulated other comprehensive (loss) income (628) 3,646
Treasury stock--5,000,000 as of December 31, 2007 -- (1,296)
-------- --------
Total shareholders' equity 173,511 204,179
-------- --------
TOTAL $197,020 $228,412
======== ========
|
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts)
Years Ended December 31
----------------------------
2005 2006 2007
-------- -------- --------
NET SALES $105,552 $124,915 $165,540
COST OF SALES 40,741 56,772 71,099
-------- -------- --------
GROSS PROFIT 64,811 68,143 94,441
-------- -------- --------
OPERATING EXPENSES (INCOME)
Research and development (a) 25,421 31,751 34,624
Selling, general and administrative (a) 20,279 29,209 34,712
Patent related litigation 10,174 10,962 10,848
Litigation income -- -- (9,364)
Stock Exchange of Hong Kong listing
expenses 2,460 786 --
-------- -------- --------
Total operating expenses 58,334 72,708 70,820
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 6,477 (4,565) 23,621
-------- -------- --------
NON-OPERATING INCOME (EXPENSES)
Interest income 2,824 3,627 3,262
Impairment loss on long-term investments -- (756) --
Foreign exchange loss, net (443) (261) (548)
Other, net 323 248 105
-------- -------- --------
Total non-operating income 2,704 2,858 2,819
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX 9,181 (1,707) 26,440
INCOME TAX EXPENSE (BENEFIT) (Note 12) 1,034 (2,450) 1,456
-------- -------- --------
NET INCOME 8,147 743 24,984
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments (238) 695 1,667
Unrealized gain (loss) on
available-for-sale securities (770) (205) 2,702
Unrealized pension loss -- -- (95)
-------- -------- --------
Total other comprehensive income
(loss) (1,008) 490 4,274
-------- -------- --------
COMPREHENSIVE INCOME $ 7,139 $ 1,233 $ 29,258
======== ======== ========
EARNINGS PER SHARE (Note 15)
Basic $ 0.0042 $ 0.0004 $ 0.0131
======== ======== ========
Diluted $ 0.0041 $ 0.0004 $ 0.0129
======== ======== ========
|
(Continued)
F-3
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts)
Years Ended December 31
--------------------------------
2005 2006 2007
---------- ---------- ----------
SHARES USED IN EARNINGS PER SHARE CALCULATION:
Basic (in thousands) 1,961,168 1,932,575 1,905,725
========== ========== ==========
Diluted (in thousands) 1,997,459 1,946,896 1,943,785
========== ========== ==========
(a)INCLUDES STOCK-BASED COMPENSATION CHARGE AS FOLLOWS:
Research and development $ -- $ 1,181 $ 1,058
Selling, general and administrative -- 1,408 1,408
---------- ---------- ----------
$ -- $ 2,589 $ 2,466
========== ========== ==========
|
The accompanying notes are an integral part of the consolidated financial
statements.
(Concluded)
F-4
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousand US Dollars, Except Per Share Amounts)
Ordinary Shares Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings
------------- ------ ---------- --------
BALANCE, JANUARY 1, 2005 1,959,403,100 $39 $139,581 $31,271
Issuance of:
Shares issued for exercise of stock options 7,422,050 -- 1,185 --
Shares issued for 1999 Purchase Plan 6,389,200 -- 1,110 --
Acquisition of treasury stock--20,420,000 shares -- -- -- --
Retirement of treasury stock (5,390,000) -- (380) (679)
Options granted to nonemployees -- -- 36 --
Net income for 2005 -- -- -- 8,147
Foreign currency translation adjustments -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- --
------------- --- -------- -------
BALANCE, DECEMBER 31, 2005 1,967,824,350 39 141,532 38,739
Issuance of:
Shares issued for exercise of stock options 5,643,000 -- 354 --
Shares issued for 1999 Purchase Plan 6,980,050 -- 985 --
Acquisition of treasury stock--58,447,450 shares -- -- -- --
Retirement of treasury stock (73,477,450) (1) (5,240) (5,605)
Options granted to nonemployees -- -- 4 --
Stock-based compensation -- -- 2,589 --
Net income for 2006 -- -- -- 743
Foreign currency translation adjustments -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- --
------------- --- -------- -------
BALANCE, DECEMBER 31, 2006 1,906,969,950 38 140,224 33,877
Issuance of:
Shares issued for exercise of stock options 13,564,800 -- 2,565 --
Shares issued for 1999 Purchase Plan 5,060,300 -- 809 --
Shares vested under RSUs 1,922,100 -- -- --
Acquisition of treasury stock--20,649,000 shares -- -- -- --
Retirement of treasury stock (15,649,000) -- (1,120) (1,914)
Stock-based compensation -- -- 2,466 --
Cumulative effect of adopting FIN 48 -- -- -- (100)
Net income for 2007 -- -- -- 24,984
Pension loss -- -- -- --
Foreign currency translation adjustments -- -- -- --
Unrealized gain on available-for-sale securities -- -- -- --
------------- --- -------- -------
BALANCE, DECEMBER 31, 2007 1,911,868,150 $38 $144,944 $56,847
============= === ======== =======
|
Accumulated Other
Comprehensive Income (Loss)
-----------------------------------------
Unrealized
Investment Cumulative Unrealized
Gain Translation Pension Treasury Shareholders'
(Loss) Adjustment Loss Total Stock Equity
---------- ----------- ---------- ------- -------- -------------
BALANCE, JANUARY 1, 2005 $ (154) $ 44 $ -- $ (110) $ -- $170,781
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 1,185
Shares issued for 1999 Purchase Plan -- -- -- -- -- 1,110
Acquisition of treasury stock--20,420,000 shares -- -- -- -- (4,355) (4,355)
Retirement of treasury stock -- -- -- -- 1,059 --
Options granted to nonemployees -- -- -- -- -- 36
Net income for 2005 -- -- -- -- -- 8,147
Foreign currency translation adjustments -- (238) -- (238) -- (238)
Unrealized loss on available-for-sale securities (770) -- -- (770) -- (770)
------- ------ ---- ------- ------- --------
BALANCE, DECEMBER 31, 2005 (924) (194) -- (1,118) (3,296) 175,896
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 354
Shares issued for 1999 Purchase Plan -- -- -- -- -- 985
Acquisition of treasury stock--58,447,450 shares -- -- -- -- (7,550) (7,550)
Retirement of treasury stock -- -- -- -- 10,846 --
Options granted to nonemployees -- -- -- -- -- 4
Stock-based compensation -- -- -- -- -- 2,589
Net income for 2006 -- -- -- -- -- 743
Foreign currency translation adjustments -- 695 -- 695 -- 695
Unrealized loss on available-for-sale securities (205) -- -- (205) -- (205)
------- ------ ---- ------- ------- --------
BALANCE, DECEMBER 31, 2006 (1,129) 501 -- (628) -- 173,511
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 2,565
Shares issued for 1999 Purchase Plan -- -- -- -- -- 809
Shares vested under RSUs -- -- -- -- -- --
Acquisition of treasury stock--20,649,000 shares -- -- -- -- (4,330) (4,330)
Retirement of treasury stock -- -- -- -- 3,034 --
Stock-based compensation -- -- -- -- -- 2,466
Cumulative effect of adopting FIN 48 -- -- -- -- -- (100)
Net income for 2007 -- -- -- -- -- 24,984
Pension loss -- -- (95) (95) -- (95)
Foreign currency translation adjustments -- 1,667 -- 1,667 -- 1,667
Unrealized gain on available-for-sale securities 2,702 -- -- 2,702 -- 2,702
------- ------ ---- ------- ------- --------
BALANCE, DECEMBER 31, 2007 $ 1,573 $2,168 $(95) $ 3,646 $(1,296) $204,179
======= ====== ==== ======= ======= ========
|
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
-----------------------------
2005 2006 2007
--------- -------- --------
OPERATING ACTIVITIES
Net income $ 8,147 $ 743 $ 24,984
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 3,684 4,947 6,927
Amortization of stock options
granted for services 264 239 98
Stock-based compensation -- 2,589 2,466
Gain on sale of long-term
investments -- -- (20)
Gain on sale of short-term
investments (10) (24) --
Deferred income taxes 527 (845) (194)
Impairment loss on long-term
investments -- 756 --
Loss on sale/disposal of property
and equipment 18 76 18
Reversal of income tax payable (658) (2,513) --
Changes in operating assets and
liabilities:
Accounts receivable, net (2,029) (7,527) (5,613)
Inventories (4,712) 1,867 (8,164)
Prepaid expenses and other
current assets (2,721) (819) (66)
Notes and accounts payable 2,125 4,091 990
Income tax payable 814 (403) 191
Accrued expenses and other
current liabilities 5,570 11 (195)
Accrued pension liabilities -- 90 (32)
FIN48 tax liabilities -- -- (7)
--------- -------- --------
Net cash provided by operating
activities 11,019 3,278 21,383
--------- -------- --------
INVESTING ACTIVITIES
Long-term notes receivables from
employees -- 402 8
Acquisition of:
Property and equipment (14,870) (23,367) (8,123)
Long-term investments (5,819) (8,073) --
Short-term investments (151,562) (98,755) (75,499)
(Increase) decrease in:
Restricted assets 306 383 2,207
Restricted cash (3,718) (2,699) 1,532
Other assets (1,750) (496) (1,057)
Proceeds from:
Sale of short-term investments 158,132 134,297 66,604
Sale of long-term investments -- -- 60
Sale of property and equipment -- 4 --
--------- -------- --------
Net cash (used in) provided by
investing activities (19,281) 1,696 (14,268)
--------- -------- --------
|
(Continued)
F-6
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
-------------------------
2005 2006 2007
------- ------- -------
FINANCING ACTIVITIES
Acquisition of treasury stock $(4,355) $(7,550) $(4,330)
Proceeds from:
Exercise of stock options 1,185 354 2,565
Issuance of ordinary shares under
1999 Purchase Plan 1,110 985 809
------- ------- -------
Net cash used in financing
activities (2,060) (6,211) (956)
------- ------- -------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE 377 300 1,000
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (9,945) (937) 7,159
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 56,320 46,375 45,438
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $46,375 $45,438 $52,597
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for interest $ -- $ -- $ --
======= ======= =======
Cash paid for tax $ 292 $ 1,311 $ 1,528
======= ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES
Increase in payable for acquisition of
equipment $ 1,183 $ -- $ --
======= ======= =======
Short-term investments reclassified to
restricted assets $ 1,430 $ 307 $ --
======= ======= =======
|
The accompanying notes are an integral part of the consolidated financial
statements.
(Concluded)
F-7
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars Unless Otherwise Noted)
1. GENERAL
Business
O2Micro, Inc. was incorporated in the state of California in the United
States of America on March 29, 1995 to design, develop, and deliver
semiconductor components primarily for mobile applications. In March 1997,
O2Micro International Limited (the "Company") was formed in the Cayman
Islands and all authorized and outstanding common stock, preferred stock and
stock options of O2Micro, Inc. were exchanged for the Company's ordinary
shares, preference shares and stock options with identical rights and
preferences. O2Micro, Inc. became the Company's subsidiary after the
share exchange.
The Company has incorporated various wholly-owned subsidiaries, including
(among others) O2Micro Electronics, Inc. ("O2Micro-Taiwan"),
O2Micro International Japan Ltd. ("O2Micro-Japan"), O2Micro Pte
Limited-Singapore ("O2Micro-Singapore") and O2Micro (China) Co.,
Ltd. ("O2Micro-China"). O2Micro-Taiwan is engaged in operations.
O2Micro-Japan is engaged in trading. O2Micro-Singapore,
O2Micro-China and other subsidiaries are mostly engaged in research and
development. To assure the testing capacity and flexibility, the Company
also established a subsidiary, OceanOne Semiconductor (Ningbo) Limited
("OceanOne") in Ningbo of the People's Republic of China ("China") in August
2005. OceanOne is engaged in semiconductor testing service and has commenced
its operations in January 2007.
In July 2007, the Company signed a Memorandum of Understanding ("MOU") with
Sigurd Microelectronics (Cayman) Co., Ltd ("Sigurd Cayman"), a subsidiary of
Sigurd Microelectronics Corporation ("Sigurd"). Sigurd is a leading provider
of semiconductor assembly and test services in Taiwan. Under this MOU, the
Company intended to divest its investment in OceanOne by selling 100%
ownership of OceanOne to Sigurd and to invest up to $10.3 million to Sigurd
Cayman to become a strategic partner of Sigurd. As of April 14, 2008, the
transaction has not completed as Sigurd is still in the process of obtaining
approval from the Taiwan government.
At the extraordinary general meeting of shareholders of the Company held on
November 14, 2005, the shareholders approved a public global offering of the
Company's Ordinary Shares and the proposed listing of the Company's Ordinary
Shares on the Main Board of The Stock Exchange of Hong Kong Limited ("SEHK")
and various matters related to the proposed listing and offering, including
the adoption of an Amended and Restated Memorandum and Articles of
Association, the 2005 Share Incentive Plan ("2005 SIP") and the 2005 Share
Option Plan ("2005 SOP"), general issue and repurchase mandates which would
authorize the Company for a period of time to issue or purchase a limited
number of shares in accordance with the Listing Rules of SEHK, and a
50-for-1 share split and the implementation of an American depositary share
("ADS") program with respect to the Company's Ordinary Shares quoted on The
Nasdaq National Market ("Nasdaq"). Following approval of these matters, the
Company ceased trading its Ordinary Shares on the Nasdaq, effected the share
split of Ordinary Shares on November 25, 2005, and commenced trading of ADSs
on Nasdaq on November 28, 2005. All share and per share data have been
retroactively restated in the accompanying consolidated financial statements
and notes to the consolidated financial statements for all periods presented
to reflect the share split.
On December 30, 2005, the Board determined to file for listing with the SEHK
by way of introduction without issuing new shares instead of a global
offering after taking market conditions and other factors into
consideration. The SEHK listing became effective on March 2, 2006.
The adoption of the Amended and Restated Memorandum and Articles of
Association, the 2005 SIP, the 2005 SOP, general issue and repurchase
mandates became effective upon the listing of the Ordinary Shares on the
SEHK.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
Significant accounting estimates reflected in the consolidated financial
statements include valuation allowance for deferred tax assets, allowance
for doubtful accounts, inventory valuation, useful lives for property and
equipment, impairment on long-lived assets, accruals for sales adjustments,
other liabilities, contingencies and stock-based compensation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, short-term
investments and accounts receivable. Cash is deposited with high credit
quality financial institutions. For cash equivalents and short-term
investments, the Company invests in time deposits and debt securities with
credit rating of A and better. For accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and the
Company maintains an allowance for doubtful accounts receivable based upon a
review of the expected collectibility of individual accounts.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, and notes and accounts payable are
carried at cost, which approximates the fair value due to the short-term
maturity of those instruments. Fair values of available-for-sale investments
including short-term investments and long-term investments represent quoted
market prices. Long-term investments in private company equity securities
are accounted for under the cost method because the Company does not
exercise significant influence over the entities. The Company evaluates
related information including operating performance, subsequent rounds of
financings, advanced product development and related business plan in
determining the fair value of these investments and whether an
other-than-temporary decline in value exists. Fair value of restricted
assets, which are composed of government bonds, negotiable certificates of
deposit and cash, is estimated based on the combination of fair value of
each component.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of not
more than three months when purchased to be cash equivalents. Investments
with maturities of more than three months are classified as short-term
investments.
F-9
Restricted Assets
The Company classifies deposits made for customs, collateral for obtaining
foundry capacity, cash pledged to a bank for the issuance of letters of
credit as restricted cash. The deposits are classified as current assets if
refundable within a twelve-month period from the balance sheet date.
Restricted assets consist of deposits made for Taiwan court cases in the
form of Taiwan Government bonds, negotiable certificates of deposit and cash
(Note 17). Restricted assets can be released only upon the resolution of the
related litigation.
Short-term Investments
The Company maintains its excess cash in time deposits, US treasury bills,
government and corporate bonds issued with high ratings. The specific
identification method is used to determine the cost of securities sold, with
realized gains and losses reflected in non-operating income and expenses. As
of December 31, 2007, all the above-mentioned investments were classified as
available-for-sale securities and were recorded at market value. Unrealized
gains and losses on these investments are included in accumulated other
comprehensive income and loss as a separate component of shareholders'
equity, net of any related tax effect, unless unrealized losses are deemed
other-than-temporary. Unrealized losses are recorded as a charge to income
when deemed other-than-temporary.
Investment transactions are recorded on the trade date.
Inventories
Inventories are stated at the lower of standard cost or market value. Cost
is determined on a currently adjusted standard basis, which approximates
actual cost on a first-in, first-out basis. The Company assesses its
inventory for estimated obsolescence or unmarketable inventory based upon
management's assumptions about future demand and market conditions and
writes down inventory as needed.
Long-term Investments
Long-term investments in private companies over which the Company does not
exercise significant influence are accounted for under the cost method of
accounting. Management evaluates related information in determining the fair
value of these investments and whether an other-than-temporary decline in
value exists. Factors indicative of an other-than-temporary decline include
recurring operating losses, credit defaults and subsequent rounds of
financings at an amount below the cost basis of the investment. The list is
not all-inclusive and management periodically weighs all quantitative and
qualitative factors in determining if any impairment loss exists.
Long-term investments in listed companies are classified as
available-for-sale securities and are recorded at fair value. Unrealized
gains and losses on these investments are included in accumulated other
comprehensive income and loss as a separate component of shareholders'
equity, net of any related tax effect, unless unrealized losses are deemed
other-than-temporary. Unrealized losses are recorded as a charge to income
when deemed other-than-temporary.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Major additions and betterments are capitalized, while maintenance and
repairs are expensed as incurred.
Depreciation is computed on a straight-line basis over estimated service
lives that range as follows: buildings--35 to 49.7 years, equipment--3 to 10
years, furniture and fixtures--3 to 15 years, leasehold improvements--the
shorter of the estimated useful life or the lease term, which is 2 to 6
years, and transportation equipment--5 years.
F-10
Long-lived Asset Impairment
The Company evaluates the recoverability of long-lived assets annually and
whenever events or changes in circumstances indicate the carrying value may
not be recoverable. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flows from the asset is
separately identifiable and is less than the carrying value. If impairment
occurs, a loss based on the excess of the carrying value over the fair
market value of the long-lived asset is recognized. Fair market value is
determined by reference to quoted market prices, if available, or discounted
cash flows, as appropriate.
Treasury Stock
The Company retires ordinary shares repurchased under a share repurchase
plan. Accordingly, upon retirement the excess of the purchase price over par
value is allocated between additional paid-in capital and retained earnings
based on the average issuance price of the shares repurchased. A repurchase
of ADSs is recorded as treasury stock until the Company completes the
withdrawal of the underlying ordinary shares from the ADS program.
Revenue Recognition
Revenue from product sales to customers, other than distributors, is
recognized at the time of shipment and when title and right of ownership
transfers to customers. The four criteria for revenue being realized and
earned are the existence of evidence of sale, actual shipment, fixed or
determinable selling price, and reasonable assurance of collectibility.
Allowances for sales returns and discounts are provided at the time of the
recognition of the related revenues on the basis of experience and these
provisions are deducted from sales.
In certain limited instances, the Company sells its products through
distributors. The Company has limited control over these distributors'
selling of products to third parties. Accordingly, the Company recognizes
revenue on sales to distributors when the distributors sell the Company's
products to third parties. Thus, products held by distributors are included
in the Company's inventory balance.
Research and Development
Research and development costs consist of expenditures incurred during the
course of planned research and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes as well as
expenditure incurred for the design and testing of product alternatives or
construction of prototypes. All expenditure related to research and
development activities of the Company are charged to operating expenses when
incurred.
Advertising Expenses
The Company expenses all advertising and promotional costs as incurred.
These costs were approximately $1,447,000 in 2005, $3,200,000 in 2006 and
$3,892,000 in 2007, respectively. A portion of these costs was for
advertising, which approximately amounted to $453,000 in 2005, $535,000 in
2006 and $229,000 in 2007, respectively.
Pension Costs
The Company provides pension benefits and account for the benefit costs on
an accrual basis. Pension amounts recognized in the consolidated financial
statements are determined on an actuarial basis using several different
assumptions. The two most significant assumptions used in the valuation are
the discount rate and the long-term rate of return in assets. In determining
the net period benefit cost, the Company applies a discount rate in the
actuarial valuation of the pension benefit.
F-11
Income Tax
The Company is not subject to income or other taxes in the Cayman Islands.
However, subsidiaries are subject to taxes of the jurisdiction where they
are located.
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." The
provision for income tax represents income tax paid and payable for the
current year plus the changes in the deferred income tax assets and
liabilities during the relevant years. Deferred income tax assets are
recognized for operating loss carryforwards, research and development
credits, and temporary differences. The Company believes that uncertainty
exists regarding the realizability of certain deferred income tax assets
and, accordingly, has established a valuation allowance for those deferred
income tax assets to the extent the realizability is not deemed to be more
likely than not. In addition, The Company recognizes liabilities for
potential income tax contingencies based on its estimate of whether, and the
extent to which, additional taxes may be due. If the Company determines that
payment of these amounts is unnecessary or if the recorded tax liability is
less than its current assessment, the Company may be required to recognize
an income tax benefit or additional income tax expense in its financial
statements, accordingly.
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes--An interpretation of FASB Statement No. 109" ("FIN 48").
The interpretation contains a two step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No.109. The
first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates it is more likely than not that
the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount which is more than 50% likely of being
realized upon ultimate settlement.
Stock-based Compensation
The Company grants stock options to its employees and certain non-employees.
Prior to January 1, 2006, the Company accounted for options granted under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" for its employee stock
options. Under APB No. 25, compensation expense is measured based on the
difference, if any, on the date of the option grant, between the fair value
of the Company's stock and the exercise price of the option.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123(R), "Share-Based Payment," using the modified
prospective application method. Under this transition method, compensation
cost recognized for the year ended December 31, 2006 and 2007, includes the
applicable amounts of: (a) compensation cost of all stock-based payments
granted prior to, but not yet vested as of, December 31, 2005 (based on the
grant-date fair value estimated in accordance with the original provisions
of SFAS No. 123 and previously presented in pro forma footnote disclosures),
and (b) compensation cost for all stock-based payments granted subsequent to
January 1, 2006 (based on the grant-date fair value estimated in accordance
with the new provisions of SFAS No. 123(R)). Results for periods prior to
January 1, 2006, have not been restated.
As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company
recorded stock-based compensation of $2,589,000 to loss before income tax
and net income for the year ended December 31, 2006, and resulted in a
decrease of $0.0013 both to basic and diluted earnings per share. Total
stock-based compensation includes the impact of stock options, restricted
stock units grants and the employee stock purchase plan. The Company's
policy for attributing the value of graded vest share-based payments is a
straight-line approach.
F-12
At the end of June 2005, the Board approved the vesting acceleration of
certain options. The Board evaluated the minimal benefit to its employees of
accelerating the remaining vesting on these significantly underwater options
against the value to shareholders of not having earnings materially affected
and the impact that this may have on the Company's market value. In
addition, these options had exercise prices in excess of current market
values and were not fully achieving their original objectives of incentive
compensation and employee retention. Accelerating the vesting of these
options accelerated the recognition of any remaining expense associated with
these options which was zero under APB No. 25.
The following pro forma information, as required by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123," is presented for comparative purposes
and illustrates the pro forma effect on net income and related earnings per
share for the year ended December 31, 2005, as if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
compensation for that period.
Year Ended
December 31,
2005
------------
Net income as reported (in thousands) $ 8,147
Add: Stock-based compensation included in net income,
including tax expense of $0 for 2005 --
Deduct: Stock-based compensation determined under SFAS
No. 123 including tax expense of $0 for 2005 (15,862)
----------
Pro forma net loss $ (7,715)
==========
Pro forma shares used in calculation--basic (in thousands) 1,961,168
==========
Pro forma loss per share--basic $ (0.0039)
==========
Earnings per share--basic as reported $ 0.0042
==========
Pro forma shares used in calculation--diluted (in thousands) 1,997,459
==========
Pro forma earnings per share--diluted $ NA
==========
Earnings per share--diluted as reported $ 0.0041
==========
|
Pro forma loss per share for the year ended December 31, 2005 was not
disclosed because the results were antidilutive.
This table includes a pro forma charge of $1,831,000 for the year ended
December 31, 2005 related to the above accelerated vesting event.
In September, November and December 2005, the Company granted 1,100,000,
100,000 and 70,600,000 stock options, respectively, to employees with the
following features:
a. Employees will be granted fully vested, immediately exercisable stock
options to purchase the Company's ordinary shares.
b. The Company has the right but is not required to repurchase exercised
stock options upon termination of an employee's service with the Company
at the closing market price on the date of repurchase. The shares
subject to repurchase are those which qualify as mature shares at the
date of such employee's termination. Mature shares are those that have
been held by the employee for a period of more than six months.
c. Employees are restricted from selling shares which are issued upon the
exercise of stock options for a total of four years with 25% of the
restriction lapsing each year.
d. There is no requisite service period or other performance criteria
required by the employee to earn the stock option.
F-13
The total pro forma charge for the immediately vested options was $8,588,000
in 2005 and is included in the table above.
Foreign Currency Transactions
The functional currency is the local currency of the respective entities.
Foreign currency transactions are recorded at the rate of exchange in effect
when the transaction occurs. Gains or losses, resulting from the application
of different foreign exchange rates when cash in foreign currency is
converted into the entities' functional currency, or when foreign currency
receivable and payable are settled, are credited or charged to income in the
period of conversion or settlement. At year-end, the balances of foreign
currency monetary assets and liabilities are restated based on prevailing
exchange rates and any resulting gains or losses are credited or charged to
income.
Translation of Foreign Currency Financial Statements
The reporting currency of the Company is the US dollar. Accordingly, the
financial statements of the foreign subsidiaries are translated into US
dollars at the following exchange rates: Assets and liabilities--current
rate on balance sheet date; shareholders' equity--historical rate; income
and expenses--weighted average rate during the year. The resulting
translation adjustment is recorded as a separate component of shareholders'
equity.
Comprehensive Income (Loss)
Comprehensive income represents net income plus the results of certain
changes in shareholders' equity during a period from non-owner sources that
are not reflected in the consolidated statement of income.
Legal Contingencies
The Company is currently involved in various claims and legal proceedings.
Periodically, the Company reviews the status of each significant matter and
assesses the potential financial exposure. If the potential loss from any
claim or legal proceeding is considered probable and the amount can be
estimated, the Company accrues a liability for the estimated loss. In view
of uncertainties related to these matters, accruals are based only on the
best information available at the time. As additional information becomes
available, the Company reassesses the potential liability related to the
pending claims and litigation and revises these estimates as appropriate.
Such revisions in the estimates of the potential liabilities could have a
material impact on the results of operations and financial position.
The Company indemnifies third parties with whom it enters into contractual
relationships, including customers; however, it is not possible to determine
the range of the amount of potential liability under these indemnification
obligations due to the lack of prior indemnification claims. These
indemnities typically hold these third parties harmless against specified
losses, such as those arising from a breach of representation or covenant,
or other third party claims that the Company's products when used for their
intended purposes infringe the intellectual property rights of such other
third parties. The indemnities are triggered by any claim of infringement of
intellectual property rights brought by a third party with respect to the
Company's products. The terms of these indemnities may not be waived or
amended except by written notice signed by the both parties and may only be
terminated with respect to the Company's products.
F-14
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and enhances fair value measurement disclosure. In February 2008, the
FASB issued FASB Staff Position (FSP) 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13" (FSP 157-1) and FSP 157-2, "Effective Date
of FASB Statement No. 157" (FSP 157-2). FSP 157-1 amends SFAS No. 157 to
remove certain leasing transactions from its scope. FSP 157-2 delays the
effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually), until the beginning of the first quarter of fiscal 2009. The
measurement and disclosure requirements related to financial assets and
financial liabilities are effective for the Company beginning in the first
quarter of fiscal 2008. The adoption of SFAS No. 157 for financial assets
and financial liabilities will not have a significant impact on the
consolidated financial statements. However, the resulting fair values
calculated under SFAS No. 157 after adoption may be different from the fair
values that would have been calculated under previous guidance. The Company
is currently evaluating the impact that SFAS No. 157 will have on the
consolidated financial statements when it is applied to non-financial assets
and non-financial liabilities beginning in the first quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands the use of
fair value accounting but does not affect existing standards, which require
assets and financial liabilities, on an instrument-by-instrument basis. If
the fair value option is elected, unrealized gains and losses on existing
items for which fair value has been elected are reported as a cumulative
adjustment to beginning retained earnings. Subsequent to the adoption of
SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The Company
chose not to elect the fair value option under SFAS No. 159 to measure its
financial assets and financial liabilities at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is
required to recognize the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement
period impact income tax expense. In addition, acquired in-process research
and development (IPR&D) is capitalized as an intangible asset and amortized
over its estimated useful life. SFAS No. 141(R) is effective on a
prospective basis for business combinations with an acquisition date
beginning in the first quarter of fiscal year 2009. The Company is in the
process of evaluating the provisions of this standard and is currently
unable to estimate the impact.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" (SFAS
No. 160). SFAS No. 160 changes the accounting and reporting for minority
interests, which will be recharacterized as non-controlling interests and
classified as a component of equity. SFAS No. 160 is effective on a
prospective basis for business combinations with an acquisition date
beginning in the first quarter of fiscal year 2009. As of December 31, 2007,
the Company did not have any minority interests. The adoption of SFAS
No. 160 will not impact the Company's consolidated financial statements.
Reclassifications
Certain amounts reported in previous years have been reclassified to conform
to the current year presentation.
F-15
3. CASH AND CASH EQUIVALENTS
December 31
---------------
2006 2007
------- -------
(In Thousands)
Time deposits $30,155 $30,378
Savings and checking accounts 13,180 22,203
US treasury bills 2,086 --
Petty cash 17 16
------- -------
$45,438 $52,597
======= =======
|
4. SHORT-TERM INVESTMENTS
December 31
---------------
2006 2007
------- -------
(In Thousands)
Time deposits $19,697 $28,650
======= =======
|
Short-term investments by contractual maturity are as follows:
December 31
---------------
2006 2007
------- -------
(In Thousands)
Due within one year $19,668 $28,650
Due after one year through two years 29 --
------- -------
$19,697 $28,650
======= =======
|
The Company's gross realized gains and losses on the sale of investments for
the year ended December 31, 2005 were $12,000 and $2,000, respectively, for
the year ended December 31, 2006 were $26,000 and $2,000, respectively, and
for the year ended December 31, 2007 were both $0. Gross unrealized gains
and losses at December 31, 2005 were $55,000 and $11,000, respectively, at
December 31, 2006 were $0 and $6,000, respectively, and at December 31, 2007
were both $0.
The following table shows the gross unrealized losses and fair value of the
Company's investments with unrealized losses that were not deemed to be
other-than-temporarily impaired, aggregated by investment category and
length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2006 (nil at December 31, 2007).
December 31, 2006
Less Than 12 Months
---------------------
Unrealized
Fair Value Losses
---------- ----------
(In Thousands)
Investment in CSMC (Note 8) $2,668 $1,123
====== ======
|
F-16
5. ACCOUNTS RECEIVABLE, NET
December 31
----------------
2006 2007
------- -------
(In Thousands)
Accounts receivable $19,310 $25,585
Allowances for
Doubtful receivable (7) (88)
Sales returns and discounts (316) (897)
------- -------
$18,987 $24,600
======= =======
|
The changes in the allowances are summarized as follows:
Years Ended
December 31
--------------
2006 2007
----- -------
(In Thousands)
Allowances for doubtful receivable
Balance, beginning of the year $ 34 $ 7
Additions -- 81
Write-off (27) --
----- -------
Balance, end of the year $ 7 $ 88
===== =======
Allowances for sales returns and discounts
Balance, beginning of the year $ 316 $ 316
Additions 848 1,836
Write-off (848) (1,255)
----- -------
Balance, end of the year $ 316 $ 897
===== =======
|
6. INVENTORIES
December 31
---------------
2006 2007
------- -------
(In Thousands)
Finished goods $ 5,412 $ 7,814
Work-in-process 5,375 5,434
Raw materials 3,289 8,879
------- -------
$14,076 $22,127
======= =======
|
F-17
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
December 31
-------------
2006 2007
------ ------
(In Thousands)
Prepayment to foundry providers $2,940 $2,680
Interest receivable 2,203 2,445
Prepaid expenses 1,418 1,514
Other receivable 76 311
Deferred tax assets 31 45
Value-added-tax paid 174 32
Others 537 449
------ ------
$7,379 $7,476
====== ======
|
8. LONG-TERM INVESTMENTS
December 31
---------------
2006 2007
------- -------
(In Thousands)
Cost method
X-FAB Semiconductor Foundries AG ("X-FAB") $ 4,968 $ 4,968
360 Degree Web Ltd. ("360 Degree Web") 1,305 1,305
GEM Services, Inc. ("GEM") 500 500
Etrend Hightech Corporation ("Etrend") 960 --
Asia SinoMOS Semiconductor Inc. ("Sinomos") 13,073 13,073
Philip Ventures Enterprise Fund ("PVEF") 585 585
------- -------
21,391 20,431
------- -------
Available for sale securities - noncurrent
CSMC Technologies Corporation ("CSMC") 2,668 5,265
Etrend -- 1,019
------- -------
2,668 6,284
------- -------
$24,059 $26,715
======= =======
|
The Company invested in X-FAB's ordinary shares in July 2002. X-FAB is a
European-American foundry group that specializes in mixed signal
application. As of December 31, 2007, the Company held 530,000 shares at the
value of $4,968,000 (4,982,000 EURO), which represents a 1.60% ownership of
X-FAB.
The Company converted its convertible loans in 360 Degree Web to Series B
and B2 preference shares of 360 Degree Web in January 2003. 360 Degree Web
designs, develops and markets intelligent security software solutions that
provide secure computing environment for personal computer mobile devices
and the internet. In March 2004, the Company sold 1,000,000 shares of its
stock in 360 Degree Web and recognized a gain of $340,000. In January 2005,
the Company purchased additional 180,769 Series D preference shares of 360
Degree Web at $1.3 per share. As of December 31, 2007, the Company held
19.52% ownership of 360 Degree Web.
The Company invested in GEM's preference shares in August 2002. GEM is a
multinational semiconductor assembly and test company. As of December 31,
2007, the Company held 333,334 shares at the value of $500,000, which
represented a 0.89% ownership of GEM.
F-18
The Company invested in Etrend's ordinary shares in December 2002, July 2003
and March 2004. Etrend is a wafer probing, packing and testing company. As
of December 31, 2007, the Company held 8.65% ownership of Etrend. In August
2007, Etrend's shares were listed on the Emerging Stock Gretai Security
Market of Taiwan and the Company reclassified the investment in Etrend to
available-for-sale securities. As of December 31, 2007, the Company recorded
an unrealized gain on investment in Etrend of $99,000.
In January 2005, the Company invested in ordinary shares of Sinomos, a
privately owned foundry company, at a total amount of $5,000,000. In May and
December 2006, the Company further invested preferred shares of $3,288,000
and $4,785,000, respectively. As of December 31, 2007, the Company held
30,101,353 of ordinary and preference shares, representing an 18.41%
ownership of Sinomos.
In November 2005, the Company invested in PVEF, a fund management company in
Singapore, with investment amount of SG$1,000,000 for 20 units in the
placement at SG$50,000 per unit. The Company held 2.77% of the fund as of
December 31, 2007.
The Company invested in Silicon Genesis Corporation ("SiGen") preferred
shares in December 2000. SiGen is an advanced nanotechnology company that
develops Silicon-on-insulator ("SOI"), stained-silicon products and other
engineered multi-layer structures to microelectronics and photonic for
advanced electronic and opto-electronic device applications. In 2002 and
2003, the Company reviewed the qualitative factors of the investment,
determined that the decline in value was other-than-temporary and the
carrying value was decreased to zero. The Company held 23,946 shares of
SiGen as of December 31, 2007, representing a 0.06% ownership in SiGen.
In August 2004, the Company invested in CSMC's ordinary shares which are
listed on the SEHK at a purchase price of $4,547,000. CSMC is a
semiconductor foundry company. As of December 31, 2007, the Company held
70,200,000 shares, which represent approximately 2.56% ownership of CSMC.
The Company considered the investment to be other-than-temporarily impaired
at June 30, 2006 due to the fact that the stock price has been below the
cost of HK$0.50 per share for a continuous 12 months and recognized an
impairment loss of $756,000 based on the quoted market price of HK$0.42 per
share on June 30, 2006. As of December 31, 2007, the Company recognized an
unrealized gain of $1,474,000 on investment in CSMC.
9. PROPERTY AND EQUIPMENT, NET
December 31
---------------
2006 2007
------- -------
(In Thousands)
Cost
Freehold Land $11,299 $11,299
Buildings 8,055 8,055
Equipment 30,599 38,357
Furniture and fixtures 1,393 1,476
Leasehold improvements 3,385 3,723
Transportation equipment 514 590
Prepayment for property and equipment 1,426 878
------- -------
56,671 64,378
------- -------
Accumulated depreciation
Buildings 313 493
Equipment 12,569 17,276
Furniture and fixtures 786 998
Leasehold improvements 1,465 2,235
Transportation equipment 111 228
------- -------
15,244 21,230
------- -------
$41,427 $43,148
======= =======
|
F-19
Depreciation expense recognized during the years ended December 31, 2005,
2006 and 2007 were approximately $3,388,000, $4,545,000 and $6,580,000,
respectively.
In April 2006, the Company purchased 29,935 square feet of freehold land in
Hsin-Chu, Taiwan for a future facility for a total purchase price of
approximately $8,789,000 (NT$286,421,000) which is included above.
10.OTHER ASSETS
December 31
-------------
2006 2007
------ ------
(In Thousands)
Land use rights, net $1,379 $1,350
Deferred charges, net 618 1,159
Refundable deposits 560 660
Deferred income tax assets--noncurrent 295 477
Prepayment for land use rights 215 230
Long-term notes receivable from employees 8 --
------ ------
$3,075 $3,876
====== ======
|
All land within municipal zones in China is owned by the government. Limited
liability companies, joint stock companies, foreign-invested enterprises,
privately held companies and individual natural persons must pay fees for
granting of rights to use land within municipal zones. Legal use of land is
evidenced and sanctioned by land use certificates issued by the local
municipal administration of land resources. Land use rights granted for
industrial purposes are limited to a term of no more than 50 years.
Land use rights are recorded at cost less accumulated amortization.
Amortization is provided on the straight-line method over the term of the
land use rights agreement which is 49.7 years.
In view of the expansion of the Company's operations in China, the Company
entered into a purchase contract to acquire land use rights located in
Ningbo, China. The total contracted price was $767,000 (RMB5,600,000) (2006:
$717,000) of which $230,000 (RMB1,680,000) (2006: $215,000) has been paid as
of December 31, 2007 and such amount has been included in the prepayment for
land use rights.
Deferred charges consist of consultant and maintenance contracts and are
amortized over the term of the contract which is 3 to 8 years.
In 2001, James Keim, one of the Company's directors, accepted the assignment
of Head of Marketing and Sales in the Cayman Islands, and moved to the
Cayman Islands in December 2001. In connection with the move and to assist
Mr. Keim to purchase a residence in the Cayman Islands, the Company entered
into a loan agreement with Mr. Keim in February 2002, under which the
Company made an interest free, unsecured loan in the amount of $400,000 to
Mr. Keim. The loan has been repaid in December 2006.
F-20
11.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
December 31
---------------
2006 2007
------- -------
(In Thousands)
Salaries, bonus and benefits $ 3,844 $ 3,717
Legal and audit fees 3,187 2,115
Consulting fees 153 1,122
Promotional expenses 743 533
Withholding tax payable 260 285
Deferred income tax liabilities 107 109
Payable for acquisition of equipment 248 89
Value-added tax payable 243 20
Other accrued expenses 2,959 2,257
Other 468 1,350
------- -------
$12,212 $11,597
======= =======
12.INCOME TAX
|
Income (loss) before income taxes consisted of:
Years Ended December 31
-----------------------
2005 2006 2007
------ ------- -------
(In Thousands)
Cayman Islands $6,226 $(3,395) $20,832
Foreign 2,955 1,688 5,608
------ ------- -------
$9,181 $(1,707) $26,440
====== ======= =======
|
Income tax expense (benefit) consisted of:
Years Ended December 31
----------------------
2005 2006 2007
------ ------- ------
(In Thousands)
Current $ 507 $(1,605) $1,650
Deferred 527 (845) (194)
------ ------- ------
Income tax expense (benefit) $1,034 $(2,450) $1,456
====== ======= ======
|
F-21
The Company and its subsidiaries file separate income tax returns.
Reconciliation of the significant differences between the statutory income
tax rate and the effective income tax rate on pretax income (loss) is as
follows:
Years Ended December 31
-------------------------
2005 2006 2007
----- ------- -----
Cayman statutory rate 0% 0% 0%
Foreign rates in excess of statutory rates 15.69% 35.21% 5.36%
Changes in deferred income tax assets (7.12%) (49.56%) (2.22%)
Adjustments to prior years' taxes (9.11%) (190.22%) (0.42%)
Change in valuation allowance for deferred income
tax assets 9.74% 35.62% (2.96%)
Others 2.06% 25.42% 5.75%
----- ------- -----
Effective tax rate 11.26% (143.53%) 5.51%
===== ======= =====
|
The deferred income tax assets and liabilities as of December 31, 2006 and
2007 consisted of the following:
December 31
----------------
2006 2007
------- -------
(In Thousands)
Deferred income tax assets
Research and development credits $ 5,553 $ 3,970
Organization costs -- 576
Net operating loss carryforwards 51 32
Accrued vacation 158 160
Depreciation and amortization 353 612
Deferred interest deductions 326 240
Others 29 292
------- -------
6,470 5,882
Valuation allowance (6,144) (5,360)
------- -------
Total net deferred income tax assets 326 522
------- -------
Deferred income tax liabilities
Unrealized foreign exchange 42 71
Unrealized capital allowance 65 38
------- -------
Total deferred income tax liabilities 107 109
------- -------
Net deferred income tax assets $ 219 $ 413
======= =======
Balance sheet caption reported in:
Prepaid expenses and other current assets (Note 7) $ 31 $ 45
Other assets (Note 10) 295 477
Accrued expenses and other current liabilities
(Note 11) 107 109
------- -------
$ 219 $ 413
======= =======
|
The valuation allowance shown in the table above relates to net operating
loss, credit carryforwards and temporary differences for which the Company
believes that realization is uncertain. The valuation allowance increased
$592,000 and decreased $784,000 for the years ended December 31, 2006 and
2007, respectively.
As of December 31, 2007, O2Micro, Inc. had US federal and state research
and development credit carryforwards of approximately $3,716,000 and
$3,810,000, respectively. The US federal research and development credit
will expire from 2018 through 2027 if not utilized, while the state research
and development credit will never expire.
F-22
The Company reversed $375,000 and $2,513,000 of income tax payable for the
2000 and 2001 tax years in September 2004 and in September 2006,
respectively, due to completion of the examination and approval of its filed
Taiwan income tax return for the years ended December 31, 2000 and 2001. The
tax authorities also determined a tax refund for 2001 income tax; therefore,
the Company recognized additional income tax benefit of $69,000 and received
the refund in October 2006.
On May 24, 2004, O2Micro-Taiwan applied to the Taiwan Customs officials
for the rectification of the value of the imported goods reported for the
period from March 2003 to March 2004. The Company had mistakenly reported a
lower value to the Taiwan Customs Authority than the correct value that was
reported on O2Micro-Taiwan's tax return for the tax years of 2003 and
2004. The Taiwan Ministry of Finance approved the rectification of the value
of the imported goods in 2005. The completion of the rectification resulted
in the reversal of a contingent income tax liability of $658,000 and an
income tax benefit was recognized in 2005.
As a result of the implementation of FIN 48, the Company recognized a
cumulative adjustment in the liability for unrecognized income tax benefits
in the amount of $100,000, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings and an adjustment of income tax
liabilities for unrecognized income tax benefits in the amount of $117,000,
which was accounted for as a reduction to the January 1, 2007 balance of
income tax payable. At the adoption date of January 1, 2007, the Company had
$217,000 of unrecognized tax benefits, all of which would affect its
effective tax rate if recognized. At December 31, 2007, the Company had
$210,000 of unrecognized tax benefits, all of which would affect its
effective tax rate if recognized. The Company does not recognize any
interest and penalty related to uncertain tax positions in income tax
expense as the related interests are not deemed material to the financial
statements.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
(In Thousands)
Balance as of January 1, 2007 $ 217
Increase in tax position balance during current year 110
Decrease in tax position balance during current year (117)
-----
Balance as of December 31, 2007 $ 210
=====
|
Uncertain tax positions relate to the allocation of income amongst the
Company's global entities. The Company estimates that there will be no
material changes in its uncertain tax positions in the next 12 months.
The Company files income tax returns in various foreign jurisdictions. The
Company is no longer subject to income tax examinations by tax authorities
for years prior to 2003.
13.RETIREMENT AND PENSION PLANS
The Company has a savings plan that qualifies under Section 401(k) of the US
Internal Revenue Code. Participating employees may defer up to the US
Internal Revenue Service statutory limit amounts of pretax salary. The
Company may make voluntary contributions to the savings plan but has made no
contributions since the inception of the savings plan in 1997.
F-23
The Company also participates in mandatory pension funds and social
insurance schemes, if applicable, for employees in jurisdictions in which
other subsidiaries or offices are located to comply with local statutes and
practices. For the years ended December 31, 2005, 2006 and 2007, pension
costs charged to income in relation to the contributions to these schemes
were $861,000, $1,293,000 and 1,675,000, respectively. In October 2006, the
Company adopted a defined benefit pension plan and established an employee
pension fund committee for certain employees of O2Micro-Taiwan who are
subject to the Taiwan Standards Labor Law ("Labor Law") to comply with local
requirements. This benefit pension plan provides benefits based on years of
service and average salary computed based on the final six months of
employment. The Labor Law requires the Company to contribute between 2% to
15% of employee salaries to a government specified plan, which the Company
currently makes monthly contributions equal to 2% of employee salaries.
Contributions are required to be deposited in the name of the employee
pension fund committee with the Central Trust of China in Taiwan. The
measurement date of the plan is December 31.
As of December 31, 2006 and 2007, the asset allocation was primarily in
cash, equity securities and debt securities. Furthermore, under the Labor
Standards Law, the rate of return on assets shall not be less than the
average interest rate on a two-year time deposit published by the local
banks. The government is responsible for any shortfall in the event that the
rate of return is less than the required rate of return.
Changes in projected benefit obligation and plan assets for the years ended
December 31, 2006 and 2007 are as follows:
Years Ended
December 31
-----------
2006 2007
---- ----
(In Thousands)
Beginning benefit obligation $444 $464
Service cost 4 5
Interest cost 16 16
Benefits paid -- --
Actuarial loss -- 97
---- ----
Ending benefit obligation $464 $582
==== ====
Years Ended
December 31
-----------
2006 2007
---- ----
(In Thousands)
Fair value of plan assets, beginning of year $ -- $ 9
Employer contributions 9 52
Actual return on plan assets -- 1
---- ----
Fair value of plan assets, end of year $ 9 $ 62
==== ====
|
F-24
The component of net periodic benefit cost is as follows:
Years Ended
December 31
----------
2006 2007
---- ----
(In Thousands)
Service cost $ 4 $ 5
Interest cost 16 16
Expected return on plan assets -- (1)
Amortization of the unrecognized transition
obligation 70 --
--- ---
Net periodic benefit cost $90 $20
=== ===
|
The funded status of the plan is as follows:
December 31
------------
2006 2007
----- -----
(In Thousands)
Accumulated benefit obligation $(332) $(424)
===== =====
Project benefit obligation $(464) $(582)
Plan assets at fair value 9 62
----- -----
Funded status of the plan $(455) $(520)
===== =====
|
The actuarial assumptions are as follows:
Years Ended
December 31
----------
2006 2007
---- ----
Discount rate 3.5% 3.0%
Rate of compensation increases 2.0% 2.0%
Expected long-term rate of return on plan assets 2.5% 2.5%
14.STOCK-BASED COMPENSATION
|
Employee Stock Purchase Plan
In October 1999, the Board adopted the 1999 Employee Stock Purchase Plan
("1999 Purchase Plan"), which was approved by the shareholders prior to the
consummation of its initial public offering in August 2000. A total of
50,000,000 ordinary shares were reserved for issuance under the 1999
Purchase Plan, plus annual increases on January 1 of each year, commencing
in 2001, up to 40,000,000 shares as approved by the Board. The 1999 Purchase
Plan is subject to adjustment in the event of a stock split, stock dividend
or other similar changes in ordinary shares or capital structure.
F-25
The 1999 Purchase Plan permits eligible employees to purchase ordinary
shares through payroll deductions, which may range from 1% to 10% of an
employee's regular base pay. Beginning November 1, 2005, the 1999 Purchase
Plan shall be implemented through consecutive offer periods of 3 months'
duration commencing on the first day of February, May, August and November.
Under the 1999 Purchase Plan, ordinary shares may be purchased at a price
equal to the lesser of 90% of the fair market value of the Company's
ordinary shares on the date of grant of the option to purchase (which is the
first day of the offer period) or 90% of the fair market value of the
Company's ordinary shares on the applicable exercise date (which is the last
day of the offer period). Employees may elect to discontinue their
participation in the purchase plan at any time; however, all of the
employee's payroll deductions previously credited to the employee's account
will be applied to the exercise of the employee's option on the next
exercise date. Participation ends automatically on termination of employment
with the Company. If not terminated earlier, the 1999 Purchase Plan will
have a term of 10 years. During 2006 and 2007, 6,980,050 and 5,060,300
ordinary shares, respectively, had been purchased under the 1999 Purchase
Plan. As of December 31, 2007, 10,791,650 shares were available for issuance.
Stock Option Plans
In 1997, the Board adopted the 1997 Stock Plan, and in 1999, adopted the
1999 Stock Incentive Plan. The plans provide for the granting of stock
options to employees, directors and consultants of the Company.
Under the 1997 Stock Plan, the Board reserved 185,000,000 ordinary shares
for issuance. After the completion of an initial public offering, no further
options were granted under the 1997 Stock Plan. Under the 1999 Stock
Incentive Plan, the maximum aggregate number of shares available for grant
shall be 150,000,000 ordinary shares plus an annual increase on January 1 of
each year, commencing in 2001, equal to the least of 75,000,000 shares or 4%
of the outstanding ordinary shares on the last day of the preceding fiscal
year or a smaller number determined by the plan administrator. As of
December 31, 2007, the number of options outstanding and exercisable was
15,041,650 and 15,041,650, respectively, under the 1997 Stock Plan, and
247,296,700 and 221,273,550, respectively, under the 1999 Stock Incentive
Plan.
The Board adopted the 2005 SOP which was effective on March 2, 2006, the
date the Company completed the SEHK listing, and then the Board terminated
the 1997 Stock Plan and 1999 Stock Incentive Plan. The Company began issuing
stock options solely under the 2005 SOP for up to 100,000,000 ordinary
shares. Under the terms of the 2005 SOP, stock options are generally granted
at fair market value of the Company's ordinary shares. The stock options
have a contractual term of 8 years from the date of grant and vest over a
requisite service period of 4 years. As of December 31, 2007, the number of
options outstanding and exercisable was 45,169,900 and 10,601,000,
respectively, under the 2005 SOP.
A summary of the Company's stock option activity under the plans as of
December 31, 2007, and changes during the year then ended is presented as
follows:
Weighted
Number of Weighted Average
Outstanding Average Remaining Aggregate
Options Exercise Contract Intrinsic
Shares Price Life Value
----------- -------- --------- ---------
Outstanding options, January 1, 2006 310,484,350 $0.2364
Granted 21,988,400 $0.1731
Exercised (5,643,000) $0.0630
Forfeited or expired (20,086,750) $0.2451
-----------
Outstanding options, December 31, 2006
(240,858,450 options exercisable at a
weighted average exercise price of
$0.2354) 306,743,000 $0.2344
Granted 31,149,000 $0.1964
|
(Continued)
F-26
Weighted
Number of Weighted Average
Outstanding Average Remaining Aggregate
Options Exercise Contract Intrinsic
Shares Price Life Value
----------- -------- --------- ----------
Exercised (13,564,800) $0.1891
Forfeited or expired (16,818,950) $0.2570
-----------
Outstanding options, December 31, 2007 307,508,250 $0.2313 5.98 $8,815,000
=========== ==== ==========
Vested and expected to vest options at
December 31, 2007 273,350,559 $0.2321 5.90 $7,808,000
=========== ==== ==========
Exercisable options at December 31, 2007 246,916,200 $0.2355 5.76 $6,712,000
=========== ==== ==========
|
(Concluded)
The total intrinsic value of options exercised during the years ended
December 31, 2005, 2006 and 2007 were $841,000, $177,000 and 1,301,000,
respectively.
The following table summarizes information about outstanding and vested
stock options:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Range of Exercise Prices Outstanding Life Price and Vested Price
------------------------ ----------- ----------- -------- ----------- --------
$0.0050--$0.0100 2,366,650 1.18 $0.0099 2,366,650 $0.0099
$0.0790--$0.1198 6,181,550 2.27 $0.0929 6,048,900 $0.0923
$0.1292--$0.1948 77,144,800 5.42 $0.1664 50,619,750 $0.1692
$0.2013--$0.2994 172,816,050 6.60 $0.2322 144,305,150 $0.2302
$0.3076--$0.4836 48,999,200 5.36 $0.3582 43,575,750 $0.3622
----------- -----------
Balance, December 31, 2007 307,508,250 5.98 $0.2313 246,916,200 $0.2355
=========== ===========
|
Share Incentive Plan
The Board adopted the 2005 SIP which was effective on March 2, 2006, the
date the Company completed the SEHK listing. The 2005 SIP provides for the
grant of restricted shares, restricted share units ("RSU"), share
appreciation rights and dividend equivalent rights (collectively referred to
as "Awards") up to 75,000,000 ordinary shares. Awards may be granted to
employees, directors and consultants. The RSUs vest over a requisite service
period of 4 years.
F-27
A summary of the status of the Company's RSUs as of December 31, 2007, and
the changes during the year ended December 31, 2007 is presented as follows:
Weighted
Number of Average
Outstanding Exercise
Awards Price
----------- --------
Initial shares granted 8,085,250 $0.1736
Vested -- --
Forfeited and expired (170,500) 0.1736
----------
Nonvested at December 31, 2006 7,914,750 $0.1736
Granted 9,236,500 $0.2041
Vested (1,922,100) $0.1736
Forfeited and expired (901,600) $0.1935
----------
Nonvested at December 31, 2007 14,327,550 $0.1920
==========
|
As of December 31, 2007, there was $5,027,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the plans including stock options and RSUs. The cost is
expected to be recognized over a weighted-averaged period of 2.95 years. The
total fair value of RSUs vested during the year ended December 31, 2006 and
2007 was $0 and $334,000, respectively.
Cash received from option exercise under all share-based payment
arrangements for the years ended December 31, 2005, 2006 and 2007 was
$2,295,000, $1,339,000 and $3,374,000, respectively.
For purposes of measuring compensation expense under APB No. 25, the fair
value of the shares on the date of grant was determined by the Board for
grants prior to August 23, 2000. The fair value of subsequent option grants
or RSU grants was based on the market price of ordinary shares on the day of
grant.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model that use the assumptions
in the following table. Risk-free interest rate is based on the US Treasury
yield curve in effect at the time of grant. The Company uses the simplified
method as provided by Staff Accounting Bulletin No. 107 by average vesting
term and contractual term of the options as their expected term. Expected
volatilities are based on historical volatility of stock prices for a period
equal to the options' expected term. The dividend yield is zero as the
Company has never declared or paid dividends on the ordinary shares or other
securities and do not anticipate paying dividends in the foreseeable future.
Stock Options Employee Stock Purchase Plan
--------------------------------- -----------------------------------------------
Years Ended December 31 Years Ended December 31
--------------------------------- -----------------------------------------------
2005 2006 2007 2005 2006 2007
--------- ----------- ----------- --------------- --------------- ---------------
Risk-free
interest
rate 4.06% 4.45%-5.10% 3.41%-4.92% 2.20%-3.96% 4.47%-5.12% 3.81%-5.13%
Expected life 5-7 years 5-7 years 5 years 0.26-0.51 years 0.25-0.26 years 0.25-0.26 years
Volatility 65% 67%-71% 58%-66% 38%-78% 44%-51% 38%-50%
Dividend -- -- -- -- -- --
|
The weighted-average grant-date fair values of options granted during the
years ended December 31, 2005, 2006 and 2007 were $0.1338, $0.1062, and
$0.1135, respectively. The weighted-average fair values for purchase rights
granted pursuant to the 1999 Purchase Plan during the years ended
December 31, 2005, 2006 and 2007 were $0.0675, $0.0316 and $0.0436,
respectively.
F-28
Ordinary Shares Reserved
As of December 31, 2007, ordinary shares reserved for future issuance were
as follows:
Outstanding stock options 307,508,250
Outstanding RSUs 14,327,550
Shares reserved for future stock option grants 54,334,600
Shares reserved for 1999 purchase plan 10,791,650
Shares reserved for Awards 58,750,350
-----------
445,712,400
===========
|
15.EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the period, using the treasury stock method for options.
A reconciliation of the numerator and denominator of basic and diluted
earnings per share calculations is provided as follows:
Years Ended December 31
--------------------------------
2005 2006 2007
---------- ---------- ----------
Net income (in thousands) $ 8,147 $ 743 $ 24,984
========== ========== ==========
Weighted average shares outstanding (in
thousands)--basic 1,961,168 1,932,575 1,905,725
Effect of dilutive securities:
Options and RSUs (in thousands) 36,291 14,321 38,060
---------- ---------- ----------
Weighted average shares outstanding (in
thousands)--diluted 1,997,459 1,946,896 1,943,785
========== ========== ==========
Earnings per share--basic $ 0.0042 $ 0.0004 $ 0.0131
========== ========== ==========
Earnings per share--diluted $ 0.0041 $ 0.0004 $ 0.0129
========== ========== ==========
|
Certain outstanding options were excluded from the computation of diluted
EPS since their effect would have been antidilutive. The antidilutive stock
options excluded and their associated exercise prices per share were
128,293,200 shares at $0.2538 to $0.4836 as of December 31, 2005,
254,805,913 shares at $0.1198 to $0.4836 as of December 31, 2006 and
166,279,163 shares at $0.1198 to $0.4836 as of December 31, 2007.
16.COMMITMENTS
Capital Commitments
As described in Note 10, the land use right purchase commitment was $537,000
as of December 31, 2007. The original agreement was expired on October 31,
2007 and the Company has negotiated with the counter party for an extension
of additional two years.
F-29
Lease Commitments
The Company leases office space and certain equipment under noncancelable
operating lease agreements that expire at various dates through December
2011. For the years ended December 31, 2005, 2006 and 2007, leasing costs
charged to income in relation to agreements were $1,686,000, $2,148,000 and
2,509,000, respectively. The Company's office lease provides for periodic
rental increases based on the general inflation rate.
As of December 31, 2007, minimum lease payments under all noncancelable
leases were as follows:
Operating
Leases
Year --------------
(In Thousands)
2008 $2,274
2009 813
2010 709
2011 62
------
Total minimum lease payments $3,858
======
|
17.CONTINGENCIES
The Company is involved in a variety of litigation matters involving
patents. For example, the Company has initiated and is pursuing certain
patent infringement actions in Taiwan. The Company has obtained preliminary
injunctions and provisional attachment orders against numerous competitors,
their customers and users. As of December 31, 2007, the Company has
deposited an amount of New Taiwan dollars equivalent to approximately $12.4
million with the Taiwan courts for court bonds, which was accounted for as
restricted assets, in connection with those actions, other preliminary
injunction actions and related provisional attachment actions. The court
bonds provide security for the enjoined party to claim damages against the
Company incurred from the preliminary injunctions, provisional attachments
or the provision of a countersecurity in the event the Company does not
ultimately succeed in the underlying infringement actions. However, these
preliminary injunctions or provisional attachments may be rescinded if the
relevant court allows the opposing party to make its own deposit or
countersecurity with the court.
In February 2007, Monolithic Power Systems, Inc. amended its complaint in
the Intermediate People's Court in Chengdu, China alleging that two of our
customers infringe Chinese Patent Number ZL03140709.9. In May 2007, a jury
in the United States District Court in the Northern District of California
found Claims 1, 2, 9, 12, 14 and 18 of our U.S. Patent Number 6,396,722 to
be invalid. In April 2008, the United States Court of Appeals for the
Federal Circuit vacated the jury verdict, the final judgment of infringement
and the permanent injunction we obtained against Beyond Innovation
Technology Co., Ltd., FSP Group, SPI Electronic Co., Ltd. and Lien Chang
Electronic Enterprise Co., Ltd. and remanded to the district court for
further proceedings. The Company has filed a petition for rehearing with the
court. The Company is also involved in several other patent litigation
matters in the United States.
In 2007, the Company received $9.4 million litigation proceeds from the
Monolithic Power Systems, Inc., Sony Corporation and Samsung Electronics
Co., Ltd. litigation cases in the United States. In March 2008, the Company
further received $2 million from a litigation case settled in the United
States.
While the Company cannot make any assurance regarding the eventual
resolution of these matters, the Company does not believe the final outcome
will have a material adverse effect on its consolidated results of
operations or financial condition.
The Company, as a normal course of business, is a party to various
litigation matters, legal proceedings and claims. These actions may be in
various jurisdictions, and may involve patent protection and/or patent
infringement. While the results of such litigations and claims cannot be
predicted with certainty, the final
F-30
outcome of such matters is not expected to have a material adverse effect on
its consolidated financial position or results of operations. No assurance
can be given, however, that these matters will be resolved without the
Company becoming obligated to make payments or to pay other costs to the
opposing parties, with the potential for having an adverse effect on the
Company's financial position or its results of operations. As of
December 31, 2007, no provision for any litigation has been provided.
18.FINANCIAL INSTRUMENTS
Information on the Company's financial instruments is as follows:
December 31
---------------------------------
2006 2007
---------------- ----------------
(In Thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
Assets
Cash and cash equivalents $45,438 $45,438 $52,597 $52,597
Restricted cash 8,342 8,342 6,830 6,830
Short-term investments 19,697 19,697 28,650 28,650
Long-term investment in available-for-sale securities 2,668 2,668 6,284 6,284
Restricted assets 14,540 14,507 12,393 12,380
|
The carrying amounts of cash and cash equivalents and restricted cash
reported in the consolidated balance sheets approximate their estimated fair
values. The fair values of short-term investments and long-term investment
in available-for-sale securities are based on quoted market prices.
Fair value of restricted assets made in the form of Taiwan Government bonds
are based on quoted market price; the remaining restricted assets are
carried at amounts which approximate fair value.
Long-term investments, except for investment in available-for-sale
securities, are in privately-held companies where there is no readily
determinable market value. The Company periodically evaluates these
investments for impairment. If it is determined that an other-than-temporary
decline has occurred in the carrying value, an impairment loss is recorded
in the period of decline in value.
19.RELATED PARTY TRANSACTIONS
Except as disclosed in the consolidated financial statements and other
notes, the following are significant related party transactions:
Executive Severance and Change of Control Agreements
In April 2007, the Company entered into an Executive Severance and Change of
Control Agreement with Sterling Du, the Chief Executive Officer and Chairman
of the Board, pursuant to which Mr. Du would be entitled to, among other
things, two times his base salary and annual target bonus and immediate
vesting of 50% of his unvested equity awards if terminated under certain
circumstances. In addition, Mr. Du would be entitled to, among other things,
three times his base salary and annual target bonus and immediate vesting of
100% of his unvested equity awards if terminated under certain circumstances
within twenty-four months of a change of control of the Company.
In April 2007, the Company entered into an Executive Severance and Change of
Control Agreement with Chuan Chiung "Perry" Kuo, the Chief Financial
Officer, pursuant to which Mr. Kuo would be entitled to, among other things,
one time his base salary and annual target bonus and immediate vesting of
50% of his unvested equity awards if terminated under certain circumstances.
In addition, Mr. Kuo would be entitled to, among other things, one and a
half times his base salary and annual target bonus and immediate vesting
F-31
of 50% of his unvested equity awards if terminated under certain
circumstances within twelve months of a change of control of the Company.
In April 2007, the Company entered into an Executive Severance and Change of
Control Agreement with James Keim, the Head of Marketing and Sales, pursuant
to which Mr. Keim would be entitled to, among other things, one time his
base salary and annual target bonus and immediate vesting of 50% of his
unvested equity awards if terminated under certain circumstances. In
addition, Mr. Keim would be entitled to, among other things, one and a half
times his base salary and annual target bonus and immediate vesting of 50%
of his unvested equity awards if terminated under certain circumstances
within twelve months of a change of control of the Company.
20.SEGMENT INFORMATION
The Company designs, develops and markets high performance semiconductors
for power management and security applications. The Company's semiconductor
products are produced with digital, analog, and mixed signal integrated
circuit manufacturing processes. The Company's Chief Operating Decision
Maker ("CODM"), the Chief Executive Officer, reviews information on an
enterprise-wide basis to assess performance and allocate resources and has
determined the Company has one reporting segment.
Net sales to unaffiliated customers by geographic region are based on the
customer's ship-to location and were as follows:
Years Ended December 31
--------------------------
2005 2006 2007
-------- -------- --------
(In Thousands)
China $ 60,889 $ 92,801 $133,887
Korea 22,957 15,018 13,435
Japan 6,323 9,603 11,992
Taiwan 14,891 6,559 4,232
Others 492 934 1,994
-------- -------- --------
$105,552 $124,915 $165,540
======== ======== ========
|
For the years ended December 31, 2005 and 2006, no customers accounted for
10% or more of net sales. For the year ended December 31, 2007, one customer
accounted for 10% or more of net sales.
Long-lived assets consist of property and equipment and are based on the
physical location of the assets at the end of each year, and were as follows:
December 31
-----------------------
2005 2006 2007
------- ------- -------
(In Thousands)
China $ 8,244 $13,015 $19,807
Taiwan 7,795 21,261 16,665
U.S.A. 6,804 6,669 6,347
Singapore 274 335 232
Others 202 147 97
------- ------- -------
$23,319 $41,427 $43,148
======= ======= =======
|
F-32
21.SUBSEQUENT EVENT
In March 2008, the Company entered into an agreement with 360 Degree Web to
acquire certain software products, sales and licensing contracts, registered
trademarks, issued patents, patent applications and proprietary technology
in exchange for $6.5 million and all of the shares of 360 Degree Web held by
the Company, including 1,583,333 shares of Series B, 500,000 shares of
Series B2 and 180,769 shares of Series D preference shares totally valued at
$1.6 million. Twenty percent of the cash consideration will be held in an
escrow account in accordance with the terms of the escrow agreement. As a
result of the asset acquisition, the Company is expected to obtain certain
core technologies that are essential to the future growth of the Company's
security appliance products. The Company is currently in the process of
obtaining third party valuations for the allocation of purchase price.
F-33
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