CONTENTS
CORPORATE INFORMATION
CHAIRMAN’S STATEMENT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL HIGHLIGHTS
1
2
4
7
- i -
CORPORATE INFORMATION
Independent Auditor
Deloitte & Touche
Legal counsel
Board of Directors
Morrison & Foerster LLP
Palo Alto office
755 Page Mill Road
Palo Alto, California 94304 USA
Maples and Calder
PO Box 309
Ugland House
Grand Cayman KY1-1104
Cayman Islands
Executive Directors
Sterling Du (Chairman, Chief Executive Officer)
Chuan Chiung “Perry” Kuo (Chief Financial Officer)
James Elvin Keim (Head of Marketing and Sales)
Independent Non-executive Directors
Michael Austin
Teik Seng Tan
Shoji Akutsu
Lawrence Lai-Fu Lin
Zhuoping Yu
Ji Liu
The Bank of New York Mellon Corporation
ADR Division
One Wall Street, 29th Floor
New York, New York 10286 USA
Maples Fund Services (Cayman) Limited
PO Box 1093
Boundary Hall, Cricket Square
Grand Cayman KY1-1102
Cayman Islands
Grand Pavilion Commercial Centre, West Bay Road
PO Box 32331 SMB, George Town
Grand Cayman KY1-1209
Cayman Islands
Phone: (345) 945-1110
Fax: (345) 945-1113
3118 Patrick Henry Drive
Santa Clara, CA 95054 USA
Phone: (408) 987-5920
Fax: (408) 987-5929
3rd Floor, 1, Sec 4
Nanjing East Road
Taipei, Taiwan 105
Phone: (886) 2-2545-9095
Fax: (886) 2-2547-1721
Maples Corporate Services Limited
Ugland House, P.O. Box 309
Grand Cayman KY1-1104, Cayman Islands
Depositary for American
Depositary Receipts
Share Registrar
Corporate Headquarters
Other Addresses
Registered office
- 1 -
CHAIRMAN’S STATEMENT
TO OUR SHAREHOLDERS
As we enter our 20th year as an innovation leader, 2014 represented a transition period for O2Micro when we
reinvigorated the Company to return to growth and profitability. Through a combination of operational expense
reductions and the implementation of certain initiatives to monetize assets of the Company, we believe we have
transitioned the Company to benefit from our next growth phase. Our high-priority initiatives to deliver superior
customer solutions resulted in design-win momentum in our new tablet and smartphone products and the expansion of our
customer base in our backlighting, battery management, power management and general lighting markets.
We view 2015 as the potential “turn around” point for the Company. We believe in this development for a number of
significant reasons including: Due to ongoing customer product ramps and cyclicality of the business, we believe our
reported first quarter 2015 revenue level will represent a trough level and we anticipate quarterly revenue growth going
forward. Second, we do not believe that we will face additional declines in our power management business for
notebook computers, as we believe this business has stabilized. Next, our shipments of products to our Chinese
customers are increasing as a percentage of total product shipments. O2Micro shipped over 45 million parts to Chinese
customers in 2014, an increase of 85% from 2013 levels. As the trend of the electronics market moves toward China,
we are better able to compete with Chinese competitors by our improved cost structure and efficient distribution channels
in the Chinese Marketplace. Fourth, we believe our higher growth drivers including products for the tablet and
smartphone markets, general lighting and battery management products will represent an increasing portion of total
revenue as we proceed throughout 2015 and into 2016. Finally, we have reduced operational expenses by over forty
percent from first quarter 2010 levels and we believe that we have achieved the necessary expense structure to return to
profitability in the near future.
In 2014, we dedicated approximately 70% of our R&D spending to developing new innovative products. As a result,
customer design activity with our new products has been robust, and should continue into 2015. In fact, revenue from
new products accounted for approximately 40% of total revenue in 2014. As this trend continues, new design revenue
will continue to gain momentum in diverse markets and expanding our customer base for our LED general lighting,
backlighting, battery management and power management products.
In our backlighting business, we are projecting renewed growth in this product area as we move into 2015, based on
increasing design activity in TV, tablet, and smartphone markets. We continue to be a worldwide leader in LED
backlighting for TVs and monitors, and our expanding customer base in our backlighting business includes such market
leaders as Sony, Toshiba, HP, Dell, Lenovo, Skyworth, TCL, Hisense, among others.
After fully assessing the landscape in 2014, we felt that another emphasis of the Company should be, among other things,
to address and penetrate the tablet and smartphone markets with our advanced and unique solutions. I am pleased to
report that our efforts are paying off and we achieved multiple significant design wins with several platform providers
who are integrating O2Micro products into high-volume tablet and smartphone products. We expect to recognize
significant revenue from these customers throughout 2015 and into 2016. These design wins are a direct result of our
strategic decision to pursue the tablet and smartphone market, and we expect to announce additional design wins in these
markets in throughout 2015 and beyond. We have also developed additional products in our product pipeline that
include a wide spectrum of integrated circuits utilizing our proprietary technology to support additional existing and new
market segments.
Our LED general lighting business continues to grow rapidly in this competitive market. Our strategy of targeting
leading LED manufacturers in China, the U.S. and Japan is working. We are very pleased an increasing number of
market leaders are using our general lighting product technologies. This customer list includes GE, Panasonic, Samsung,
Toshiba, Osram, IKEA, IRIS Japan, Lights of America, and TCP, and we continue to see a broader-based acceptance of
our proprietary Free Dimming and two- color dimming products in more applications, thereby expanding our
international customer base.
We have also successfully introduced our TRIAC controller lighting products for legacy dimmable fixtures and see these
products gaining revenue momentum in 2015. This segment of the market continues to evolve, and feel we are our
products and technologies are well positioned to serve this market for years to come.
O2Micro’s proprietary, analog power management technology in our battery management segment supports a variety of
end markets and continues to grow with our rapidly expanding customer base. Our battery management products
continue to achieve many new design wins, and we continue to be very optimistic for continued growth in power tool,
e-bike, e-vehicle, appliances and vacuum cleaner markets. We are also seeing increasing design activity for products in
- 2 -
uninterrupted power supply applications. Major manufacturers using our products include Black & Decker, Electrolux,
LG, Panasonic, and TTI, to name a few.
At the end of 2014, we continued to make difficult, yet necessary, cost saving measures to better align the Company
financials with current and anticipated revenue levels. We also focused our efforts to take full advantage of our
technological and business strengths. As we highlighted at the end of 2014, we have shifted some of our resources to
design win activity in the China based tablet and smartphone markets. This concentrated effort to exploit our market
strengths will allow us to better support our customers with a high level of satisfaction that our customers have come to
expect from O2Micro, and we will continue to garner additional design wins in our target markets. Finally, we are also
in the process of monetizing some of our real-estate assets and long-term investments. The company began this
monetization process in the second half of 2014 and we expect to continue to evaluate these assets going forward and
share additional information with our Shareholders throughout 2015.
In 2015, O2Micro is well positioned with a more cost-efficient business model, strong secular growth drivers and proven
strategies in place to return to profitability in the near future. Revenue from previous generation technologies now
represents a minimal portion of our overall business, which, in turn, allows us to dedicate more resources to new and
emerging technologies. We are already witnessing revenue from our new products exceeding the declines that we faced
from legacy technologies in 2014. In fact, we expect that revenue from general lighting and battery management will
represent approximately 25% of our total revenue by the middle of 2015. Our Management Team is diversified and
experienced. We strongly believe we have one of the strongest international infrastructure support organizations in the
industry, which will enable us to foster future growth and sustainability in the years to come.
We thank you for your support and we look forward to reporting our progress to you throughout the year.
Sterling Du
Chairman of the Board and
Chief Executive Officer
- 3 -
O2Micro International Limited and
Subsidiaries
Consolidated Financial Statements as of
December 31, 2014 and 2013 and for the Three Years Ended
December 31, 2014, 2013 and 2012, and
Report of Independent Registered Public
Accounting Firm
- 4 -
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, 2014 and 2013, and the related consolidated statements of
operations and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2014 (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 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, 2014 and 2013, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on the
criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated April 23, 2015 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 23, 2015
- 5 -
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, 2014, based on criteria established in Internal Control - Integrated
Framework (1992) 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 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, 2014, based on the criteria established in Internal Control - Integrated Framework
(1992) 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, 2014, of the
Company and our report dated April 23, 2015 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 23, 2015
- 6 -
FINANCIAL HIGHLIGHTS
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes 4 and 5)
Restricted cash
Short-term investments (notes 4 and 6)
Accounts receivable, net
Inventories (note 7)
Prepaid expenses and other current assets (note 8)
Total current assets
LONG-TERM INVESTMENTS (notes 4 and 9)
PROPERTY AND EQUIPMENT, NET (note 10)
OTHER ASSETS
Intangible assets, net (note 11)
Other assets (note 12)
Total other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities (note 13)
Total current liabilities
OTHER LONG-TERM LIABILITIES
Accrued pension liabilities (note 15)
Other liabilities (note 10)
Total long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (notes 18 and 19)
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 – 1,660,786,600 shares
Outstanding – 1,327,260,450 and 1,391,744,250 shares as of
December 31, 2014 and 2013, respectively
Additional paid-in capital
Accumulated deficits
Accumulated other comprehensive income
Treasury stock – 333,526,150 and 269,042,350 shares as of
December 31, 2014 and 2013, respectively
Total shareholders’ equity
$
December 31
2014
2013
$
41,069
164
21,481
6,789
8,642
1,308
79,453
42,293
173
33,606
10,024
7,217
1,437
94,750
14,754
16,121
19,363
23,039
-
3,168
3,168
-
3,509
3,509
$ 116,738
$ 137,419
$
$
2,131
650
6,049
8,830
293
349
642
4,169
238
5,353
9,760
391
658
1,049
9,472
10,809
-
-
33
141,229
(17,291)
6,768
33
140,198
(2,234)
8,512
(23,473)
(19,899)
107,266
126,610
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 116,738
$ 137,419
The accompanying notes are an integral part of the consolidated financial statements.
- 7 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
Years Ended December 31
2013
2014
2012
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES
Research and development (a)
Selling, general and administrative (a)
Costs associated with exit activities (note 3)
Provision for litigation (note19)
Litigation income (note 19)
$
63,591
$
73,785
$
97,666
30,856
36,411
44,067
32,735
37,374
53,599
21,885
24,721
3,027
-
(75)
27,017
30,898
-
-
-
34,310
34,594
3,343
9,422
(100)
Total operating expenses
49,558
57,915
81,569
LOSS FROM OPERATIONS
(16,823)
(20,541)
(27,970)
NON-OPERATING INCOME
Interest income
Foreign exchange gain (loss), net
Gain on sale of long-term investments (note 9)
Gain on sale of real estate (note 10)
Other, net
Total non-operating income
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX
1,035
589
436
458
432
2,950
1,303
491
-
-
646
1,706
(217)
23
-
873
2,440
2,385
(13,873)
(18,101)
(25,585)
INCOME TAX EXPENSE (note 14)
1,184
992
1,103
NET LOSS FROM CONTINUING OPERATIONS
(15,057)
(19,093)
(26,688)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX
-
(6)
895
NET LOSS
(15,057)
(19,099)
(25,793)
OTHER COMPREHENSIVE INCOME (LOSS), NET
OF TAX EFFECT OF NIL
Foreign currency translation adjustments
Unrealized (loss) gain on available-for-sale securities
(note 9)
Unrealized pension gain (loss)
Total other comprehensive (loss) income
(1,416)
(398)
70
(1,744)
11
342
294
647
COMPREHENSIVE LOSS
$
(16,801)
$
(18,452)
$
846
185
(65)
966
(24,827)
(Continued)
- 8 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand US Dollars, Except Per Share Amounts and Share Data)
Years Ended December 31
2013
2014
2012
BASIC AND DILUTED LOSS PER SHARE (note 17)
Continuing operations
Discontinued operations
$
$
(0.01)
-
(0.01)
$
$
(0.01) $
-
$
(0.01)
(0.02)
-
(0.02)
NUMBER OF SHARES USED IN LOSS PER
SHARE CALCULATION:
Basic and Diluted (in thousands)
(a) INCLUDES STOCK-BASED
COMPENSATION CHARGE AS FOLLOWS:
Research and development
Selling, general and administrative
1,362,465
1,435,778
1,552,190
$
$
489
1,631
$
$
700
1,909
$
$
930
2,137
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 9 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousand US Dollars, Except Share Data)
BALANCE, JANUARY 1, 2012
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock –130,927,000 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2012
Pension loss
Foreign currency translation adjustments
Unrealized gain on available-for-sale securities
BALANCE, DECEMBER 31, 2012
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 126,856,850 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2013
Pension gain
Foreign currency translation adjustments
Unrealized gain on available-for-sale securities
Ordinary Shares
Shares
Amount
Additional
Paid – in
Capital
Retained
Earnings
(Accumulated
Deficits)
Accumulated Other Comprehensive Income
Unrealized
Investment
Gain (Loss)
Cumulative Unrealized
Translation
Adjustment Gain (Loss)
Pension
Treasury Shareholders’
Total
Stock
Equity
1,653,265,600
$ 33
$ 136,625 $ 42,658
$ (129)
$ 7,445
$ (417)
$ 6,899
$ (4,111)
$ 182,104
1,566,650
7,553,950
15,245,000
-
(1,217,700)
(5,611,550)
(10,015,350)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
80
532
-
-
-
-
-
-
(109)
(505)
(897)
3,067
-
-
-
-
- (25,793)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
185
-
-
-
-
-
-
-
-
-
-
846
-
-
-
-
-
-
-
-
-
-
(65)
-
-
-
-
-
-
-
-
-
-
-
(65)
846
185
-
-
-
(10,584)
109
505
897
-
-
-
-
-
80
532
-
(10,584)
-
-
-
3,067
(25,793)
(65)
846
185
1,660,786,600
33
138,793 16,865
56
8,291
(482)
7,865
(13,184)
150,372
543,100
6,046,050
13,297,850
-
(543,100)
(6,046,050)
(13,297,850)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25
335
-
-
-
-
-
-
(42)
(467)
(1,055)
2,609
-
-
-
-
- (19,099)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
342
-
-
-
-
-
-
-
-
-
-
11
-
-
-
-
-
-
-
-
-
-
294
-
-
-
-
-
-
-
-
-
-
-
294
11
342
-
-
-
(8,279)
42
467
1,055
-
-
-
-
-
25
335
-
(8,279)
-
-
-
2,609
(19,099)
294
11
342
BALANCE, DECEMBER 31, 2013
1,660,786,600
33
140,198 (2,234)
398
8,302
(188)
8,512
(19,899)
126,610
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 83,468,900 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2014
Pension gain
Foreign currency translation adjustments
Unrealized gain on available-for-sale securities
Reclassification adjustments for gain on available-for-sale
securities included in net loss
796,900
5,284,800
12,903,400
-
(796,900)
(5,284,800)
(12,903,400)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
44
258
-
-
-
-
-
-
(59)
(383)
(949)
2,120
-
-
-
-
- (15,057)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
74
-
-
-
-
-
-
-
-
-
-
(1,416)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
70
-
-
-
-
-
-
-
70
(1,416)
74
-
-
(472)
-
-
(472)
-
-
-
(4,965)
59
383
949
-
-
-
-
-
-
44
258
-
(4,965)
-
-
-
2,120
(15,057)
70
(1,416)
74
(472)
1,660,786,600
BALANCE, DECEMBER 31, 2014
The accompanying notes are an integral part of the consolidated financial statements.
$ 33
$ 141,229 $(17,291)
$
-
$ 6,886
$ (118)
$ 6,768
$ (23,473)
$ 107,266
- 10 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2013
2012
2014
OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$ (15,057)
$ (19,099)
$ (25,793)
Depreciation and amortization
Stock-based compensation
Loss on asset write-off
Inventory write-downs
Gain on sale of long-term investments
Impairment loss on long-term investments
Gain on disposal of property and equipment, net
Deferred income taxes
Other, net
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Deferred charges
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities
Accrued pension liabilities
Long-term income tax payable
Other liabilities
3,718
2,120
82
1,538
(436)
83
(428)
78
(36)
3,235
(2,963)
130
(985)
(2,038)
412
577
(12)
-
(346)
4,685
2,609
-
900
-
-
(106)
41
(1)
(1,251)
(200)
510
(1,366)
413
(124)
(1,083)
(25)
-
(8,893)
5,372
3,067
2,320
1,220
(23)
-
(85)
101
80
3,289
(1,211)
213
(790)
(2,885)
(244)
(1,025)
53
(66)
9,422
Net cash used in operating activities
(10,328)
(22,990)
(6,985)
INVESTING ACTIVITIES
Acquisition of:
Short-term investments
Long-term investments
Property and equipment
Decrease (increase) in:
Restricted assets
Restricted cash
Other assets
Proceeds from:
Sale of short-term investments
Sale of long-term investments
Disposal of property and equipment
(22,346)
-
(1,004)
(15,496)
(250)
(743)
-
(1)
116
34,333
1,304
1,982
10,000
1
108
52,131
-
166
(24,722)
-
(2,151)
(10,000)
(1)
(83)
48,381
583
296
Net cash provided by investing activities
14,384
45,917
12,303
FINANCING ACTIVITIES
Acquisition of treasury stock
Proceeds from:
(4,965)
(8,279)
(10,916)
Exercise of stock options
Issuance of ordinary shares under the Employee Stock Purchase Plan
44
258
25
335
80
532
Net cash used in financing activities
(4,663)
(7,919)
(10,304)
(Continued)
- 11 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2013
2012
2014
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE
$
(617)
$
(613)
$
322
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,224)
14,395
(4,664)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
42,293
27,898
32,562
CASH AND CASH EQUIVALENTS AT END OF THE YEAR
$
41,069
$
42,293
$
27,898
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for interest
Cash paid for tax
$
$
-
697
$
$
-
1,064
$
$
-
1,307
The accompanying notes are an integral part of the consolidated financial statements.
(Concluded)
- 12 -
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.
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
designs, develops and markets innovative power management components for the Computer, Consumer,
Industrial, Automotive and Communications markets.
The Company’s ordinary shares (“Shares”) were initially listed on The NASDAQ National Market
(“NASDAQ”) on August 23, 2000, and on the Cayman Islands Stock Exchange on February 1, 2001. At
the Extraordinary General Meeting of Shareholders (“EGM”) held on November 14, 2005, the shareholders
approved a public global offering of the Company’s Shares and the proposed listing of the Company's
Shares on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) and various matters
related to the proposed listing and offering. Following the approval of these matters, the Company ceased
trading its Shares on the NASDAQ, effected a 50-for-1 share split of Shares, created an American
depositary share (“ADS”) program for the ADSs to be quoted on the NASDAQ, and delisted the Shares
from the NASDAQ on November 25, 2005. The Company commenced trading of ADSs on the NASDAQ
on November 28, 2005, and subsequently listed the Shares on the SEHK on March 2, 2006, by way of
introduction. On February 27, 2009, the Company submitted an application for the voluntary withdrawal
of the listing of Shares on the Main Board of SEHK (collectively referred to as “Proposed Withdrawal”) for
reasons of cost and utility. The Company retained its existing primary listing of ADSs on the NASDAQ
following the Proposed Withdrawal and for the foreseeable future. The Proposed Withdrawal was
approved at the EGM held on May 30, 2009, and the listing of the Shares on SEHK was withdrawn on
September 9, 2009.
The Company has incorporated various wholly-owned subsidiaries in the past, including, among others,
O2Micro Electronics, Inc. (“O2Micro-Taiwan”), O2Micro International Japan Ltd. (“O2Micro-Japan”),
O2Micro Pte Limited-Singapore (“O2Micro-Singapore”), O2Micro (China) Co., Ltd. (“O2Micro-China”),
and O2Security Limited (“O2Security”). O2Micro-Taiwan is engaged in operations and sales support
services. O2Micro-Japan is engaged in sales support services. O2Micro-Singapore, O2Micro-China, and
other subsidiaries are mostly engaged in research and development services. O2Security was primarily
engaged in operations and sales of Network Security products (“Network Security Group”). In November
2010, the Company commenced a plan to terminate its Network Security business and initiated shutdown
activities associated with the Network Security Group, and in 2011, the Company formally dissolved all
business entities related to O2Security Limited. The Company has reflected the operating results of this
business group as discontinued operations in the accompanying consolidated statements of operations and
comprehensive income. Please also see discussions in note 3.
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.
- 13 -
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 Company’s consolidated financial statements include
valuation allowance for deferred income tax assets, allowance for doubtful accounts, inventory valuation,
useful lives for property and equipment, impairment of long-lived assets and identified intangible assets,
allowances for sales adjustments, pension and uncertain tax 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
primarily in time deposits and debt securities with high credit quality. For accounts receivable, the
Company performs ongoing credit evaluations of its customers’ financial condition and the Company
maintains an allowance for doubtful accounts based upon a review of the expected collectability of
individual accounts.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts
receivable, and notes and accounts payable. The carrying amounts approximate the fair value due to the
short-term maturity of those instruments. Fair value of available-for-sale investments including short-term
investments and long-term investments is based on 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 financing, 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.
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.
Restricted Cash
The Company classifies deposits made for customs and 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.
Short-term Investments
The Company maintains its excess cash in time deposits, government, corporate, or other agency bonds
issued with high credit 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, 2013, all the above-mentioned investments except for time deposits were classified as
available-for-sale securities and were 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
losses are deemed
shareholders’ equity, net of any
other-than-temporary.
income when deemed
other-than-temporary. There were no available-for-sale securities as of December 31, 2014.
losses are recorded as a charge
tax effect, unless unrealized
Unrealized
related
to
Investment transactions are recorded on the trade date.
- 14 -
Inventories
Inventories are stated at the lower of standard cost or market value. The cost of inventories comprises cost
of purchasing raw materials and where applicable, those overheads that have been incurred in bringing the
inventories to their present location and condition. 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. Management evaluates related information in
determining whether an other-than-temporary decline in value exists. Factors indicative of an
other-than-temporary decline include recurring operating losses, credit defaults and subsequent rounds of
financing 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 9 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.
Long-lived Asset Impairment
The Company evaluates the recoverability of long-lived assets whenever events or changes in
circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset
is considered impaired when the anticipated undiscounted cash flows from 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 value of the long-lived asset is recognized. Fair value is determined by
reference to quoted market prices, if available, or discounted cash flows, as appropriate.
Identified Intangible Assets
Intellectual property assets primarily represent customer relationship, tradename, and developed
technologies acquired, and are recorded based on a purchase price allocation analysis on the fair value of
the assets acquired. The Company amortizes acquired intangible assets using straight-line method over the
estimated life ranging from 3 to 10 years.
The intangible assets, subject to amortization, are reviewed for impairment whenever circumstances
indicate that the useful life is shorter than the Company had originally estimated or that the carrying amount
of assets may not be recoverable. If such facts and circumstances exist, the Company assesses the
recoverability of identified intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset or group of assets over their remaining lives against their respective
carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of
those assets. The Company determines the fair value using the income approach which includes the
discounted cash flow and other economic factors as inputs.
- 15 -
Treasury Stock
The Company may retire 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. The Company may also
determine not to retire ordinary shares repurchased for the purpose of reissuing them upon exercise of stock
option, Employee Stock Purchase Plan, and release of restricted stock units (“RSUs”). The reissue cost of
shares repurchased is determined by the moving average method. A repurchase of ADS 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 collectability.
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.
Freight Costs
Costs of shipping and handling for delivery of the Company’s products that are reimbursed by customers
are recorded as revenue in the consolidated statements of operations and comprehensive income. Shipping
and handling costs are charged to cost of sales as incurred.
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 and intellectual property that will be useful in
developing new products or processes, or at significantly enhancing existing products or production
processes as well as expenditures incurred for the design and testing of product alternatives or construction
of prototypes. All expenditures 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
$948,000, $1,349,000, and $1,203,000 in 2014, 2013, and 2012, respectively. A portion of these costs was
for advertising, which approximately amounted to $205,000, $297,000, and $272,000 in 2014, 2013, and
2012, respectively.
Pension Costs
For employees under defined contribution pension plans, pension costs are recorded based on the actual
contributions made to employees’ pension accounts. For employees under defined benefit pension plans,
pension costs are recorded based on the actuarial calculation.
Government Grants
Government grants received by the Company to assist with specific research and development activities are
recognized as non-operating income. If the Company has an obligation to repay any of the funds provided
by government grants regardless of the outcome of the research and development, the Company will
estimate that obligation and recognize the amount as a liability.
- 16 -
Income Tax
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 and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their respective tax bases, and operating loss
and tax credit carryforwards. The Company believes that uncertainty exists regarding the realization of
certain deferred income tax assets and, accordingly, has established a valuation allowance for those deferred
income tax assets to the extent the realization is not deemed to be more likely than not. Deferred income
tax assets and liabilities are measured using enacted tax rates.
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained in a dispute with taxing authorities,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
Stock-based Compensation
The Company grants stock options to its employees and certain non-employees and estimates the fair value
of share-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite
service periods. The Company has elected to use the Black-Scholes option pricing model to determine the
fair value of stock options on the date of grant. The Company also grants RSUs to its employees and the
RSUs are measured based on the fair market value of the underlying stock on the date of grant.
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 recorded 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 (loss) represents net income (loss) plus the results of certain changes in
shareholders’ equity during a period from non-owner sources.
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.
- 17 -
As part of its standard terms and conditions, the Company offers limited indemnification to 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 indemnifications typically hold 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. These indemnifications 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 indemnifications may not be waived or amended except by written notice signed by both
parties, and may only be terminated with respect to the Company’s products.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standard Board (“FASB”) issued an accounting update, which
provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and
several liability arrangements for which the total amount of the obligation within the scope of the guidance
is fixed at the reporting date. The guidance requires an entity to measure such obligations as the sum of the
amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus
additional amounts the reporting entity expects to pay on behalf of its co-obligors. The new guidance is
effective for fiscal years beginning after December 15, 2013. The adoption of this guidance did not have a
material impact on the Company’s results of operations, financial position or cash flows.
In March 2013, the FASB issued an accounting update that amended guidance on a parent’s accounting for
the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign
entity. This guidance requires that the parent release any related cumulative translation adjustment into net
income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided. The guidance is effective for fiscal years
beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or cash flows.
In July 2013, the FASB issued an accounting update, which creates new guidance regarding the
presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward. The guidance is effective for fiscal years beginning after
December 15, 2013 and early adoption is permitted. The adoption of this guidance did not have a material
impact on the Company’s financial statement disclosures since the Company did not have any unrecognized
tax benefits.
In April 2014, the FASB issued an accounting update, which changes the criteria for reporting discontinued
operations for all public and nonpublic entities. The guidance requires only disposals that represent a
strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as
discontinued operations. The guidance also requires entities 1) to expand their disclosures about
discontinued operations to include more information about assets, liabilities, income, and expenses and 2)
to disclose the pre-tax income attributable to a disposal of “of an individually significant component of an
entity that does not qualify for discontinued operations presentation in the financial statements.” The
guidance is effective for fiscal years beginning after December 15, 2014 and early adoption is prohibited.
The adoption of this guidance is not expected to have a material impact on the Company’s results of
operations, financial position or cash flow.
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard,
recognition of revenue occurs when a customer obtains control of promised goods or services in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The new standard is effective for fiscal years
beginning after December 15, 2016 and early adoption is prohibited. The new guidance is required to be
applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect
of initially applying it recognized at the date of initial application. The Company has not yet selected a
transition method nor has it determined the impact of the new standard on the Company’s consolidated
financial statements.
- 18 -
In June 2014, the FASB issued an accounting update, which clarifies the accounting for share-based
payments. The guidance requires that a performance target that affects vesting and that could be achieved
after the requisite service period is treated as a performance condition. The guidance is effective for fiscal
years beginning after December 15, 2015 and early adoption is permitted. The adoption of this guidance is
not expected to have a material impact on the Company’s results of operations, financial position or cash
flow.
In August 2014, the FASB issued new standard related to the presentation of financial statements when
there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a
going concern. This standard sets forth management’s responsibility to evaluate, each reporting period,
whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide
related footnote disclosures. The standard is effective for fiscal years beginning after December 15, 2016
and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on
the Company’s results of operations, financial position or cash flow.
In February 2015, the FASB issued an accounting update to amend the consolidation analysis. All legal
entities are subject to reevaluation under the revised consolidation model. The amendment is effective for
fiscal years beginning after December 15, 2015 and early adoption is permitted. The adoption of this
amendment is not expected to have a material impact on the Company’s results of operations, financial
position or cash flow.
3. DISCONTINUED OPERATIONS AND EXIT ACTIVITIES
Discontinued Operations
As part of the Company’s strategy to evaluate its business segments periodically, management noted that
the Network Security Group has incurred significant operating losses and its business had not grown as
projected. In light of the downturn of business in Network Security products the Company determined
that a triggering event had occurred and initiated an impairment loss analysis on the Network Security
Group’s long-lived assets using a discounted cash flow approach in estimating fair value as market values
could not be readily determined. In November 2010, the Board of Directors (the “Board”) resolved to
discontinue the operations of Network Security Group and to liquidate the assets of the Network Security
Group in due course. The Company has ceased the segment’s operation and has commenced the related
shutdown activities, most of which were completed in 2011. The Company did not have any revenue and
expense from the operations of this business segment in 2014.
The Company determined that the Network Security Group meets the definition of a separate component
and the results of the Network Security Group are reported as discontinued operations in the accompanying
statements of operations and comprehensive income.
Exit Activities
In November 2012, the Company determined to dissolve the Intelligent E-Commerce Group, one of the
product lines of the Company’s Integrated Circuit Group, which comprised of the IC products such as
Smart Card ICs, connectivity ICs, and power switches ICs. The actions taken to dissolve the Intelligent
E-Commerce Group resulted in significantly reducing the operating activities of the Intelligent
E-Commerce products, terminating the related workforce, and licensing the related intellectual property and
technology to one of the Company’s authorized sales representatives, Axland Corporation Limited
(“Axland”). Axland provides certain support services to the existing customers of the Intelligent
E-Commerce products.
For the year ended December 31, 2012, the Company recorded costs associated with exit activities of
$3,343,000, of which $2,320,000 and $1,023,000 were related to a loss on asset write-off and one-time
employee termination benefits, respectively. The Company determined that those assets directly
held/carried by the Intelligent E-Commerce Group provided no future benefit and recognized a loss on asset
write-off, including property and equipment of $462,000, intangible assets of $1,198,000, and deferred
charges of $660,000. As of December 31, 2012, one-time employee termination benefits of $1,023,000
were accrued and recorded as accrued expenses and other current liabilities on the balance sheet, which had
been settled in 2013.
- 19 -
In December 2014, the Company determined to dissolve the Intelligent Power Group, one of the product
lines of the Company’s Integrated Circuit Group, which comprised of the IC products such as DC/DC
controller ICs, battery charger controllers ICs, charger ICs, and LDO Regulator ICs. The actions taken to
dissolve the Intelligent Power Group resulted in significantly reducing the developing activities of the
Intelligent Power products, and terminating the related workforce.
For the year ended December 31, 2014, the Company recorded costs associated with exit activities of
$3,027,000, of which $82,000 and $2,945,000 were related to a loss on asset write-off and one-time
employee termination benefits, respectively. The Company determined that those assets directly
held/carried by the Intelligent Power Group provided no future benefit and recognized a loss on asset
write-off, including property and equipment of $24,000, and deferred charges of $58,000. As of December
31, 2014, one-time employee termination benefits of $2,945,000 were accrued and recorded as accrued
expenses and other current liabilities on the balance sheet, which had been settled in 2015.
4.
FAIR VALUE MEASUREMENTS
The Company measures its cash equivalents and marketable securities at fair value. The Company also
determines the fair value of long-term investments and long-lived assets whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or liability. A
three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used
in the valuation methodologies in measuring fair value:
Level 1 – Observable inputs such as quoted prices for identical instruments in active markets;
Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or
indirectly;
Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity
to develop its own assumptions.
Assets and liabilities measured at fair value on recurring and nonrecurring bases were as follows:
Items measured at fair value on a recurring
basis at December 31, 2014
Cash and cash equivalents
Money market mutual funds
Items measured at fair value on a recurring
basis at December 31, 2013
Cash and cash equivalents
Money market mutual funds
Short-term investments
Government bonds
Corporate bonds
Agency bonds
Long-term investments
Fair Value Measurements at the End
of the Reporting Period
Level 2
Level 1
Level 3
(In Thousands)
Total
$
-
$
162
$
-
$
162
$
-
$ 1,764
$
-
$ 1,764
-
-
-
1,613
1,517
5,448
-
-
-
-
1,613
1,517
5,448
1,284
Available-for-sale securities (note 9)
1,284
-
Total recurring fair value measurements
$ 1,284
$ 10,342
$
-
$ 11,626
- 20 -
Items measured at fair value on a
nonrecurring basis at December 31,
Total
Losses
2014
Level 1
Level 2
Level 3
Total
Long-term investments
Cost method securities (note 9)
$
-
$
-
$
167
$
167 $
(83)
Long-lived assets held and used related to the
exit activities
Property and equipment (note 3)
Other assets (note 3)
-
-
-
-
-
-
-
-
(24)
(58)
Total nonrecurring fair value measurements
$
-
$
-
$
167
$
167 $
(165)
As described in note 3, in connection with the dissolution of the Intelligent Power Group, property and
equipment and deferred charges with a carrying amount of $24,000, and $58,000, respectively, were written
down to their fair value of zero, resulting in an exit activities charge of $82,000, which was included in
earnings for the year ended December 31, 2014. There were no items measured at fair value on a
nonrecurring basis at December 31, 2013.
The Company utilized a pricing service to estimate fair value measurements for the money market mutual
funds, government bonds, corporate bonds and agency bonds. The pricing service utilized market
quotations for fixed maturity securities that had quoted prices in active markets. Fixed maturity securities
generally traded daily on dealer bids rather than bids recorded on exchanges. The pricing service prepared
estimates of fair value measurements for these securities using its proprietary pricing applications which
included available relevant market information, benchmark curves, benchmarking of like securities, sector
groupings and matrix pricing. Since most of the fixed maturity securities had maturities of one year or
less, the Company believed that the fair value would not be materially different from the original purchased
cost. The Company’s fair value processes included controls that were designed to ensure appropriate fair
values were recorded.
The fair value estimates provided by the pricing service for the Company’s investments were based on
observable market information rather than market quotes. Accordingly, the estimates of fair value for
short-term investments were determined based on Level 2 inputs at December 31, 2014 and 2013,
respectively.
The fair value measurement in cost method securities was determined based on a recent round financing in
August, 2014. Please also see discussions in note 9.
5. CASH AND CASH EQUIVALENTS
Time deposits
Savings and checking accounts
Money market mutual funds
Petty cash
(In Thousands)
December 31
2014
2013
$ 17,679
23,214
162
14
$ 24,015
16,499
1,764
15
$ 41,069
$ 42,293
- 21 -
6. SHORT-TERM INVESTMENTS
(In Thousands)
December 31, 2014
Gross
Gross
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
Time deposits
$ 21,481
$
-
$
-
$ 21,481
(In Thousands)
December 31, 2013
Gross
Gross
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
Time deposits
$ 25,028
$
-
$
-
$ 25,028
Available-for-sale securities
Government bonds
Corporate bonds
Agency bonds
1,610
1,519
5,448
$ 33,605
$
3
-
2
5
-
(2)
(2)
1,613
1,517
5,448
$
(4)
$ 33,606
Short-term investments by contractual maturity were as follows:
Time deposits
Due within one year
Due after one year through two years
Time deposits
Due within one year
Due after two years
Available-for-sale securities
Due within one year
(In Thousands)
December 31, 2014
Fair
Value
Cost
$ 21,477
4
$ 21,481
$ 21,477
4
$ 21,481
(In Thousands)
December 31, 2013
Fair
Value
Cost
$ 25,024
4
25,028
$ 25,024
4
25,028
8,577
8,578
$ 33,605
$ 33,606
The Company’s gross realized gains and losses on the sale of investments for the year ended December 31,
2014 were $38,000 and $2,000, respectively. Please also see discussions in note 9. The Company’s
gross realized gains and losses on the sale of investments for the year ended December 31, 2013, were
$1,000 and $0, respectively. The Company’s gross realized gains and losses on the sale of investments for
the year ended December 31, 2012, were $1,000 and $0, respectively.
- 22 -
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, 2013 (nil at December 31, 2014).
(In Thousands)
December 31, 2013
Less Than 12 Months_ 12 Months or Greater_
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
500
1,517
2,830
$ 4,847
$
-
2
2
4
$
$
-
-
-
-
$
$
-
-
-
-
$
500 $
1,517
2,830
$ 4,847 $
-
2
2
4
Government bonds
Corporate bonds
Agency bonds
7. INVENTORIES
Finished goods
Work-in-process
Raw materials
(In Thousands)
December 31
2014
2013
$ 2,686
1,405
4,551
$ 2,153
1,725
3,339
$ 8,642
$ 7,217
(In Thousands)
December 31
2014
2013
$
$
674
293
26
19
17
279
592
338
29
56
16
406
$ 1,308
$ 1,437
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses
Interest receivable
Other receivable
Value-added-tax recoverable
Deferred income tax assets
Other
- 23 -
9. LONG-TERM INVESTMENTS
Cost method
Sigurd Microelectronics (Cayman) Co., Ltd. (“Sigurd Cayman”)
X-FAB Silicon Foundries SE (“X-FAB”)
Philip Ventures Enterprise Fund (“PVEF”)
GEM Services, Inc. (“GEM”)
Excelliance MOS Co., Ltd (“EMC”)
Verticil Electronics Corp. (“Verticil”)
Asia Sinomos Semiconductor Inc. (“Sinomos”)
Silicon Genesis Corporation (“SiGen”)
Available-for-sale securities – noncurrent
Etrend Hightech Corp. (“Etrend”)
(In Thousands)
December 31
2014
2013
$ 7,200
4,968
497
78
1,844
167
-
-
14,754
$ 7,200
4,968
497
78
1,844
250
-
-
14,837
-
1,284
$ 14,754
$ 16,121
The following table shows the movement of gross unrealized gains and losses of the Company’s
available-for-sale securities.
(In Thousands)
Years Ended December 31
2013
2014
2012
Balance at beginning of period
Other comprehensive income before
reclassification adjustment
Reclassification adjustment
Balance at end of period
$
398
$
56
$
(129)
74
(472)
342
-
185
-
$
-
$
398
$
56
The following table shows the gross unrealized gains and losses and fair value of the Company’s
available-for-sale securities at December 31, 2013 (nil at December 31, 2014).
(In Thousands)
December 31, 2013
Gross
Gross
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
Etrend
$
920
$
364
$
-
$ 1,284
In July 2008, the Company invested in preferred shares of Sigurd Cayman for $5,700,000 to become a
strategic partner of Sigurd Microelectronics Corporation (“Sigurd”). Upon completion of the transaction,
the Company obtained a 19.54% ownership of Sigurd Cayman. The Company accounts for the investment
under the cost method as the Company does not exercise significant influence over operating and financial
policies of Sigurd Cayman and management of Sigurd holds the controlling interests. In April 2010, the
Company participated in another round of preferred shares issued by Sigurd Cayman amounting to
$1,500,000. As of December 31, 2014, the Company held 9,690,445 shares, which represented an 18.88%
ownership of Sigurd Cayman.
The Company invested in X-FAB’s ordinary shares in July 2002. X-FAB (formerly known as X-FAB
Semiconductor Foundries AG)
in
analog/mixed-signal application. As of December 31, 2014, the Company held 530,000 shares at the cost of
$4,968,000 (4,982,000 EURO), which represented a 1.60% ownership of X-FAB.
is a European-American
that specializes
foundry group
- 24 -
In November 2005, the Company invested in PVEF, a fund management company in Singapore, with an
investment amount of $585,000 (SG$1,000,000) for 20 units in the placement at SG$50,000 per unit. The
Company further invested $357,000 (SG$500,000) in June 2010 to obtain 30 units. A portion of the
shares were redeemed by PVEF in November 2012 at the cost of $445,000 and the carrying cost of the
Company reduced to $497,000 accordingly. The Company held a 5% interest in the fund as of December
31, 2014.
The Company invested in GEM’s preference shares in August 2002. GEM is a multinational semiconductor
assembly and test company. On April 16, 2012, GEM signed a share purchase agreement with a listed
company in Taiwan which will purchase GEM’s preference share at a price of $0.235 per share to obtain
approximately 58.4% ownership of GEM. In respect to this subsequent event, the Company considered
this a Type I subsequent event and the investment to be other-than-temporarily impaired. Therefore, the
Company recognized an impairment loss of $422,000 as of December 31, 2011. As of December 31,
2014, the Company held 333,334 shares at the cost of $78,000, which represented a 0.36% ownership of
GEM.
The Company invested $1,960,000 (NT$62,900,000) in EMC’s 3,468,000 ordinary shares in June 2010.
EMC is a fabless power device design company in Taiwan, specialized in power semiconductor process
development, and the design of high efficiency power device and system. In December 2012, the
Company sold 200,000 shares in the amount of $138,000 in the process of EMC’s getting listed on the
Emerging Stock GreTai Security Market of Taiwan. As of December 31, 2014, the Company held
3,474,854 shares at the cost of $1,844,000, which represented a 10.86% ownership of EMC.
In July 2013, the Company invested $250,000 (NT$7,500,000) in Verticil, a privately-owned manufacturer
of LED power modules and integrated lighting solutions provider in Taiwan. Based on the recent
operating status and a round of financing of Verticil in August 2014, the Company considered the
investment to be other-than-temporarily impaired. Therefore, the Company recognized an impairment loss
of $83,000 (NT$2,500,000) in the third quarter of 2014. As of December 31, 2014, the Company held
500,000 shares of Verticil, represented a 3.33% ownership.
The Company invested in Etrend’s ordinary shares in December 2002, July 2003, and March 2004,
respectively. Etrend is a wafer probing, packing and testing company. 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. Etrend was successfully listed on the GreTai
Securities Market of Taiwan in November 2010. The Company sold the entire Etrend shares in the stock
exchange market during the second half year of 2014 and a gain of $436,000 was recorded for the year
ended December 31, 2014.
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 in
preferred shares of $3,288,000 and $4,785,000, respectively. In September 2008, in view of Sinomos’
operating status and recurring financial losses, the Company determined that the decline in fair value of the
investment in Sinomos was other-than-temporary and recognized an impairment charge of $13,073,000.
Along with the recognition of impairment charge, the Company also wrote-off the outstanding prepayments
in relation to Sinomos’ foundry service of $2,942,000. As of December 31, 2014, the Company held
30,101,353 of ordinary and preference shares, representing an 18.41% ownership of Sinomos.
The Company invested in SiGen preferred shares in December 2000. SiGen is an advanced
nanotechnology company that develops Silicon-on-insulator, 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 qualitative factors related to 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, 2014, representing a 0.06% ownership of
SiGen.
- 25 -
10. PROPERTY AND EQUIPMENT, NET
Cost
Land
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
Prepayment for property and equipment
Accumulated depreciation
Buildings
Equipment
Furniture and fixtures
Leasehold improvements
Transportation equipment
Property leased to others
(In Thousands)
December 31
2014
2013
$ 2,510
8,055
22,751
1,030
2,052
668
3,766
4,397
45,229
1,757
20,887
886
1,701
619
16
25,866
$ 2,510
8,055
26,052
1,148
3,150
673
-
9,929
51,517
1,577
22,649
935
2,724
593
-
28,478
$ 19,363
$ 23,039
Depreciation expense recognized during the years ended December 31, 2014, 2013, and 2012 was
approximately $2,548,000, $3,464,000, and $3,707,000, respectively.
As a result of dissolution activities of the Intelligent Power Group and the Intelligent E-commence Group,
losses on asset write-off of $24,000 and $462,000, respectively, on property and equipment were incurred
for the years ended December 31, 2014 and 2012. Please see discussions in note 3.
In August 2009, the Company sold its land, located in Hsinchu, Taiwan, to a real estate developer in
exchange for a portion of the real estate after it is developed, which includes a portion of an office building
and a portion of a parking lot, with a carrying value of approximately $8,918,000. The Company
consummated this transaction to acquire office building space and parking lot space for the purpose of
future operations and business growth. The Company deferred the transaction gain of $129,000 during the
construction period. In the fourth quarter of 2014, some units of the building were completed and the
Company recorded realized gain of $72,000 accordingly. Considering the Company’s current operating
scale and capital requirements, the Company leased out three units to a third party in December 2014. The
Company also sold two building units to third parties in the fourth quarter of 2014. As a result of the sale
of building units, a net gain of $458,000 was recorded for the year ended December 31, 2014.
- 26 -
11. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following as of December 31, 2013 (nil as of December 31, 2014):
(In Thousands)
Gross
Carrying Accumulated
Amount Amortization Write-off
Asset
Net
Developed technologies
Other
$ 2,564
317
$ (1,366)
(317)
$ (1,198)
-
$
$ 2,881
$ (1,683)
$ (1,198)
$
-
-
-
As a result of dissolution activities of the Intelligent E-Commerce Group, a loss on asset write-off of
$1,198,000 on intangible assets was incurred for the year ended December 31, 2012. Please see
discussions in note 3.
Amortization expense of the intangible assets acquired was approximately $31,000 for the year ended
December 31, 2013. The intangible assets were fully amortized in the year ended December 31, 2013.
12. OTHER ASSETS
Deferred charges
Land use rights
Refundable deposits
Deferred income tax assets - noncurrent
(In Thousands)
December 31
2014
2013
$ 1,338
1,151
565
114
$ 1,554
1,179
681
95
$ 3,168
$ 3,509
Deferred charges are advanced payments for consulting, maintenance, and engineering license contracts and
are amortized over the terms of the contracts from 2 to 5 years. Amortization expense of the deferred
charges for the years ended December 31, 2014, 2013, and 2012, was approximately $1,142,000,
$1,162,000, and $1,299,000, respectively.
As a result of dissolution activities of the Intelligent Power Group and the Intelligent E-Commerce Group,
losses on asset write-off of $58,000 and $660,000, respectively, on deferred charges incurred for the years
ended December 31, 2014 and 2012. Please see discussions in note 3.
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 a
straight-line basis over the term of the land use rights agreement which is 49.7 years. Amortization
expense of the land use rights for the years ended December 31, 2014, 2013, and 2012, was approximately
$28,000, $28,000, and $29,000, respectively.
- 27 -
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Salaries, bonus and benefits
Engineering related expenses
Legal and audit fees
Value-added tax payable
Consulting fees
Withholding tax payable
Deferred income tax liabilities
Shipping expenses
Promotional expenses
Other accrued expenses
14. INCOME TAX
(In Thousands)
December 31
2014
2013
$ 3,094
1,030
258
158
150
138
119
92
56
954
$ 2,697
645
456
81
150
151
21
120
155
877
$ 6,049
$ 5,353
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.
Loss before income taxes from continuing operations consisted of:
(In Thousands)
Years Ended December 31
2013
2014
2012
Cayman Islands
Foreign
Income tax expense from continuing operations consisted of:
$(18,943)
5,070
$(22,116)
4,015
$(31,218)
5,633
$(13,873)
$(18,101)
$(25,585)
(In Thousands)
Years Ended December 31
2013
2014
2012
Current
Deferred
$ 1,106
78
$
951
41
$ 1,002
101
Income tax expense
$ 1,184
$
992
$ 1,103
Income tax expenses (benefit) from discontinued operations were $0, $0, and $(1,000) for the years ended
December 31, 2014, 2013, and 2012, respectively.
The Company and its subsidiaries file separate income tax returns. The applicable statutory income tax
rate in the Cayman Islands was zero for the Company for the years being reported. The reconciliation
between the provision for income taxes at the statutory rate and the provision for income taxes at the
effective tax rate is as follows:
- 28 -
(In Thousands)
Years Ended December 31
2013
2014
2012
Tax expense at statutory rate
Increase (decrease) in tax resulting from:
Differences between Cayman and foreign tax rates
Changes in deferred income tax assets
Adjustments to prior years’ taxes
Changes in valuation allowances for deferred income tax
assets
Other
$
-
$
-
$
-
989
(72)
23
150
94
808
(474)
20
515
123
1,048
156
(2)
(55)
(44)
$ 1,184
$
992
$ 1,103
The deferred income tax assets and liabilities as of December 31, 2014 and 2013 consisted of the following:
Deferred income tax assets
Research and development credits
Net operating loss carryforwards
Depreciation and amortization
Accrued vacation and other expenses
Valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities
Unrealized capital allowance
Unrealized foreign exchanges
(In Thousands)
December 31
2014
2013
$ 5,858
101
293
98
6,350
(6,219)
$ 5,634
71
301
174
6,180
(6,069)
$
131
$
111
$
$
10
109
$
119
$
16
5
21
The valuation allowance shown in the table above relates to net operating losses, credit carryforwards and
temporary differences for which the Company believes that realization is not more than likely. The
valuation allowance increased by $150,000 and $515,000 and decreased by $55,000 for the years ended
December 31, 2014, 2013, and 2012, respectively. The changes in the valuation allowance in 2014, 2013,
and 2012 were primary due to the fluctuations in R&D credits from O2Micro Inc. that could not be utilized.
As of December 31, 2014, O2Micro, Inc. had U.S. federal and state research and development credit
carryforwards of approximately $5,349,000 and $6,590,000, respectively. The US federal research and
development credit will expire from 2022 through 2034 if not utilized, while the state research and
development credit will never expire. Utilization of the research and development credits may be subject
to significant annual limitation due to the ownership change limitations provided by the U.S. Internal
Revenue Code of 1986 and similar provisions in the State of California’s tax regulations. The annual
limitation may result in the expiration of federal research and development credits before utilization.
The Company files income tax returns in various foreign jurisdictions. The Company is generally no
longer subject to income tax examinations by tax authorities for years prior to 2009 because of the statute of
limitations.
15. 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
- 29 -
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.
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, 2014, 2013, and 2012, pension costs charged to income
in relation to the contributions to these schemes were $1,328,000, $1,586,000, and $1,837,000, respectively.
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 Labor Standards 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
Bank of Taiwan.
The government is responsible for the administration of all the defined benefit plans for the companies in
Taiwan under the Labor Standards Law. The government also sets investment policies and strategies,
determines investment allocation and selects investment managers. As of December 31, 2014 and 2013, 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 and the government is responsible for any shortfall in the event that the
rate of return is less than the required rate of return. However, information on how investment allocation
decisions are made, inputs and valuation techniques used to measure the fair value of plan assets, the effect
of fair value measurements using significant unobservable inputs on changes in plan assets for the period
and significant concentrations of risk within plan assets is not fully made available to the companies by the
government. Therefore, the Company is unable to provide the required fair value disclosures related to
pension plan assets.
The percentage of major category of plan assets as of December 2014 and 2013 were as follows:
Cash
Debt securities
Equity securities
December 31
2014
2013
19%
31%
50%
23%
32%
45%
Changes in projected benefit obligation and plan assets for the years ended December 31, 2014 and 2013
were as follows:
(In Thousands)
Years Ended December 31
2013
2014
2012
Projected benefit obligation, beginning of the year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Effect of changes in foreign exchange rate
$
933
3
17
-
(61)
(54)
$ 1,220
3
18
-
(277)
(31)
$ 1,074
5
20
-
76
45
Projected benefit obligation, end of the year
$
838
$
933
$ 1,220
Fair value of plan assets, beginning of the year
Employer contributions
Actual return on plan assets
Effect of changes in foreign exchange rate
$
$
$
542
24
12
(33)
512
36
7
(13)
446
42
5
19
Fair value of plan assets, end of the year
$
545
$
542
$
512
- 30 -
The component of net periodic benefit cost was as follows:
(In Thousands)
Years Ended December 31
2013
2014
2012
Service cost
Interest cost
Expected return on plan assets
Amortization of net pension loss
$
$
3
17
(9)
6
$
3
18
(9)
20
5
20
(10)
17
Net periodic benefit cost
$
17
$
32
$
32
The funded status of the plan was as follows:
Accumulated benefit obligation
Project benefit obligation
Plan assets at fair value
Funded status of the plan
(In Thousands)
December 31
2014
2013
$
(653)
$
(711)
(838)
545
(933)
542
$
(293)
$
(391)
The actuarial assumptions to determine the benefit obligations were as follows:
Discount rate
Rate of compensation increases
December 31
2014
2013
2.0%
2.0%
2.0%
2.0%
The actuarial assumptions to determine the net periodic benefit cost were as follows:
Years Ended December 31
2013
2014
2012
Discount rate
Rate of compensation increases
Expected long-term rate of return on plan assets
2.0%
2.0%
1.8%
2.0%
2.0%
1.8%
1.5%
2.0%
1.8%
The expected long-term rate of return shown for the plan assets was weighted to reflect a two-year deposit
interest rate of local banking institutions.
- 31 -
Estimated future benefit payments are as follows:
Year
2015
2016
2017
2018
2019 and thereafter
16. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
(In Thousands)
$
5
5
14
36
284
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. In June 2008, an additional 20,000,000 shares were reserved for issuance as also approved
by the Board. The 1999 Purchase Plan was subject to adjustment in the event of a stock split, stock dividend
or other similar changes in ordinary shares or capital structure.
The 1999 Purchase Plan permitted 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 was 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 have elected 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 had a term of 10 years. By 2009, 10,685,400 ordinary shares had been
purchased under the 1999 Purchase Plan.
As approved by the EGM held on May 30, 2009, the Company adopted the 2009 Employee Stock Purchase
Plan (“2009 Purchase Plan”) along with the Company delisting from SEHK in September 2009. The 2009
Purchase Plan succeeded the 1999 Purchas Plan, and the terms and provisions of 2009 Purchase Plan are
generally the same as the 1999 Purchase Plan. The 2009 Purchase Plan has a term of 10 years, if not
terminated earlier. A total of 25,000,000 ordinary shares were reserved for issuance under the 2009
Purchase Plan starting November 2009. As approved by the Annual General Meeting of Shareholders
(“AGM”) held on June 22, 2012, additional 15,000,000 ordinary shares were reserved for issuance under
the 2009 Purchase Plan. From 2012 to 2014, 18,884,800 ordinary shares had been purchased under the
2009 Purchase Plan.
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 was
150,000,000 ordinary shares plus an annual increase on January 1 of each year, which commenced in 2001,
equal to the lesser 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,
2014, the number of options outstanding and exercisable was 67,115,600 and 67,115,600, respectively,
under the 1999 Stock Incentive Plan.
- 32 -
The Board adopted the 2005 Share Option Plan (“2005 SOP”), which was effective on March 2, 2006, the
date the Company completed the listing on the SEHK. The adoption of the 2005 SOP also resulted in the
Board terminating 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. As approved by the EGM held
on May 30, 2009, the number of shares available for issue was increased from 100,000,000 to 175,000,000
shares. The references to Hong Kong and Hong Kong related rules and regulations were also removed
along with the completion of the Company’s delisting from the SEHK in 2009. As approved by the AGM
held on June 22, 2012, additional 50,000,000 ordinary shares were reserved for issuance under the 2005
SOP. 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, 2014, the number of options
outstanding and exercisable was 161,551,000 and 126,393,300, respectively, under the 2005 SOP.
A summary of the Company’s stock option activity under the plans as of December 31, 2014, and changes
during the year then ended is presented as follows:
Number of
Options Shares
Weighted Weighted
Average
Average
Remaining
Exercise
Contract Life
Price
Aggregate
Intrinsic
Value
Outstanding Options, January 1, 2014
Granted
Exercised
Forfeited or expired
247,157,450
19,840,000
(796,900)
(37,533,950)
$ 0.1482
$ 0.0706
$ 0.0549
$ 0.1921
Outstanding Options, December 31, 2014
228,666,600
$ 0.1345
2.88
$ 48,000
Vested and Expected to Vest Options at
December 31, 2014
226,113,220
$ 0.1352
2.84
$ 48,000
Exercisable Options at December 31, 2014 193,508,900
$ 0.1452
2.26
$ 48,000
The total intrinsic value of options exercised during the years ended December 31, 2014, 2013, and 2012
was $13,000, $9,000, and $74,000, respectively.
The following table summarizes information about outstanding and vested stock options:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$0.0460 - $0.0612
$0.0620 - $0.0940
$0.0948 - $0.1594
$0.1636 - $0.1774
$0.2036- $0.3432
Number
Outstanding
35,580,950
45,194,650
43,649,800
34,053,100
70,188,100
Life
2.73
6.08
3.84
1.65
0.89
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Price
Number
Exercisable
and Vested
Weighted
Average
Exercise
Price
$ 0.0491 32,393,000
$ 0.0718 19,464,100
$ 0.1178 38,021,800
$ 0.1664 33,441,900
$ 0.2132 70,188,100
$ 0.0479
$ 0.0759
$ 0.1194
$ 0.1664
$ 0.2132
Balance, December 31, 2014
228,666,600
2.88
$ 0.1345 193,508,900
$ 0.1452
- 33 -
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 to
estimate the expected life because the options are considered as plain vanilla share-based payment awards.
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 does not anticipate paying dividends in the foreseeable future.
Stock Options
Years Ended December 31
2013
2014
2012
Employee Stock Purchase Plan
Years Ended December 31
2013
2012
2014
Risk-free interest rate
Expected life
Volatility
Dividend
1.49%-1.76% 0.68%-1.75% 0.59%-1.04% 0.02%-0.05% 0.04%-0.06% 0.06%-0.10%
5
Years
34%-37%
-
5
Years
40%-48%
-
5
Years
48%-50%
-
0.25-0.26
Years
30%-45%
-
0.25-0.26
Years
24%-40%
-
0.25-0.26
Years
27%-45%
-
The weighted-average grant-date fair value of options granted during the years ended December 31, 2014,
2013, and 2012 was $0.0245, $0.0263, and $0.0438, respectively. The weighted-average fair value of
options granted under the 2009 Purchase Plan during the years ended December 31, 2014, 2013, and 2012
was $0.0104, $0.0106, and $0.0140, respectively.
Share Incentive Plan
The Board adopted the 2005 Share Incentive Plan (“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,
RSU, share appreciation rights and dividend equivalent rights (collectively referred to as “Awards”) up to
75,000,000 ordinary shares. As approved by the EGM held on May 30, 2009, the number of shares
available for issue was increased from 75,000,000 to 125,000,000 shares. The references to Hong Kong
and Hong Kong related rules and regulations were also removed along with the completion of the
Company’s delisting from the SEHK. As approved by the AGM held on June 22, 2012, an additional
62,500,000 ordinary shares were reserved for issuance under the 2005 SIP. Awards may be granted to
employees, directors and consultants. The RSUs vest over a requisite service period of 4 years.
A summary of the status of the Company’s RSUs as of December 31, 2014, and changes during the year
ended December 31, 2014, is presented as follows:
Nonvested at January 1, 2014
Granted
Vested
Forfeited and expired
Number of
Outstanding
Awards
Weighted
Average
Grant-Date
Fair Value
36,215,100
29,222,650
(12,903,400)
(5,710,500)
$ 0.0824
$ 0.0691
$ 0.0921
$ 0.0705
Nonvested at December 31, 2014
46,823,850
$ 0.0710
As of December 31, 2014, there was $2,908,000 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-average period of 2.34 years. The total fair
value of RSUs vested during the years ended December 31, 2014, 2013, and 2012was $1,189,000,
$1,321,000, and $1,474,000, respectively.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2014, 2013, and 2012 was $302,000, $360,000, and $612,000, respectively.
Ordinary Shares Reserved
- 34 -
As of December 31, 2014, ordinary shares reserved for future issuance were as follows:
Outstanding stock options
Outstanding RSUs
Shares reserved for future stock option grants
Shares reserved for Employee Stock Purchase Plan
Shares reserved for Awards
228,666,600
46,823,850
54,697,550
10,335,100
55,569,900
396,093,000
Shares issued for the exercise of stock options, Employee Stock Purchase Plan and shares vested under
restricted stock units are from the treasury shares.
17. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number
of ordinary shares outstanding during the period. Diluted earnings (loss) per share is calculated by
dividing net income (loss) 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 (loss) per share
calculations was as follows:
Years Ended December 31
2013
2014
2012
Net loss from continuing operations (in thousands)
Income (loss) from discontinued operations (in thousands)
$ (15,057)
-
$ (19,093)
(6)
$ (26,688)
895
Net loss (in thousands)
$ (15,057)
$ (19,099)
$ (25,793)
Weighted average shares outstanding (in thousands) – basic
1,362,465
1,435,778
1,552,190
Effect of dilutive securities:
Options and RSUs (in thousands)
-
-
-
Weighted average shares outstanding (in thousands) – diluted
1,362,465
1,435,778
1,552,190
Loss per share – basic and diluted
Continuing operations
Discontinued operations
$
(0.01)
$
(0.01)
$
-
(0.01)
$
-
(0.01)
$
$
(0.02)
-
(0.02)
Certain outstanding options and RSUs were excluded from the computation of diluted EPS since their effect
would have been anti-dilutive. The anti-dilutive stock options excluded and their associated exercise prices
per share were 228,666,600 shares at $0.0460 to $0.3462 as of December 31, 2014, 247,157,450 shares at
$0.0558 to $0.4792 as of December 31, 2013, and 261,321,450 shares at $0.0460 to $0.4792 as of
December 31, 2012. The anti-dilutive RSUs excluded were 46,823,850 shares, 36,215,100 shares, and
32,838,550 shares as of December 31, 2014, 2013, and 2012, respectively.
- 35 -
18. COMMITMENTS
Lease Commitments
The Company leases office space and certain equipment under non-cancelable operating lease agreements
that expire at various dates through December 2019. For the years ended December 31, 2014, 2013, and
2012, leasing costs charged to income in relation to these agreements were $2,415,000, $2,661,000, and
$2,918,000, respectively. The Company’s office lease provides for periodic rental increases based on the
general inflation rate.
As of December 31, 2014, future minimum lease payments under all non-cancelable operating lease
agreements were as follows:
Year
2015
2016
2017
2018
2019
Total minimum lease payments
(In Thousands)
Operating Leases
$ 1,542
659
291
177
67
$ 2,736
Purchase obligations and commitments include payments due under various types of license, maintenance
and support agreements with contractual terms within one year. As of December 31, 2014, those purchase
commitments amounted to $997,000.
19. CONTINGENCIES
Legal Proceedings
The Company is involved in several litigation matters relating to its intellectual property, as detailed below.
While the Company cannot make any assurances regarding the eventual resolution of these matters, the
Company does not believe at this time that the final outcomes will have a material adverse effect on its
consolidated results of operations or financial condition.
Monolithic Power Systems, Inc. v. O2Micro International Limited, Case No. C 08-4567 CW. On October 1,
2008, Monolithic Power Systems, Inc. (“MPS”) filed a complaint in the United States District Court in the
Northern District of California for declaratory judgment that certain claims of the Company’s patents are
invalid and not infringed. The Company filed counterclaims for patent infringement. The matter was
scheduled for trial in July 2010; however the Company dismissed the case in June 2010, and agreed not to
assert the patent in dispute for this matter against MPS. MPS moved for costs and attorneys fees. On
May 3, 2012, the Court approved MPS’ revised motion and set the final award of $8,419,429 in attorneys’
fees, and two orders of costs for $663,151 and $339,315 and accordingly, the Company recorded
approximately $9.4 million of provision for litigation as of December 31, 2012. The Company filed an
appeal with the United States Court of Appeals for the Federal Circuit (Case No. 12-1221), and filed a
supersedeas bond to secure the judgment. The matter was affirmed on appeal on August 13, 2013, by the
United States Court of Appeals, Federal Circuit, and the supersedeas bond was released and a Satisfaction
of Judgment was filed on November 21, 2013, in the amount of $9,488,926 and the restricted assets were
subsequently released in December 2013. The Company appealed the matter before the United States
Supreme Court, which was denied on March 24, 2014, and the matter is now closed.
O2Micro, Inc. v. Texas Instruments Japan Limited. In November 2013, the Company filed a patent
infringement suit against Texas Instruments Japan Limited (“Texas Instrument”) in the Civil Division of the
Tokyo District Court. The complaint alleges, inter alia, that Texas Instruments’ charging products
infringe on the Company’s related Japanese patents. The matter is currently pending.
O2 Holdings Limited v. O2Micro International Ltd., Germany, District of Hamburg. On August 20, 2008,
the Regional Court of Hamburg issued a temporary restraining order prohibiting the Company from using
the trademark “O2Micro” and “O2Micro Breathing Life into Mobility” in Germany. A hearing was held,
- 36 -
and on November 4, 2009, the initial order was upheld, and the Appellate Court upheld the initial ruling in
August 2012. The parties settled the case, and the case has been dismissed.
retailer. With
O2Micro (Wuhan) Co Ltd. v. Protek (Shanghai) Ltd., et al., Wuhan Intermediate Court, China. On
February 10, 2011, the Company filed a patent infringement action in Wuhan Intermediate Court against
ASUS Notebook manufacturer “Protek (Shanghai) Ltd.” and Wuhan Heyonghaoyu Co Ltd., the infringing
the Company added ChiMei-Innolux Corporation
product
(“ChiMei-Innolux”), Richtek Technology Corporation (“Richtek”) et al. as defendants. The objection to
the jurisdiction made by ChiMei-Innolux and Richtek has been rejected by court. The Company and
Richtek submitted their respective test scheme in November 2012 and tested respectively in the court on
March 16, 2013. The first hearing was held on May 21. 2013. The Company dismissed the case in April
2014.
further evidence,
O2Micro(China) v. Legendsec Information Technology (Beijing) Inc., et al., Chengdu Intermediate Court,
China. The Company filed a trade secret infringement suit against Yunfeng Li, Feitong and Legendsec
Information Technology (Beijing) Inc. (“Legendsec”) in Chengdu Intermediate Court on August 18, 2014,
requesting the three defendants to stop the infringement actions and claim for compensatory damages.
The first hearing was held on October 30, 2014. The matter is currently pending.
O2Micro(China) v. Legendsec Information Technology (Beijing) Inc., Beijing Haidian District People's
Court, China. The Company filed a copyright infringement suit against Legendsec in Beijing Haidian
District People's Court on November 19, 2014, requesting the defendant to stop the infringement actions
and claimed for compensatory damages. The first hearing was held on March 16, 2015. The matter is
currently pending.
The Company received $75,000, $0, and $100,000 litigation income in relation to patent litigation cases in
the United States for the years ended December 31, 2014, 2013, and 2012, respectively.
The Company, as a normal course of business, is a party to litigation matters, legal proceedings, and claims.
These actions may be in various jurisdictions and may involve patent protection and/or infringement. While
the results of such litigations and claims cannot be predicted with certainty, the final 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. Except for the
litigation provision stated above, no other provision for any litigation has been provided as of December 31,
2014 and 2013.
20. FINANCIAL INSTRUMENTS
Information on the Company’s financial instruments was as follows:
(In Thousands)
December 31
2014
2013
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 41,069
164
21,481
$ 41,069
164
21,481
$ 42,293
173
33,606
$ 42,293
173
33,606
Assets
Cash and cash equivalents
Restricted cash
Short-term investments
Long-term investments in available-for-sale
securities
-
-
1,284
1,284
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
investments in available-for-sale securities are based on quoted market prices.
- 37 -
Long-term investments, except for investments in available-for-sale securities, are in privately-held
companies where there is no readily determinable market value and are recorded using the cost method.
Since they entail an unreasonable high cost to obtain verifiable fair values, fair value is not presented. 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.
21. SEGMENT INFORMATION
In September 2008, the Board approved a plan to transfer Network Security business to O2Security along
with its Series A preference shares financing. In anticipation of the business transfer, management
identified two reportable segments, including Integrated Circuit Group and Network Security Group. The
Integrated Circuit Group’s core products and principal source of revenue are its power management
semiconductors. These semiconductor products are produced with digital, analog, and mixed signal
integrated circuit (“IC”) manufacturing processes. The Network Security Group’s system security solution
products include support for VPN and firewalls, which provide security functions between computer
systems and networks, including the transmission of data across the Internet. In November 2010, the
Company determined to discontinue the Network Security Group. Please see discussions in note 3.
The Company does not identify or allocate assets by operating segment, nor does the chief operating
decision maker (“CODM”) evaluate operating segments using discrete asset information. The Company
does not have inter-segment revenue, and, accordingly, there is none to be reported. The Company does
not allocate gains and losses from interest and other income, or income taxes to operating segments. The
accounting policies for segment reporting are the same as for the Company as a whole.
Operating segment net sales and operating loss, including the discontinued Network Security Group, were
as follows:
(In Thousands)
Net sales
Integrated Circuit Group
Network Security Group
Loss from operations
Integrated Circuit Group
Network Security Group
Years Ended December 31
2013
2014
2012
$
63,591
-
$
73,785
-
$
97,666
825
$
63,591
$
73,785
$
98,491
$
(16,823)
-
$
(20,541)
(6)
$
(27,970)
767
$
(16,823)
$
(20,547)
$
(27,203)
Net sales to unaffiliated customers (including the discontinued Network Security Group) by geographic
region are based on the customer’s ship-to location and were as follows:
China
Japan
Taiwan
Korea
Other
(In Thousands)
Years Ended December 31
2013
2014
2012
$
$
$
55,133
4,490
2,022
288
1,658
65,602
4,677
1,892
500
1,114
78,709
6,502
2,271
7,965
3,044
$
63,591
$
73,785
$
98,491
For the years ended December 31, 2014 and 2013, two customers accounted for 10% or more of net sales.
For the year ended December 31, 2012, only one customer accounted for 10% or more of net sales. Sales
- 38 -
to these major customers were generated from the Integrated Circuit Group. The percentage of net sales to
these customers was as follows:
Customer A
Customer B
Customer C
Years Ended December 31
2013
2012
2014
12%
10%
4%
15%
7%
10%
9%
10%
5%
Long-lived assets consisted of property and equipment and were as follows based on the physical location
of the assets at the end of each year:
(In Thousands)
Taiwan
China
U.S.A.
Singapore
Other
2014
December 31
2013
2012
$
8,689 $
6,363
4,188
59
64
10,576 $
7,872
4,388
98
105
11,608
9,500
4,718
155
161
$
19,363
$
23,039
$
26,142
- 39 -