CONTENTS
CORPORATE INFORMATION
CHAIRMAN’S STATEMENT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL HIGHLIGHTS
1
2
4
7
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)
for
Depositary
Depositary Receipts
American
Share Registrar
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
Corporate Headquarters
Other Addresses
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
Registered office
Maples Corporate Services Limited
Ugland House, P.O. Box 309
Grand Cayman KY1-1104, Cayman Islands
- 1 -
CHAIRMAN’S STATEMENT
TO OUR SHAREHOLDERS
2015 represented a year of stabilization for O2Micro as we have realigned 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 2016 as a potential growth year for the Company in terms of year-over-year revenue growth as we
believe we are well aligned with the mega-trends in the industry-including 4K TV, battery management and LED
general lighting. We believe in this development for a number of significant reasons including: Due to ongoing
customer product ramps, we sustained higher quarterly revenues in each quarter of Fiscal year 2015. 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, 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 2016 and into 2017. Finally, we have reduced operational
expenses by approximately fifty percent from fiscal year-end 2012 levels and we believe that we have achieved the
necessary expense structure to return to profitability in the near future.
In 2015, we dedicated approximately 65% 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 2016. In fact, revenue
from new products accounted for approximately 32% of total revenue in 2015. As this trend continues, new design
revenue will continue to gain momentum in diverse markets and expand our customer base for our LED general
lighting, backlighting, battery management and power management products.
O2Micro’s proprietary, analog power management technology in our battery management segment supports a
variety of end markets and this business enjoyed excellent year-over-year growth in 2015. Our battery
management products not only exceeded our stated goal of reaching fifteen percent of second half 2015
revenue, but we are now expecting sales from these products to represent approximately twenty to twenty five
percent of our projected 2016 revenues. This will make battery management the second largest product line for
O2Micro in 2016. 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 uninterrupted power supply applications. Major
manufacturers using our products include Black & Decker, Electrolux, LG, Panasonic, and TTI, to name a few.
In our backlighting business, we are projecting renewed growth in this product area as we move into 2016, based
on increasing design activity in TV and Monitor and the emergence and increasing penetration rate of 4K TVs. 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.
The Company continues to garner design wins for the smartphone and tablet markets. 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.
Our LED general lighting business continues to grow in this competitive market as we remain focused on the higher
end of this market. We are very pleased that an increasing number of market leaders are using our general lighting
product technologies. This customer list includes GE, Panasonic, Samsung, Toshiba, Osram, IKEA, Philips, 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.
In 2016, 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. Our Management Team is diversified and
- 2 -
experienced. We are also in the process of monetizing some of our real-estate assets and long-term investments.
Returns to shareholders are a top priority and we continue to be active in our share repurchase program. Since
2002, we have repurchased approximately nineteen million ADS shares for approximately one hundred million
dollars. 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, 2015 and 2014 and for the Three Years Ended
December 31, 2015, 2014 and 2013, 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, 2015 and 2014, 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, 2015 (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, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 28, 2016 expressed an unqualified opinion on the
Company’s internal control over financial reporting.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 28, 2016
- 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, 2015, 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, 2015, 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, 2015, of the Company and
our report dated April 28, 2016 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Taipei, Taiwan
Republic of China
April 28, 2016
- 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)
Asset held for sale (note 10)
Total current assets
LONG-TERM INVESTMENTS (notes 4 and 9)
PROPERTY AND EQUIPMENT, NET (note 10)
OTHER ASSETS (note 11)
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes and accounts payable
Income tax payable
Accrued expenses and other current liabilities (note 12)
Total current liabilities
OTHER LONG-TERM LIABILITIES
Accrued pension liabilities (note 14)
Other liabilities (note 10)
Total long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (notes 17 and 18)
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 – 1,278,661,400 and 1,327,260,450 shares as of
December 31, 2015 and 2014, respectively
Additional paid-in capital
Accumulated deficits
Accumulated other comprehensive income
Treasury stock – 382,125,200 and 333,526,150 shares as of
December 31, 2015 and 2014, respectively
Total shareholders’ equity
$
December 31
2015
2014
$
41,199
31
11,233
5,197
9,662
1,126
1,956
70,404
41,069
164
21,481
6,789
8,642
1,308
-
79,453
9,304
14,754
14,011
19,363
2,489
3,168
$
96,208
$ 116,738
$
$
3,333
2,245
7,102
12,680
2,131
650
6,049
8,830
272
139
411
293
349
642
13,091
9,472
-
-
33
141,886
(38,386)
4,824
33
141,229
(17,291)
6,768
(25,240)
(23,473)
83,117
107,266
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
96,208
$ 116,738
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)
NET SALES
COST OF SALES
GROSS PROFIT
Years Ended December 31
2014
2015
2013
$
54,841
$
63,591
$
73,785
27,145
30,856
36,411
27,696
32,735
37,374
OPERATING EXPENSES
Research and development (a)
Selling, general and administrative (a)
Costs associated with exit activities (note 3)
Litigation income (note 18)
18,493
23,632
-
-
21,885
24,721
3,027
(75)
27,017
30,898
-
-
Total operating expenses
42,125
49,558
57,915
LOSS FROM OPERATIONS
(14,429)
(16,823)
(20,541)
NON-OPERATING INCOME
Interest income
Foreign exchange gain, net
Impairment loss on long-term investments (note 9)
Gain on sale of long-term investments (note 9)
Gain on sale of real estate (note 10)
Other, net
681
730
(4,953)
8
767
741
1,035
589
(83)
436
458
515
1,303
491
-
-
-
646
Total non-operating (loss) income
(2,026)
2,950
2,440
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX
(16,455)
(13,873)
(18,101)
INCOME TAX EXPENSE (note 13)
4,640
1,184
992
NET LOSS FROM CONTINUING OPERATIONS
(21,095)
(15,057)
(19,093)
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX
-
-
(6)
NET LOSS
(21,095)
(15,057)
(19,099)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
EFFECT OF NIL
Foreign currency translation adjustments
(1,945)
(1,416)
Unrealized (loss) gain on available-for-sale securities
(note 9)
Unrealized pension gain
-
1
(398)
70
Total other comprehensive (loss) income
(1,944)
(1,744)
COMPREHENSIVE LOSS
$
(23,039)
$
(16,801)
$
11
342
294
647
(18,452)
(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)
BASIC AND DILUTED LOSS PER SHARE (note 16)
Continuing operations
Discontinued operations
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
Years Ended December 31
2014
2015
2013
$
(0.02) $
(0.01) $
-
-
$
(0.02)
$
(0.01)
$
(0.01)
-
(0.01)
1,301,465
1,362,465
1,435,778
$
$
322
1,590
$
$
489
1,631
$
$
700
1,909
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, 2013
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
BALANCE, DECEMBER 31, 2013
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
BALANCE, DECEMBER 31, 2014
Issuance of:
Shares for exercise of stock options
Shares for Employee Stock Purchase Plan
Shares vested under restricted share units
Acquisition of treasury stock – 69,838,000 shares
Treasury stock reissued for :
Exercise of stock options
Employee Stock Purchase Plan
Restricted share units
Stock-based compensation
Net loss for 2015
Pension gain
Foreign currency translation adjustments
Ordinary Shares
Shares
Amount
Additional
Paid – in
Capital
Retained
Earnings
(Accumulated
Deficits)
Accumulated Other Comprehensive Income
Unrealized
Investment
Gain (Loss)
Cumulative
Translation
Adjustment
Unrealized
Pension
Gain (Loss)
Total
Treasury
Stock
Shareholders’
Equity
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
1,660,786,600
33
140,198
(2,234)
398
8,302
(188)
8,512
(19,899)
126,610
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
33
141,229 (17,291)
677,100
4,833,300
15,728,550
-
(677,100)
(4,833,300)
(15,728,550)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31
180
-
-
-
-
-
-
(47)
(328)
(1,091)
1,912
-
-
-
-
- (21,095)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,886
(118)
6,768
(23,473)
107,266
-
-
-
-
-
-
-
-
-
-
(1,945)
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
-
-
-
1
(1,945)
-
-
-
(3,233)
47
328
1,091
-
-
-
-
31
180
-
(3,233)
-
-
-
1,912
(21,095)
1
(1,945)
$ 4,941
$
(117)
$ 4,824
$ (25,240)
$
83,117
BALANCE, DECEMBER 31, 2015
The accompanying notes are an integral part of the consolidated financial statements.
1,660,786,600
$ 33
$ 141,886 $(38,386)
$
- 10 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
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
Other liabilities
Years Ended December 31
2014
2015
2013
$
(21,095)
$
(15,057)
$
(19,099)
2,446
1,912
-
913
(8)
4,953
(738)
1,989
-
1,592
(1,933)
191
(416)
1,202
1,595
(1,039)
(11)
(168)
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)
Net cash used in operating activities
(8,615)
(10,328)
(22,990)
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
(7,128)
-
(724)
-
132
82
16,755
537
3,205
(22,346)
-
(1,004)
-
(1)
116
34,333
1,304
1,982
(15,496)
(250)
(743)
10,000
1
108
52,131
-
166
Net cash provided by investing activities
12,859
14,384
45,917
FINANCING ACTIVITIES
Acquisition of treasury stock
Proceeds from:
(3,233)
(4,965)
(8,279)
Exercise of stock options
Issuance of ordinary shares under the Employee Stock Purchase Plan
31
180
44
258
25
335
Net cash used in financing activities
(3,022)
(4,663)
(7,919)
(Continued)
- 11 -
O2MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand US Dollars)
Years Ended December 31
2014
2015
2013
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE
$
(1,092)
$
(617)
$
(613)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
130
(1,224)
14,395
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
41,069
42,293
27,898
CASH AND CASH EQUIVALENTS AT END OF THE YEAR
$
41,199
$
41,069
$
42,293
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for interest
Cash paid for tax
$
$
-
1,068
$
$
-
697
$
$
-
1,064
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
(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-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 doubtful accounts,
other-than-temporary impairment of securities, inventory valuation, useful lives for property and
equipment, impairment of long-lived assets and identified intangible assets, allowances for sales returns,
pension and uncertain tax liabilities, contingencies and stock-based compensation.
tax assets, allowance
for deferred
income
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 at the banks with good credit rating. 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. 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 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. There were no available-for-sale securities as
of December 31, 2015 and 2014.
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 50 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.
Assets held for sale
The Company considers assets to be held for sale (a) when management or others having the authority to
do so approve a plan to sell the assets, (b) the assets are available for immediate sale in their present
condition, (c) the Company has initiated an active program to locate a buyer and other actions required to
complete the plan to sell the assets, (d) consummation of the transactions is probable and is expected to
qualify for recognition as a completed sale, within one year, (e) the assets are being actively marketed for
sale at a price that is reasonable in relation to their current fair value, and (f) the significant changes to the
plan to sell the assets are not expected to be made or the plan is not expected to be withdrawn. When
property and equipment are classified as held for sale, the Company discontinues depreciating the assets
and measures the assets at lower of their carrying amount and fair value less costs to sell.
Long-lived Asset Impairment
The Company evaluates the recoverability of
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.
long-lived assets whenever events or changes
Treasury Stock
The Company may retire ordinary shares repurchased under a share repurchase plan. Accordingly, upon
- 15 -
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
These costs were
approximately $782,000, $948,000, and $1,349,000 in 2015, 2014, and 2013, respectively. A portion of
these costs was for advertising, which approximately amounted to $236,000, $205,000, and $297,000 in
2015, 2014, and 2013, respectively.
incurred.
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
realizability of certain deferred income tax assets and, accordingly, has established a valuation allowance
for those deferred income tax assets to the extent the realizability is not deemed to be more likely than
not. Deferred income tax assets and liabilities are measured using enacted tax rates.
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained in a dispute with taxing authorities,
including resolution of related appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate
settlement.
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
- 17 -
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.
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 April 2014, the Financial Accounting Standard Board (“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
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 did not 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. In August 2015, the FASB
issued an amendment to defer the effective date. The new standard is effective for fiscal years beginning
after December 15, 2017 and early adoption is permitted for annual reporting periods beginning after
December 15, 2016. In March and April 2016, the FASB issued two accounting updates to clarify the
implementation guidance on principal versus agent considerations, performance obligations and the
licensing. 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 is currently evaluating this guidance, but does not expect the adoption to
have a material effect on the Company’s consolidated financial statements.
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
- 18 -
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.
In July 2015, the FASB issued an accounting update to simplify the measurement of inventory. The
amendment requires the measurement of inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation. The amendment applies to inventories for which cost is
determined by methods other than the last-in first-out and the retail inventory methods. This amendment is
effective prospectively for annual periods beginning after December 15, 2016 and early application 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.
In November 2015, the FASB issued an accounting update to simplify the presentation of deferred income
taxes. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The current requirement that deferred tax liabilities and assets of
a tax-paying component of an entity be offset and presented as a single amount is not affected by the
amendments in this guidance. This amendment is effective prospectively or retrospectively for annual
periods beginning after December 15, 2016 and early application is permitted. The Company is currently
evaluating the effect this standard will have on its financial position.
In January 2016, the FASB issued an accounting update regarding the subsequent measurement of equity
investment. The amendment requires all equity investment to be measured at fair value with changes in
the fair value recognized through net income other than those accounted for under equity method of
accounting or those that result in consolidation of the investee. The amendment also simplifies the
impairment assessment of equity investments without readily determinable fair value by requiring
assessment for impairment qualitatively and eliminating the complexity of the other-than-temporary
impairment guidance. For financial reporting, the amendment requires an entity to present separately in
other comprehensive income the portion of the total change in the fair value of a liability resulting from a
change in the instrument-specific credit risk when the entity has elected to measure the liability at fair
value in accordance with the fair value option for financial instruments. In addition, for public company:
the amendment eliminates the requirement to disclose the methods and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet; for nonpublic company: the amendment eliminates the requirement to disclose
the fair value of financial instruments measured at amortized cost. This amendment is effective for fiscal
years beginning after December 15, 2017 and early application is prohibited. The adoption of this
amendment is not expected to have a material impact on the Company’s financial position, results of
operations, cash flow and financial statement disclosures.
In February 2016, the FASB issued a new standard regarding leases. The new standard requires an entity to
recognize assets and liabilities arising from a lease for both financing and operating leases other than that
the entity elects the short-term lease recognition and measurement exemption. Qualitative and
quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash
flows arising from leases. This standard is effective for fiscal years beginning after December 15, 2018, and
early adoption is permitted. The Company is currently evaluating the effect this standard will have on its
financial position, results of operations, cash flow and financial statement disclosures.
In March 2016, the FASB issued an accounting update to simplify several aspects of the accounting for
share-based payment award transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. The amendment is effective
for fiscal years beginning after December 15, 2016, and earlier adoption is permitted. The adoption of this
amendment is not expected to have a material impact on the Company’s financial position, results of
operations, cash flow and financial statement disclosures.
3. DISCONTINUED OPERATIONS AND EXIT ACTIVITIES
Discontinued Operations
As part of the Company’s strategy to evaluate its business segments periodically, management noted that
- 19 -
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 2015 and 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 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. 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. 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. 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:
Fair Value Measurements at the End of
the Reporting Period
Level 2
Level 3
Level 1
(In Thousands)
Total
Items measured at fair value on a recurring
basis at December 31, 2015
- 20 -
Cash and cash equivalents
Money market mutual funds
Items measured at fair value on a recurring
basis at December 31, 2014
Cash and cash equivalents
Money market mutual funds
$
-
$
161
$
-
$
161
$
-
$
162
$
-
$
162
Items measured at fair value on a
nonrecurring basis at December 31, 2015
Level 1
Level 2
Level 3
Total
Total
Losses
Long-term investments
Cost method securities (note 9)
$
-
$
-
$ 2,414
$ 2,414 $ (4,953)
Items measured at fair value on a
nonrecurring basis at December 31, 2014
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.
The Company utilized a pricing service to estimate fair value measurements for the money market mutual
funds. 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. Such controls,
which may be performed quarterly or when certain assets need to be measured at fair value on a
non-recurring basis, include a detailed review of methodologies and assumptions and a management
review of valuation.
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, 2015 and 2014,
respectively.
The fair value measurement in cost method securities was determined based on certain evidential
financial information. Please also see discussions in note 9.
- 21 -
5. CASH AND CASH EQUIVALENTS
Time deposits
Savings and checking accounts
Money market mutual funds
Petty cash
6. SHORT-TERM INVESTMENTS
(In Thousands)
December 31
2015
2014
$ 8,616
32,414
161
8
$ 17,679
23,214
162
14
$ 41,199
$ 41,069
(In Thousands)
December 31, 2015
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Cost
Time deposits
$ 11,233
$
-
$
-
$ 11,233
December 31, 2014
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Cost
Time deposits
$ 21,481
$
-
$
-
$ 21,481
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 one year through two years
- 22 -
(In Thousands)
December 31, 2015
Fair
Value
Cost
$ 11,205
28
$ 11,233
$ 11,205
28
$ 11,233
(In Thousands)
December 31, 2014
Fair
Value
Cost
$ 21,477
4
$ 21,481
$ 21,477
4
$ 21,481
The Company’s gross realized gains and losses on the sale of investments for the year ended December 31,
2015 were both $0. 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.
7.
INVENTORIES
Finished goods
Work-in-process
Raw materials
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses
Payment in advance
Other receivable
Interest receivable
Deferred income tax assets
Value-added-tax recoverable
Other
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
- 23 -
(In Thousands)
December 31
2015
2014
$ 3,080
1,847
4,735
$ 2,686
1,405
4,551
$ 9,662
$ 8,642
(In Thousands)
December 31
2015
2014
$
$
545
230
158
94
26
4
69
674
192
26
293
17
19
87
$ 1,126
$ 1,308
(In Thousands)
December 31
2015
2014
$ 2,365
4,968
49
78
1,844
-
-
-
9,304
$ 7,200
4,968
497
78
1,844
167
-
-
14,754
Etrend Hightech Corp. (“Etrend”)
-
-
$ 9,304
$ 14,754
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
2014
2015
2013
Balance at beginning of period
Other comprehensive income before
reclassification adjustment
Reclassification adjustment
Balance at end of period
$
$
-
-
-
-
$
398
$
56
74
(472)
342
-
$
-
$
398
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. In September 2015, Sigurd Cayman announced the liquidation of its wholly owned subsidiary,
Sigurd Microelectronics (Wuxi) Co., Ltd. (“Sigurd Wuxi”), whose sales and operations account for the
majority business of Sigurd Cayman. In view of Sigurd Cayman’s recurring financial losses and its decision
to cease operations of Sigurd Wuxi, the Company determined that the decline in fair value of the
investment in Sigurd Cayman was other-than-temporary and recognized an impairment charge of
$4,835,000 in 2015. The resulting investment which was classified as Level 3 in the fair value hierarchy was
valued using a discounted cash flow model considering the latest available financial information which
primarily consists of cash and time deposits. The valuation inputs primarily included an estimate of future
cash flows, expectations about possible variations in the amount and timing of cash flows. The significant
unobservable input is assuming no future revenue and cost associated with production activities. As of
December 31, 2015, the Company held 9,690,445 shares, which represented an 18.88% ownership of
Sigurd Cayman, and the fair value of the investment after impairment was $2,365,000.
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, 2015, 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. In April 2016, the
Company sold the entire X-FAB’s ordinary shares to a third party company and recognized a gain on
disposal of $413,000.
is a European-American
foundry group
specializes
that
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 and May 2015 at a cost of $445,000 and $330,000,
respectively, and the carrying cost of the Company is reduced to $167,000 accordingly. In December
2015, in view of the fund’s liquidation and continuous lower net asset value than the cost, the Company
determined that the decline in fair value of the investment in PVEF was other-than- temporary and
recognized an impairment charge of $118,000. The fair value for the fund was estimated based on the net
asset value of the Company’s ownership interest in the fund. The investment was classified as Level 3 in
the fair value hierarchy since the fund was redeemable at December 31, 2015. Distributions from fund will
be received through the liquidation of the underlying assets of the fund or the redemption of shares
initiated by the fund. As of December 31, 2015, there were no unfunded commitments and the Company
held a 5% interest in the fund as of December 31, 2015.
- 24 -
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, 2015,
the Company held 333,334 shares at the cost of $78,000, which represented a 0.35% 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, 2015, the Company held
3,474,854 shares at the cost of $1,844,000, which represented a 10.98% 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. The Company sold the entire Verticile shares
during the second half of 2015 and a gain of $8,000 was recorded for the year ended December 31, 2015.
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 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, 2015, the
Company held 30,101,353 of ordinary and preference shares, representing an 18.41% ownership of
Sinomos.
invested
in SiGen preferred shares
The Company
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, 2015, representing a
0.06% ownership of SiGen.
in December 2000.
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
2015
2014
$ 2,510
6,066
21,819
826
1,785
698
3,875
1,863
39,442
1,526
20,965
744
1,474
619
103
25,431
$ 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
$ 14,011
$ 19,363
Depreciation expense recognized during the years ended December 31, 2015, 2014, and 2013 was
approximately $1,730,000, $2,548,000, and $3,464,000, respectively.
As a result of dissolution activities of the Intelligent Power Group, a loss on asset write-off of $24,000 on
property and equipment was incurred for the year ended December 31, 2014. 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. Since the fourth quarter of 2014, the title of some units of the buildings were
completed and sold to the third party and the Company has realized the deferred gain of $106,000
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 has also sold 5 building units to
third parties since the fourth quarter of 2014. As a result of the sale of building units, net gains of
$767,000 and $458,000 were recorded for the years ended December 31, 2015 and 2014, respectively.
Beginning in November 2015, the Company has negotiated with a third party company to dispose one of
the three units of the Company’s office building located in China. A letter of intent has also been signed
by both parties in January 2016. The Company determined that this transaction meets the criteria of asset
held for sale and such reclassification was made as of December 31, 2015. In April 2016, an agreement was
signed by both parties and this transaction is expected to be completed in the second half of 2016.
- 26 -
11. OTHER ASSETS
Deferred charges
Land use rights
Refundable deposits
Deferred income tax assets - noncurrent
(In Thousands)
December 31
2015
2014
$ 1,060
743
483
203
$ 1,338
1,151
565
114
$ 2,489
$ 3,168
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, 2015, 2014, and 2013 was approximately $688,000,
$1,142,000, and $1,162,000, respectively.
As a result of dissolution activities of the Intelligent Power Group, loss on asset write-off of $58,000 on
deferred charges was incurred for the year ended December 31, 2014. 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, 2015, 2014, and 2013 was approximately
$28,000, $28,000, and $28,000, respectively.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(In Thousands)
December 31
2015
2014
$ 2,305
2,206
630
366
361
146
100
35
27
926
$ 3,094
119
1,030
150
258
92
138
56
158
954
$ 7,102
$ 6,049
Salaries, bonus and benefits
Deferred income tax liabilities
Engineering related expenses
Consulting fees
Legal and audit fees
Shipping expenses
Withholding tax payable
Promotional expenses
Value-added tax payable
Other accrued expenses
- 27 -
13. INCOME TAX
The Company is not subject to income or other taxes in the Cayman Islands. However, subsidiaries are
subject to taxes of the jurisdiction where they are located.
Loss before income taxes from continuing operations consisted of:
(In Thousands)
Years Ended December 31
2014
2015
2013
Cayman Islands
Foreign
Income tax expense from continuing operations consisted of:
$(19,183)
2,728
$(18,943)
5,070
$(22,116)
4,015
$(16,455)
$(13,873)
$(18,101)
(In Thousands)
Years Ended December 31
2014
2015
2013
Current
Deferred
$ 2,651
1,989
$ 1,106
78
$
951
41
Income tax expense
$ 4,640
$ 1,184
$
992
Income tax expenses from discontinued operations were all $0 for the years ended December 31, 2015,
2014, and 2013, 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:
(In Thousands)
Years Ended December 31
2014
2015
2013
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
Withholding taxes on repatriation of subsidiary profits
Other
$
-
$
-
$
-
675
1,976
20
13
1,757
199
989
(72)
23
150
-
94
808
(474)
20
515
-
123
$ 4,640
$ 1,184
$
992
- 28 -
The deferred income tax assets and liabilities as of December 31, 2015 and 2014 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
Withholding taxes on repatriation of subsidiary profits
Unrealized foreign exchanges
Unrealized capital allowance
(In Thousands)
December 31
2015
2014
$ 5,933
195
277
56
6,461
(6,232)
$ 5,858
101
293
98
6,350
(6,219)
$
229
$
131
$
$ 2,188
18
-
-
109
10
$ 2,206
$
119
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 $13,000, $150,000, and $515,000 for the years ended December 31,
2015, 2014, and 2013, respectively. The changes in the valuation allowance in 2015, 2014, and 2013
were primary due to the fluctuations in R&D credits from O2Micro Inc. that could not be utilized.
As of December 31, 2015, O2Micro, Inc. had U.S. federal and state research and development credit
carryforwards of approximately $5,304,000 and $6,721,000, 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.
To better position itself for the future growth phase, the Company considered the repatriation of the
earnings from subsidiaries in Taiwan and China in the second and fourth quarter of 2015. As a result, a
deferred tax liability and a withholding tax expenses for the unremitted earnings in Taiwanese and Chinese
subsidiaries have been recorded for $2,188,000 as of December 31, 2015.
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 2010 because of the statute
of limitations.
14. RETIREMENT AND PENSION PLANS
The Company has a savings plan that qualifies under Section 401(k) of the US Internal Revenue Code.
Participating employees may defer up to the US Internal Revenue Service statutory limit amounts of pretax
salary. The Company may make voluntary contributions to the savings plan but has made no
contributions since the inception of the savings plan in 1997.
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
- 29 -
and practices. For the years ended December 31, 2015, 2014, and 2013, pension costs charged to
income in relation to the contributions to these schemes were $1,152,000, $1,328,000, and $1,586,000,
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, 2015 and 2014,
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 2015 and 2014 were as follows:
Cash
Debt securities
Equity securities
December 31
2015
2014
17%
30%
50%
19%
31%
50%
Changes in projected benefit obligation and plan assets for the years ended December 31, 2015 and 2014
were as follows:
(In Thousands)
Years Ended December 31
2014
2015
2013
Projected benefit obligation, beginning of the year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Effect of changes in foreign exchange rate
$
$
838
3
16
-
11
(30)
933
3
17
-
(61)
(54)
$ 1,220
3
18
-
(277)
(31)
Projected benefit obligation, end of the year
$
838
$
838
$
933
Fair value of plan assets, beginning of the year
Employer contributions
Actual return on plan assets
Effect of changes in foreign exchange rate
$
$
545
27
14
(20)
$
542
24
12
(33)
512
36
7
(13)
Fair value of plan assets, end of the year
$
566
$
545
$
542
The component of net periodic benefit cost was as follows:
- 30 -
(In Thousands)
Years Ended December 31
2014
2015
2013
Service cost
Interest cost
Expected return on plan assets
Amortization of net pension loss
$
$
3
16
(9)
6
$
3
17
(9)
6
3
18
(9)
20
Net periodic benefit cost
$
16
$
17
$
32
The funded status of the plan was as follows:
(In Thousands)
December 31
2015
2014
Accumulated benefit obligation
$
(672)
$
(653)
Project benefit obligation
Plan assets at fair value
Funded status of the plan
(838)
566
(838)
545
$
(272)
$
(293)
The actuarial assumptions to determine the benefit obligations were as follows:
Discount rate
Rate of compensation increases
December 31
2015
2014
1.5%
2.0%
2.0%
2.0%
The actuarial assumptions to determine the net periodic benefit cost were as follows:
Years Ended December 31
2014
2015
2013
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%
2.0%
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.
Estimated future benefit payments are as follows:
Year
2016
2017
2018
2019
2020 and thereafter
- 31 -
(In Thousands)
$
10
19
20
14
391
15. STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
In October 1999, the Board adopted the 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”),
which was approved by the shareholders prior to the consummation of its initial public offering in August
2000. A total of 50,000,000 ordinary shares were reserved for issuance under the 1999 Purchase Plan,
plus annual increases on January 1 of each year, commencing in 2001, up to 40,000,000 shares as
approved by the Board. 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 2013 to 2015, 16,164,150 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,
2015, the number of options outstanding and exercisable was 722,300 and 722,300, respectively, under
the 1999 Stock Incentive Plan.
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
- 32 -
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, 2015, the number of options
outstanding and exercisable was 176,806,500 and 126,404,750, respectively, under the 2005 SOP. In 2015,
the Board adopted the 2015 Stock Incentive Plan, which was approved by the Shareholders in July 2015,
and replaced the 2005 SOP after it expired on March 2, 2016.
A summary of the Company’s stock option activity under the plans as of December 31, 2015, and changes
during the year then ended is presented as follows:
Number of
Options Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Aggregate
Intrinsic
Value
Outstanding Options, January 1, 2015
Granted
Exercised
Forfeited or expired
228,666,600
$ 0.1345
43,263,900 $ 0.0501
$ 0.0460
$ 0.1938
(677,100)
(93,724,600)
Outstanding Options, December 31, 2015
177,528,800
$ 0.0869
4.18
$
Vested and Expected to Vest Options at
December 31, 2015
175,617,560
$ 0.0831
4.16
$
Exercisable Options at December 31, 2015 127,127,050
$ 0.0944
3.21
$
-
-
-
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013
was $2,000, $13,000, and $9,000, respectively.
The following table summarizes information about outstanding and vested stock options:
Options Outstanding
Weighted
Average Weighted
Average
Exercise
Price
Remaining
Contractual
Life
Number
Outstanding
Options Exercisable
Number
Exercisable
and Vested
Weighted
Average
Exercise
Price
46,740,200
40,027,700
31,246,750
33,915,300
25,598,850
3.57
5.61
6.16
3.25
1.90
$ 0.0476 32,034,900
$ 0.0663 24,111,300
$ 0.0826 12,323,500
$ 0.1124 33,058,500
$ 0.1621 25,598,850
$ 0.0467
$ 0.0653
$ 0.0863
$ 0.1125
$ 0.1621
Range of Exercise Prices
$0.0454 - $0.0506
$0.0522 - $0.0750
$0.0776 - $0.0940
$0.0948 - $0.1276
$0.1320 - $0.2176
Balance, December 31, 2015
177,528,800
4.18
$ 0.0869 127,127,050
$ 0.0944
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.
- 33 -
Stock Options
Years Ended December 31
2014
2015
2013
Employee Stock Purchase Plan
Years Ended December 31
2014
2013
2015
Risk-free interest rate
Expected life
Volatility
Dividend
1.18%-1.50%
5
Years
33%-36%
-
1.49%-1.76%
5
Years
34%-37%
-
0.68%-1.75% 0.01%-0.08% 0.02%-0.05% 0.04%-0.06%
5
Years
40%-48%
-
0.25-0.26
Years
35%-48%
-
0.25-0.26
Years
30%-45%
-
0.25-0.26
Years
24%-40%
-
The weighted-average grant-date fair value of options granted during the years ended December 31, 2015,
2014, and 2013 was $0.0127, $0.0245, and $0.0263 respectively. The weighted-average fair value of
options granted under the 2009 Purchase Plan during the years ended December 31, 2015, 2014, and 2013
was $0.008, $0.0104, and $0.0106, 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. In 2015,
the Board adopted the 2015 Stock Incentive Plan, which was approved by the Shareholders in July 2015,
and replaced the 2005 SIP after it expired on March 2, 2016.
A summary of the status of the Company’s RSUs as of December 31, 2015, and changes during the year
ended December 31, 2015, is presented as follows:
Weighted
Average
Number of
Outstanding Grant-Date
Fair Value
Awards
Nonvested at January 1, 2015
Granted
Vested
Forfeited and expired
Nonvested at December 31, 2015
46,823,850
24,979,250
$ 0.0710
$ 0.0491
(15,728,550) $ 0.0792
(5,466,200) $ 0.0602
50,608,350
$ 0.0588
As of December 31, 2015, there was $2,534,000 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 2.31 years. The total fair
value of RSUs vested during the years ended December 31, 2015, 2014, and 2013 was $1,246,000,
$1,189,000, and $1,321,000, respectively.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2015, 2014, and 2013 was $211,000, $302,000, and $360,000, respectively.
Ordinary Shares Reserved
As of December 31, 2015, ordinary shares reserved for future issuance were as follows:
- 34 -
Outstanding stock options
Outstanding RSUs
Shares reserved for future stock option grants
Shares reserved for Employee Stock Purchase Plan
Shares reserved for Awards
177,528,800
50,608,350
38,764,950
5,501,800
36,056,850
308,460,750
Shares issued for the exercise of stock options, Employee Stock Purchase Plan and shares vested under
restricted stock units are from the treasury shares.
16. 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
2014
2015
2013
Net loss from continuing operations (in thousands)
Income loss from discontinued operations (in thousands)
$ (21,095)
-
$ (15,057)
-
$ (19,093)
(6)
Net loss (in thousands)
$ (21,095)
$ (15,057)
$ (19,099)
Weighted average shares outstanding (in thousands) – basic
1,301,465
1,362,465
1,435,778
Effect of dilutive securities:
Options and RSUs (in thousands)
-
-
-
Weighted average shares outstanding (in thousands) – diluted
1,301,465
1,362,465
1,435,778
Loss per share – basic and diluted
Continuing operations
Discontinued operations
$
(0.02)
$
(0.01)
$
(0.01)
-
(0.02)
-
(0.01)
$
-
(0.01)
$
$
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 177,528,800 shares at $0.0454 to $0.2176 as of December 31, 2015, 228,666,600
shares at $0.0460 to $0.3462 as of December 31, 2014, and 247,157,450 shares at $0.0558 to $0.4792 as
of December 31, 2013. The anti-dilutive RSUs excluded were 50,608,350 shares, 46,823,850 shares, and
36,215,100 shares as of December 31, 2015, 2014, and 2013, respectively.
- 35 -
17. COMMITMENTS
Lease Commitments
leases office space and certain equipment under non-cancelable operating
The Company
lease
agreements that expire at various dates through December 2020. For the years ended December 31,
2015, 2014, and 2013, leasing costs charged to income in relation to these agreements were $2,106,000,
$2,415,000, and $2,661,000, respectively. The Company’s office lease provides for periodic rental
increases based on the general inflation rate.
As of December 31, 2015, future minimum lease payments under all non-cancelable operating lease
agreements were as follows:
Year
2016
2017
2018
2019
2020
Total minimum lease payments
(In Thousands)
Operating Leases
$ 1,772
984
380
210
72
$ 3,418
Purchase obligations and commitments include payments due under various types of license, maintenance
and support agreements with contractual terms from one to two years. As of December 31, 2015, those
purchase commitments were as follows:
Year
2016
2017
Total
18. CONTINGENCIES
Legal Proceedings
(In Thousands)
$ 266
97
$ 363
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.
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.
O2Micro (China) Co., Ltd. v. Legendsec Information Technology (Beijing) Inc., et al., Chengdu Intermediate
Court, China. The Company filed a trade secret infringement suit against Yunfeng Li, Chengdu Feitong
Technology Co., Ltd. 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. Three hearings have been held since October 2014. The matter
- 36 -
is currently pending.
O2Micro (China) Co., Ltd. v. Legendsec Information Technology (Beijing) Inc., Beijing Haidian District
People's Court, China. The Company filed a copyright infringement suit against Legendsec Information
Technology (Beijing) Inc. in Beijing Haidian District People's Court on November 19, 2014, requesting the
defendant to stop the infringement actions and claim for compensatory damages. The first hearing was
held on March 16, 2015. The second hearing was held on April 22, 2015. The third hearing was held on
May 19, 2015. The Court made a judgment to reject the Company’s claim on July 3, 2015. The Company
appealed to Beijing Intellectual Property Court on July 14, 2015. The first hearing of the second trial was
held on December 23, 2015. The Court made a final judgment to reject the Company’s appeal and sustain
the original judgment on February 26, 2016. The matter is now closed.
O2Micro (China) Co., Ltd. v. Nanjing AnalogChipTech Semiconductor Co., Ltd.,et al., Nanjing Intermediate
Court, China. The Company filed a patent infringement suit against Nanjing AnalogChipTech Semiconductor
Co., Ltd., and Nantong Minghui Power Tools Co., Ltd. in Nanjing Intermediate Court on October 29, 2015,
requesting two defendants to stop the infringement action, destroy the infringing products and claim for
compensatory damages. The first hearing was held on January 18, 2016. All parties reached and signed a
settlement agreement on January 18, 2016 and this case is now closed.
O2Micro (China) Co., Ltd. v. Nanjing AnalogChipTech Semiconductor Co, Ltd.,et al., Nanjing Intermediate
Court, China. The Company filed a trade secret infringement suit against Xiaohu Tang and Nanjing
AnalogChipTech Semiconductor Co., Ltd. in Nanjing Intermediate Court on October 29, 2015, requesting
two defendants to stop the infringement action, destroy the infringing products and claim for
compensatory damages. The first hearing was held on January 11, 2016. All parties reached and signed a
settlement agreement on January 18, 2016 and this case is now closed.
The Company received $0, $75,000, and $0 litigation income in relation to patent litigation cases in the
United States for the years ended December 31, 2015, 2014, and 2013, 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. No
provision for any litigation has been provided as of December 31, 2015 and 2014.
19. FINANCIAL INSTRUMENTS
Information on the Company’s financial instruments was as follows:
(In Thousands)
December 31
2015
2014
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 41,199
31
11,233
$ 41,199
31
11,233
$ 41,069
164
21,481
$ 41,069
164
21,481
Assets
Cash and cash equivalents
Restricted cash
Short-term investments
The carrying amounts of cash and cash equivalents, restricted cash and short-term investments reported in
the consolidated balance sheets approximate their estimated fair values.
- 37 -
Long-term investments 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.
20. 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
2014
2013
2015
$
54,841
-
$
63,591
-
$
73,785
-
$
54,841
$
63,591
$
73,785
$
(14,429)
-
$
(16,823)
-
$
(20,541)
(6)
$
(14,429)
$
(16,823)
$
(20,547)
Net sales to unaffiliated customers by geographic region are based on the customer’s ship-to location and
were as follows:
China
Japan
Taiwan
Singapore
Korea
Other
(In Thousands)
Years Ended December 31
2014
2013
2015
$
$
45,854
3,759
2,274
1,398
879
677
$
55,133
4,490
2,022
1,341
288
317
65,602
4,677
1,892
523
500
591
- 38 -
$
54,841
$
63,591
$
73,785
For the year ended December 31, 2015, only one customer accounted for 10% or more of net sales. For
the years ended December 31, 2014 and 2013, two customers accounted for 10% or more of net sales.
Sales 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
2014
2013
2015
11%
8%
1%
12%
10%
4%
15%
7%
10%
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.
Other
2015
December 31
2014
2013
$
5,813 $
3,997
4,162
39
8,689 $
6,363
4,188
123
10,576
7,872
4,388
203
$
14,011
$
19,363
$
23,039
- 39 -