UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F/A
(Mark One)
[ ] Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934
or
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-30910
O2 MICRO INTERNATIONAL LIMITED
(Exact Name of Registrant as Specified in Its Charter)
The Cayman Islands
(Jurisdiction of Incorporation or Organization)
Grand Pavilion Commercial Centre, West Bay Road
P.O. Box 32331 SMB, George Town
Grand Cayman, Cayman Islands
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Name of Each Exchange On Which
Title of Each Class Registered
------------------- ------------------------------
Ordinary Shares, par value $0.001 per share Nasdaq National Market
Cayman Islands Stock Exchange
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
39,032,616 Ordinary Shares
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [x]
EXPLANATORY NOTE
This Form 20-F/A amends and restates Items 8, 18, and 19 of the annual report on
Form 20-F for the year ended December 31, 2003 filed by O2 Micro International
Limited (the "Company") on June 14, 2004 (the "2003 Form 20-F") to make certain
corrections to disclosures set forth in Notes 2 and 12 to the Company's
Consolidated Financial Statements included in those items in the 2003 Form 20-F.
This Form 20-F/A consists of a cover page, this explanatory note, the
disclosures as required by Items 8, 18, and 19 of the 2003 Form 20-F, the
signature page and the required certifications of the principal executive
officer and the principal financial officer of O2 Micro International Limited.
While the disclosures required by Items 8, 18, and 19 of the Form 20-F have been
restated in full in this Form 20-F/A as required by Rule 12b-15 under the
Securities Exchange Act of 1934, no changes have been made to the disclosures
except to the Notes as described above.
Other than as set forth above, this Form 20-F/A does not, and does not purport
to, amend, update or restate the information in any other Item of the 2003 Form
20-F nor reflect any events that have occurred after the 2003 Form 20-F was
filed on June 14, 2004.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
Our financial statements set forth in the accompanying index to
Consolidated Financial Statements included in this Annual Report on Form 20-F/A
following Part IV beginning on page F-1 are hereby incorporated in this Annual
Report on Form 20-F/A. Our Consolidated Financial Statements are filed as part
of this Annual Report.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our ordinary shares or
other securities and do not anticipate paying cash dividends in the foreseeable
future.
ITEM 18. FINANCIAL STATEMENTS
The Company's financial statements set forth in the accompanying Index to
Consolidated Financial Statements included in this annual report on Form 20-F/A
following Part IV beginning on page F-1 are hereby incorporated herein by this
reference. Such consolidated financial statements are filed as part of this
annual report on Form 20-F/A.
ITEM 19. EXHIBITS
12.3 Certification of Chief Executive Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act, for this Form 20-F/A.
12.4 Certification of Chief Financial Officer of the Company, pursuant to
Section 302 of the Sarbanes-Oxley Act, for this Form 20-F/A.
13.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act, for this Form 20-F/A
14.3 Consent of Deloitte & Touche, independent registered public accounting
firm
14.4 Consent of Deloitte & Touche, independent registered public accounting
firm
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Form 20-F/A amendment to the annual report on Form 20-F
for the year ended December 31, 2003 on its behalf.
O2 MICRO INTERNATIONAL LIMITED
Date: May 26, 2005 By: /s/ STERLING DU
---------------------------------
Name: Sterling Du
Title:Chief Executive Officer
O2 MICRO INTERNATIONAL LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ................................................F-2
Consolidated Balance Sheets .................................................F-4
Consolidated Statements of Operations and Comprehensive Income ..............F-5
Consolidated Statements of Shareholders' Equity .............................F-7
Consolidated Statements of Cash Flows ...................................... F-8
Notes to Consolidated Financial Statements .................................F-10
O//2//Micro International Limited and Subsidiaries
Consolidated Financial Statements as of
December 31, 2002 and 2003 and
Report of Independent Registered Public Accounting Firm
[LETTERHEAD OF DELOITTE&TOUCHE CAYMAN ISLANDS]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and the Shareholders
O//2//Micro International Limited
We have audited the accompanying consolidated balance sheets of O//2//Micro
International Limited and subsidiaries as of December 31, 2002 and 2003 and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the years ended December 31,
2002 and 2003 (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. The financial statements of the Company for the year ended December 31,
2001 were audited by other auditors whose report expressed an unqualified
opinion on those statements.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O//2//Micro
International Limited and subsidiaries as of December 31, 2002 and 2003 and the
results of their operations and their cash flows for each of the years ended
December 31, 2002 and 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 "Stock-based Compensation" and Note 12, the 2002 and 2003
pro forma net income and pro forma earnings per share disclosures have been
restated.
/s/ Deloitte & Touche
January 30, 2004 (May 10, 2005 as to Note 2 "Stock-based Compensation" and Note
12)
F-2
[LETTERHEAD OF DELOITTE&TOUCHE TAIPEI, TAIWAN]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and the Shareholders
O2Micro International Limited
We have audited the accompanying consolidated balance sheet of O//2//Micro
International Limited and subsidiaries as of December 31, 2001 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the year ended December 31, 2001. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O//2//Micro
International Limited and its subsidiaries as of December 31, 2001 and the
results of their operations and their cash flows for the year ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 "Stock-based Compensation" and Note 12, the 2001 pro
forma net income and pro forma earnings per share disclosures have been
restated.
/s/Deloitte & Touche
January 24, 2002 (May 10, 2005 as to Note 2 "Stock-based Compensation" and Note
12)
F-3
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------
December 31
------------------------
2002 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 69,334 $ 66,489
Restricted cash 2,019 1,892
Short-term investments 42,675 53,923
Accounts receivable--net 7,595 9,794
Inventories 6,967 9,613
Prepaid expenses and other current assets 2,891 3,365
---------- ----------
Total current assets 131,481 145,076
---------- ----------
LONG-TERM INVESTMENTS 7,735 7,865
---------- ----------
FIXED ASSETS--Net 5,611 4,880
---------- ----------
OTHER ASSETS
Restricted assets--net -- 10,044
---------- ----------
Others 1,009 1,428
---------- ----------
TOTAL ASSETS $ 145,836 $ 169,293
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 5,202 $ 6,334
Income tax payable 1,957 2,852
Accrued expenses and other current liabilities 3,529 5,380
---------- ----------
Total current liabilities 10,688 14,566
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preference shares at $0.001 par value per share
Authorized--5,000,000 shares -- --
Ordinary shares at $0.001 par value per share
Authorized--95,000,000 shares
Issued--38,857,094 shares including 720,700 shares of treasury stocks as
of December 31, 2002 and 39,032,616 shares as of December 31, 2003 39 39
Treasury stock (6,823) --
Additional paid-in capital 133,016 137,076
Accumulated other comprehensive loss (692) (521)
Retained earnings 9,608 18,133
---------- ----------
Total shareholders' equity 135,148 154,727
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 145,836 $ 169,293
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------
Years Ended December 31
-----------------------------------
2001 2002 2003
--------- --------- ---------
NET SALES $ 45,819 $ 70,187 $ 88,599
COST OF SALES 16,465 28,143 38,314
--------- --------- ---------
GROSS PROFIT 29,354 42,044 50,285
--------- --------- ---------
OPERATING EXPENSES
Research and development (exclusive of amortization of deferred stock
compensation of $91, $30 and $0 in 2001, 2002 and 2003,
respectively) 14,320 18,935 19,219
Selling, general and administrative (exclusive of amortization of
deferred stock compensation of $75, $14 and $0 in 2001, 2002
and 2003, respectively) 9,909 12,325 17,476
Stock-based compensation 166 44 --
--------- --------- ---------
Total operating expenses 24,395 31,304 36,695
--------- --------- ---------
INCOME FROM OPERATIONS 4,959 10,740 13,590
--------- --------- ---------
NON-OPERATING INCOME(EXPENSES)
Interest income 1,814 1,802 1,283
Impairment loss on long-term investments -- (483) (17)
Interest expenses (11) (4) (1)
Foreign exchange gain--net 59 4 287
Other--net (35) 343 (115)
--------- --------- ---------
Total non-operating income 1,827 1,662 1,437
--------- --------- ---------
INCOME BEFORE INCOME TAX 6,786 12,402 15,027
INCOME TAX EXPENSE 1,152 1,673 1,826
--------- --------- ---------
NET INCOME 5,634 10,729 13,201
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Translation adjustments on subsidiaries (489) 132 (90)
Unrealized gain (loss) on available-for-sale securities 15 (127) 261
--------- --------- ---------
Total other comprehensive income (loss) (474) 5 171
--------- --------- ---------
COMPREHENSIVE INCOME $ 5,160 $ 10,734 $ 13,372
========= ========= =========
(Continued)
F-5
Years Ended December 31
-----------------------------------
2001 2002 2003
---------- ---------- ----------
EARNINGS PER SHARE:
Basic $ 0.17 $ 0.28 $ 0.34
========== ========== ==========
Diluted $ 0.16 $ 0.27 $ 0.33
========== ========== ==========
SHARES USED IN EARNINGS PER SHARE CALCULATION:
Basic (in thousands) 34,020 38,300 38,374
========== ========== ==========
Diluted (in thousands) 35,576 39,591 39,736
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
(Concluded)
F-6
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------
Additional Paid-in Capital
Ordinary Shares ------------------------------
------------------- Ordinary Stock Treasury
Shares Amount shares options Total Stock Warrants
---------- ------ -------- ------- --------- -------- --------
BALANCE, JANUARY 1, 2001 32,788,238 $ 33 $ 53,148 $ 1,923 $ 55,071 $ -- $ 51
Issuance of:
Shares issued for exercise of stock options 656,215 1 1,780 (796) 984 -- --
Shares issued for 1999 ESPP Plan 90,058 -- 690 -- 690 -- --
Shares, net of $601 in offering costs 4,600,000 4 73,450 -- 73,450 -- --
Cancellation of stock options -- -- -- (39) (39) -- --
Options granted to nonemployees -- -- -- 41 41 -- --
Amortization of deferred stock compensation -- -- -- -- -- -- --
Net income for 2001 -- -- -- -- -- -- --
Translation adjustments on subsidiaries -- -- -- -- -- -- --
Unrealized gain on available-for-sale securities -- -- -- -- -- -- --
---------- ------ -------- ------- --------- -------- --------
BALANCE, DECEMBER 31, 2001 38,134,511 38 129,068 1,129 130,197 -- 51
Issuance of:
Shares issued for exercise of stock options 325,279 1 1,187 (275) 912 -- --
Shares issued for 1999 ESPP Plan 97,304 -- 737 -- 737 -- --
Shares issued for exercise of warrants 300,000 -- 801 -- 801 -- (51)
Acquisition of treasury stocks--720,700 shares -- -- -- -- -- (6,823) --
Cancellation of stock options -- -- -- (2) (2) -- --
Options granted to nonemployees -- -- -- 371 371 -- --
Amortization of deferred stock compensation -- -- -- -- -- -- --
Net income for 2002 -- -- -- -- -- -- --
Translation adjustments on subsidiaries -- -- -- -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- -- -- -- --
---------- ------ -------- ------- --------- -------- --------
BALANCE, DECEMBER 31, 2002 38,857,094 39 131,793 1,223 133,016 (6,823) --
Issuance of:
Shares issued for exercise of stock options 863,987 1 6,135 (503) 5,632 -- --
Shares issued for 1999 ESPP Plan 109,735 -- 942 -- 942 -- --
Cancellation of stock options -- -- -- (23) (23) -- --
Acquisition of treasury stock--77,500 shares -- -- -- -- -- (647) --
Retirement of treasury stock (798,200) (1) (2,793) -- (2,793) 7,470 --
Options granted to nonemployees -- -- -- 302 302 -- --
Net income for 2003 -- -- -- -- -- -- --
Translation adjustments on subsidiaries -- -- -- -- -- -- --
Unrealized loss on available-for-sale securities -- -- -- -- -- -- --
---------- ------ -------- ------- --------- -------- --------
BALANCE, DECEMBER 31, 2003 39,032,616 $ 39 $136,077 $ 999 $ 137,076 $ -- $ --
========== ====== ======== ======= ========= ======== ========
Accumulated Other
Comprehensive Income (Loss)
----------------------------------- Retained
Unrealized Cumulative Earnings Total
Deferred investment translation (Accumulated Shareholders'
Compensation gain/loss adjustment Total Deficit) Equity
------------ ------------ ----------- ----- ------------ -------------
BALANCE, JANUARY 1, 2001 ($ 249) $ -- ($ 223) ($223) $ (6,755) $ 47,928
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 985
Shares issued for 1999 ESPP Plan -- -- -- -- -- 690
Shares, net of $601 in offering costs -- -- -- -- -- 73,454
Cancellation of stock options 6 -- -- -- -- (33)
Options granted to nonemployees -- - -- -- -- 41
Amortization of deferred stock compensation 199 -- -- -- -- 199
Net income for 2001 -- -- -- -- 5,634 5,634
Translation adjustments on subsidiaries -- -- (489) (489) -- (489)
Unrealized gain on available-for-sale securities -- 15 -- 15 -- 15
------------ ------------ ----------- ----- ------------ -------------
BALANCE, DECEMBER 31, 2001 (44) 15 (712) (697) (1,121) 128,424
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 913
Shares issued for 1999 ESPP Plan -- -- -- -- -- 737
Shares issued for exercise of warrants -- -- -- -- -- 750
Acquisition of treasury stocks--720,700 shares -- -- -- -- -- (6,823)
Cancellation of stock options -- -- -- -- -- (2)
Options granted to nonemployees -- -- -- -- -- 371
Amortization of deferred stock compensation 44 -- -- -- -- 44
Net income for 2002 -- -- -- -- 10,729 10,729
Translation adjustments on subsidiaries -- -- 132 132 -- 132
Unrealized loss on available-for-sale securities -- (127) -- (127) -- (127)
------------ ------------ ----------- ----- ------------ -------------
BALANCE, DECEMBER 31, 2002 -- (112) (580) (692) 9,608 135,148
Issuance of:
Shares issued for exercise of stock options -- -- -- -- -- 5,633
Shares issued for 1999 ESPP Plan -- -- -- -- -- 942
Cancellation of stock options -- -- -- -- -- (23)
Acquisition of treasury stock--77,500 shares -- -- -- -- -- (647)
Retirement of treasury stock -- -- -- -- (4,676) --
Options granted to nonemployees -- -- -- -- -- 302
Net income for 2003 -- -- -- -- 13,201 13,201
Translation adjustments on subsidiaries -- -- (90) (90) -- (90)
Unrealized loss on available-for-sale securities -- 261 - 261 -- 261
------------ ------------ ----------- ----- ------------ -------------
BALANCE, DECEMBER 31, 2003 $ -- $ 149 ($ 670) ($521) $ 18,133 $ 154,727
============ ============ =========== ===== ============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand U.S. Dollars)
--------------------------------------------------------------------------------
Years Ended December 31
--------------------------------------
2001 2002 2003
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 5,634 $ 10,729 $ 13,201
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,180 1,937 2,623
Amortization of deferred stock compensation 166 44 --
Amortization of stock options granted for services 19 74 335
Loss (gain) on sale of short-term investments 2 (385) 5
Deferred income tax assets (153) 198 386
Impairment of long-term investments -- 483 17
Loss on sale of fixed assets -- 7 68
Changes in operating assets and liabilities:
Accounts receivable--net 1,720 (3,895) (2,199)
Inventories 111 (1,606) (2,646)
Prepaid expenses and other current assets (571) (765) (474)
Notes and accounts payable (197) 1,632 1,132
Income taxes payable 770 737 895
Accrued expenses and other current liabilities 831 333 1,413
---------- ---------- ----------
Net cash provided by operating activities 9,512 9,523 14,756
---------- ---------- ----------
INVESTING ACTIVITIES
Receivables from employee cash advance (185) (262) (104)
Acquisition of:
Fixed assets (2,295) (4,275) (1,749)
Patents (122) -- --
Long-term investments -- (6,968) (147)
Short-term investments (21,636) (188,231) (116,138)
(Increase) decrease in:
Restricted assets -- -- (10,044)
Restricted cash 40 (860) 127
Other assets (68) (46) (612)
Proceeds from:
Sale of short-term investments 1,513 165,970 105,146
Sale of fixed assets -- 3 1
---------- ---------- ----------
Net cash used in investing activities (22,753) (34,669) (23,520)
---------- ---------- ----------
(Continued)
F-8
Years Ended December 31
--------------------------------------
2001 2002 2003
---------- ---------- ----------
FINANCING ACTIVITIES
Acquisitions of treasury stock $ -- $ (6,823) $ (647)
Proceeds from:
Exercise of stock options 985 913 5,633
Issuance of ordinary shares 73,454 -- --
Issuance of shares for warrants exercised -- 750 --
Issuance of ordinary shares under ESPP Plan 690 737 942
Payments of principal of capital leases (42) (10) (6)
Decrease in guarantee deposits (51) -- --
---------- ---------- ----------
Net cash provided by (used in) financing
activities 75,036 (4,433) 5,922
---------- ---------- ----------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE (429) 99 (3)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 61,366 (29,480) (2,845)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,448 98,814 69,334
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 98,814 $ 69,334 $ 66,489
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Cash paid for interest $ 11 $ 4 $ 1
Cash paid for tax 474 744 600
NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired under capital leases 5 -- --
Convertible loans converted to long-term investments -- -- 1,750
Unrealized gain (loss) on short-term investments 15 (127) 261
The accompanying notes are an integral part of the consolidated financial
statements.
(Concluded)
F-9
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars Unless Otherwise Noted)
--------------------------------------------------------------------------------
1. GENERAL
Business
O//2//Micro, Inc. was incorporated in the state of California in the United
States of America on March 29, 1995 to design, develop, and deliver
semiconductor components primarily for mobile applications. In March 1997,
O//2//Micro, Inc. reincorporated in the Cayman Islands under the name
O//2//Micro International Limited (the "Company"). In connection with the
reincorporation, all authorized and outstanding common stock, preferred
stock and stock options of O//2//Micro, Inc. were exchanged for the
Company's ordinary shares, preference shares and stock options with
identical rights and preferences. O//2//Micro, Inc. became the Company's
subsidiary after the shares exchange.
The Company had incorporated various wholly-owned subsidiaries, namely,
O//2//Micro Electronics, Inc. (O//2//Micro--Taiwan), O//2//Micro
International Japan Limited (O//2//Micro--Japan), O//2//Micro PTE
Limited--Singapore (O//2//Micro--Singapore), and other subsidiaries.
O//2//Micro-Taiwan and O//2//Micro--Japan are engaged in trading while
O//2//Micro--Singapore and other subsidiaries are engaged in research and
development. The Company also established a Taiwanese branch office,
O//2//Micro International Limited--Taiwan Branch (O//2//Micro--Taiwan
Branch) to engage in marketing and customer support related services. Due
to the duplicate function of O//2//Micro--Taiwan Branch and
O//2//Micro--Taiwan, the Board of Directors determined to dissolve
O//2//Micro--Taiwan Branch on October 31, 2002. The dissolution process of
O//2//Micro--Taiwan Branch was not completed as of December 31, 2003.
2. ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash is deposited with high credit quality financial
institutions. For accounts receivable, the Company performs ongoing credit
evaluations of its
F-10
customers' financial condition and the Company maintains an allowance for
doubtful accounts receivable based upon review of the expected
collectibility of individual accounts.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, notes and accounts payable, and
capital lease obligations are carried at cost, which approximates the fair
value due to the short-term maturity of those instruments. Fair values of
short-term investments and long-term investments represent quoted market
prices, if available. If no quoted market prices are available, fair values
are estimated based on other factors.
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.
Restricted Assets
The Company classifies deposits made for customs, collateral for obtaining
foundry capacity, lines of credit, office leases and Taiwan court cases as
restricted assets. The deposits are classified as current asset if
refundable within a twelve-month period.
Short-term Investments
The Company maintains its excess cash in U.S. treasury bills and notes,
government and corporate bonds issued by financial institutions with strong
ratings. The specific identification method is used to determine the cost
of securities sold, with realized gains and losses reflected in
non-operating income and expenses. As of December 31, 2003, all of the
Company's investments were classified as available-for-sale securities and
are recorded at market value. Unrealized gains and losses on these
investments are included with accumulated other comprehensive income, 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.
Inventories
The Company outsources the wafer fabrication, assembly, and testing of its
products. Inventories are stated at the lower of standard cost or market
value. Cost is determined on a currently adjusted standard basis, which
approximates actual cost on a first-in first-out basis.
Long-term Investments
Long-term investments over which the Company does not exercise significant
influence are accounted for under the cost method of accounting. Management
evaluates related information in addition to quoted market prices, if any,
in determining the fair value of these investments and whether an other
than temporary decline in value exists. Factors indicative of an other than
temporary decline include recurring operating losses, credit defaults and
subsequent rounds of financings at an amount below the cost basis of the
investment. The list is not all inclusive and management periodically
weighs all quantitative and qualitative factors in determining if any
impairment loss exists.
F-11
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Major
additions, renewals and betterments are capitalized, while maintenance and
repairs are expensed as incurred.
Depreciation is provided on the straight-line method over estimated service
lives that range as follows: equipment--3 to 10 years, furniture and
fixtures--3 to 15 years, equipment under capital lease--2 to 5 years,
leasehold improvements--2 to 6 years and transportation equipment--5 years.
Depreciation expense recognized during the years ended December 31, 2001,
2002 and 2003 was approximately $1,129,000, $1,884,000 and $2,325,000,
respectively.
Equipment covered by agreements qualifying as capital leases is stated at
the lower of fair market value or the present value of the minimum lease
payments at the inception of the lease, less depreciation.
Asset Impairment
The Company evaluates the recoverability of long-lived assets whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flows from such asset is
separately identifiable and is less than the carrying value. If impairment
occurs, a loss based on the excess of carrying value over the fair market
value of the long-lived asset is recognized. Fair market value is
determined by reference to quoted market prices, if available, or
discounted cash flows, as appropriate.
Other Assets--Others
Other assets--others consist of refundable deposits, employee cash
advances, deferred charges and patents. Costs incurred in connection with
securing patents, including attorneys' fees, are capitalized and amortized
over the estimated life of the related technology which is estimated to be
five years.
Treasury Stock
In 2003, the Company determined it will retire ordinary shares repurchased
under a share repurchase plan. Accordingly, the excess of the purchase
price over par value was allocated between additional paid-in capital and
retained earnings based on the average issuance price of the shares
repurchased. Any future repurchases will be immediately retired.
Revenue Recognition
Revenue from product sales to customers, other than distributors, is
recognized at the time of shipment and when title and right of ownership
transfers to customers. The four criteria for revenue being realized and
earned are the existence of evidence of sale, actual shipment, fixed or
determinable selling price, and reasonable assurance of collectibility.
Allowances for sales returns and discounts are provided at the time of the
recognition of the related revenues on the basis of experience and these
provisions are deducted from sales.
In certain limited instances, the Company sells its products through
distributors. The Company has limited control over these distributors'
selling of products to third parties. Accordingly, the Company
F-12
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.
The Company provides its distributors with limited product rotation and
price protection rights for products held in distributors' inventory. To
date, the Company has given no price adjustments to or rotated products for
its distributors.
Research and Development
Research and development costs consist of expenditures incurred during the
course of planned research and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or
at significantly enhancing existing products or production processes as
well as expenditures incurred for the design and testing of product
alternatives or construction of prototypes. All expenditures related to
research and development activities of the Company are charged to operating
expenses when incurred.
Advertising Expenses
The Company expenses all advertising and promotional costs as incurred.
These costs were $1,464,000, $1,577,000 and $795,000 in the years ended
December 31, 2001, 2002 and 2003, respectively. A portion of these costs
were for advertising, which amounted to $138,000 in 2001, $138,000 in 2002
and $153,000 in 2003.
Income Taxes
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.
Under current Republic of China ("ROC") tax regulations, the current year's
earnings, on a tax basis, that are not distributed in the following year
are subject to a 10% additional income tax. This 10% additional income tax
is recognized in the period during which the related income is generated.
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". The
provision for income tax represents income tax paid and payable for the
current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income tax assets are recognized for
operating loss carryforwards, research and development credits, and
temporary differences. The Company believes that uncertainty exists
regarding the realizability of certain deferred income tax assets and,
accordingly, has established a valuation allowance for those net deferred
income tax assets to the extent the realizability is not deemed more likely
than not.
Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for its employee stock options. Under APB No. 25,
compensation expense is measured based on the difference, if any, on the
date of the grant, between the fair value of the Company's stock and the
exercise price.
Had the compensation expense for the Company's stock-based compensation
plans been determined on the basis of the fair values under SFAS No. 123,
the Company's fiscal 2001, 2002 and 2003 net income and net income per
share would be the following.
F-13
Years Ended December 31
--------------------------------
2001 2002 2003
-------- -------- --------
Net income as reported (in thousands) $ 5,634 $ 10,729 $ 13,201
Add: Stock-based compensation expense included in net
income, including tax expense of $0 for 2001, 2002 and 2003,
respectively 166 44 --
Deduct: Stock-based compensation expense determined under
SFAS No. 123 including tax expense of $0 for 2001, 2002 and
2003, respectively (3,929) (8,643) (8,061)
-------- -------- --------
Pro forma net income $ 1,871 $ 2,130 $ 5,140
======== ======== ========
Pro forma shares used in calculation--basic (in thousands) 34,020 38,300 38,374
-------- -------- --------
Pro forma earnings per share--basic $ 0.05 $ 0.06 $ 0.13
======== ======== ========
Earnings per share--basic as reported $ 0.17 $ 0.28 $ 0.34
======== ======== ========
Pro forma shares used in calculation--diluted (in thousands) 35,576 39,591 39,736
======== ======== ========
Pro forma earnings per share--diluted $ 0.05 $ 0.05 $ 0.13
======== ======== ========
Earnings per share--diluted as reported $ 0.16 $ 0.27 $ 0.33
======== ======== ========
The Company determined that certain volatility assumptions used to compute
the fair value of employee stock compensation for 2001, 2002 and 2003 were
inappropriate. Accordingly, such pro forma amounts presented above have
been restated. The pro forma net income previously reported was $3,503,000,
$5,652,000 and $8,676,000 for 2001, 2002 and 2003, respectively. The pro
forma basic earnings per share and pro forma diluted earnings per share
previously reported for 2001, 2002 and 2003 was $0.10 and $0.10, $0.15 and
$0.14, and $0.23 and $0.22, respectively. This change did not impact the
Company's consolidated financial position, results of operations, or cash
flows for any periods presented.
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 receivables and payables are settled, are credited or
charged to income in the period of conversion or settlement. At year-end,
the balances of foreign currency monetary assets and liabilities are
restated based on prevailing exchange rates and any resulting gains or
losses are credited or charged to income.
Translation of Foreign Currency
Financial Statements
The reporting currency of the Company is the U.S. dollar. Accordingly, the
financial statements of the foreign subsidiaries are translated into U.S.
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.
F-14
Comprehensive Income (Loss)
Comprehensive income represents net income plus the results of certain
changes in shareholders' equity during a period from non-owner sources that
are not reflected in the consolidated statement of operations.
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. Because
of uncertainties related to these matters, accruals are based only on the
best information available at the time. As additional information becomes
available, the Company reassesses the potential liability related to the
pending claims and litigation and revises these estimates as appropriate.
Such revisions in the estimates of the potential liabilities could have a
material impact on the results of operations and financial position.
Recent Accounting Pronouncements
Not Yet Adopted
In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46") which requires that all primary beneficiaries of Variable Interest
Entities ("VIE") consolidate that entity. FIN 46 is effective immediately
for VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003 to VIEs in which an enterprise
holds a variable interest it acquired before February 1, 2003. In December
2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some
of the provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly
referred to as special purpose entities (SPE's) are required to apply the
provisions of the interpretation in financial statements for periods ending
after March 14, 2004. The Company does not have interests in special
purpose entities and will apply the provisions of FIN 46R with its first
quarter 2004 financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
The statement establishes standards for how an issuer classifies and
measures certain financial instruments. This statement is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The statement requires that certain
financial instruments that, under previous guidance, could be accounted for
as equity, be classified as liabilities, or assets in some circumstances.
This statement does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The statement also
requires disclosures about alternative ways of settling the instruments and
the capital structure of entities whose shares are mandatorily redeemable.
The adoption of SFAS No. 150 did not impact the Company's consolidated
financial statements.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 2003 presentation.
F-15
3. CASH AND CASH EQUIVALENTS
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Time deposits $ 31,191 $ 34,951
US treasury bills and corporate bonds 25,997 17,122
Savings and checking accounts 12,140 14,409
Petty cash 6 7
-------- --------
$ 69,334 $ 66,489
======== ========
4. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities:
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
US treasury bills $ 26,914 $ 33,958
Time deposits 10,263 10,611
Corporate bonds 2,247 8,185
Foreign government bonds 3,227 1,144
Others 24 25
-------- --------
$ 42,675 $ 53,923
======== ========
Available-for-sale securities by contractual maturity are as follows:
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Due within one year $ 40,606 $ 52,752
Due after one year through two years 2,069 --
Due after two years -- 1,171
-------- --------
$ 42,675 $ 53,923
======== ========
The Company's gross realized gains and losses on the sale of investments
for the year ended December 31, 2002 were $606,000 and $221,000,
respectively, and for the year ended December 31, 2003 were $0 and $5,000,
respectively. Gross unrealized gains and losses at December 31, 2002 were
$64,000 and $176,000, respectively, and at December 31, 2003 were $196,000
and $47,000, respectively. The Company did not provide the disclosure of
fair value and unrealized losses by category of investment as required by
EITF No 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" as the amount of the unrealized losses
for 2003 are deemed insignificant.
F-16
5. ACCOUNTS RECEIVABLE--NET
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Accounts receivable $ 7,973 $ 10,195
Allowances for
Doubtful receivables (64) (86)
Sales returns and discounts (314) (315)
-------- --------
$ 7,595 $ 9,794
======== ========
The changes in the allowances are summarized as follows:
2001 2002 2003
------ ------ ------
(In Thousands)
Allowances for doubtful receivables
Balance, beginning of year $ 38 $ 55 $ 64
Additions 17 9 22
------ ------ ------
Balance, end of year $ 55 $ 64 $ 86
====== ====== ======
Allowances for sales returns and discounts
Balance, beginning of the year $ 252 $ 314 $ 314
Additions 62 -- 1
------ ------ ------
Balance, end of the year $ 314 $ 314 $ 315
====== ====== ======
6. INVENTORIES
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Finished goods $ 2,344 $ 2,042
Work-in-process 2,846 3,608
Raw materials 1,777 3,963
-------- --------
$ 6,967 $ 9,613
======== ========
7. LONG-TERM INVESTMENTS
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Cost method
X-FAB Semiconductor Foundries AG (X-FAB) $ 4,968 $ 4,968
360 Degree Web Ltd. (360 Degree Web) -- 1,750
GEM Services, Inc. (GEM) 500 500
Etrend Hightech Corporation (Etrend) 500 647
Silicon Genesis Corporation (SiGen) 17 --
-------- --------
5,985 7,865
Convertible loans to 360 Degree Web 1,750 --
-------- --------
$ 7,735 $ 7,865
======== ========
F-17
The Company invested in X-FAB's ordinary shares in July 2002. X-FAB is a
European-American foundry group that specializes in mixed signal
applications. As of December 31, 2003, the Company acquired 530,000 shares
for $4,968,000 (4,982,000 EURO), which represents a 2.03% ownership of
X-FAB.
The Company invested in GEM's preferred shares in August 2002. GEM is a
multinational semiconductor assembly and test company. As of December 31,
2003, the Company acquired 333,334 shares for $500,000, which represents a
1.26% ownership of GEM.
The Company invested in Etrend's ordinary shares in December 2002 and July
2003. Etrend is a wafer probing, packing and testing company. As of
December 31, 2003, the Company acquired 2,189,288 shares for $647,000,
which represents approximately 12.5% ownership of Etrend.
The Company invested in SiGen preferred shares in December 2000. SiGen is
an advanced nanotechnology company that develops silicon-on-insulator
"SOI", strained-silicon products and other engineered multi-layer
structures to the microelectronics and photonics industries for advanced
electronic and opto-electronic device applications. As of December 31,
2003, the Company acquired 71,840 shares for $500,000, which represents a
0.25% ownership of SiGen. In 2002 and 2003, the Company reviewed
qualitative factors of this investment and determined that the decline in
value of SiGen was other-than-temporary and recognized an impairment loss
of $483,000 and $17,000, respectively.
On January 3, 2003, the Company exercised its option to convert its
convertible loans of $1,750,000 in 360 Degree Web to 2,083,333 Series B
preference shares of capital stock at $0.36 per share and 1,000,000 Series
B2 preference shares of capital stock at $1.00 per share. 360 Degree Web
designs, develops and markets intelligent security software solutions that
provide secure computing environment for personal computer mobile devices
and the internet. After the conversion, the Company had a 35.18% ownership
in 360 Degree Web. The Company did not participate in 360 Degree Web's
financing during 2003 and the ownership was diluted to 29.33% as of
December 31, 2003. At December 31, 2003, one of the Company's directors
serves as a director of 360 Degree Web. In addition, the Company does not
actively participate in the decision-making process at 360 Degree Web.
Management of 360 Degree Web owns more than 50% of the outstanding voting
shares and 100% of the Series A voting preferred shares which has more
characteristics of common stock than the other preferred shares. Therefore,
the Company accounts for the investment under the cost method of
accounting.
8. FIXED ASSETS--NET
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Cost
Equipment $ 8,928 $ 10,457
Furniture and fixtures 242 336
Equipment under capital lease 165 165
Leasehold improvements 654 727
Transportation equipment 56 56
Prepayment for leasehold 239 43
-------- --------
10,284 11,784
-------- --------
Accumulated depreciation
Equipment 3,985 6,096
Furniture and fixtures 117 131
Equipment under capital lease 155 162
Leasehold improvements 398 486
Transportation equipment 18 29
-------- --------
4,673 6,904
-------- --------
$ 5,611 $ 4,880
======== ========
F-18
9. OTHER ASSETS
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Restricted assets $ -- $ 10,044
-------- --------
Long-term note receivables from employees 447 551
Deferred charges 39 473
Refundable deposits 373 404
Patent costs--net of accumulated amortization of $169 in 2002 and
$319 in 2003 150 --
-------- --------
1,009 1,428
-------- --------
$ 1,009 $ 11,472
======== ========
As of December 31, 2003, restricted assets consisted of deposits made for
Taiwan court cases in the form of Taiwan Government bonds, negotiated
certificates of deposit and cash, amounting to $10,044,000.
In 2001, James Keim, one of the Company's directors, accepted the
assignment of Head of Marketing and Sales in the Cayman Islands, and moved
to the Cayman Islands in December 2001. In connection with the move and to
assist Mr. Keim to purchase a residence in the Cayman Islands, the Company
entered into a term loan agreement with Mr. Keim in February 2002, under
which the Company made an interest free, unsecured loan in the amount of
$400,000 to Mr. Keim. The loan is repayable on February 2007. As of
December 31, 2003, $18,000 had been repaid.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
December 31
-------------------
2002 2003
-------- --------
(In Thousands)
Legal and audit fees $ 314 $ 1,180
Salaries and bonus 995 1,155
Deferred income tax liabilities -- 444
Accrued vacation 350 371
ESPP payable 172 301
Commissions 331 239
Others accrued expenses 1,367 1,690
-------- --------
$ 3,529 $ 5,380
======== ========
F-19
11. INCOME TAXES
Income before income taxes consisted of:
Years Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
(In Thousands)
Cayman $ 2,635 $ 10,735 $ 12,159
Other subsidiaries 4,151 1,667 2,868
-------- -------- --------
$ 6,786 $ 12,402 $ 15,027
======== ======== ========
Income tax expense consisted of:
Years Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
(In Thousands)
Current $ 1,305 $ 1,475 $ 1,440
Deferred (153) 198 386
-------- -------- --------
Income tax expense $ 1,152 $ 1,673 $ 1,826
======== ======== ========
The Company and its subsidiaries file separate income tax returns.
Reconciliation of the significant differences between the statutory income
tax rate and the effective income tax rate on pretax income is as follows:
Years Ended December 31
----------------------------
2001 2002 2003
------ ------ ------
Cayman statutory rate 0% 0% 0%
Foreign in excess of statutory rate 22.40% 12.40% 10.72%
Research and development credits (14.10%) (5.90%) (4.39%)
Adjustments to prior years' taxes (6.40%) 0.40% 0.09%
Valuation allowance 10.40% 5.70% 2.55%
Others 4.70% 0.90% 3.18%
------ ------ ------
Effective tax rate 17.00% 13.50% 12.15%
====== ====== ======
The deferred income tax assets and liabilities as of December 31, 2002 and
2003 consisted of the following:
December 31
--------------------
2002 2003
-------- --------
(In Thousands)
Deferred income tax assets
Net operating loss carryforwards $ 567 $ 390
Research and development credits 2,835 3,409
Depreciation and amortization 93 104
Accrued vacation 122 118
Others 43 165
-------- --------
3,660 4,186
Valuation allowance (3,440) (3,909)
-------- --------
Total net deferred income tax assets 220 277
-------- --------
Deferred income tax liabilities
Withholding tax liabilities -- 359
Unrealized capital allowance -- 76
Unrealized foreign exchange 1 9
-------- --------
Total deferred income tax liabilities 1 444
-------- --------
Net deferred income tax assets (liabilities) $ 219 ($ 167)
======== ========
Balance sheet caption reported in:
Prepaid expenses and other current assets $ 219 $ 277
Accrued expenses and other current liabilities -- 444
-------- --------
$ 219 ($ 167)
======== ========
F-20
As of December 31, 2003, O//2//Micro, Inc. had U.S. federal and state net
operating loss carryforwards of approximately $290,000 and $4,994,000, and
federal and state research and development credit carryforwards of
approximately $2,123,000 and $1,949,000, respectively. The U.S. federal net
operating loss carryforwards will expire from 2011 through 2012 if not
utilized. The state net operating loss carryforwards will expire in 2004
and 2005 if not utilized. The U.S. federal research and development credit
will expire from 2012 through 2023 if not utilized, while the state
research and development credit will never expire. Utilization of the net
operating loss carryforwards 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 net operating losses before utilization.
12. EMPLOYEE BENEFIT PLANS
Savings plan
The Company has a savings plan that qualifies under Section 401(k) of the
U.S. Internal Revenue Code. Participating employees may defer up to 15% of
pretax salary, but not more than statutory limits. The Company may make
voluntary contributions to the savings plan but has made no contributions
since the inception of the savings plan.
1999 employee stock purchase plan ("1999 purchase plan")
In 1999, the Company's Board of Directors adopted the 1999 Purchase Plan,
which was approved by the shareholders in October 1999. A total of
1,000,000 ordinary shares have been reserved for issuance under the 1999
Purchase Plan, plus annual increases on January 1 of each year, commencing
in 2001, up to 800,000 shares as approved by the Board of Directors. The
1999 Purchase Plan is subject to adjustment in the event of a stock split,
stock dividend or other similar changes in ordinary shares or capital
structure.
The 1999 Purchase Plan permits eligible employees to purchase ordinary
shares through payroll deductions, which may range from 1% to 10% of an
employee's regular base pay at a price equal to the lesser of 85% of the
fair market value of the Company's ordinary shares on the date of grant of
F-21
the option to purchase or 85% of the fair market value of the Company's
ordinary shares on the applicable exercise date. Employees may elect to
discontinue their participation in the purchase plan at any time during the
enrollment period. Participation ends automatically on termination of
employment with the Company. If not terminated earlier, the 1999 Purchase
Plan will have a term of 10 years. During 2002 and 2003, 97,304 and 109,735
ordinary shares, respectively, had been purchased under the 1999 Purchase
Plan. As of December 31, 2003, 702,903 shares were available for issuance.
Stock option plans
In 1997, the Company's Board of Directors adopted the 1997 Stock Plan, and
in 1999, adopted the 1999 Stock Incentive Plan (collectively, the "Plans").
The Plans provide for the granting of stock options to employees, directors
and consultants of the Company. Options granted under the Plans may be
either incentive stock options ("ISO") within the meaning of Section 422 of
the United States Internal Revenue Code, or nonstatutory stock options
("NSO"). ISOs may be granted only to Company employees and directors. NSOs
may be granted to Company employees and consultants.
Options under the Plans may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares (in
the case of NSOs) on the date of grant as determined by the Board of
Directors, provided, however, that (i) the exercise price of an ISO may not
be less than 100% of the estimated fair value of the shares on the date of
grant, and (ii) the exercise price of an ISO granted to a 10% shareholder
may not be less than 110% of the estimated fair value of the shares on the
date of grant. Options may be exercised following the termination of a
grantee's continuous service only to the extent provided in the award
agreement. Options generally expire no later than ten years after grant, or
five years in the case of an ISO granted to a 10% shareholder. The options
generally vest over a period of four years from the vesting commencement
date. Options may be granted with different vesting terms from time to
time.
Under the 1997 Stock Plan, the Board of Directors reserved 3,700,000
ordinary shares for issuance. After the completion of an initial public
offering, no further options were granted under the 1997 Stock Plan. Under
the 1999 Stock Incentive Plan, the maximum aggregate number of shares
available for grant shall be 3,000,000 ordinary shares plus an annual
increase on January 1 of each year, commencing in 2001, equal to the least
of 1,500,000 shares (in the case of ISOs) or 4% of the outstanding ordinary
shares on the last day of the preceding fiscal year or a smaller number
determined by the administrator. As of December 31, 2003, the number of
options outstanding and exercisable were 570,207 and 522,554 under the 1997
Stock Plan, respectively, and 3,349,653 and 878,038 under the 1999 Stock
Incentive Plan, respectively.
A summary of the Company's stock option activity and related information is
as follows:
Weighted
Number of Average
Available Outstanding Exercise
for Grant Options Price
----------- ----------- -----------
Balance, January 1, 2001 3,034,006 2,323,365
Granted (1,615,000) 1,615,000 $ 12.04
Exercised -- (656,215) $ 1.50
Canceled 168,373 (168,373) $ 6.45
----------- -----------
Balance, December 31, 2001 1,587,379 3,113,777
Additional shares authorized 1,500,000 --
Granted (1,310,400) 1,310,400 $ 12.30
Exercised -- (325,113) $ 2.96
Canceled 54,894 (54,894) $ 10.83
----------- -----------
Balance, December 31, 2002 1,831,873 4,044,170
Additional shares authorized 1,500,000 --
Granted (913,300) 913,300 $ 13.88
Exercised -- (863,987) $ 6.52
Canceled 173,623 (173,623) $ 13.05
----------- -----------
Balance, December 31, 2003 2,592,196 3,919,860
=========== ===========
F-22
The following table summarizes information about the stock options
outstanding as of December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Range of Exercise Prices Outstanding Life Price and Vested Price
------------------------ ----------- ----------- -------- ----------- --------
$0.03--$0.09 69,292 3.46 $ 0.045 69,292 $ 0.05
$0.18--$0.25 2,396 4.80 $ 0.245 2,396 $ 0.25
$0.50 50,333 5.19 $ 0.500 50,333 $ 0.50
$3.95--$5.88 277,560 6.23 $ 4.777 234,749 $ 4.58
$6.50--$9.60 1,115,723 7.87 $ 8.460 522,204 $ 8.37
$10.06--$14.97 1,550,677 8.36 $12.900 316,156 $12.92
$15.38--$24.18 853,879 8.68 $18.168 205,462 $17.81
---------- ---------
3,919,860 8.01 $ 11.81 1,400,592 $ 9.44
========== =========
For purposes of measuring compensation expense under APB No. 25, the fair
value of the shares on the date of grant was determined by the Board of
Directors for grants prior to August 23, 2000. The fair value of subsequent
option grants were based on the market price of ordinary shares on the day
of grant.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS
No. 123. The Black-Scholes option valuation model was developed for
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
model requires the input of highly subjective assumptions, including the
expected stock price volatility. The Company used the following
weighted-average assumptions in calculating the fair value of the options
granted: For purposes of measuring compensation expense under APB No. 25,
the fair value of the shares on the date of grant was determined by the
Board of Directors for grants prior to August 23, 2000. The fair value of
subsequent option grants were based on the market price of ordinary shares
on the day of grant.
F-23
Stock Options Employee Stock Purchase Plan
---------------------------------------- --------------------------------------------------------
Years Ended December 31
-----------------------------------------------------------------------------------------------------
2001 2002 2003 2001 2002 2003
----------- ----------- ----------- --------------- --------------- ---------------
Risk-free interest rate 4.40% 2.76% 3.34% 2.21 %- 4.32% 1.82% 1.58% - 1.80%
Expected life 5 - 9 years 5 - 9 years 5 - 9 years 0.51-1.53 years 0.50-2.03 years 0.51-1.53 years
Volatility 80% 75% 70% 85% 85% 65%
Dividend -- -- -- -- -- --
Expected life of stock options is estimated to be one year after vesting.
The weighted average fair values under SFAS No. 123 for options granted
during the years ended December 31, 2001, 2002 and 2003 was $7.54, $9.83
and $7.64, respectively. The weighted average fair values under SFAS No.
123 for purchase rights granted pursuant to the Employee Stock Purchase
Plan during the years ended December 31, 2001, 2002, and 2003 was $4.40,
5.13 and $5.40, respectively.
As explained in Note 2, the Company determined that certain volatility
assumptions used to compute the fair value of employee stock compensation
for 2001, 2002 and 2003 were inappropriate. Accordingly, such volatility
percentages presented above have been restated. The volatility previously
used in the computation for stock options was 41%, 45% and 31% for 2001,
2002 and 2003, respectively.
Deferred compensation
In connection with stock option grants since the Company's inception, the
Company recognized accumulated deferred compensation totaling $3,056,000
which was fully amortized as of December 31, 2002. Amortization expense
recognized during the years ended December 31, 2001, 2002 and 2003 was
approximately $166,000, $44,000 and $0, respectively.
Shares reserved
Ordinary shares reserved for future issuance was as follows at December 31,
2003:
Shares
----------
Outstanding stock options 3,919,860
Shares reserved for future stock option grants 2,592,196
Shares reserved for employee stock purchase plan 702,903
----------
7,214,959
==========
F-24
13. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the period, using either the "as if converted" method
for convertible preference shares or the treasury stock method for options
and warrants.
A reconciliation of the numerator and denominator of basic and diluted
earnings per share calculations is provided as follows:
Years Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
Net income (in thousands) $ 5,634 $ 10,729 $ 13,201
======== ======== ========
Weighted average thousand shares outstanding--basic 34,020 38,300 38,374
Effect of dilutive securities:
Options 1,317 1,194 1,362
Warrants 239 97 --
-------- -------- --------
Weighted average thousand shares outstanding--diluted 35,576 39,591 39,736
======== ======== ========
Earnings per share--basic $ 0.17 $ 0.28 $ 0.34
======== ======== ========
Earnings per share--diluted $ 0.16 $ 0.27 $ 0.33
======== ======== ========
Certain antidilutive outstanding options and warrants were excluded from
the computation of diluted EPS since their exercise prices exceeded the
average market price of the ordinary shares during the period. The
antidilutive stock options excluded and their associated exercise prices
per share were 1,023,100 shares and $12.54 to $24.05 as of December 31,
2001, 1,141,900 shares and $14.10 to $24.18 as of December 31, 2002 and
916,646 shares and $15.38 to $24.18 as of December 31, 2003.
14. LEASE COMMITMENTS
The Company leases office space and certain equipment under non-cancelable
operating lease agreements that expire at various dates through January
2006. The Company's office lease provides for periodic rent increases based
on the general rate of inflation. The Company also leases certain equipment
under a capital lease that expires in May 2004. There are provisions in the
lease that provide for a bargain purchase option upon the expiration of the
lease.
As of December 31, 2003, minimum lease payments under all noncancelable
leases were as follows:
Capital Operating
Year Leases Leases
---- -------- ---------
(In Thousands)
2004 $ 2 $ 1,359
2005 -- 213
2006 -- 3
2007 -- --
2008 -- --
-------- ---------
Total minimum lease payments 2 $ 1,575
=========
Less--amount representing interest 1
--------
Present value of minimum lease payments 1
Less--current portion 1
--------
Long-term obligations under capital lease $ --
========
F-25
Capital lease obligations are secured by the related equipment and the
total costs of the equipment under capital lease was $165,000, $165,000 and
$165,000 for December 31, 2001, 2002 and 2003, respectively. Accumulated
depreciation was $122,000, $155,000 and $162,000 at December 31, 2001, 2002
and 2003, respectively.
15. CONTINGENCIES
Monolithic Power Systems, Inc. ("MPS"), a privately held company in Los
Gatos, California, USA has alleged in a counterclaim that certain products
of the Company infringe on two of MPS' patents. Litigation on such claim is
pending in the United States District Court in the Northern District of
California. Trial is currently scheduled for August 2004.
While the Company cannot make any assurance regarding the eventual
resolution of this matter, the Company does not believe the final outcome
will have a material adverse effect on its consolidated results of
operations or financial condition.
The Company, as a normal course of business, is a party to various
litigation matters, legal proceedings and claims. These actions may be in
various jurisdictions, and may involve patent protection and/or patent
infringement. While the results of such litigations and claims cannot be
predicted with certainty, the final 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.
16. FINANCIAL INSTRUMENTS
Information on the Company's financial instruments are as follows:
December 31
-----------------------------------------
2002 2003
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
(In Thousands)
Assets
Cash and cash equivalents $ 69,334 $ 69,334 $ 66,489 $ 66,489
Restricted cash 2,019 2,019 1,892 1,892
Short-term investments 42,675 42,675 53,923 53,923
Accounts receivable--net 7,595 7,595 9,794 9,794
Restricted assets--net -- -- 10,044 10,796
Liabilities
Notes and accounts payable 5,202 5,202 6,334 6,334
F-26
Fair values of restricted assets made in the form of Taiwan Government
bonds are based on market value; otherwise are carried at amounts which
approximate fair value.
Long-term investments are in privately-held companies where there is no
readily determinable market value. The Company periodically evaluates these
investments for impairment. If it is determined that an other than
temporary decline has occurred in the carrying value, an impairment charge
is recorded in the period of decline in value.
17. SEGMENT INFORMATION
The Company designs, develops and markets innovative power management and
security components for mobile communication, computer, information
appliance and LCD products. The Company's integrated circuit products are
produced with digital, analog, and mixed signal integrated circuit
manufacturing processes. The Company's Chief Operating Decision Maker
("CODM"), the Chief Executive Officer, reviews information on an
enterprise-wide basis to assess performance and allocate resources so the
Company has one reporting segment.
Net revenues from unaffiliated customers by geographic region are based on
the customer's bill-to location and were as follows:
Years Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
(In Thousands)
Asia $ 45,780 $ 70,149 $ 88,548
United States 39 31 51
Europe -- 7 --
-------- -------- --------
$ 45,819 $ 70,187 $ 88,599
======== ======== ========
Long-lived assets consist of fixed assets and are based on the physical
location of the assets at the end of each year.
Years Ended December 31
------------------------------
2001 2002 2003
-------- -------- --------
(In Thousands)
Taiwan $ 1,272 $ 2,759 $ 2,354
U.S.A. 1,190 1,422 1,251
Singapore 227 764 633
People's Republic of China 204 388 415
Others 320 278 227
-------- -------- --------
$ 3,213 $ 5,611 $ 4,880
======== ======== ========
During the year ended December 31, 2003, one customer accounted for 13.5%
of net revenues. During the year ended December 31, 2002, two customers
accounted for 18.6% and 15.9% of net revenues. During the year ended
December 31, 2001, two customers accounted for 20.9% and 11.0% of net
revenues.
F-27