SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2004
Commission File Number: 000-30910
O2 MICRO INTERNATIONAL LIMITED
(Translation of registrant's name into English)
Grand Pavilion Commercial Centre, West Bay Road
P.O. Box 32331 SMB, George Town
Grand Cayman, Cayman Islands
(345) 945-1110
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
82- N.A.
1
INDEX
O2 MICRO INTERNATIONAL LIMITED
Page No.
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND
DECEMBER 31, 2003 3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003, AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2004 AND SEPTEMBER 30, 2003 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 13
PART II OTHER INFORMATION
Item 1. EXHIBITS 14
EXHIBIT INDEX 14
SIGNATURE 15
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand U.S. Dollars, Except Share Amounts)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 80,281 $ 66,489
Restricted cash 1,896 1,892
Short-term investments 38,057 53,923
Accounts receivable - net 12,594 9,794
Inventories 11,458 9,613
Prepaid expenses and other current assets 3,942 3,365
-------- --------
Total Current Assets 148,228 145,076
-------- --------
LONG-TERM INVESTMENTS 12,202 7,865
-------- --------
LAND, PROPERTY AND EQUIPMENT - NET 9,619 4,880
-------- --------
OTHER ASSETS
Restricted assets - net 13,043 10,044
-------- --------
Other Assets 1,266 1,428
-------- --------
TOTAL ASSETS $184,358 $169,293
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 6,892 $ 6,334
Income taxes payable 2,947 2,852
Accrued expenses and other current liabilities 7,858 5,380
-------- --------
Total Current Liabilities 17,697 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 - 39,118,104 and 39,032,616 shares as of September 30, 2004 and
December 31, 2003, respectively 39 39
Additional paid-in capital 138,372 137,076
Accumulated other comprehensive loss (360) (521)
Retained earnings 28,610 18,133
-------- --------
Total Shareholders' Equity 166,661 154,727
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $184,358 $169,293
======== ========
The accompanying notes are an integral part of the financial statements.
3
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In Thousand U.S. Dollars, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
NET SALES $22,093 $23,193 $68,354 $63,429
COST OF SALES 8,793 10,042 27,917 27,649
------- ------- ------- -------
GROSS PROFIT 13,300 13,151 40,437 35,780
------- ------- ------- -------
OPERATING EXPENSES
Research and development 4,915 4,845 14,157 14,600
Selling, general and administrative 5,684 4,559 14,926 13,197
------- ------- ------- -------
Total Operating Expenses 10,599 9,404 29,083 27,797
------- ------- ------- -------
INCOME FROM OPERATIONS 2,701 3,747 11,354 7,983
------- ------- ------- -------
NON-OPERATING INCOME (EXPENSES)
Interest income 448 379 933 952
Impairment loss on long-term investments -- -- -- (17)
Gain on sale of long-term investments -- -- 340 --
Foreign exchange gain (loss) (80) 367 (111) 453
Other - net 12 (32) 22 (113)
------- ------- ------- -------
Total Non-operating Income 380 714 1,184 1,275
------- ------- ------- -------
INCOME BEFORE INCOME TAX 3,081 4,461 12,538 9,258
INCOME TAX EXPENSE 12 502 1,115 1,173
------- ------- ------- -------
NET INCOME 3,069 3,959 11,423 8,085
OTHER COMPREHENSIVE INCOME (LOSS)
Translation adjustments on subsidiaries (75) 54 (14) (90)
Unrealized gain on available-for-sale securities 242 185 175 344
------- ------- ------- -------
Total Other Comprehensive Income (Loss) 167 239 161 254
------- ------- ------- -------
COMPREHENSIVE INCOME $ 3,236 $ 4,198 $11,584 $ 8,339
======= ======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.08 $ 0.10 $ 0.29 $ 0.21
======= ======= ======= =======
Diluted $ 0.08 $ 0.10 $ 0.28 $ 0.21
======= ======= ======= =======
SHARES USED IN EARNINGS PER SHARE CALCULATION:
Basic (in thousands) 39,117 38,341 39,146 38,217
======= ======= ======= =======
Diluted (in thousands) 39,722 39,845 40,220 39,390
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
4
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousand U.S. Dollars)
Nine Months Ended
September 30,
---------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income $ 11,423 $ 8,085
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,083 1,912
Amortization of stock options granted for services 105 290
Gain on sale of long-term investments (340) --
Deferred income tax 245 182
Impairment of long-term investments 17
Loss on sale of properties 1 66
Changes in operating assets and liabilities:
Accounts receivable - net (2,800) (2,907)
Inventories (1,845) (3,774)
Prepaid expenses and other current assets (882) (119)
Notes and accounts payable 558 2,197
Income taxes payable 95 615
Accrued expenses and other current liabilities 2,441 2,034
--------- ---------
Net Cash Provided by Operating Activities 11,084 8,598
--------- ---------
INVESTING ACTIVITIES
Receivables from employee cash advance -- (112)
Acquisitions of:
Land, property and equipment (6,548) (1,463)
Short-term investments (102,901) (102,489)
Long-term investments (4,861) (147)
(Increase) decrease in:
Restricted assets (1,855) (7,643)
Restricted cash (4) 127
Other assets (109) (601)
Proceeds from:
Sale of short-term investments 117,640 85,077
Sale of long-term investments 1,020 --
Sale of equipment 1
--------- ---------
Net Cash Provided by (Used in) Investing Activities 2,382 (27,250)
--------- ---------
FINANCING ACTIVITIES:
Acquisitions of treasury stock (1,369) (647)
Proceeds from exercise of stock options 1,194 1,506
Issuance of ordinary shares under ESPP plan 513 468
Payment of principal on capital leases -- (5)
--------- ---------
Net Cash Provided by Financing Activities 338 1,322
--------- ---------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE (12) 24
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,792 (17,306)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 66,489 69,334
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,281 $ 52,028
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid for interest $ -- $ 1
Cash paid for income taxes $ 774 $ 395
NON-CASH INVESTING AND FINANCING ACTIVITIES
Convertible loans converted to long-term investments $ -- $ 1,750
Unrealized gain on available-for-sale securities $ 175 $ 344
Short-term investments reclassified to restricted asset $ 1,144 $ --
The accompanying notes are an integral part of the financial statements
5
O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in management's opinion, include all
adjustments, consisting only of normal recurring accruals necessary to fairly
present the resulting operations for the indicated periods. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. Although the Company believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Form 20-F registration statement for the year ended
December 31, 2003.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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.
b. Recent accounting pronouncements
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 the adoption of FIN 46R did not impact the
Company's financial statements.
3. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities:
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
US treasury bills $28,903 $33,958
Time deposit 365 10,611
Foreign government bonds 3,723 1,144
Corporate bonds 5,041 8,185
Others 25 25
------- -------
$38,057 $53,923
======= =======
6
Available-for-sale securities by contractual maturity are as follows:
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
Due within one year $35,469 $52,752
Due after two years 2,588 1,171
------- -------
$38,057 $53,923
======= =======
The Company's gross unrealized gains and losses at September 30, 2004 were
$287,000 and $119,000, respectively, and at December 31, 2003 were $196,000 and
$47,000, respectively.
4. ACCOUNTS RECEIVABLE - NET
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
Accounts receivable $12,995 $10,195
Allowances for:
Doubtful receivable (86) (86)
Sales returns and discounts (315) (315)
------- -------
$12,594 $ 9,794
======= =======
5. INVENTORIES
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
Finished goods 2,615 $2,042
Work-in-process 4,863 3,608
Raw materials 3,980 3,963
------- ------
$11,458 $9,613
======= ======
7
6. LONG-TERM INVESTMENTS
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
Cost method
X-FAB Semiconductor Foundries AG $ 4,968 $4,968
360 Degree Web Ltd. (360 Degree Web) 1,070 1,750
Etrend Hightech Corporation (Etrend) 960 647
GEM Services, Inc. 500 500
Silicon Genesis Corporation -- --
------- ------
Subtotal $ 7,498 $7,865
Available for sale securities-noncurrent
CSMC Technologies Corporation (CSMC) 4,704 --
------- ------
$12,202 $7,865
======= ======
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 35.2% ownership in 360 Degree Web. The
Company did not participate in 360 Degree Web's financing during 2003 and the
ownership was diluted to 29.3% 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.
In March 2004, the Company sold 1,000,000 shares of its stock in 360 Degree
Web and recognized a gain of $340,000. Upon completion of the transaction, the
Company's ownership was reduced to 19.8%.
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 tendered an additional
$320,000 for Etrend's financing in March 2004 of which $6,634 was subsequently
returned to the Company due to a change in exchange rates in the period prior to
closing, resulting in a net investment of $313,000. The Company's ownership was
reduced to 11.2% as of March 31, 2004.
The Company invested in CSMC's ordinary shares in August 2004. CSMC is a
semiconductor foundry company. As of September 30, 2004, the Company held
70,200,000 shares acquired for a purchase price of $4,547,000, which represents
approximately 2.7% ownership of CSMC.
The Company's unrealized gains on available-for-sale securities non-current
investments at September 30, 2004 were $156,000.
7. INCOME TAX
The effective income tax rate for the three and nine months ended September
30 was 0.4% in 2004 and 11.3% in 2003, and 8.9% in 2004 and 12.7 % in 2003,
respectively.
The Company reversed $375,000 of additional income tax payable for the 2000
tax year in September 2004 due to completion of the examination and approval of
its filed income tax return for the year ended December 31, 2000.
8
8. EARNINGS PER SHARE
The following table shows the calculation of basic and diluted earnings per
share:
All numbers in thousands except earnings per share
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(Unaudited) (Unaudited)
Basic earnings per share:
Net income $ 3,069 $ 3,959 $11,423 $ 8,085
======= ======= ======= =======
Weighted average shares outstanding - basic 39,117 38,341 39,146 38,217
Earnings per share - basic $ 0.08 $ 0.10 $ 0.29 $ 0.21
======= ======= ======= =======
Diluted earnings per share:
Net income $ 3,069 $ 3,959 $11,423 $ 8,085
======= ======= ======= =======
Weighted average shares outstanding - basic 39,117 38,341 39,146 38,217
Effect of dilutive securities:
Options 605 1,504 1,074 1,173
------- ------- ------- -------
Weighted average shares outstanding - diluted 39,722 39,845 40,220 39,390
======= ======= ======= =======
Earnings per share - diluted $ 0.08 $ 0.10 $ 0.28 $ 0.21
======= ======= ======= =======
9. RELATED PARTY TRANSACTIONS
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 in purchasing 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 in February 2007. As of September 30, 2004, $18,000
had been repaid.
10. CONTINGENCIES
Monolithic Power Systems, Inc. ("MPS"), a privately held company in Los
Gatos, California, USA has alleged that our OZ960, OZ961, OZ969 and OZ970
products infringe on one of their patents and a continuation of that patent.
Litigation on such claim is pending in the United States District Court in the
Northern District of California. We have answered MPS' claims, denying all of
their substantive allegations. In addition, given the results of the claims
constructions adopted by the Court on November 26, 2001 and December 27, 2002,
we believe that we have meritorious defenses against MPS' allegations. On May
28, 2004, the Court granted our motion for summary judgment that MPS lacked
evidence of damages. As the judgment currently stands, MPS will not be able to
recover damages at trial but may only attempt to seek injunctive relief and
attorneys' fees. Trial is currently scheduled for February 2005.
9
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.
11. 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 ship-to location and are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(In Thousands) (In Thousands)
(Unaudited) (Unaudited)
Asia $22,079 $23,173 $68,327 $63,397
United States 14 20 27 32
------- ------- ------- -------
$22,093 $23,193 $68,354 $63,429
======= ======= ======= =======
Long-lived assets consist of fixed assets and are based on the physical
location of the assets at the end of each period.
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
(In Thousands)
United States $5,752 $1,251
Taiwan 2,558 2,354
People's Republic of China 656 415
Singapore 360 633
Others 293 227
------ ------
$9,619 $4,880
====== ======
During the quarter ended September 30, 2004, one customer accounted for 10%
or more of net revenues (18.5%). During the nine month period ended September
30, 2004, one customer accounted for 10% or more of net revenues (13.5%). During
the quarter ended September 30, 2003, one customer accounted for 10% or more of
net revenues (12.7%). During the nine month period ended September 30, 2003, one
customer accounted for 10% or more of net revenues (17.8%).
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the interim
financial statements and the notes thereto in Part I, Item 1 of this quarterly
report and with Operating and Financial Review and Prospects contained in the
Company's Annual Report on Form 20-F (the "Annual Report").
Overview
We design, develop and market high performance mixed signal integrated
circuits for power management, power saving applications and computer security
applications. Our net sales have been derived primarily from the sale of
integrated circuit products to customers in the computer, consumer electronics,
industrial and communications markets. Products in these markets include
notebook computers, liquid crystal displays, mobile phones, portable intelligent
devices, global positioning systems and portable DVD players. Our system-level
expertise, proprietary design methodologies and extensive experience with power
management systems allow us to develop products quickly so that our customers
can achieve rapid time to market with new devices. Our products are used in
electronic devices currently sold by large computer and consumer electronics
companies.
We utilize a "fabless" semiconductor business model, which means we focus
on designing, developing and marketing products, while having these products
manufactured by large independent semiconductor foundries. Because we are a
fabless semiconductor company, we do not need to invest significant capital to
manufacture semiconductor devices, and can take advantage of some of the
cost-efficiencies of third-party foundries. We place purchase orders with third
parties for specific quantities of packaged semiconductor devices or wafers at
set prices. We also use third parties to test and assemble our products, which
reduces the capital we need to invest in these activities.
Results of Operations
Net Sales. Net sales for the three months ended September 30, 2004 were
$22.1 million, a decrease of $1.1 million or 4.7% from $23.2 million for the
three months ended September 30, 2003. The decrease in net sales reflects the
weakness in the computer and consumer electronics market that comprise the
majority of the revenue.
Gross Profit. Gross profit for the three months ended September 30, 2004
was $13.3 million, an increase of $149,000 or 1.1% from $13.2 million for the
three months ended September 30, 2003. This change in dollar amount was due to
the continuous efforts on reducing costs. We expect that our gross profit as a
percentage of net sales will fluctuate in the future as a result of the stages
of our products in their life cycles, variations in our product mix, the timing
of our product introductions and specific product manufacturing costs.
Research and Development Expenses. Research and development expenses for
the three months ended September 30, 2004 were $4.9 million, an increase of
$70,000 or 1.4% from $4.8 million for the three months ended September 30, 2003.
This increase was primarily due to hiring of additional personnel and
re-arrangement of several shuttle runs or shared engineering test wafers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2004 were $5.7
million, an increase of $1.1 million or 24.7% from $4.6 million for the three
months ended September 30, 2003. This increase in absolute dollar amount was
primarily due to increased expenses relating to intellectual property protection
activities, hiring of additional personnel, traveling, and other related
expenses.
Non-operating Income-net. Non-operating income-net for the three months
ended September 30, 2004 was $380,000, a decrease of $334,000 from $714,000 for
the three months ended September 30, 2003, primarily reflecting a foreign
exchange loss recognized due to the foreign currency fluctuation and offset by
increase in interest income.
11
Income Taxes. Income tax expenses for the three months ended September 30,
2004 was $12,000, a decrease of $490,000 from $502,000 for the three months
ended September 30, 2003. The effective income tax rate for three months ended
September 30, 2004 was 0.4% and 11.3% for the three months ended September 30,
2003. The effective rate was lower for the three months ended September 30, 2004
primarily due to the reversal of additional accrued income tax payable for the
2000 tax year as a result of an examination and approval of our 2000 income tax
return by the local tax office authority. (See Note 7 to the interim financial
statements.)
Our quarterly results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future based on a number of factors,
not all of which are in our control. In particular, our results of operations
have fluctuated in the past due to, among other things, changes in demand for
devices that use our products; general business conditions in the semiconductor
industry and the economy as a whole; general economic conditions; currency
fluctuations; changes in the volume of product sales and in the mix of sales of
higher margin products and lower margin products; competitive pressures on
selling prices; the timing and cancellation of customer orders; lengthy sales
cycles; pricing concessions on volume sales; product pricing from foundries; the
availability of foundry capacity and raw materials; our ability to develop,
introduce and market new products and technologies on a timely basis;
introduction of products and technologies by our competitors; and market
acceptance of our and our customers' products. As a result of the foregoing
factors, we believe period to period comparisons are not necessarily meaningful
and should not be relied upon as indicative of future results.
Liquidity and Capital Resources
On September 30, 2004, we had $148.2 million in total current assets,
including $80.3 million in cash and cash equivalents and $38.1 million in
short-term investments. Our operating activities provided $11.1 million cash
during the nine months ended September 30, 2004. Additionally, our investing
activities provided cash of $2.4 million in the nine months ended September 30,
2004 and our financing activities provided cash of $338,000 in the nine months
ended September 30, 2004. As of September 30, 2004, we have deposited $13.0
million with the Taiwan courts for court bonds in connection with preliminary
injunction actions and related provisional attachment actions that we are
pursuing against various parties in Taiwan. The court bonds provide security for
the enjoined party to claim damages against in the event we do not ultimately
prevail in the underlying infringement action associated with the particular
preliminary injunction action or provisional attachment action. While the
results of such litigation cannot be predicted with certainty, the final outcome
of such matters is not expected to have a material adverse effect on our
consolidated financial position or results of operations. No assurance can be
given, however, that these matters will be resolved without us becoming
obligated to make payments or to pay other costs to the opposing parties, with
the potential for having an adverse effect on our financial position or our
results of operations.
We expect our operating activities will continue to generate additional
cash but we expect to continue to deposit more cash with the Taiwan courts for
preliminary injunctions and provisional attachment actions.
Disclosure Regarding Forward-Looking Statements
This Form 6-K contains statements of a forward-looking nature. These
statements are made under the "safe harbor" provisions of the U.S. Private
Securities Litigation Reform Act of 1995. You can identify these forward-looking
statements by terminology such as "may," "will," "expects," "should," "could,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms and other comparable
terminology. These forward-looking statements include statements regarding our
ability to develop products in a timely manner to meet customer demands, our
ability to take advantage of cost-efficiencies associated with the "fabless"
semiconductor business model, our future gross
12
profits, continued expansion of our engineering, research and development
resources, and our efforts to reduce costs and expenses. The forward-looking
statements contained in this Form 6-K involve known and unknown risks,
uncertainties and other factors that may cause our or the industry's actual
results, levels of activity, performance or achievements to be materially
different from the future results, levels of activity, performance or
achievements expressed or implied by these statements. Such risks and
uncertainties include: changes in demand for devices that use our products;
market conditions in the semiconductor industry and the economy as a whole; the
stages of our products in their life cycles, variations in our product mix, the
timing of our product introductions, specific product manufacturing costs,
increased competition, introduction of new competing technologies and the
increase of unexpected expenses. These factors also include, among other things,
those risks outlined in our filings with the Securities and Exchange Commission,
including our Annual Report, that could cause actual results to differ
materially from the results contemplated by the forward-looking statements. We
assume no obligation to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss related to adverse changes in market
prices, including interest rates and foreign exchange rates, of financial
instruments. In the normal course of business, our financial position is
routinely subject to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-U.S. dollar
denominated assets and liabilities, as well as collectibility of accounts
receivable.
We regularly assess these financial instruments and their ability to
address market risk and have established policies and business practices to
protect against the adverse effects of these and other potential exposures.
Interest Rate Risk
Our major market risk exposure is changing interest rates. Our exposure to
market risk for changes in interest rates relates primarily to our investments
in US treasury bills, time deposits, government and corporate bonds.
We maintain an investment portfolio consisting mainly of fixed income
securities. These securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market rates were to increase
immediately and uniformly by 10.0% from the levels at September 30, 2004, the
fair value of the portfolio would decline by an immaterial amount. We presently
intend to treat our fixed income investments as available for sale, and
therefore we do not expect our operating results or cash flows to be affected to
any significant degree by the effect of a sudden short-term change in market
interest rate exposures. We did not purchase or hold any derivative financial
instruments for trading purposes.
The table below provides information about our financial instruments whose
maturity dates are greater than three months as of September 30, 2004.
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Expected Maturity Dates
-------------------------------------------------------------------
Total
2008 and Carrying
2004 2005 2006 2007 thereafter Value Fair Value
------ ----- ----- ----- ---------- -------- ----------
(in thousands)
US Treasury Bills
Fixed rate (US$)... 21,420 7,483 -- -- -- 28,903 28,903
Government Bonds:
Fixed rate (US$)... 1,160 -- 3,995 6,569 1,561 13,285 13,285
Time Deposits:
Fixed rate (US$)... 32 995 -- -- -- 1,027 1,027
Corporate Bonds
Fixed rate (US$)... 1,652 3,389 -- -- -- 5,041 5,041
Foreign currency risk
Fluctuations in exchange rates may adversely affect our financial results.
The functional currencies for our foreign subsidiaries are the local currency.
As a result, certain of our assets and liabilities, including certain bank
accounts, accounts receivable, restricted assets and accounts payable, exist in
non-U.S. dollar denominated currencies such as New Taiwan Dollar, which are
sensitive to foreign currency exchange rate fluctuations. As of September 30,
2004, we held approximately $16.8 million in government bonds, certificates of
deposits, time deposits and demand accounts denominated in New Taiwan Dollars.
We have not engaged in hedging techniques designed to mitigate foreign
currency exposures and we may experience economic loss as a result of foreign
currency exchange fluctuations. In the three month and nine month period ended
September 30, 2004, we experienced losses of $80,000 and $111,000, respectively
due to foreign currency exchange fluctuations, which are reflected in our the
results of operations.
PART II. OTHER INFORMATION
Item 1. Exhibits
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by reference to
this Item.
(b)
EXHIBIT INDEX
Exhibit
Number Exhibit Title
------- -------------
99 Press Release
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
O2 MICRO INTERNATIONAL LIMITED
Date: November 29, 2004 /S/ STERLING DU
------------------------------
Name: Sterling Du
Title: Chief Executive Officer
15