ACTIONS SEMICONDUCTOR CO., LTD.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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, 2010
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-51604
Actions Semiconductor Co., Ltd.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
15-1, No. 1, HIT Road
Tangjia Zhuhai, Guangdong, 519085
The People’s Republic of China
(Address of principal executive offices)
Pei-Fen (Patricia) Chou, Chief Financial Officer
Telephone: +86-756-339-2353
Facsimile: +86-756-339-2256
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing Six Ordinary Shares, par value US$0.000001 per share | Nasdaq—Global Market System | |
Ordinary Shares, par value US$0.000001 per share | Nasdaq—Global Market System* |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
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. 516,000,000 Ordinary Shares.**
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
x U.S. GAAP | o International Financial Reporting Standards as issued by the International Accounting Standards Board | o Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
* | Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. |
** | The total number of Ordinary Shares outstanding as of December 31, 2010 includes 7,821,882, 22,676,244, 34,938,198 and 24,212,718 Ordinary Shares underlying the American Depositary Shares that the Registrant repurchased during 2007, 2008, 2009 and 2010, respectively. |
ACTIONS SEMICONDUCTOR CO., LTD.
TABLE OF CONTENTS
CERTAIN DEFINED TERMS | 3 | |||
FORWARD-LOOKING STATEMENTS | 3 | |||
PART I | 4 | |||
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 4 | |||
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE | 4 | |||
ITEM 3. KEY INFORMATION | 4 | |||
A. | Selected Financial Data | 4 | ||
B. | Capitalization and Indebtedness | 6 | ||
C. | Reasons for the Offer and Use of Proceeds | 6 | ||
D. | Risk Factors | 6 | ||
ITEM 4. INFORMATION ON THE COMPANY | 24 | |||
A. | History and Development of the Company | 24 | ||
B. | Business Overview | 25 | ||
C. | Organizational Structure | 38 | ||
D. | Property, Plants and Equipment | 39 | ||
ITEM 4A. UNRESOLVED STAFF COMMENTS | 39 | |||
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS | 39 | |||
A. | Operating Results | 39 | ||
B. | Liquidity and Capital Resources | 49 | ||
C. | Research and Development, Patents and Licenses, etc. | 52 | ||
D. | Trend Information | 54 | ||
E. | Off-balance Sheet Arrangements | 55 | ||
F. | Tabular Disclosure of Contractual Obligations | 55 | ||
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES | 55 | |||
A. | Directors and Senior Management | 55 | ||
B. | Compensation | 56 | ||
C. | Board Practices | 59 | ||
D. | Employees | 59 | ||
E. | Share ownership | 60 | ||
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | 60 | |||
A. | Major Shareholders | 60 | ||
B. | Related Party Transactions | 61 | ||
C. | Interests of Experts and Counsel | 62 | ||
ITEM 8. FINANCIAL INFORMATION | 62 | |||
A. | Consolidated Statements and Other Financial Information | 62 | ||
B. | Significant Changes | 63 | ||
ITEM 9. THE OFFER AND LISTING | 63 | |||
A. | Offer and Listing Details | 63 | ||
B. | Plan of Distribution | 64 | ||
C. | Markets | 64 | ||
D. | Selling Shareholders | 64 | ||
E. | Dilution | 64 | ||
F. | Expense of the Issue | 64 | ||
ITEM 10. ADDITIONAL INFORMATION | 64 | |||
A. | Share Capital | 64 | ||
B. | Memorandum and Articles of Association | 64 | ||
C. | Material Contracts | 73 | ||
D. | Exchange Controls | 73 |
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E. | Taxation | 74 | ||
F. | Dividends and paying agents | 77 | ||
G. | Statement by experts | 77 | ||
H. | Documents on display | 77 | ||
I. | Subsidiary Information | 78 | ||
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 78 | |||
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | 78 | |||
A. | Debt Securities | 78 | ||
B. | Warrants and Rights | 78 | ||
C. | Other Securities | 79 | ||
D. | American Depositary Shares | 79 | ||
PART II | 80 | |||
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | 80 | |||
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 80 | |||
ITEM 15. CONTROLS AND PROCEDURES | 80 | |||
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT | 81 | |||
ITEM 16B. CODE OF ETHICS | 81 | |||
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES | 81 | |||
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES | 82 | |||
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 82 | |||
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT | 83 | |||
ITEM 16G. CORPORATE GOVERNANCE | 83 | |||
PART III | 83 | |||
ITEM 17. FINANCIAL STATEMENTS | 83 | |||
ITEM 18. FINANCIAL STATEMENTS | 83 | |||
ITEM 19. EXHIBITS | 83 |
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CERTAIN DEFINED TERMS
References to “China” or “PRC” or “Mainland China” herein are references to the People’s Republic of China which, for the purposes of this annual report, exclude Hong Kong, Macau and Taiwan, and references to “Hong Kong” are references to the Hong Kong Special Administrative Region. References to “United States” or “U.S.” are to the United States of America. All references to the “Government” herein are references to the government of the People’s Republic of China.
All references herein to “we,” “us,” “our,” “Actions” and the “Company” are references to Actions Semiconductor Co., Ltd. and, unless the context otherwise requires, all such references include our subsidiaries.
References in this annual report to “U.S. dollars,” “$” and “US$” are to United States dollars, the lawful currency of the United States and references herein to “RMB” are to Renminbi, the lawful currency of the PRC. Certain figures (including percentages) have been rounded for convenience, and therefore indicated and actual sums, quotients, percentages and ratios may differ. Unless otherwise indicated, our financial information has been presented in United States dollars in accordance with the generally accepted accounting principles in the United States, or U.S. GAAP, and is presented on a consolidated basis U.S. GAAP, and is presented on a consolidated basis.
Solely for the convenience of the reader, certain RMB amounts have been translated into U.S. dollars at specified rates. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB were made based on the exchange rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board at each specified date. As of December 31, 2010 and April 15, 2011, the exchange rate for one U.S. dollar was RMB 6.6000 and RMB 6.5317, respectively. The table below indicates information concerning exchange rates between RMB and U.S. dollars for the applicable period. We make no representation that the RMB or U.S. dollar amounts referred to herein could have been or could be converted to U.S. dollars or RMB, as the case may be, at any particular rate.
Per U.S. Dollar | ||||||||||||||||
Period End | Average1 | High | Low | |||||||||||||
2006 | 7.8041 | 7.9579 | 7.8041 | 8.0702 | ||||||||||||
2007 | 7.2946 | 7.5806 | 7.2946 | 7.8127 | ||||||||||||
2008 | 6.8225 | 6.9193 | 6.7800 | 7.2946 | ||||||||||||
2009 | 6.8259 | 6.8295 | 6.8176 | 6.8470 | ||||||||||||
2010 | 6.6000 | 6.7539 | 6.6000 | 6.8330 | ||||||||||||
October 2010 | 6.6707 | 6.6678 | 6.6397 | 6.6912 | ||||||||||||
November 2010 | 6.6670 | 6.6538 | 6.6330 | 6.6892 | ||||||||||||
December 2010 | 6.6000 | 6.6497 | 6.6000 | 6.6745 | ||||||||||||
January 2011 | 6.6017 | 6.5964 | 6.5809 | 6.6364 | ||||||||||||
February 2011 | 6.5713 | 6.5761 | 6.5520 | 6.5965 | ||||||||||||
March 2011 | 6.5483 | 6.5645 | 6.5483 | 6.5743 | ||||||||||||
April (through April 15, 2011) | 6.5317 | 6.5382 | 6.5310 | 6.5477 |
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 20-F, including those statements contained under the captions “Item 4—Information on the Company” and “Item 5—Operating and Financial Review and Prospects” that are not statements of historical fact, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be generally identified by the use of terms such as “may,” “will,” “could,” “would,” “plans,” “intends,” “believes,” “expects,” “projects,” “estimates” or “anticipates,” the negatives of such terms, or comparable terms. In addition to the statements contained in this Form 20-F, we (or our directors or executive officers authorized to speak on our behalf) from time to time may make forward-looking statements, orally or in writing, regarding Actions (including its subsidiaries) and its business, including in press releases, oral presentations, filings under the Securities Act, the Exchange Act or securities laws of other countries, and filings with Nasdaq, or other stock exchanges.
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You should not rely upon forward-looking statements as predictors of future events. Such forward-looking statements represent our judgment or expectations regarding the future, and are subject to risks and uncertainties that may cause actual events and our future results to be materially different than expected by us or indicated by such statements. Such risks and uncertainties include in particular (but are not limited to) the risks and uncertainties related to: the risk that we may not be able to develop and successfully market new products; the risk that consumer preferences will shift away from the products manufactured by our customers; the risk that our rights to intellectual property used in our products may be challenged by our competitors; the risk that we will not be able to develop and implement additional operational and financial systems to manage our operations as they expand; intensifying competition in the market in which we operate; the outcome of legal proceedings in which we are currently engaged; the risk that we may be unable to retain or attract key personnel; governmental uncertainties; and the risk that our various relationships with our distributor and contract manufacturer customers will change in a way that adversely affects our business. See also the information under “Item 3.D Key Information—Risk Factors” and elsewhere in this Annual Report for a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. We undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report might not occur.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected consolidated financial data presented below as of and for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 have been prepared in accordance with U.S. GAAP. Our selected consolidated statements of operations data and cash flow data for the three years ended December 31, 2008, 2009 and 2010 and selected balance sheet data as of December 31, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this document. Our selected consolidated statements of operations data and cash flow data for the years ended December 31, 2006 and 2007 and selected balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements not included elsewhere in this document. The historical results are not necessarily indicative of results to be expected in any future period. All amounts below are in U.S. dollars, except number of shares data.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
For the year ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(thousands, except per share data) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
System-on-a-chip products | US$ | 170,129 | US$ | 116,320 | US$ | 94,916 | US$ | 43,937 | US$ | 37,434 | ||||||||||
Semiconductor product testing services | 99 | 308 | 214 | 203 | 151 | |||||||||||||||
Total revenues | 170,228 | 116,628 | 95,130 | 44,140 | 37,585 | |||||||||||||||
Cost of revenues: | ||||||||||||||||||||
System-on-a-chip products | (75,853 | ) | (56,687 | ) | (47,248 | ) | (30,093 | ) | (22,846 | ) | ||||||||||
Semiconductor product testing services | (58 | ) | (231 | ) | (177 | ) | (117 | ) | (81 | ) | ||||||||||
Total cost of revenues | (75,911 | ) | (56,918 | ) | (47,425 | ) | (30,210 | ) | (22,927 | ) | ||||||||||
Gross profit | 94,317 | 59,710 | 47,705 | 13,930 | 14,658 | |||||||||||||||
Other operating income | 1,634 | 392 | 797 | 918 | 966 | |||||||||||||||
Gain on deemed disposal | — | — | — | 1,736 | — | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | (9,773 | ) | (12,381 | ) | (19,477 | ) | (19,295 | ) | (17,325 | ) | ||||||||||
General and administrative | (8,663 | ) | (10,485 | ) | (10,399 | ) | (8,812 | ) | (8,125 | ) | ||||||||||
Selling and marketing | (1,626 | ) | (1,880 | ) | (1,694 | ) | (1,115 | ) | (1,208 | ) | ||||||||||
Total operating expenses | (20,062 | ) | (24,746 | ) | (31,570 | ) | (29,222 | ) | (26,658 | ) | ||||||||||
Income (loss) from operations | 75,889 | 35,356 | 16,932 | (12,638 | ) | (11,034 | ) | |||||||||||||
Other income (loss) | — | 11,570 | 1,213 | (654 | ) | 2,348 | ||||||||||||||
Dividend income | — | — | 20 | 440 | — | |||||||||||||||
Fair value change in trading securities | — | — | 92 | 40 | (2 | ) | ||||||||||||||
Gain on disposal of other investment | — | — | — | — | 137 | |||||||||||||||
Interest income | 4,876 | 7,162 | 11,912 | 10,977 | 9,608 | |||||||||||||||
Interest expense | (160 | ) | (82 | ) | (4 | ) | (57 | ) | — | |||||||||||
Other-than-temporary impairment loss on investments | — | — | — | (7,407 | ) | — | ||||||||||||||
Income (loss) before income taxes, equity in net loss of equity method investees and noncontrolling interest | 80,605 | 54,006 | 30,165 | (9,299 | ) | 1,057 | ||||||||||||||
Income tax expense | (5,984 | ) | (2,202 | ) | (3,632 | ) | (537 | ) | (422 | ) | ||||||||||
Equity in net loss of equity method investees | (156 | ) | (383 | ) | (576 | ) | (826 | ) | (781 | ) | ||||||||||
Remeasurement gain on equity interest on acquisition of a subsidiary | — | — | — | — | 494 | |||||||||||||||
Net income (loss) | 74,465 | 51,421 | 25,957 | (10,662 | ) | 348 | ||||||||||||||
Add: Net loss attributable to noncontrolling interest | 96 | 220 | 166 | 264 | 36 | |||||||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. | US$ | 74,561 | US$ | 51,641 | US$ | 26,123 | US$ | (10,398 | ) | US$ | 384 |
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For the year ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
Net income (loss) per share attributable to Actions Semiconductor Co., Ltd. shareholders | ||||||||||||||||||||
Basic | US$ | 0.144 | US$ | 0.101 | US$ | 0.052 | US$ | (0.023 | ) | US$ | 0.001 | |||||||||
Diluted | US$ | 0.144 | US$ | 0.101 | US$ | 0.052 | US$ | (0.023 | ) | US$ | 0.001 | |||||||||
Net income (loss) per ADS attributable to Actions Semiconductor Co., Ltd. shareholders | ||||||||||||||||||||
Basic | US$ | 0.867 | US$ | 0.603 | US$ | 0.312 | US$ | (0.138 | ) | US$ | 0.005 | |||||||||
Diluted | US$ | 0.867 | US$ | 0.603 | US$ | 0.312 | US$ | (0.138 | ) | US$ | 0.005 | |||||||||
Weighted-average shares used in computation: | — | — | — | — | — | |||||||||||||||
Basic | 516,000,000 | 513,588,069 | 501,763,805 | 460,812,477 | 438,401,072 | |||||||||||||||
Diluted | 516,000,000 | 513,588,069 | 501,763,805 | 460,812,477 | 454,568,850 |
CASH FLOW DATA
For the year ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(thousands) | ||||||||||||||||||||
Cash provided by (used in): | ||||||||||||||||||||
Operating activities | US$ | 76,774 | US$ | 46,816 | US$ | 9,930 | US$ | 27, 637 | US$ | 2,760 | ||||||||||
Investing activities | (48,188 | ) | (111,147 | ) | (30,683 | ) | 22, 127 | (51,215 | ) | |||||||||||
Financing activities | (1,917 | ) | (4,411 | ) | (8,423 | ) | (7,497 | ) | 2,619 |
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BALANCE SHEET DATA
As of December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(thousands) | ||||||||||||||||||||
Cash and cash equivalents | US$ | 137,778 | US$ | 72,054 | US$ | 45,435 | US$ | 87,706 | US$ | 42,872 | ||||||||||
Time deposits | 45,713 | 2,613 | 61 | 62 | 34 | |||||||||||||||
Restricted cash | — | 1,782 | 440 | — | — | |||||||||||||||
Marketable securities | 20,531 | 165,317 | 201,151 | 139,984 | 164,336 | |||||||||||||||
Trading securities | — | — | 19,299 | — | 535 | |||||||||||||||
Accounts receivable, net | 3,667 | 5,103 | 2,435 | 1,891 | 1,844 | |||||||||||||||
Amount due from a related party | 2,192 | 943 | 1,497 | 530 | 559 | |||||||||||||||
Amount due from affiliate | — | — | — | 492 | 104 | |||||||||||||||
Notes receivable | 2,154 | 372 | 74 | — | — | |||||||||||||||
Inventories | 6,280 | 12,542 | 8,720 | 4,501 | 4,832 | |||||||||||||||
Prepaid expenses and other current assets | 6,413 | 2,479 | 1,532 | 1,258 | 3,242 | |||||||||||||||
Amount due from an equity method investee | 133 | — | — | — | — | |||||||||||||||
Deferred tax assets | 662 | 739 | 686 | 371 | 399 | |||||||||||||||
Total current assets | 225,523 | 263,944 | 281,330 | 236,795 | 218,757 | |||||||||||||||
Investment in equity method investees | 1,469 | 1,719 | 4,142 | 1,577 | 6,401 | |||||||||||||||
Other investments ($82, $196, $420 and NIL carried at fair value as of December 31, 2007, 2008, 2009 and 2010 respectively) | — | 5,479 | 7,044 | 3,258 | 2,764 | |||||||||||||||
Marketable securities | — | — | — | 23,773 | 24,831 | |||||||||||||||
Rental deposits | 52 | 79 | 39 | 46 | 40 | |||||||||||||||
Property, plants and equipment, net | 5,309 | 6,436 | 7,144 | 14,437 | 24,604 | |||||||||||||||
Land use right | 1,440 | 1,509 | 1,580 | 1,546 | 1,554 | |||||||||||||||
Acquired intangible assets, net | 3,787 | 5,849 | 4,197 | 3,625 | 4,318 | |||||||||||||||
Deposit paid for acquisition of property, plant and equipment | 91 | 27 | 403 | — | 2,408 | |||||||||||||||
Deferred tax assets | — | — | 206 | 149 | 88 | |||||||||||||||
Goodwill | — | — | — | — | 468 | |||||||||||||||
Total assets | US$ | 237,671 | US$ | 285,042 | US$ | 306,085 | US$ | 285,206 | US$ | 286,233 | ||||||||||
Total current liabilities | 28,165 | 24,921 | 14,915 | 9,518 | 13,185 | |||||||||||||||
Other liabilities | — | 686 | 249 | 319 | 83 | |||||||||||||||
Deferred tax liabilities | — | — | 1,750 | 2,058 | 2,286 | |||||||||||||||
Total liabilities | 28,165 | 25,607 | 16,914 | 11,895 | 15,554 | |||||||||||||||
Total equity | 209,506 | 259,435 | 289,171 | 273,311 | 270,679 | |||||||||||||||
Total liabilities & equity | $ | 237,671 | $ | 285,042 | $ | 306,085 | $ | 285,206 | $ | 286,233 |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
We wish to caution the readers that the following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are a non-U.S. company, there are risks associated with investing in American Depositary Shares (“ADSs”) that are not typical with investments in shares of U.S. companies. If any of the following risks actually occurs, our business, financial condition and results of operations would likely suffer. In such case, the trading price of our ADSs could decline, and you could lose all or part of your investment.
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Risks Related to Our Company
We derive almost all of our revenues from our SoCs for portable media players, and we cannot be sure that sales of these products will continue to be successful.
We derive almost all of our revenues from sales of our Systems-on-a-Chip, or SoCs, for portable media players. We cannot be sure that our SoCs will continue to be successful in the markets in which we compete, or that portable media players will continue to remain popular with retail customers. Our future success depends on our ability to develop successful new products in a timely and cost-effective manner; meanwhile, we attempt to exploit new application markets to bring us additional revenues. We are required to continually evaluate expenditures for planned product developments and choose among alternatives based upon our expectations of future market trends, which are difficult to predict. For example, if market demand shifts rapidly toward portable, multifunctional electronic products such as mobile phones with add-on portable media player functionality and away from stand-alone portable media players, the sales of our SoCs for portable media players may decline. The migration and adoption of 3G mobile phone networks may also cause the embedding of portable media player functionality into mobile phones to grow in popularity as 3G technology allows audio, image and video files to be readily downloaded to mobile phones. We may not be able to compete with SoC providers that target mobile phone manufacturers by combining mobile phone and portable media player functionality into one SoC. We may not be able to develop and introduce new or enhanced products in a timely and cost-effective manner, keep pace with market trends, or be sure that our products will generate significant revenues. The development of our SoCs and total solutions is highly complex, and successful product development and market acceptance of our products depend on a number of factors, including:
• | our accurate prediction of the changing requirements of our customers; |
• | our timely completion and introduction of new designs; |
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• | the availability of third-party manufacturing, assembly, and testing capacity; |
• | the ability of our contract foundries to achieve high manufacturing yields for our products; |
• | the quality, price, performance, power efficiency and size of our products relative to our competitors; |
• | our management of effective sales channels; |
• | our customer service capabilities and responsiveness; |
• | the success of our relationships with existing and potential customers; and |
• | changes in industry standards. |
The selling prices of our products tend to decline over time, and if we are unable to develop successful new products in a timely manner, our operating results and competitive position could be harmed.
As is typical in the semiconductor industry, the selling prices of our products tend to decline significantly over the life of the product. If we are unable to offset reductions in the selling prices of our products by introducing new products at higher prices or by reducing our costs, our revenues, gross margins and operating results will be adversely affected. We must continuously develop new SoCs or other products and enhancements for existing SoCs to keep pace with evolving industry standards and rapidly changing customer requirements. We may not have the financial resources necessary to fund future innovation. Even if we have sufficient financial resources, if our future innovation produces technology that is behind that of our competitors, we may lose customers. Similarly, if our new products are ahead of the current technological standards in our industry, our customers may be unwilling to invest in developing consumer electronics products that can utilize our products, or purchase our SoCs, until the consumer electronics market is ready to accept them. Further, we may be required to develop products that utilize technologies with which our engineers are not familiar. Our efforts to develop in-house capability to work with these technologies or to acquire such expertise through acquisitions or investments in businesses may not be successful. If we are unable to successfully define, develop and introduce competitive new SoCs or other products, we may not be able to compete successfully. In addition, if we, or our customers, are unable to manage product transitions, our business and results of operations would be negatively affected.
Our failure to manage adequately the fluctuation in our growth and expansion may adversely impact our results of operations and financial condition.
Fluctuations in our growth and expansion have presented, and may continue to present, a significant challenge to our management and administrative systems and resources and, as a result, to our results of operations and financial condition. Our future success will depend on, among other things, our ability to:
• | effectively maintain and service our existing customer relationships while developing new value-added distributor, contract manufacturer and brand owner customers; |
• | continue training, motivating and retaining our existing employees and attract and integrate new technical, engineering and sales and marketing employees; |
• | identify and attract new management personnel to our company as we continue to expand; |
• | protect our intellectual property effectively; |
• | integrate new businesses, technologies, services and products that we acquire by way of acquisitions or investments into our operations; |
• | effectively manage our capital expenditures and working capital requirements; |
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• | maintain and further improve our operational, financial, accounting and other internal systems and controls; and |
• | maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. securities laws, is complete and accurate. |
Because of the lengthy product development periods for our products and the headcount driven nature of a significant portion of our expenses, we may incur substantial expenses before we earn associated revenues and may not ultimately achieve our forecasted sales for our products.
It may take nine to 18 months for us to design, develop and commence production of our products, and commercial production of consumer end-products that use our SoCs may take an additional two to six months. Product development cycles for our products are lengthy for a number of reasons:
• | our customers usually complete an in-depth technical evaluation of our products before they place a purchase order; |
• | the commercial adoption of our products by value-added distributors, contract manufacturers and brand owners is typically limited during the initial release of their new products while they evaluate product performance and consumer demand; |
• | new product introductions often center around key trade shows or periods of time before the commencement of major sales seasons and failure to deliver a product prior to such events or design-in windows may seriously delay or cancel introduction of a product; and |
• | the development and commercial introduction of products incorporating new technology frequently are delayed or canceled. |
Because most of our expenses are associated with our headcount or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall in sales. We are currently expanding our staffing and increasing our expenditures to support future growth, which may increase our cost of revenues and operating expenses. If our growth does not materialize, our operating results would be adversely impacted.
As a result of the time it takes to begin commercial production and sales of a new product, the fact that the market demand for end products that incorporate our products may have changed by the time we complete our product development process and the fact that a significant portion of our operating expenses are driven primarily by personnel compensation or are incurred in advance of anticipated sales, we may incur substantial expenses in developing new products before we earn associated revenues. For example, we encountered difficulty in promoting our new Series 25 SoCs and the consequent less-than-expected sales of only 75,000 units in 2009, caused both by the complexity of this chip’s software and hardware and the increased competition and dramatic changes in end customer buying patterns after we incurred significant development expenses in 2008 and 2009. These factors caused us to miss the sales targets we set for products when we commenced development activities, and we may not be able to decrease our operating expenses in a timely manner to offset additional short falls in sales, which could adversely affect our results of operations.
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We currently rely on third-party contractors to manufacture almost all of our mass-produced SoC products; any event that prevents these foundries from producing our products, or our failure to successfully manage our relationship with these foundries, could damage our relationships with our customers, decrease our sales, and limit our growth.
We do not own or operate a semiconductor fabrication facility. Instead we rely on third-parties to manufacture our semiconductors. Presently, He Jian Technology Company, or He Jian, and United Microelectronics Corporation, or UMC manufacture almost all of our semiconductors. As a result, if He Jian and UMC were to experience any catastrophic or other event that caused it to be unable to conduct manufacturing operations, or otherwise choose to discontinue manufacturing our products, it could have a significant adverse impact on our ability to sell our products. While we have in the past utilized, and continue to maintain relationships with, other contract foundries to have access to alternative manufacturing capabilities, we cannot be sure that these other contract foundries would be willing or have the capacity to produce our products. Even if such other foundries were willing to produce semiconductors for us, they may be unable to provide us with the same committed capacity, or be able to manufacture our semiconductors with the same yield rate, as we currently have with He Jian and UMC. As a result, we depend significantly on maintaining a strong relationship with He Jian and UMC, and these two companies’ continued ability to manufacture our semiconductor products, to maintain our revenues and customer relationships.
We provide He Jian and UMC with monthly rolling forecasts of our production requirements; however, the ability of them to provide silicon wafers to us is limited by their available capacity. Moreover, the price of our silicon wafers fluctuates based on changes in available industry capacity. We do not have a long term supply contract with these two companies or any other contract foundry. Therefore, they could choose to prioritize capacity for other customers, reduce or eliminate deliveries to us on short notice or increase the prices they charge us. Accordingly, we cannot be certain that these two companies or any other contract foundry will allocate sufficient capacity to satisfy our requirements. If we are unable to obtain foundry capacity as required, we may experience delays in our ability to deliver our products, which would harm our relationships with our existing customers and result in decreased sales. There are additional risks associated with our reliance on third-party contractors, including:
• | their inability to increase production and achieve acceptable yields on a timely basis; |
• | their production shutdown due to earthquake, power shortage, fires or storms; |
• | reduced control over delivery schedules and product quality; |
• | increased exposure to potential misappropriation of our intellectual property; |
• | limited warranties on wafers or products supplied to us; |
• | shortages of materials that foundries use to manufacture our products, including as a result of the recent earthquake, tsunami and nuclear crisis in Japan; |
• | labor shortages or labor strikes; and |
• | actions taken by our third-party contractors that breach our agreements. |
We currently rely on third-party contractors to package almost all, and to test a portion of, our mass-produced SoC products; the loss of the services of our independent testing, and packaging vendors could significantly disrupt our shipments, harm our customer relationships and reduce our sales.
We use a number of different independent vendors to carry out testing, and packaging functions, including Tian Shui Hua Tian Technology, Siliconware Technology, and Nantong Fujitsu Microelectronics. As a result, we do not directly control our product delivery schedules or quality assurance and control. These vendors may also test and package products for other companies, including our competitors. and we do not have long-term agreements with independent testing and packaging vendors that guarantee us access to capacity. We typically obtain services from our vendors on an order-by-order basis. Since we do not have long-term agreements with the independent testing and packaging vendors that we use, they may give priority to orders from other customers when demand for their service is high. If any of our vendors experiences capacity constraints or financial difficulties, raises its prices, suffers any damage to its facilities, gets acquired and restructures its business, or terminates its relationship with us, or if there is any other disruption of testing and packaging capacity, we may have to seek alternative services, which may not be available on commercially reasonable terms, or at all, or which may expose us to risks associated with qualifying new vendors. We currently estimate that it would take us six to nine months to locate and qualify a new testing and packaging vendor. Because of the amount of time that it takes us to qualify third-party testing and packaging vendors, we could experience significant delays in product shipments if we are required to find alternative vendors on short notice. In addition, we may be required to pay higher testing and packaging costs. Any problems that we may encounter with the delivery or quality of our products could damage our reputation, cause us to lose customers, and adversely affect our business and financial results.
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We may experience difficulties in transitioning to smaller process geometry technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.
We are currently transitioning our SoCs for portable media players from 0.15 micron to 0.11 micron processing technology in order to ensure we continue to satisfy our customers’ demands and to maintain our competitiveness. This transition requires us to redesign certain of our products and will require our contract foundries to modify the manufacturing processes they use to produce our products. In addition, we will incur significant engineering costs and the attention of our engineering personnel will be diverted from other product development efforts during this transition. In the past, we have experienced some difficulties in shifting to smaller process geometry technologies or new manufacturing processes, which resulted in periods of reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller micron process geometry.
In addition, we will depend on our contract foundries to transition to smaller process geometries successfully. Our contract foundries may not be able to effectively manage this transition. If our contract foundries or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations. As smaller process geometries become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all. Further, we cannot be sure that integrating greater functionality into a SoC will result in a corresponding increase in selling price.
Because our customers are able to change or cancel orders on relatively short notice, we could unexpectedly lose anticipated sales.
The lengthy product development periods for our products make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy product development periods raise additional risks that customers may cancel or change their orders. Because industry practice allows contract manufacturers and brand owners to reschedule or cancel orders on relatively short notice, backlog and customer forecasts are not always good indicators of our future sales. If customers reduce or cancel their orders, it could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. Further, because our sales are made by means of standard purchase orders rather than long term contracts, our customers may not continue to purchase our products at current levels, or at all.
Our reliance on value-added distributors for the sale of a substantial portion of our products subjects us to a number of risks.
Many of our key customers are value-added distributors, who integrate our products into a system platform and sell that system platform to contract manufacturers, although we also sell some of our products directly to contract manufacturers. Growth in our business will depend on our ability to maintain and expand our relationships with both value-added distributor customers and contract manufacturer customers. Our reliance on our value-added distributor customers subjects us to a number of risks. For example, if we were to lose a significant value-added distributor as a customer, our financial performance could be adversely affected in the short term before we were able to replace this distributor. In addition, some of our value-added distributor customers may also carry and sell product lines that are competitive with ours. As these customers are not required to maintain a specified minimum level of purchases from us, we cannot be sure that they will prioritize selling our products. As we continue to expand our sales capabilities, we will also need to manage the potential conflicts that may arise between us and our value-added distributor customers. Further, we rely on our value-added distributor customers to accurately and timely report to us their shipment forecasts and resale activity and to provide certain engineering support services to the brand owners who market and distribute the end products to consumers. Our inability to obtain accurate and timely reports and to successfully manage these relationships could adversely affect our business and financial results.
Failure to collect, or delayed collection of, trade receivables could affect our liquidity.
In order to promote our sales, we may be required to extend payment terms, provide additional financing or modify payment terms for some customers, in some cases without requiring collateral in some cases. l. In addition, payments may not be collected until a certain period of time after our customers receive their products. We perform ongoing evaluation of our customers’ financial conditions and generally experience little difficulty collecting their payments. However, if the financial condition of our customers deteriorates and results in an impairment of their ability to make timely payments, more allowance for doubtful accounts may be required. Furthermore, if any of our customers becomes insolvent or commences bankruptcy or similar proceedings, our receivables from such customers may become uncollectible, which may lead to additional bad debt expenses for us and may adversely affect our results of operations and cash flows.
If our products are not manufactured with satisfactory yields or quality, our sales could decrease, and our relationships with our customers and our reputation may be harmed.
Due to the complexity of SoC design and manufacturing process, even minor deviations in the semiconductor manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. We establish a minimum yield with our foundries at the time our products are qualified. If actual yield at the foundry is below the minimum, the foundry assumes the cost of the wafers, and if actual yield is above the minimum, we assume the cost. However, the fact that a contract foundry is achieving minimum yields on a product does not mean that the yield is sufficient to allow us to maintain or increase our profits on that product. Further, even though a contract foundry is responsible for yield losses we incur on a particular shipment of SoCs, these yield losses could cause us to delay shipments to our customers and damage our relationship with them.
The manufacturing yields for our new products tend to be lower initially and increase as the contract foundry achieves full production. Our product pricing is based on the assumption that increases in manufacturing yields will continue, even with the increasing complexity of our semiconductors. However, we may experience fluctuations in the manufacturing yield in some cases and thus be unable to sustain a high and improving yield level. Furthermore, shorter product life cycles require us to develop new products faster and require our contract foundry to manufacture these products in shorter periods of time. In some cases, these shorter manufacturing periods may not reach the high volume manufacturing periods conducive to higher manufacturing yields and declining costs. If our contract foundry fails to deliver fabricated silicon wafers of satisfactory quality in the volume and at the price required, we may be unable to meet our customers’ demand for our products or to sell those products at an acceptable profit margin, which would adversely affect our sales and margins and damage our customer relationships.
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Our products are complex and may require modifications to resolve undetected errors or failures in our hardware and software, which could lead to an increase in our costs, a loss of customers or a delay in market acceptance of our products.
Our SoCs and total solutions are complex and may contain undetected hardware and software errors or failures when first introduced or as new versions are released. These errors could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and harm both our customer relations and business reputation. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products could be harmed. We provide warranties for product defects under which we must collect and replace defective goods upon receipt of notice from our customers. Increased claims under these warranties would increase our costs and adversely affect our profitability. Defects could also lead to liability as a result of lawsuits against us or against our customers.
Our products are manufactured across several sites throughout China and the Asia-Pacific region. Failure to deliver the work-in-process in time from one site to another may lead to higher operation costs, a decrease in sales and harm our reputation.
Our principle operation center and our third-party manufacturing partners such as foundry service providers, testing houses and packing subcontractors are all located throughout China and the Asia-Pacific region. The distance between manufacturing sites is long and the delivery of raw material, work-in-process, and finished goods relies on the land-carriage and air-express, which are restricted by the weather and transportation conditions. Any delay in delivery could have a negative effect on our operations and may lead to higher operating costs, a decrease in sales, and harm our reputation and customer relationships.
The worldwide economic downturn adversely affected, and could continue to adversely affect, the demand for our products, which directly impacted, and would directly impact, our business and results of operations.
The economic and financial downturn in 2008 and 2009 that affected global business, banking and financial sectors adversely affected the consumer electronic market, especially in the United States and Europe. While the Chinese economy has recovered more quickly than some other major economies, it still faces challenges. Our customers have altered and may continue to alter their purchasing activities in response to lack of credit, economic uncertainty and concern about the stability of markets in general, and have reduced or delayed purchases of our products and services. There could also be a number of effects from such turmoil on our business, including continued decreases in orders from our customers; insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; and counter party failures negatively impacting our treasury operations. Current uncertainty in global economic conditions also poses a risk to the overall economy that could impact our ability to manage commercial relationships with our customers, suppliers and creditors. In addition, to the extent we offer credit to any customer and such customer experiences financial difficulties due to the economic slowdown, we could have difficulty collecting payment from such customer.
Our principal contract foundry, other subcontractors and many of our customers are located in the Pacific Rim, an area subject to significant risk of earthquakes, tsunamis, snowstorms, typhoons, and adverse consequences related to the outbreak of SARS (Severe Acute Respiratory Syndrome), avian influenza and other public health concerns.
The principal contract foundry that manufactures our products and all of the principal subcontractors that assemble, package, and test our products are located in China, Hong Kong or Taiwan. Many of our customers are also located in these areas. The risk of earthquakes, tsunamis, snowstorms, typhoons and other natural disasters in these Pacific Rim locations is significant. The occurrence of an earthquake or other natural disaster, such as the magnitude 9.0 earthquake and resulting tsunami in Japan in March 2011, near our principal contract foundry or subcontractors could result in damage, power outages, nuclear radiation pollution, and other disruptions that impair their production and assembly capacity and decrease the availability of raw materials or components from suppliers and manufacturers in Japan. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling, packaging or production testing from the affected contractor to another third-party vendor. For example, in January and February of 2008, China’s worst snowstorm in more than half a century caused a significant adverse impact on the transportation industry and the economy of China. In May 2008, a major earthquake occurred with its epicenter in Sichuan, China. The earthquake caused over 69,000 known deaths and estimated property damage in excess of US$20 billion. As a result of the earthquake, the economy of China was adversely affected. Also, the 2003 outbreak of severe acute respiratory syndrome, or SARS, curtailed travel to and from certain countries (primarily in the Asia-Pacific region) and limited travel and consumer activities within those countries, which had a significant adverse effect on the economies of many countries in this region. In addition, since 1997, certain Asian countries, including China, have, from time to time, encountered incidents of avian influenza that resulted in several confirmed human cases and deaths and significant disruption to worker productivity. Any future outbreaks of SARS, avian influenza or other public health concerns could result in a significant negative impact on the economy in China and the Asia-Pacific region, harming our business.
We may experience significant period-to-period quarterly and annual fluctuations in our revenues and operating results, which may result in volatility in our share price.
The industry in which we operate is highly cyclical. We have had in the past and may in the future experience significant period-to-period fluctuations in our revenues and operating results. It is possible that our revenues and operating results in some quarters may be below market expectations, which would cause the value of our ordinary shares and ADSs to decline. Our quarterly and annual operating results are affected by a number of factors, including:
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• | the unpredictable timing and volume of purchase orders and cancellations from our customers; |
• | the rate of acceptance of our products by our customers; |
• | the rate of growth of the market for portable media players and our SoCs; |
• | fluctuation and seasonality in demand for consumer electronics products; |
• | increases in prices charged by contract foundries and other third-party subcontractors; |
• | the availability of third-party foundry capacity; |
• | the availability and pricing of other components used in our customers’ products, including NAND Flash memory and TFT-LCD panels; |
• | fluctuations in our contract foundry’s manufacturing yields; |
• | the difficulty of forecasting and managing our inventory and production levels; |
• | our ability to successfully develop, introduce and sell new or enhanced products; |
• | additions or departures of key personnel; |
• | our involvement in litigation; |
• | natural disasters, particularly earthquakes, snowstorms or disease outbreaks affecting countries in which we conduct our business or in which our products are manufactured, assembled, or tested; and |
• | the evolution of industry standards and introduction of new products by our competitors. |
Because the markets in which we compete are highly competitive and many of our competitors have greater resources than us, we cannot be certain that our products will compete successfully and we may lose or be unable to gain market share.
We face competition from a relatively large number of competitors in China and internationally. In the portable media player market, our principal competitors include ALi, AllWinner, Amlogic, Anyka, BestRely, Buildwin, Freescale (SigmaTel), General Plus, Ingenic, MVSilicon, Rockchips, Sino Wealth, Sunplus, Top Wise and Vmicro. As we diversify and expand our product categories, we may also face competition from other semiconductor companies and manufacturers of consumer electronics and mobile devices. We expect to face increased competition in the future from our current and emerging competitors. In addition, some of our customers have developed and other customers could develop technology or products internally that could replace their need for our products or otherwise reduce demand for our products. Our customers may also enter into strategic relationships with or acquire existing semiconductor design companies.
The consumer electronics market, which is the principal end market for our SoCs, has historically been subject to intense price competition. In many cases, low cost, high volume producers have entered markets and driven down profit margins. If a low cost, high volume producer should develop products that are competitive with our products, our sales and profit margins would suffer.
Some of our potential competitors may have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we can. Our current and potential competitors may develop and introduce new products that will carry lower prices, provide better performance or achieve greater market acceptance than our products. In addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain capacity when we are unable to do so. Furthermore, our current or potential competitors have established, or may establish, financial and strategic relationships among themselves or with existing or potential customers or other third-parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business will suffer and we may lose or be unable to gain market share.
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Our business may be severely disrupted if we lose the services of our key executives and employees or fail to add new senior and mid-level managers to our management.
Our future success is heavily dependent upon the continued service of our board of directors and key executives. Our future success is also dependent upon our ability to attract and retain qualified senior and mid-level managers to our management team. If one or more of our key executives and employees are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and our business may be severely disrupted. In addition, if any of these key executives or employees joins a competitor or forms a competing company, we could lose customer, suppliers and know-how, which may lead to significant adverse impact on our business, and incur additional expenses to recruit and train personnel. We do not maintain life insurance for any of our key executives.
We also rely on a number of key technology staff for the operation of our company. Given the competitive nature of our industry, the risk of key technology staff leaving our company is high and losses of significant numbers of technology staff could disrupt our operations. Our inability to retain and attract qualified technical personnel in the future, or delays in hiring such additional personnel, could make it difficult to meet key objectives, such as timely and effective product introductions.
We may not be able to successfully execute future acquisitions or investments or manage or effectively integrate any acquired business, technologies or teams.
We seek to acquire or invest in businesses that are complementary to ours. This may require a significant commitment of management time, capital investment and other management resources. We cannot assure you that we will be successful in identifying and negotiating acquisitions or investments on terms favorable to us. If we are unable to execute, manage or integrate our acquisitions and investments effectively, our growth, operating results and financial condition may be materially and adversely affected.
We have limited business insurance coverage and may be subject to losses that might not be covered by existing insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we only have limited business liability or disruption insurance coverage for our operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
We believe we are a “passive foreign investment company” or PFIC, for U.S. federal income tax purposes for calendar year 2010 and in future years. Assuming the Company is treated as a PFIC, U.S. investors in the ADSs will be subject to certain adverse U.S. federal income tax rules.
We believe we were a PFIC, as that term is defined in Section 1297 of the U.S. Internal Revenue Code of 1986, as amended, for calendar year 2010 and believe we will be a PFIC in the foreseeable future. Consequently, this classification may result in adverse tax consequences, for U.S. holders. See the discussion about taxation in Item 10 of this Annual Report. U.S. shareholders and prospective holders of our ADSs are encouraged to consult their own tax advisers regarding the consequences of our PFIC status under U.S. federal income tax rules.
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the market price of our ADSs.
We are subject to reporting obligations under the U.S securities laws. The U.S Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over financial reporting.
Our management and independent registered public accounting firm have concluded that our internal controls as of December 31, 2010 were effective. However, we cannot assure you that in the future we or our independent registered public accounting firm will not identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal control over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of our ADSs, and harm our reputation. Furthermore, we have incurred and expect to continue to incur considerable costs and to use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
Risks Related to Intellectual Property
We or our customers may be exposed to infringement claims on intellectual property rights by third-parties.
Third-parties, including our competitors, may in the future make claims or initiate litigation that assert patent, copyright, trademark and other intellectual property rights in technologies, related standards and product names that are relevant to us. As we continue to expand our operations and the number of products we manufacture, the risk of such claims may increase. In addition to making claims against us, third-parties may make claims against our customers that incorporate our SoCs into their products. Such actions could adversely affect our relationships with such customers and hurt our sales. The large number of patents in the semiconductor industry, the confidential treatment of some pending patent applications and the rapid rate of issuance of new patents make it neither economically feasible nor possible to determine conclusively in advance whether a product, any of its components, its method of manufacture or use, or its ornamental design, currently infringes or will in the future infringe upon the patent rights of others. Parties making infringement claims may be able to obtain an injunction that could prevent us from selling our products or using technology that contains the allegedly infringing intellectual property, which could have a material negative effect on our business. Third-parties making infringement claims may also be able to bring an action before the U.S. International Trade Commission that could result in an order stopping the importation into the United States of our products or bring similar actions in other parts of the world. Further, in addition to claims that may be made directly against us, we may be named in infringement actions made against our manufacturers, suppliers or customers. Some of our customer contracts provide that we indemnify the customer against claims of infringement based on our products. Regardless of the merit of these claims, they can be time-consuming, and result in costly litigation and divert the attention of our technical and management personnel.
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To resolve any claim made against us, we may be required to develop alternative non-infringing technology or obtain a license for the relevant intellectual property, each of which could be costly and time consuming. Licenses may not be available to us on commercially reasonable terms and conditions, or at all. We might also be required to cease using the trademark or other intellectual property under which our products were being marketed and sold. If any infringement or other intellectual property-based claim made against us by any third-party is successful, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, financial condition and results of operations could be materially and adversely affected.
We rely upon third-party licensed technology to develop our products. If licenses of third-party technology do not continue to be available to us or become very expensive, our ability to develop and introduce new products could be negatively impacted.
We integrate third-party software or other licensed technology into almost all of our products. From time to time, we may be required to license additional technology from third-parties to develop new products or product enhancements. However, these third-party licenses may not be available to us on commercially reasonable terms or at all. Further, some of our existing licenses can be terminated without cause by the licensor. Our inability to maintain existing licenses on reasonable terms, or obtain additional licenses necessary to develop new products and product enhancements, could require us to obtain substitute technology at a greater cost or of lower quality or performance standards or delay product development. Any of these results may limit our ability to develop new products that utilize the latest technologies, which could harm our business, financial condition and results of operations.
Our products are designed for use in devices manufactured by our customers that comply with international standards. These international standards are often covered by patents or copyrights held by third-parties, which may include our competitors. Before we design our products, we discuss with our customers the proprietary technologies that we must incorporate into our SoCs and the international standards that our SoCs must meet to function in the targeted portable media player products. We then obtain licenses required to incorporate each of those proprietary technologies into SoCs that meet these standards. The combined costs of identifying and obtaining licenses from all holders of patents and copyrights essential to such international standards could be high and could reduce our profitability or increase our losses. The cost of not obtaining such licenses could also be high if a holder of such patent or copyrights brings a claim for patent or copyright infringement. Any claims for indemnification that may be made could have a material adverse effect on our business, financial condition and results of operations.
Our rights to the intellectual property we develop may be difficult to enforce.
We generally rely on patent, copyright, trademark, trade secret and other intellectual property laws to establish and protect the proprietary rights in our know-how, technology, products, and product names. Our patent and trademark applications may not be granted, or if granted, may be challenged, invalidated, or circumvented by others. Further, we cannot be sure that any rights granted under patents, trademarks, copyrights or proprietary rights that are issued or registered will be sufficient to protect our technology or will in fact provide competitive advantages to us. As our revenue is not dependent on any particular patent, we believe the expiration or loss of any particular patent would not materially harm our business. However, if we are unable to protect the key intellectual property that we develop and use in our products, our ability to compete effectively may be diminished.
Our success also depends on our other rights in proprietary technology. We rely on a combination of copyright, trade secret, trademark and contractual protection to establish and protect our proprietary rights that are not protected by patents, and we also typically enter into confidentiality agreements with our employees and consultants. We require our customers to enter into confidentiality and nondisclosure agreements before we disclose any sensitive aspect of our platforms, technology or business plans. Despite our efforts to protect our proprietary rights through confidentiality agreements and/or licensing agreements, unauthorized parties may attempt to copy or otherwise obtain and use our platforms or technology. It is difficult to monitor unauthorized use of technology, particularly in China and other developing countries. Our precautions may not prevent misappropriation or infringement of our intellectual property.
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From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources. Even where we take such actions, we cannot assure you that we will be successful or that our rights will be protected. Further, our headquarters, manufacturing operations and the principal market of most of our products are located in China. Our efforts to protect our proprietary rights could be ineffective in China where the laws may not protect proprietary rights as effectively as the laws do in other countries such as the United States.
Our intellectual property indemnification practices may adversely impact our business.
From time to time, we may be required to indemnify our customers for certain costs and damages of patent and copyright infringement in circumstances where our product is the factor creating the customer’s infringement exposure. This practice may subject us to significant indemnification claims by our customers and may adversely impact our business.
Risks Related to our Industry
Demand for our products is highly dependent on the consumer electronics market, which is characterized by short product life cycles and subject to risks related to product transitions and supply of other components.
We derive almost all of our revenues from a limited number of products that are used in consumer electronic devices. The consumer electronics market is characterized by intense competition, rapidly changing technology, and continuously evolving consumer preferences. These factors result in the frequent introduction of new products, short product life cycles and significant price competition. The dynamic nature of this market limits our, as well as our customers’, ability to accurately forecast quarterly and annual sales. If we or our customers are unable to manage product transitions, our business and results of operations could be negatively affected. In addition, we are subject to the risk of supply problems for other components, such as flash memory and TFT- LCD display, which our customers require for manufacturing the consumer end products. For example, if our customers are unable to obtain sufficient supplies of other key components in their portable media players, the sales of our products that are also used in such devices would be adversely affected. A decrease in demand for consumer electronics will also decrease demand for our products, which will adversely affect our business and results of operations.
The availability of digital media content may affect demand for our products.
The demand for portable media players may be adversely impacted by the enforcement of limits on file sharing and downloadable media content. The major record labels are pursuing ways to curb consumer downloading of music from the Internet without paying any fees or royalties to the owners of that music. In particular, the Recording Industry Association of America, a recording industry trade group, has sued numerous individuals for distributing copyrighted songs over the Internet. The U.S. Supreme Court has ruled that distributors of software for sharing music and video files may be held responsible for theft if their intent was to encourage users to illegally trade copyrighted files. These developments may cause websites offering such software to cease operating. If the record labels, other music or video producers, or other parties are successful in limiting the ability of consumers to obtain free music or videos on the Internet, without offering satisfactory alternatives, the demand for consumer electronic devices such as portable media players that use our products may decline, which in turn could harm our business, financial condition and results of operations.
We are subject to the highly cyclical nature of the semiconductor industry.
The semiconductor industry is highly cyclical. The industry has experienced both periods of increased demand and significant downturns, often in connection with, or in anticipation of, maturing product life cycles (of both semiconductor companies’ and their customers’ products) and declines in general economic conditions. The downturns have been characterized by production overcapacity, high inventory levels and accelerated erosion of average selling prices. For example, in early 2009, the semiconductor industry experienced a dramatic and unprecedented decline in demand for semiconductor devices due to the worldwide economic downturn. On the other hand, at times of increased demand, if we cannot meet such demand because of reasons such as production capacity constraints, insufficient inventory or untimely transportation, our business, financial condition and results of operations may also be materially adversely affected.
The industry standards supported by our products are continually evolving, and our success depends on our ability to adapt our products to meet these changing industry standards.
Our ability to compete in the future will depend on our ability to ensure that our products comply with changing industry standards. The emergence of new industry standards could render our products incompatible with products developed by our customers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products do not comply with prevailing industry standards for a significant period of time, we could miss opportunities to make crucial product introductions. We may invest substantial effort and expense in developing or using new technologies or in developing new products or product enhancements, but such effort and expense may not result in market acceptance of our products.
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Risks Related to Doing Business in China
The M&A rules establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
Six PRC regulatory agencies promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, commonly referred to as the Merger & Acquisition Rules, or the M&A Rules, effective on September 8, 2006. In addition, the PRC State Council recently promulgated the Notice on Launching the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Security Review Notice, which became effective on March 6, 2011. The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. The M&A Security Review Notice provides for certain circumstances under which foreign investors’ acquisition of Chinese companies shall be subject to national security review of the PRC government. Because we may expand our business in part by acquiring complementary businesses, complying with the requirements of the M&A Rules and the M&A Security Review Notice to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
An unexpected slowdown in the growth of the Chinese economy may harm our growth and profitability.
Our business is primarily dependent upon the economy and the business environment in China. In particular, our growth strategy is based upon the assumption that demand in China for portable media players will continue to grow with the Chinese economy. While the Chinese economy has experienced significant growth in recent years, the growth of the Chinese economy has been uneven across geographic regions and economic sectors. The PRC government has implemented various economic and political policies and laws and regulations to encourage economic development and guide the allocation of resources. Any adverse changes to these policies of the PRC government or the laws and regulations of the PRC could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
China’s legal system is characterized by uncertainty that could negatively impact our business and results of operations.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have limited value as precedent. Beginning in 1979, the PRC government promulgated a comprehensive system of laws and regulations governing economic matters, which has had the overall effect of significantly enhancing the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively new and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors. In addition, enforcement of existing laws, or contracts based on existing law, may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of any litigation. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of a violation of these policies and rules until some time after the violation.
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Changes in China’s political and economic policies could negatively impact our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject in a significant degree to the economic, political and legal developments in China. China's economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. Any adverse changes to these policies of the PRC government or the laws and regulations of the PRC could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
Restrictions on foreign currency exchange may limit our ability to receive and use our revenues effectively.
Any future restrictions on currency exchanges may limit our ability to use revenues generated in RMB to fund our business activities outside China or to make dividend or other payments in U.S. dollars or other foreign currencies. The PRC government has introduced regulations since 1996 to allow greater convertibility of the RMB, under which regulations RMB is freely convertible for current account transactions such as trade and service-related foreign exchange transactions, but not for capital account transactions such as direct investment, loan or investment in securities outside China unless the prior approval of the State Administration of Foreign Exchange is obtained. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions.
Changes in the preferential tax treatments we currently enjoy in the PRC may have an adverse impact on our results of operations.
The PRC Enterprise Income Tax Law, or EIT Law, effective January 1, 2008, has imposed a single uniform income tax rate of 25% for most domestic enterprises and foreign-invested enterprises. It contemplates various transition periods and measures for existing preferential tax policies in favor of foreign-invested enterprises, including among others, a five-year transition period from its effective date for those companies which were established before the promulgation date of the EIT Law and which were entitled to a preferential tax treatment such as a reduced tax rate or a tax holiday.
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Each of our principal and major PRC subsidiaries, Actions Semiconductor Co., Ltd., or Actions Semiconductor (Zhuhai), and Artek Microelectronics Co., Ltd., or Artek Microelectronics (Shenzhen), is a foreign invested enterprise operating in a designated economic zone. Actions Semiconductor (Zhuhai) benefited from a 9.0% preferential enterprise income tax rate for the year ended December 31, 2008, 15.0% for the year ended December 31, 2009, and 15.0% for the year ended December 31, 2010 due to its certification as a High Technology Enterprise. Artek Microelectronics (Shenzhen) was exempted from income tax for the years ended December 31, 2008 and benefited from a 10.0% preferential rate for the year ended December 31, 2009, and 11.0% for the year ended December 31, 2010 due to its certification as a High Technology Enterprise. We expect that our overall applicable tax rates will increase in 2011 and further increase following the expiry of the above preferential tax treatment in December 2012.
While the EIT Law equalizes the tax rates for foreign-invested enterprises and domestic enterprises, preferential tax treatment would continue to be given to companies in certain encouraged sectors and to entities classified as High Technology Enterprises supported by the PRC government, whether foreign-invested enterprises or domestic enterprises. According to the EIT Law, entities that qualify as High Technology Enterprises supported by the PRC government are expected to benefit from a tax rate of 15%, as compared to the uniform tax rate of 25%. In December 2008, Actions Semiconductor (Zhuhai) was certified as a “High Technology Enterprise” by the relevant tax authorities and became entitled to a preferential income tax rate of 15%. Unless Actions Semiconductor (Zhuhai) continues to qualify as a “High Technology Enterprise” in 2011 and beyond, it will be subject to a 24% tax rate in 2011 and a 25% tax rate starting in 2012. There can be no assurances that any of our PRC subsidiaries will continue to qualify as High Technology Enterprises supported by the PRC government in the future, and benefit from such preferential tax rate. For more information regarding the impact of the EIT Law on us, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Taxation.”
We may be deemed a Chinese resident enterprise under the PRC Enterprise Income Tax Law and be subject to the PRC taxation on our worldwide income.
Under the EIT Law, if any enterprise incorporated outside the PRC has its “de facto management body” located within the PRC, such enterprise may be recognized as a PRC resident enterprise and be subject to the unified enterprise income tax rate of 25%. On December 6, 2007, the Implementation Rules of the EIT Law were promulgated, which rules defined the “de facto management body” as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Further, on April 22, 2009, the PRC State Administration of Tax, or SAT, issued a Notice on Certain Issues regarding the Determination of Offshore Companies Controlled by PRC Companies as Resident Enterprises pursuant to “De Facto Management Bodies” Standard, or the April Notice, which took effect retrospectively on January 1, 2008. According to the April Notice, any company established pursuant to laws and regulations other than PRC laws but that is controlled by companies or company groups within China shall be deemed as a resident enterprise for PRC tax purposes if all the following conditions are met: (i) the senior management in charge of the daily operation and management of the company is based within China or the premises where the senior management performs its duties are located within China; (ii) the financial matters (such as raising funds, financing or financial risk management) and human resources matters (such as appointment and dismissal of employees or their payrolls) are decided by companies or individuals within China or require approval from companies or individuals within China; (iii) material assets, books and accounts, company chop and meeting minutes of board meetings or shareholder meetings are kept or placed within China; and (iv) half or more of the directors with voting rights or senior management habitually reside within China. According to this April Notice, in determining the location of de facto management, “substance over form” principle should be followed. Because this April Notice was issued to regulate PRC tax resident judgment of companies established overseas and controlled by PRC companies, which is not applicable in our case, the criteria in the notice can only be used for reference purposes. The PRC tax authorities can determine whether or not certain offshore companies shall be deemed as resident enterprises for PRC tax purposes.
Currently no interpretation or application of the EIT Law and its implementing rules is available for non-Chinese enterprise or group enterprise controlled entity. Therefore, it is unclear whether PRC tax authorities would treat us as a PRC resident enterprise. If we or any of our subsidiaries that are not incorporated in the PRC are treated as a PRC resident enterprise, we or any such subsidiaries, as the case may be, will be subject to PRC enterprise income tax on our worldwide income, or on the worldwide income of such subsidiaries, as the case may be, at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations and increase our income tax expenses.
Dividends we receive from our non-PRC resident subsidiaries and dividends payable by us to our foreign investors and gain on the sale of our Shares may become subject to withholding taxes under PRC tax laws.
According to the EIT Law, dividends received by a PRC resident enterprise from another PRC resident are exempted from enterprise income tax except for the dividends derived from publicly issued and traded shares of a resident enterprise that are held for less than 12 consecutive months. However, given the short history of the EIT Law and the subsequently issued circulars retroacting to January 1, 2009, it remains unclear whether we, Actions Semiconductor Co., Ltd., and/or our overseas holding companies will be treated as PRC resident enterprises or, if so, whether dividends declared and paid by our subsidiaries in the PRC to our overseas holding companies and by our overseas holding companies to us will be exempted from enterprise income tax. Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises” (and that do not have an establishment or place of business in the PRC, or that have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business) to the extent such dividends have their source within the PRC. Under PRC Individual Income Tax Law, individuals are generally liable for a 20% individual income tax on dividend income. Such individual income tax should apply to dividends received by a non-resident individual from a PRC resident enterprise. A reduced tax rate on dividends may be applicable for non-resident enterprise investors and non-resident individual investors under an applicable tax treaty or tax arrangement between the PRC and the investor’s resident country or region. Similarly, any gain realized on the transfer of shares by non-resident enterprise and individual investors is also subject to a 10% PRC enterprise income tax and a 20% individual income tax, respectively, if such gain is regarded as income derived from sources within the PRC unless otherwise exempted under PRC domestic regulations and applicable tax treaties or tax arrangements.
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Our subsidiaries in China are foreign-invested enterprises directly held by our subsidiaries in Hong Kong or Mauritius. According to the tax treaties between China and Hong Kong and between China and Mauritius, dividends payable by a foreign-invested enterprise in China to a company in Hong Kong or to a company in Mauritius, which directly holds at least 25% of the equity interests in the foreign-invested enterprise, will be subject to a withholding tax of 5%. However, on February 20, 2009, the State Administration of Taxation promulgated the Notice on Relevant Issues of Implementing Dividend Clauses under Tax Treaties, or the 2009 February Notice, clarifying that no enterprise is entitled to the preferential treatment on dividend withholding tax rates pursuant to any tax treaties if such enterprise becomes qualified for such preferential tax rates through any transaction or arrangement whose major purpose is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. Furthermore, on August 24, 2009, the State Administration of Taxation promulgated the Administrative Measures on Treatment of Non-residents under Tax Treaties (Trial Implementation), or 2009 August Notice, which became effective on October 1, 2009. According to the 2009 August Notice, any non-resident who wishes to enjoy tax treaty treatment under the following sections in the relevant tax treaties shall apply to the tax authorities with competent jurisdiction for approval: (i) dividend; (ii) interest; (iii) royalty; and (iv) property income. The relevant tax authorities shall have twenty to fifty working days, after an application is accepted, to decide whether to approve such application. If the relevant tax authorities do not notify the applicant of the approving result in writing within the above time frame, the relevant application shall be deemed to have been approved. We have not applied to the relevant tax authorities for the preferential withholding tax rate under the tax treaty between China and Hong Kong or the tax treaty between China and Mauritius so far. Since both the 2009 February Notice and the 2009 August Notice have been in effect for a relatively short period of time,, it remains unclear how the PRC tax authorities will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiaries or our Mauritius subsidiary. If the relevant tax authority determines that our Hong Kong subsidiaries and Mauritius subsidiary were set up to take advantage of the preferential tax rates on dividends, or our application for the preferential withholding tax rate under the tax treaty between China and Hong Kong or the tax treaty between China and Mauritius is rejected by the competent tax authorities, the higher 10% withholding tax rate may apply to such dividends.
If we are considered as a PRC “resident enterprise”, the dividends we pay with respect to our ADSs, or the capital gain you may realize from the transfer of our ADSs, could be treated as income derived from sources within the PRC and be subject to PRC withholding tax. If such dividends or capital gains are taxable in the PRC, the applicable income tax rate would be 10% for non-PRC institutional shareholders and 20% for non-PRC individual shareholders, unless they are able to claim a lower tax rate pursuant to applicable tax treaties. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC resident shareholders, or if you are required to pay PRC income tax on the transfer of your ADSs, the value of your investment in our ADSs may be materially and adversely affected.
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Equity Transfer (“Circular 698”) that was released in December 2009 with retroactive effect from January 1, 2008.
The SAT released the Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity Transfers, or Circular 698, on December 10, 2009 that addresses the transfer of equity interest in resident enterprises by nonresident companies. Circular 698, which is effective retroactively from January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an intermediate offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. If the intermediate holding company mainly serves as a tax avoidance vehicle and does not have any reasonable business purpose, the PRC tax authority may disregard the intermediate holding company and re-characterize the equity transfer by referring to its economic essence, and as a result, the foreign investor may be subject to a 10% PRC withholding tax for the capital gains realized from the equity transfer.
We do not believe that a transfer of our ordinary shares or ADSs by our non-PRC shareholders should be treated as an indirect transfer of equity interests in our PRC subsidiaries subject to Circular 698, as such share transfer is not carried out for the main purposes of avoiding PRC taxes. However, Circular 698 is relatively new and there is uncertainty as to the interpretation and application of Circular 698 by the PRC tax authorities in practice. If you are required to pay PRC withholding tax on the transfer of our ordinary shares or ADSs, your investment in us may be materially and adversely affected. In addition, we cannot predict how Circular 698 will affect our financial conditions or operations. For example, we may be required to expend valuable resources on complying with Circular 698 or establishing that we should not be taxed under Circular 698, any of which could have an adverse effect on our financial condition and results of operations.
We rely principally on dividends paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.
We are a holding company and rely principally on dividends paid by our subsidiaries for cash requirements, including the funds necessary to service any debt we may incur. If any of our subsidiaries incurs debt in its own name in the future, the instruments governing the debt may restrict dividends or other distributions on its equity interest to us.
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Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our PRC entities only out of their retained earnings, if any, determined in accordance with PRC accounting standards. Our PRC subsidiaries are required to set aside a certain percentage of their after-tax profit based on PRC accounting standards each year to their reserve fund in accordance with the requirements of relevant laws and provisions in their respective articles of associations. As a result, our PRC subsidiaries may be restricted in their ability to transfer a portion of their net income to us whether in the form of dividends, loans or advances. Any limitation on the ability of our subsidiaries to pay dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
Relations between Taiwan and China could negatively affect our business, financial condition and operating results and, therefore, the market value of our ADSs.
China does not recognize the sovereignty of Taiwan. Although significant economic and cultural relations have been established during recent years between Taiwan and China, relations have often been strained. Therefore, factors affecting the military, political or economic relationship between China and Taiwan could adversely affect our business, financial condition and operating results. For example, the Taiwan government may periodically adopt or amend its regulations and policies relating to investment and participation in investments in PRC companies by Taiwanese persons or entities established under the laws of Taiwan, referred to as Taiwanese Persons. In the past, the Taiwan government imposed restrictions on direct and indirect investments by Taiwanese Persons in certain industries in the PRC, including the semiconductor design industry and certain sectors of the semiconductor manufacturing industry, and provided that any Taiwanese Person with “control and influence” over a non-Taiwan entity that has investments in a PRC entity would be deemed to have made an indirect investment in such PRC entity. Because certain of our directors, senior management and employees are Taiwanese Persons, if these prior investment restrictions were reinstated, the Taiwan government may consider one or more of our directors, senior management and employees to have inappropriate control and influence. In this event, such director, senior management member or employee could be required to leave the company or be subject to sanctions by the Taiwan government.
Fluctuations in the value of the RMB could negatively impact our results of operations.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar so that the RMB is permitted to fluctuate within a managed band based on market supply and demand and by reference to a basket of certain foreign currencies. This change in policy has resulted in a 25% appreciation of the RMB against the U.S. dollar between July 21, 2005 and December 31, 2010. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which may result in a further and more significant appreciation of the RMB against the U.S. dollar. Although our reporting currency is the U.S. dollar and virtually all of our sales are denominated in U.S. dollar, our operating expenses and substantially all of our assets and liabilities are denominated in RMB. As a result, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. Generally, if the RMB appreciates against the U.S. dollar, our operating expenses will increase and, as a consequence, our operating margins and net income will likely decline. However, this effect may partially offset by the fact that we also incur expenses and liabilities in U.S. dollar and other foreign currencies and have our major interest-generating financing activities in RMB.
As we rely entirely on dividends paid to us by Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), any significant devaluation of the RMB may have a material adverse effect on our financial condition.
Reduction in interest rates will result in a decrease in our interest income.
Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our RMB cash deposits in banks and other financial institutions. We have very limited derivative financial instruments in our investment portfolio to hedge interest rate risks. In 2008, 2009 and 2010, the rate of return on RMB cash deposit was 4.7%, 4.3% and 4.4% respectively. In light of the current global economic recovery and prudent monetary policy, interest rates for cash deposits may stay at relatively high levels for an extended period of time. For example, China’s central bank raised interest rates twice in 2010. As of December 31, 2010, the one-year RMB deposit rate was 2.75% in China, increased by 0.5% from the beginning of 2010. However, if there was any uncertainty in global economic and market conditions, decreasing interest rate might adversely affect out interest income and further impact our net income.
The systematic credit risks among banking and financial institutions in China and worldwide may negatively impact our results of cash management and eventually shareholder’s equity.
As of December 31, 2010, we had marketable securities, current and non-current, of US$189.2 million. These marketable securities were principally investments with guaranteed high interest rates and mainly 3 to 24 month terms. Most of them were issued, managed or guaranteed by state-owned banks or financial institutions in China. Chinese government has been closely supervising its state-owned banks and financial institutions since the global financial crisis in 2008 and does not allow any delinquencies in credit guaranteed by them. However, if Chinese government relaxes its discipline on its banking and financial systems, the systematic credit risks may cause our investments in marketable securities or the returns on such investments to become uncollectible, impacting our results of cash management, and eventually deteriorating shareholder’s equity.
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Risks Related to Our Corporate Structure and Our ADSs
We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, there may be less protection of your shareholder rights than you would have under U.S. law.
Our corporate affairs are governed by our memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more developed and judicially interpreted bodies of corporate law than the Cayman Islands.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of our board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
We may incur significant costs to avoid being considered an investment company under the Investment Company Act of 1940.
Generally, the Investment Company Act of 1940, or the 1940 Act, provides that a company is not an investment company and is not required to register under the 1940 Act as an investment company if the company is primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities or has investment securities that comprise less than 40% of its total assets (exclusive of U.S. government securities or cash items) on an unconsolidated basis.
We are a fabless semiconductor company that engages primarily in the businesses of designing, developing and marketing integrated platform systems, including SoCs, firmware, software development tools and reference designs, for manufacturers of portable multimedia players. Also, based on the primary activities of our officers and directors and an analysis of our income during 2010, we do not believe we will be considered an investment company. Nevertheless, a part of the determination of whether we will be an investment company will be based upon the composition and value of our assets, a significant portion of which are time deposits, restricted cash in the form of loan guarantees and marketable securities that are subject to change, particularly when market conditions are volatile. As a result, we could inadvertently become an investment company.
If we were to become subject to the requirements of the 1940 Act, our operations and results would be negatively impacted in a significant manner, including among other possible effects, our inability to borrow money or raise capital through the offer and sale of our securities in the United States. We could also be subject to administrative or legal proceedings and, among other things, contracts to which we are a party might be rendered unenforceable or subject to rescission. Additionally, we would be unable to continue operating as we currently do and might need to acquire or sell assets that we would not otherwise acquire or sell in order to avoid becoming an "investment company" as defined under the 1940 Act. We may incur significant costs and management time to avoid being considered an investment company under the 1940 Act, as amended.
Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be limited because we are incorporated in the Cayman Islands, because we conduct substantially all of our operations in China and because the majority of our directors and officers reside outside of the United States.
We are incorporated in the Cayman Islands, and we conduct substantially all of our operations in China through Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen). Most of our directors and officers reside, and substantially all of the assets of those persons are located, outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands or China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
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The price of our ADSs has been volatile and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations. Since our ADSs became listed in November 2005, the closing price of our ADSs on the Nasdaq Global Market has ranged from US$12.24 to US$ 1.35 per ADS and the last reported sale price on April 21, 2011 was US$2.40. Our ADSs price may fluctuate in response to a number of events and factors. The financial markets in general, and the market prices for many ADS issuers with a majority of operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies.
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business reasons, including those discussed in this Risk Factors section. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will be traded. We cannot give any assurance that these factors will not occur in the future.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to holders of our ordinary shares, including rights to acquire our securities. We cannot offer to holders of our ADSs those rights unless the securities to which the rights relate are either registered under the U.S. Securities Act of 1933, which we refer to in this document as the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings. The depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.
Holders of ADSs may not be able to exercise the rights of shareholders, including the right to vote as a shareholder.
As a holder of our ADSs, you will not be recorded as a shareholder on the share register of the Company. Only registered holders of our ordinary shares are entitled as a matter of Cayman Islands law to exercise the rights of shareholders including voting their shares and receiving dividends and distributions. The depositary or its custodian will be the registered holder of all the ordinary shares represented by the ADSs and, thus, will be the only party entitled to exercise the rights of a shareholder with respect to those ordinary shares held by them. You will not be able to exercise the rights of a shareholder, including the right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not be able to withdraw ordinary shares in time to be able to exercise your rights. For example, you may not know about shareholder meetings far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary will notify you of an upcoming vote and arrange to deliver our voting materials to you. You may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be little you can do if the ordinary shares underlying your ADSs are not voted as you requested.
Except in limited circumstances, the depositary for our ADSs, in the case of poll voting will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at a shareholders meeting, which could adversely affect your interests.
Under the deposit agreement for the ADSs, the depositary, in the case of poll voting will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless we notify the depositary that:
• | we do not wish to receive a discretionary proxy; |
• | we think there is substantial shareholder opposition to the particular proposal; or |
• | we think the particular proposal would have a material adverse impact on our shareholders. |
The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
You may not receive dividends or other distributions on our ordinary shares or any value for them if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us or the depositary to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.
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You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by American Depositary Receipts, or ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
You may be subject to limitations on transfers of our ordinary shares.
Our ordinary shares are transferable subject to restrictions in our articles of association. However, our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share without assigning any reasons therefor. In addition, the registration of transfers may be suspended as our board of directors may determine, for up to 45 days in any year.
ITEM 4. INFORMATION ON THE COMPANY
A. | History and Development of the Company |
We, Actions Semiconductor Co., Ltd., or Actions Cayman, are an exempted company incorporated under the Companies Law (2010 Revision) of the Cayman Islands on July 27, 2005 for the purpose of becoming the sole shareholder of Actions Semiconductor Co., Ltd., originally established as a “category 2” global business company incorporated in the Republic of Mauritius, which we refer to as Actions Semiconductor (Mauritius). A category 2 global business license is issued by the Financial Services Commission of Mauritius to a private company carrying on a qualified global business in a currency other than the Mauritian currency with persons who are resident outside of Mauritius. In 2010, we switched Actions Semiconductor (Mauritius) to a “category 1” global business company to be qualified as a resident company in Mauritius. A preferential tax regime is applicable in Mauritius to a company holding a category 1 global business license. In August 2005, we issued 480 million shares to shareholders of Actions Semiconductor (Mauritius) in consideration for 100% of its share capital. By incorporating our company in the Cayman Islands, we believe that we may have additional flexibility to pursue future business opportunities or financing alternatives.
Actions Semiconductor (Mauritius) was initially organized on November 16, 2001 as Cristo Capital Inc. to become the holding company of the semiconductor design operations we established in Zhuhai, China. Cristo Capital Inc. changed its name to Actions Semiconductor Co., Ltd. on July 8, 2005. Actions Semiconductor (Mauritius) is the 100% shareholder of Actions Semiconductor Co., Ltd., a subsidiary incorporated on December 28, 2001 in Zhuhai, China, which we refer to as Actions Semiconductor (Zhuhai). We conducted substantially all of our operations through Actions Semiconductor (Zhuhai) until Artek Microelectronics Co. Ltd., or Artek Microelectronics (Shenzhen), another wholly owned subsidiary in China with focus on the design, manufacturing, and marketing of SoCs for portable media players, was established on March 14, 2006. As our scale of operations and revenues increased, we determined that it would be advantageous to establish a Hong Kong company through which to conduct some of our sales and customer service activities. In January 2004, Actions Semiconductor (Mauritius) acquired for consideration of HK$1.00, Actions Technology (HK), a trading company with limited ongoing operations incorporated in Hong Kong, through which we set up a sales and customer support center in Hong Kong. By making sales through our sales center in Hong Kong, we are able to utilize Hong Kong’s well developed and efficient customs, forwarding and logistic infrastructure. In addition, certain of our customers may be able to conduct global tax planning by making purchases through our Hong Kong subsidiary. In August 2007, Actions Semiconductor (Mauritius) transferred its ownership of Actions Technology (HK) to Actions Enterprises (HK) Co., Ltd., or Actions Enterprises (HK), an investment holding company incorporated in Hong Kong in 2007 and wholly owned by Actions Cayman. In July 2010, Actions Enterprises (HK) transferred all of its interest in Actions Technology (HK) to Actions Cayman. As described in more detail below, in July, 2010, Actions Cayman sold Actions Enterprises (HK) to Nann Capital Corporation, or Nann Capital, for a nominal consideration of US$1.00, which reflected its zero net value.
On November 17, 2005, we established a subsidiary in the British Virgin Islands, Actions Microelectronics Co., Ltd., or Actions Microelectronics (BVI), which serves as a holding company of our research and development center. On December 19, 2005, Actions Microelectronics (BVI) established a subsidiary in Beijing, China, Beijing Actions North Microelectronic Co., Ltd., or Beijing Actions, which served as our research and development center for imaging and video technology. On February 13, 2006, Beijing Actions North Microelectronic Co., Ltd. changed its English name into Actions Microelectronics Co., Ltd., which we continue to refer to as Beijing Actions. On September 22, 2009, Beijing Actions introduced a group of new shareholders and raised its registered capital from US$2.5 million to US$10.0 million. We further invested US$1.5 million in Beijing Actions in connection with such registered capital increase and subsequently invested an additional US$2.6 million in Beijing Actions on January 25, 2011. Our interest in Beijing Actions was diluted from 80% to 35% in 2009 but then increased to 46% in 2011 as a result of the above financing and investment activities. Our total investment in Beijing Actions reached US$6.1million as of January 25, 2011. Beijing Actions has been deconsolidated and became an equity method investee effective September 30, 2009.
On December 28, 2005, we established a subsidiary in the British Virgin Islands, Artek Microelectronics Co., Ltd., or Artek Microelectronics (BVI), which served as a holding company for other subsidiaries we might establish in China later on. On January 16, 2006, Artek Microelectronics (BVI) established a subsidiary in Hong Kong, Artek Microelectronics Co., Ltd., (HK) or Artek Microelectronics (HK), which we originally planned to use as our second sales and customer support center in Hong Kong, but it did not operate in trading activity. On March 14, 2006, Artek Microelectronics (BVI) established another subsidiary in Shenzhen, China, Artek Microelectronics Co., Ltd., or Artek Microelectronics (Shenzhen), which serves as a part of our sales office and houses our technology service center.
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On February 10, 2006, we established a subsidiary in the British Virgin Islands, Actions Capital Investment, Inc., or Actions Capital, through which we may invest in or acquire technologies or companies complementary to our current operations. On January 13, 2009, Actions Capital established a subsidiary in Republic of Malaysia, Actions Capital Investment (Malaysia) Inc., or Actions Capital Malaysia, which serves as a tax-effective investment vehicle of Actions Capital.
We determined that it is advantageous for us to adjust our investment structure to use Hong Kong companies to hold our interests in our PRC subsidiaries. On August 17, 2007 and September 6, 2007, we established two subsidiaries in Hong Kong, Actions Microelectronics Co., Ltd., or Actions Microelectronics (HK), and Actions Enterprises (HK), respectively, which serve as the holding companies of Beijing Actions and Actions Technology (HK), respectively. We wound up two BVI holding companies, Actions Microelectronics (BVI) and Artek Microelectronics (BVI), after the latter transferred its holding of Artek Microelectronics (Shenzhen) to Artek Microelectronics (HK), on December 1, 2007 and 2008, respectively. Before Artek Microelectronics (BVI) was dissolved, it transferred in 2008 its 100% ownership interest in Artek Microelectronics (HK) to Actions Cayman, which then became the sole shareholder of Artek Microelectronics (HK).
On March 27, 2008, Actions Semiconductor (Zhuhai) established a subsidiary in Shanghai, China, Shanghai Actions Semiconductor Co., Ltd., or Shanghai Actions, which currently serves as our research and development center in Eastern China and may expand its operations into manufacturing and marketing for its own portable media player product lines in the future.
On August 20, 2009, Actions Enterprises (HK) established a 100%-owned subsidiary in Shanghai, China, Actions Technology (Shanghai), which acquired a land use right from Shanghai Zhangjiang Government for the purpose of constructing a new office building in Shanghai Zhangjiang High-Tech Park. However, considering our limited utilization of the new office building, we subsequently transferred our entire ownership interest in Actions Technology (Shanghai)’s holding company, Actions Enterprises (HK), to Nann Capital for US$1.00, which fairly reflected the zero networth of Actions Enterprises (HK). Following the disposal of Actions Enterprises (HK), we made a capital injection of US$4.4 million to acquire 40% equity interest in Nann Capital in July 2010.
On August 31, 2010, to expand our research and development capability, and explore the competitive potentials of our products, we acquired additional interest in one of our equity method investees, Mavrix Technology, Inc., or Mavrix, for approximately US$1.2 million. As a result, Mavrix became a 93.4% owned subsidiary subject to consolidation.
Our principal executive offices are located at 15-1, No. 1, HIT Road, Tangjia, Zhuhai, Guangdong, 519085, the People’s Republic of China, and our telephone number is (86-756) 339-2353. Our agent for service of process in the United States is Depositary Management Corporation, located at 570 Lexington Avenue, 44 th Floor, New York, New York 10022. Our Internet address is www.actions-semi.com. The information on our web site is not a part of this document.
B. Business Overview
We are a fabless semiconductor company that designs, develops and markets integrated platform solutions, including SoCs, firmware, software development tools and reference designs, for manufacturers of portable media players. We provide integrated platform solutions to portable media player manufacturers, brand owners and value-added distributors that enable them to accelerate the time-to-market for their products. Our integrated platform solutions incorporate the following features that enable our customers to rapidly bring portable media players to market with a minimum level of technology investment:
• | Our integrated platform solutions, which comprise SoCs, firmware, software development tools and reference designs, obviate the need for our customers to invest in costly and time-consuming internal firmware and software development for their products, or to source them from multiple suppliers. |
• | Our network of third-party value-added distributors and applications developers enable our customers to quickly introduce products with differentiated features and to cost-effectively customize our solutions. |
• | Our mixed-signal design capabilities allow us to integrate analog and digital components using a compact system architecture in our portable media player SoCs, and enable our customers to reduce their overall costs and produce smaller, more power-efficient portable products. |
• | Our proximity to the China-based manufacturers of portable media players and presence in the rapidly evolving China market for portable media players enable us to better identify market trends and align our product development efforts with these market trends. |
We believe that our integrated platform solution approach provides a high level of value for our customers and creates a successful business model for us. We seek to extend our market leadership in SoC products and platform solutions for the development of portable media players through investing in technology development, extending our network of independent software developers and value-added distributors, incorporating high-end features into products for the mass-market, and improving the functionality-to-price ratio of our products.
Industry Background
Portable media players are battery-powered, portable consumer electronic devices that capture, store and play digital media files such as compressed audio, image and video files. Portable media players are featured with a wide range of industry audio compression technologies, the most popular of which include AAC, APE, FLAC, MP3, Ogg Vorbis and WMA, and video compression technologies such as AMV, FLV, H.264, MPEG2/4 and WMV.
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Portable media players have in recent years emerged as one of the most popular consumer electronics products, with dedicated audio players and integrated digital audio/video players currently being the two most popular products in this category. We believe that several factors will continue to drive the growth in demand for portable media players:
• | Transition from traditional consumer electronic devices to digital. Digital portable media players have several advantages over traditional devices, such as CD and DVD players, including reduced size, greater capacity and longer battery life; |
• | Proliferation of digital media content. The availability and adoption of digital media content continue to grow rapidly driven by the increasing penetration of broadband Internet and growing acceptance of digital media distribution channels on the Internet such as Apple iTunes, Yahoo, Music Match and Napster; |
• | Demand growth in emerging markets. High economic growth in emerging economies such as China, India, Russia and Brazil has resulted in increased per capita disposable income, which has stimulated strong demand for consumer electronics products such as portable media players; |
• | Advancing functionality. Beginning with dedicated audio players, digital portable media devices have increasingly integrated video functionality, and gradually adopting additional features such as advanced video game, image and video capture, digital audio and video broadcast reception, and wireless connectivity over time; |
• | Embedding of portable media player functions in new products. The expansion of entry-level portable media capability—based on solutions such as ours that achieve highly attractive price points—into high-volume embedded markets, such as fashion accessories, toys, audio visual products, automotive, and boom box, is expected to further increase demand; and |
• | Decline in cost of commodity components. As prices of commodity components such as memory and displays used in portable media players continue to decline, consumers are able to purchase products with superior memory capacity and resolutions at an equivalent or lower price, which stimulates the growth in the overall market. |
Portable Media Player Design and Manufacturing Value Chain
The portable media player industry, like many other segments of the consumer electronics industry, is increasingly centered in China. Portable media players manufactured by China-based manufacturers are often rebranded and sold across the world by importers, retailers, and consumer electronics companies. China’s low cost design and manufacturing capabilities are an increasingly important competitive advantage, as consumers increasingly demand more functionality at a lower price in each successive generation of portable media players. Contract manufacturers and brand owners also increasingly rely on SoC platform providers and value-added distributors to provide integrated platform solutions that enable them to accelerate their products’ time-to-market. The following chart illustrates the typical portable media player design and manufacturing value chain:
In order to differentiate their products, brand owners of portable media players must equip their products with unique designs and features. Often, brand owners and contract manufacturers lack comprehensive in-house design capabilities required to address the market trend towards increased functionality and short product life cycles. Since it is generally time-consuming and cost-prohibitive to create an entirely new system for each new function added, brand owners rely on value-added distributors to work closely with an integrated platform provider to not only provide the required features and functions but also provide total, integrated solutions that deliver the correct combination of features, cost, processing speed and power consumption. We believe we are one of the few integrated platform providers to have the capability to provide total solutions directly to the contract manufacturers and brand owners based on a standard reference design.
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Products and Technology
We provide a variety of solutions along the portable media player design and manufacturing value chain. For most of our value-added distributor customers and certain more sophisticated contract manufacturer and brand owner customers, we provide our SoCs and solution development kits, or SDKs. For less sophisticated customers, we provide our total solutions that consist of our SoCs, SDKs as well as reference designs that include detailed specifications of other required components and references to the providers of those components, which together allow these customers to assemble a complete portable media player.
Our capability to provide total solutions is the result of our detailed knowledge of the manufacturing technology along the different points of the design and manufacturing value chain. By applying that knowledge, we can mix, match and combine our solutions to fit the diverse needs of our customer base.
System-on-a-Chip (SoC)
The functionality of portable media players is largely determined by the SoC controller, which together with memory components constitute a significant portion of a portable media player’s total cost. Portable media players’ small size and cost considerations usually require the use of a highly integrated mixed-signal SoC that incorporates standard digital components such as a processor, embedded memory and peripheral connections as well as analog components including codec, power management and audio signal amplifiers. Our SoCs are integrated circuits that incorporate a digital signal processor, a micro controller unit, embedded memory, codec, a power management unit and other components. Our SoCs are designed to be utilized for portable media players with upgradeable firmware. SoCs for portable media players must address a range of requirements, including high performance, low cost, high levels of system integration and low power consumption. We utilize a compact system architecture that incorporates an optimized algorithm with an embedded task management system in order to maximize the cost efficiency of our SoCs and solutions. Further, this architecture reduces the size of our SoCs and improves our SoCs’ power efficiency and functionality.
Our SoCs are manufactured using industry-standard, mixed-mode, complementary metal-oxide semiconductor, or CMOS, processes and are designed to help our customers lower the number of components required to manufacture their finished products and reduce their overall cost. Our multi-voltage SoC design results in lower noise and lower power consumption and supports audio encoders, digital rights management, USB and Bluetooth connectivity and audio post-processing effects, such as equalization and stereo expansion. Our SoC products also include on-chip memory, controllers for color liquid crystal display, and analog components, including digital-to-analog converters, phase lock loops and USB transceivers.
The following table sets forth major SoCs we have introduced and shipped from 2008 to the first quarter of 2011.
Targeted Application | Product No. | Key Features | Month Introduced | |||
MP4 | ATJ2283A | 1080P Video Decoder, AV/YPbPr, 40bit ECC (Error Correcting Code), LQFP128 packaging | April 2011 | |||
ATJ2285A | 1080P Video Decoder, AV/YPbPr/HDMI TV Out, Flash UI (User Interface), Flash Game, USB Host, TP (Transport Program), 40bit ECC, LQFP176 packaging | March 2011 | ||||
ATJ2289B | 1080P Video Decoder, AV/YPbPr/HDMI TV Out, CMOS Sensor, Flash UI, Flash Game, USB Host, TP, 40bit ECC, LQFP176 packaging | March 2011 | ||||
ATJ2273B | 720P Video Decoder, CPU/RGB LED+AV/YPbPr, 40bit ECC, LQFP128 packaging | February 2011 | ||||
ATJ2275B | 720P Video Decoder, CPU/RGB LED+YPbPr+HDMI, 40bit ECC, LQFP176 packaging | October 2010 | ||||
ATJ2279B | 720P Video Decoder, AV/YPbPr/HDMI TV Out, CMOS Sensor, Flash UI, Flash Game, USB Host, TP, 40bit ECC, LQFP176 packaging | October 2010 | ||||
ATJ2257 | VGA Decoder & Encoder, up to VGA 25fps, Sensor, TV Out, 12bit ECC, LQFP144 packaging | September 2010 | ||||
ATJ2255C | ATJ2253C Function, USB Host, Flash UI, Flash game, LQFP128 packaging | June 2010 | ||||
ATJ2237K | TV Out, CMOS Sensor, 8/16bit Game Simulator, 12Bit ECC, LQFP128 packaging | June 2010 | ||||
ATJ2258C | 2253C Function, RGB (Red, Green, Blue) LCD, LQFP144 packaging | November 2009 | ||||
ATJ2253C | 32bit ECC, D1 Video Decoder, TV Out, LQFP128 packaging | November 2009 | ||||
ATJ2259C | Replace ATJ2259B, 32bit ECC, LQFP176 packaging | June 2009 | ||||
ATJ2236T | MP3, WMA (Windows Media Audio), OGG (oggVorbis), APE (lossless audio format), DRM10 (Digital Rights Management), FM, Voice Recording, SRS (Sound Retrieval System), Picture Browse, AVI(XviD) / WMV Video (QVGA 30fps), 12bit ECC, TV Out, SDRAM support up to 64MB; LQFP128 packaging | July 2008 | ||||
ATJ2137 | MP3, WMA, FM Radio Video Play QVG (Quarter VGA) 30frame-XVID (codec format), WMV, FLV (Flash Video), 3GP, RM/RMVB (Real Media/ Real Media Variable Bit) , SRS , AVOUT, Video Recorder, AVI (Xvid QVGA 24fps), NAND Flash, Game USB Slave 2.0 | January 2008 | ||||
MP3 | ATJ3315 | LQFP64 (7*7mm), 4wire-card, Nor flash, 24bit ECC flash, Li-ion/AAA battery | June 2010 | |||
ATJ3310 | MP3, WMA, USB high speed, LQFP48 (7*7mm), 24 bit ECC flash | June 2010 | ||||
AK2117 | MP3, WMA, FM Radio, Voice Recording, SRS, Picture browse, AMV, AVI (MJPEG), LQFP64 (7*7mm), 4wire-card, 24bit ECC flash | August 2010 | ||||
ATJ2057C | MP3, WMA, OGG, APE, FLAC, SRS, DRM 10, FM Radio, Voice Recording, AMV. | March 2010 | ||||
AK2011C | MP3, WMA, OGG, APE, FLAC (Free Lossless Audio Codec), DRM 10, SRS, LQFP48 (7*7mm) packaging, 24bit ECC | November 2009 | ||||
ATJ2115C | MP3, WMA, OGG, APE, FLAC,DRM10, FM, Voice Recording, SRS, Picture browse, AMV, AVI (MJPEG) LQFP80 (10*10mm) packaging, 8wire-card, 24bit ECC flash, MP3 encode | July 2009 | ||||
AK2027C | MP3, WMA, OGG, APE, FLAC, DRM 10, FM Radio, Voice Recording, SRS, Picture browse, AMV, AVI (MJPEG), LQFP64 (7*7mm) packaging, 4wire-card, 24bit ECC | July 2009 | ||||
ATJ2031 | MP3, WMA, USB high speed, LQFP48 (7*7mm) packaging, 12bit ECC flash | June 2009 | ||||
ATJ2037 | LQFP64 (7*7mm) packaging, 4wire-card, Nor flash, 12bit ECC flash, Li-ion/AAA battery | June 2009 | ||||
AK2011 | MP3, WMA, USB 2.0 High Speed, No Display /Display, NAND Flash | June 2008 |
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Targeted Application | Product No. | Key Features | Month Introduced | |||
Car Audio Dongle | AK3027T | MP3, WMA, OGG, APE, DRM 10, FM Radio, Voice Recording, SRS, Picture browse, AMV, AVI (MJPEG), FM Transmit integrated, LQFP64, 4wire-card, 24bit ECC | March 2011 | |||
ATJ3003S | MP3, WMA, FM Transmit I/F, Host, Nand flash, Card, 24Bit ECC, LQFP48 | June 2010 | ||||
ATJ3003T | MP3, WMA, FM Transmit integrated, Host, Card, 24Bit ECC, LQFP64 | July 2010 | ||||
ATJ2003T | MP3, WMA, FM Transmit integrated, Host, Card, 8/12Bit ECC, LQFP64 | October 2009 | ||||
ATJ2009T | MP3, WMA, FM Transmit integrated, Nor Flash, Host, Card, LQFP64 | October 2009 | ||||
ATJ2009 | MP3, WMA, FM Transmit I/F, Nor Flash, Host, Card, LQFP48 | July 2009 | ||||
ATJ2003 | MP3, WMA, FM Transmit I/F, Host, Nand flash, Card, 8/12Bit ECC, LQFP48 packaging | June 2009 | ||||
Boom-Box | ATS2503 | MP3, WMA, FM Receiver I/F, RTC (Real-Time Clock), REC (Record), Nor Flash, Host, 4wire-card, LQFP64 packaging , Karaoke function | January 2011 | |||
ATS2501 | MP3, WMA, FM Receiver I/F, RTC, REC, Nor Flash, Host, 4wire-card, LQFP64 | September 2009 | ||||
ATJ2009 | MP3, WMA, FM Receiver, Nor Flash, Host, 1wire-Card, LQFP48 | July 2009 | ||||
Automobile Audio System | ATS2501 | MP3, WMA, FM Receiver I/F, RTC, REC, Nor Flash, Host, 4wire-card, LQFP64 packaging | September 2009 | |||
ATS2503 | MP3, WMA, FM Receiver I/F, RTC, REC, Nor Flash, Host, 4wire-card, LQFP64 packaging | March 2011 |
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Solution Development Kits
Our solution development kits, or SDKs, include the embedded firmware code, software tools and documentation necessary to utilize our SoCs in portable media players. Our firmware utilizes an embedded structure design with standard interface that allows our customers to pick and choose functionalities and add new device drivers, which in turn lowers the complexity they face in developing their new products and accelerates the time-to-market for their products. Our manufacturing software tools also allow our customers to quickly mass produce their products based on our turnkey process. The principal features of our SDKs include the capability to:
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• | enable high-quality audio, image and video playback and encoding through optimized implementation of digital media compression and decompression functions; |
• | Support a range of file types, audio, images, text and video through a flexible format management system; |
• | Support firmware upgrades that would allow the addition of new features; |
• | incorporate a standard library function such as digital music file decoder, voice recorder, file system management and data storage functions; |
• | Actively scale the processor speed depending on required function at the time, resulting in lower power consumption; and |
• | reduce the required data movement and associated power drain through advanced memory allocation techniques. |
Reference Designs
Our total solutions include our SoCs, SDKs and reference designs that include detailed specifications of other required components and references to the providers of those components, which, together, allow those customers to assemble a complete portable media player. Our total solutions enable our customers to minimize the time and effort associated with design, development and production of new products.
Customers and Sales
We sell our products in China and world-wide through distribution arrangements and through our direct sales force to value-added distributors, contract manufacturers and brand owners. Though the substantial majority of our sales are made directly to value-added distributors, we consider all members of the portable media player design and manufacturing chain, including the brand owners and contract manufacturers, to be important customers as they may also be involved in the system design and the selection of the integrated platform provider. Brand owners and contract manufacturers often lack the comprehensive in-house design capabilities required to address the market need for increased functionality and the industry trend towards shorter product life cycles. As a result, they generally depend on value-added distributors and integrated platform providers like us to provide total solutions.
We do not typically enter into long-term contracts with our customers. Most of our value-added distributor customers provide us with a three-month non-binding rolling forecasts each month and typically place purchase orders shorter than one month before expected delivery, although such purchase orders are still subject to adjustments or cancellations by such customers. Our customers are generally invoiced at the time of delivery. We also provide limited credit terms for our key customers.
Our most significant customers in 2009 included GMI Technology, Steed Digital Technology, Sino-Mos Electronics, Boton-tech and WPI, all of which are value-added distributors and collectively accounted for approximately 65% of our revenues. In 2010, our top five customers included GMI Technology, TCH(HK) Technology, Junjia Digital Technology, Sino-Mos Electronics, and Boton-tech, all of which are value-added distributors and collectively accounted for approximately 70% of our revenues. In 2009 and 2010, sales directly to brand owners accounted for approximately 3% and 1.2% of our SoCs sold, respectively, many of our products sold to value-added distributors were incorporated in branded products.
Our sales to customers in the PRC accounted for approximately 1.6%, 2.0% and 2.1% of our revenues in 2008, 2009 and 2010, respectively. Export sales to our customers in Hong Kong accounted for approximately 98.4%, 98.0% and 97.9% of our revenues in 2008, 2009 and 2010.We anticipate that a significant majority of our revenue will continue to be represented by sales to customers in Hong Kong and the PRC.
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Marketing
Our marketing group focuses its efforts on product strategy, new product introduction, demand assessment and competitive analysis. Our marketing group works closely with our value-added distributors and contract manufacturer customers to better align our product development efforts with the requirements of the brand owners. We also hold product introduction seminars with our value-added distributor, contract manufacturers and brand owner customers whenever we have a major breakthrough in product development. Our marketing group monitors our sales and the inventory levels of our customers to allocate our shipments. In addition, our marketing group collaborates with our customers in product development strategies and strategic marketing. We have been able to leverage our position at the beginning of the portable media player design and manufacturing value chain to organize group purchases and negotiate volume discounts for our downstream customers who require other portable media player components, such as flash memory, LCD or OLED displays, to build their end-products. Our marketing group also coordinates our product development activities, product launches and ongoing demand and supply planning with our research and development department as well as with our brand owner customers.
As of December 31, 2010, we had a total of 24 direct sales and marketing employees, most of whom have a background in engineering, which enables them to better communicate with our customers and work with them in designing portable media players to meet their changing demands.
Technology Service Center
We have created a technology service center to quickly customize our platform and total solutions based on our customers’ needs, including changes in specifications of a current product or requests to add new product features. The field application engineers at our technology service center assist our customers with pre-sale consultation, jointly design product specifications, develop system solutions and monitor and assist the manufacturing process in cooperation with value-added distributors, contract manufacturers and brand owners. They also provide after sale services when mass production commences. We believe that our geographical proximity to our customers who, for the most part, have operations located in the Pearl River Delta region in southern China allows us to respond to their needs in a shorter period of time and accelerate their product time-to-market. At the same time, timely feedback from our customers allows us to identify market trends and demands ahead of our competitors. As of December 31, 2010, our technology service center employed 114 field application engineers, 90 of whom were located in Zhuhai and 24 of whom were located in Shenzhen. We plan to increase the number of our application engineers as we continue to grow our business.
Information Technology
We believe that we have a well developed information technology infrastructure. Our information technology systems are based on Information Technology Infrastructure Library, or ITIL. As one of the most widely accepted approaches to information technology service management, ITIL provides a cohesive set of international best practices, drawn from public and private sector companies. It is supported by a comprehensive qualifications scheme, accredited training organizations, and implementation and assessment tools.
We also implemented an Oracle Enterprise Resource Planning (ERP) system on January 1, 2008, so that we can successfully data mine critical design and marketing information from our customers’ orders, our own research and development efforts and product delivery status. We use control objectives for information and related technology, or COBIT, as guidance and a framework for our information technology governance. We believe our well developed information technology system is one of the key factors in allowing us to identify market trends and demands ahead of our competitors.
Manufacturing
Our SoCs are manufactured by third-party foundries that process silicon wafers and produce the SoCs. Presently, He Jian and UMC manufacture almost all of our semiconductors in mass production stage. We also maintain relationships with other contract foundries to help ensure we have alternative manufacturing capabilities in various processing technologies.
The supplies of raw silicon wafers for fabrication are sufficient. However, the processing capacity in certain technology nodes may significantly fluctuate due to market demands and contract foundries’ capital investment plans. If the capacity is tied up and in high demand, fabricated wafer price will increase and the lead time will be prolonged. During the financial downturn in late 2008 through early 2009, when the market demands were extremely light and foundry utilizations were at record low, we enjoyed competitive wafer pricing. In the second half of 2009, the market demands recovered and foundry capacity become short, and as a result wafer prices had limited flexibility. In addition, in 2010, certain international Integrated Device Manufacturers (IDMs) released large orders to foundries, and the foundry capacity was tied up, as a result of which the wafer price had little flexibility We are further migrating our processing technology to smaller geometries to reduce costs and bottlenecks in capacity.
We manage much of our manufacturing logistics internally, including pre-production hardware testing, test program development, characterization and qualification testing, production scheduling, capacity planning, work-in-progress tracking, yield management, shipping logistics, supplier management and quality support functions, such as failure analysis.
Our SoCs are designed to use low-cost, industry standard packages and are to be tested with widely available automatic testing equipment. Following processing, silicon wafers that are manufactured for our SoCs are either tested by us internally or by third-party testing houses such as Siliconware Technology and Tian Shui Hua Tian Technology. Thereafter, these wafers are shipped to third-party packaging subcontractors such as Tian Shui Hua Tian Technology, Siliconware Technology and Nantong Fujitsu Microelectronics, where they are sliced into individual die, and assembled into finished semiconductor packages and tested on site or returned to us for final product testing.
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We manufacture or purchase the testing equipment we use under strict cost-efficiency criteria. We enter into contracts with third-party testing houses whenever our production volume outpaces our testing capacity. We also develop and control almost all product testing programs used by us internally and by the testing and packaging subcontractors. These testing programs are developed based on our product specifications, thereby maintaining our ownership of the functional and parametric performance of our semiconductors. By conducting many of the testing programs internally, we are able to maintain a fabless business model, yet also gain first-hand knowledge of the manufacturing process. We conducted almost all of the testing of our silicon wafers internally in 2008, 2009 and 2010, and approximately 98%, 100% and 100% of the testing of our final SoC products internally in 2008, 2009 and 2010, respectively. We will closely evaluate our in-house testing capacity to ensure the most cost-effective combination between on-site and out-sourced testing.
Quality and Reliability Assurance
We have designed and implemented a quality management system that provides the framework for continual improvement of our products, processes and customer service. We apply established design rules and practices for devices through standard design, layout and testing processes. We also rely on in-depth simulation studies and practical application testing to validate and verify our SoCs. We strive to achieve best-in-class quality and reliability performance on all of our products through a systematic approach that emphasizes quality at every phase of product development and manufacturing. From initial design conception to fabrication, testing, and assembly, we strive to assure quality by fabrication and assembly process monitoring, materials inspections, wafer level reliability, testing, new product qualification testing and reliability monitoring of finished products. We emphasize a strong supplier quality management practice in which the independent suppliers that are used by our manufacturing logistics partners are pre-qualified by our operations and quality teams. We also require that the independent suppliers used by our manufacturing logistics partners have a quality management system, are certified to the ISO9000 seriesstandard and have an environmental management system certified to the ISO14000 standard. In addition, our suppliers and we actively comply with the requirements of the applicable laws and regulations related to environment control and protection. To ensure consistent product quality, reliability and yield, we work together with our contract manufacturers to closely monitor the production cycle by reviewing manufacturing process data from each wafer foundry, testing house and assembly subcontractor.
Intellectual Property
As of December 31, 2010, we held 81 issued patents and had 107 pending patent applications in PRC, nine pending patent applications in the United States and nine pending patent applications in the European Union. We intend to continue to assess appropriate occasions for seeking patent protection for those aspects of our technology that we believe provide significant competitive advantages. In addition, we owned 18 registered layout designs and 22 registered computer software copyrights in the PRC.
We held 26 registered trademarks and 40 pending trademark applications in the PRC as of December 31, 2010. In addition, we also held four registered trademarks in Hong Kong, four in Taiwan, four in the United States, four in the European Union, three in Australia, three in Russia, three in Korea, three in Singapore, two in Japan, three in Canada and one in India as of December 31, 2010. Our trademarks include Actions, Actions Semiconductor, and Actions Semiconductor logo. These trademarks remain valid while we continue to use and renew them.
We have established an intellectual property rights, or IPR, department which serves our entire organization and undertakes patent application, trademark registration, integrated circuit layout design [registration?], software copyright registration, and related legal affairs. As of December 31, 2010, we had seven in-house intellectual property legal counsels and engineers who worked closely with all departments including marketing, research and development and had extensive connections with external law firms and intellectual property offices.
Competition
The market for SoCs for portable media players is competitive and rapidly evolving. Increased competition may result in industry-wide price reductions or reduced margins. In particular, we face competition from SoC platform providers such as ALi, AllWinner, Amlogic, Anyka, BestRely, Buildwin, Freescale (SigmaTel), General Plus, Ingenic, MVSilicon, Rockchips, Sino Wealth, Sunplus, Top Wise and Vmicro. As we diversify and expand our product categories, we may also face competition from other semiconductor companies and manufacturers of consumer electronics and mobile devices. Many of these companies have significantly greater financial, technical, manufacturing, marketing, sales and other resources than us. These companies may offer high-level performance semiconductors for certain segments of the consumer electronics market that may include portable media player functionality in addition to other functions. We may also face competition from some of our customers who may develop products or technologies internally that are competitive with our SoCs, or who may enter into strategic relationships with or acquire existing semiconductor providers. In addition, some of our competitors manufacture SoCs using smaller process geometries than we use in our production process, and produce products that offer functions that are different from the functions of our SoCs. However, we believe that our semiconductor chip architecture allows our SoCs to offer very competitive performance compared with chips produced by our competitors. Further, we believe that the location of our facilities in China provides us with access to lower cost research and development and other engineering personnel, and provides significant benefits to our overall cost structure. This in turn allows us to produce SoCs that combine functionality with aggressive pricing, or high functionality-to-price ratios.
As portable media players become a mass produced consumer item, consumers become more sensitive to the design, size, functionality and price of the devices they purchase. In turn, brand owners have responded by quickly introducing more models with varying price, functions and features, such as embedding portable media player functionality of audio and video into mobile phones, global positioning systems (GPS), mobile digital TVs, digital photo frames, gaming devices, automotive stereos, boom boxes, MPEG readers, eyewear, watches, bluetooth earphones, gifts, toys and other fashion items. As a result, we believe that the key competition for SoC platform providers like us will be in the design and manufacturing technology. To be successful, we must compete on the basis of:
• | ability to deliver integrated platforms solutions that support a wide variety of industry standards; |
• | design flexibility that allows customers to differentiate their products; |
• | strong customer support that decreases the length of product design cycles and accelerates product time-to-market; |
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• | power efficiency that offsets the increased power requirements of color displays and graphics processing; |
• | competitive pricing; and |
• | intellectual property position and know-how. |
We believe we are well positioned to compete in the design and manufacturing technology areas against our competitors because of our ability to provide total solutions cost-efficiently to our customers that allow them to quickly roll out new and differentiated products while reducing the overall system cost and size.
Regulations
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.
Foreign Investment
Pursuant to the Foreign Investment Industrial Guidance Catalogue (the “Guidance Catalogue”) amended on October 31, 2007 and effective as of December 1, 2007 by the PRC Ministry of Commerce and the PRC State Development and Reform Commission (the “SDRC”), integrated circuit design and software development and production are classified as industrial sectors in which foreign investments are encouraged. The Guidance Catalogue does not exert any limitation of foreign ownership in the businesses of integrated circuit design and software development and production currently conducted by Actions Semiconductor (Zhuhai) and our other subsidiaries within the PRC.
Integrated Circuit Design and Software Development
Pursuant to the Several Policies on Encouragement of Development of Software and Integrated Circuit Industries promulgated by the PRC State Council on June 24, 2000 and effective as of the same date (the “Encouragement Policies”), certified software enterprises can enjoy various incentive polices available to the software enterprises under the Encouragement Policies, such as incentive policies relating to investment and financing, taxation, industrial technologies, exports, income distribution and protection of intellectual property rights. For example, certified software enterprises are exempt from tariffs on their imported manufacturing equipment for self-use. Certified integrated circuit design enterprises are treated in the same manner as certified software enterprises and therefore can enjoy the incentive polices available to certified software enterprises under the Encouragement Policies.
Certification of software enterprises is governed by the Tentative Standards and Administrative Measures on Certification of Software Enterprises, or the Software Certification Measures, issued by the PRC Ministry of Industry and Information Technology, or MIIT, which was formally called Ministry of Information and Industry prior to June 29, 2008, the PRC Ministry of Education, the PRC Ministry of Science and Technologies and the SAT on October 16, 2000 and effective as of the same date. Pursuant to the Software Certification Measures, software products are defined as software embedded in computer software, information systems or equipment provided to users or computer software provided in conjunction with the provision of computer information system integration or application services or other technical services. The MIIT is responsible for the nationwide administration of such certification, and relevant software industrial associations or other associations authorized by the MIIT are the certification organizations of software enterprises. Actions Semiconductor (Zhuhai) has been certified as a software enterprise from 2003 to 2010, and is subject to annual inspection.
Certification of integrated circuit design enterprises and products is governed by the Administration Measures on Certification of Integrated Circuit Design Enterprises and Products, or the IC Design Certification Measures issued by the MIIT and the SAT on March 7, 2002 and effective as of the same date. Pursuant to the IC Design Certification Measures, integrated circuit products are defined as integrated circuit design software and circuits (including products designed by Chinese companies that cannot be produced in China and should be processed by foreign companies) and integrated circuit design enterprises are defined as independent legal person entities established in China engaged in the design of integrated circuit products (including development of integrated circuit software). Pursuant to a joint notice regarding adjustment of administration of certification of integrated circuit design enterprises and products issued by the MIIT and the SAT effective as of July 1, 2004, applications for such certification are subject to preliminary review by certification organizations duly authorized by the MIIT. Final verification and approval must be given by the MIIT in accordance with the procedures and requirements set forth in the IC Design Certification Measures, and a copy of such approvals must be provided to the SAT. Actions Semiconductor (Zhuhai) has been certified as an integrated circuit design enterprise from 2005 to 2010, and is subject to annual inspection.
China’s State Council publicly issued a circular on January 28, 2011 that provides various incentives for the software and integrated circuit industries. Specifically, the Notice on Certain Policies to Further Encourage the Development of the Software and Integrated Circuit Industries (Guo Fa [2011] No. 4), or Circular 4 contains tax, investment and financing, and R&D incentives. In addition to existing incentives, Circular 4 confirms that certain new tax incentives will be introduced. For example, the certified software enterprises and certified integrated circuit design enterprises may be exempt from business tax and simplified application procedures will apply to the following activities: (1) Software development and testing; (2) Information system integration, consulting and maintenance; and (3) IC design. Implementation rules for these incentives will be issued by the competent government authorities, including the PRC Ministry of Finance and the SAT.
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Intellectual Property Rights
China has adopted comprehensive legislation governing intellectual property rights, including trademarks, patents, copyrights and other intellectual property rights. China has adhered to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.
Integrated circuit diagram designs are specifically protected under the Protection Regulations for Integrated Circuit Diagram Design promulgated by the State Council on April 2, 2001 and effective as of October 1, 2001 and its Implementation Rules issued by the PRC State Intellectual Property Office, or the SIPO, on September 18, 2001 and effective as of October 1, 2001. Integrated circuit diagram designs are entitled to proprietary rights for a ten-year period upon registration with the SIPO.
Registered trademarks are protected under the Trademark Law amended by the Standing Committee of National People’s Congress or the SCNPC on October 27, 2001 and effective as of December 1, 2001. Trademarks can be registered with the Trademark Office for renewable ten-year periods.
Registered patents are protected under the Patent Law amended by SCNPC on December 27, 2008 and effective as of October 1, 2009. Under the Patent Law, patents are divided into three categories: specifically inventions, utility models and exterior designs, which can be registered with the Patent Office. The protection period for inventions is 20 years, and the protection periods for utility models and exterior designs are 10 years.
The SCNPC amended the Copyright Law on February 26, 2010, which amendment went effective as of April 1, 2010, pursuant to which certain engineering and product designs and software are eligible for copyright protection. In addition, copyrights for computer software are specifically protected under the Protection Regulations issued by the State Council on December 20, 2001 and effective as of January 1, 2002. There is also a voluntary registration system for computer software copyrights, which is administered by the China Copyright Protection Center.
Taxation in the PRC
The EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. Under the EIT Law, foreign invested enterprises and domestic enterprises are subject to a uniform tax rate of 25%. The EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the EIT Law and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations. In accordance with regulations issued by the State Council, the tax rate of such companies may gradually transition to the 25% uniform tax rate during such five-year period. For those companies which are enjoying tax holidays, such tax holidays may continue until its expiration in accordance with the regulations issued by the State Council, but where the tax holiday has not yet started because of losses, such tax holiday shall be deemed to commence from the first effective year of the EIT Law, i.e., 2008. While the EIT Law equalizes the tax rates for foreign invested enterprises and domestic enterprises, preferential tax treatment would continue to be given to companies in certain encouraged sectors and to entities classified as High Technology Enterprises supported by the PRC government, whether foreign invested enterprises or domestic enterprises. For the potential effects of the EIT Law on our preferential tax treatment, see “Item 3.D. Risk Factors – Risks Related to Doing Business in China – Changes in the preferential tax treatments we currently enjoy in the PRC may have an adverse impact on our results of operations.”
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Currently no interpretation or application of the EIT Law and its implementing rules is available for non-Chinese enterprise or group enterprise controlled entity. Therefore, it is unclear whether PRC tax authorities would treat us as a PRC resident enterprise. Please see “Item 3.D. Risk Factors – Risks Related to Doing Business in China – We may be deemed a Chinese resident enterprise under the PRC Enterprise Income Tax Law and be subject to the PRC taxation on our worldwide income.”
According to the EIT Law, dividends received by a PRC resident enterprise from another PRC resident are exempted from enterprise income tax except for the dividends derived from publicly issued and traded shares of a resident enterprise that are held for less than 12 consecutive months. However, given the short history of the EIT Law and its subsequently issued circulars retroacting to January 1, 2009, it remains unclear whether we, Actions Semiconductor Co., Ltd., and/or our overseas holding companies will be treated as PRC resident enterprises or, if so, whether dividends declared and paid by our subsidiaries in the PRC to our overseas holding companies and by our overseas holding companies to us will be exempted from enterprise income tax. Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises” (and that do not have an establishment or place of business in the PRC, or that have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business) to the extent such dividends have their source within the PRC. Under PRC Individual Income Tax Law, individuals are generally liable for a 20% individual income tax on dividend income. Such individual income tax should apply to dividends received by a non-resident individual from a PRC resident enterprise. A reduced tax rate on dividends may be applicable for non-resident enterprise investors and nonresident individual investors under an applicable tax treaty or tax arrangement between the PRC and the investor’s resident country or region. Similarly, any gain realized on the transfer of shares by non-resident enterprise and individual investors is also subject to a 10% PRC enterprise income tax and a 20% individual income tax, respectively, if such gain is regarded as income derived from sources within the PRC unless otherwise exempted under PRC domestic regulations and applicable tax treaties or tax arrangements. Please see “Item 3.D. Risk Factors – Risks Related to Doing Business in China – Dividends we receive from our non-PRC resident subsidiaries and dividends payable by us to our foreign investors and gain on the sale of our Shares may become subject to withholding taxes under PRC tax laws.”
Foreign Currency Exchange
Pursuant to the Administrative Regulations on Foreign Exchange amended by the State Council on August 5, 2008 and effective as of the same date and various further regulations issued by the PRC State Administration of Foreign Exchange, or the SAFE, RMB can be freely converted into foreign currency and remitted out of China through a designated foreign exchange bank for current account transactions, such as payment for purchase of goods and services as long as such payment is supported by bona fide legal transactions, which will be examined by the responsible bank. For capital account transactions, such as equity investments and loans, conversion of foreign currency into RMB, or RMB into foreign currency, and remittance thereof into or out of China requires approval or registration by SAFE or its local counterparts.
Within China, unless otherwise approved, all payments must be made in RMB. Pursuant to the newly amended regulation, Chinese companies may repatriate foreign currency payments received from abroad into China or retain them abroad, the conditions and terms thereof shall be provided by SAFE, in accordance with the balance of payments and the need of foreign currency administration. Foreign invested enterprises, such as Actions Semiconductor (Zhuhai), are allowed to retain foreign currency in accounts with designated foreign exchange banks, subject to a maximum amount set by SAFE.
SAFE Regulations on Employee Stock Options
On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate foreign exchange administration of PRC domestic individuals who participate in employee stock holding plans and stock option plans of overseas listed companies. According to the Stock Option Rule, if a PRC domestic individual participates in any employee stock holding plan or stock option plan of an overseas listed company, a PRC domestic agent or the PRC subsidiary of such overseas listed company shall, among others things, file, on behalf of such individual, an application with SAFE to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises as PRC domestic individuals may not directly use overseas funds to purchase stock or exercise stock options. Concurrent with the filing of such application with SAFE, the PRC subsidiary shall obtain approval from SAFE to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of stock, any dividends issued upon the stock and any other income or expenditures approved by SAFE. The PRC subsidiary also is required to obtain approval from SAFE to open an overseas special foreign exchange account at an overseas trust bank to hold overseas funds used in connection with any stock purchase.
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All proceeds obtained by PRC domestic individuals from sales of stock shall be fully remitted back to China after relevant overseas expenses are deducted. The foreign exchange proceeds from these sales can be converted into RMB or transferred to such individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank. If the stock option is exercised in a cashless exercise, the PRC domestic individuals are required to remit the proceeds to the special foreign exchange account.
Although the Stock Option Rule was promulgated recently and many issues require further interpretation, we and our PRC employees who have been granted stock options became subject to the Stock Option Rule commencing from the date on which we became an overseas listed company. If we or our PRC employees fail to comply with the Stock Option Rule, we and/or our PRC employees may face sanctions imposed by foreign exchange authority or any other PRC government authorities.
In addition, the SAT recently has issued a few circulars concerning employee stock options. Under these circulars, our employees working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.
Dividend Distribution
The principal regulations governing distribution of dividends by wholly foreign owned enterprises include the Wholly Foreign-owned Enterprise Law amended by SCNPC on October 31, 2000 and effective as of the same date, and its Implementing Rules amended by the State Council on April 12, 2001 and effective as of the same date.
Under these regulations, a foreign invested enterprise in China may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association, and the accounting standards and regulations in China. In particular, each of our principal PRC subsidiaries, Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), as wholly foreign owned enterprises, is required to set aside at least 10% of their respective after-tax profits each year, if any, to fund certain reserve funds until such reserves have reached at least 50% of their respective registered capital. These reserves are not distributable as cash.
Regulations on Labor
On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. The regulations include specific provisions related to fixed-term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work, and collective bargaining. According to the Labor Contract Law, an employer is obliged to sign a labor contract with unlimited term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts. The employer has to compensate the employee upon the expiration of a fixed-term labor contract that is not renewed, unless the non-renewal is due to the employee’s refusal to renew such contract on terms the same as or better than those contained in the expired contract. The employer also has to compensate an employee if the employer terminates a labor contract without a cause permitted by law. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their length of service. Employees who waive such vacation time at the request of employers shall be compensated for three times their regular salaries for each waived vacation day.
Seasonality
For a discussion of the seasonal factors affecting our business, see “Item 5. Operating and Financial Review and Prospects – D. Trend Information – Seasonality of the demand for our products.
C. | Organizational Structure |
The following chart indicates the equity ownership structure and jurisdiction of incorporation of each of our subsidiaries as of March 31, 2011.
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D. | Property, Plants and Equipment |
Our principal locations, their purposes and the expiration dates for leases on facilities at those locations are shown in the table below.
Location | Purpose | Approximate square feet | Lease expiration | |||
Zhuhai, PRC | Corporate headquarters | 80,044 | April 2011 | |||
Hong Kong | Export trade office and warehouse | 2046 | December 2012 and March 2013 | |||
Shenzhen, PRC | Sales office and technology service center | 13,546 | Monthly renew | |||
Shanghai, PRC | Research and development and management service center | 19,021 | March 2012 |
With support from our subsidiaries in Shanghai and Shenzhen, China, our corporate headquarters facilitate the majority of our semiconductor design operations, including our semiconductor testing operations. We entered into a Land Use Right Grant Agreement on December 21, 2005 with the Bureau of Land Resources, Zhuhai for 52,250 square meters of land on which to set up our new corporate headquarters. We began construction of our new headquarters at this location in June 2008 and the total construction cost is estimated approximately at US$30.5 million. As of December 31, 2010, the total expenditure related to the new construction is approximately US$20.9 million and the construction is expected to be completed around April 2011. As we have sufficient cash flow on hand, there is no plan for external financing. We believe our current facilities are adequate and that additional space will be available on commercially reasonable terms for the foreseeable future.
On March 19, 2010, Actions Technology (Shanghai) won the bid to purchase from the local government the land use right for 50 years of a parcel of land of approximately 11,000 square meters in size located in Zhangjiang Hi-Tech Park, Pudong District, Shanghai, for a purchase price of RMB 61.2 million and enter into a land transfer contract with the Pudong District government after paying the full biding price on July 23, 2010. After Actions Cayman transferred Actions Enterprise (HK), the holding company of Actions Technology (Shanghai), to Nann Capital and invested 40% of Nann Capital, Actions Technology (Shanghai) has become one of our indirect equity method investments. Actions Technology (Shanghai) is in the process to comply with the requirements of environmental evaluation, investment approval and land use planning approval of the applicable PRC government authorities. Actions Technology (Shanghai) plans to construct a research and development center on this parcel of land and expects to fund the bulk of the construction expenditures with capital injection from its shareholders, including us.
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. | Operating Results |
Overview
We are a fabless semiconductor company that designs, develops and markets integrated platform solutions, including SoCs, firmware, software development tools and reference designs, for manufacturers of portable media players. We provide integrated platform solutions to portable media player manufacturers, brand owners and value-added distributors that enable them to accelerate the time-to-market for their products. We believe that our integrated platform solution approach provides a high level of value for our customers and creates a successful business model for us. We seek to extend our market position through investing in technology leadership, extending our network of independent software developers and value-added distributors, incorporating high-end features into products for the mass-market, and improving the functionality-to-price ratio of our products.
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Financial Operations Overview
The following describes key components of our statements of operations:
Revenues
We generate revenues primarily from sales of SoCs for portable media players. We generally sell our SoCs together with solution development kits, or SDKs, or together with SDKs and reference designs, which we sometimes refer to as our total solutions.
We have also generated limited revenues in providing semiconductor product testing services to our investee companies, such as Actions Beijing and Hi-Trend Technology (Shanghai), or Hi-Trend, at times when we had excess capacity in our semiconductor testing operations.
Revenues from our SoCs for portable media players are affected by the volume of units shipped and the average selling price, which are in turn influenced by our product mix and selling prices for individual products. Our selling prices are principally determined by our products’ features and functionality, and by market conditions. As our SoCs for portable media players mature in the market, their selling prices tend to decline over time. We have been able to limit the decline in our average selling prices by introducing new products with additional features and functions with higher initial selling prices. In 2008, 2009 and 2010, sales of SoCs for portable media players accounted for approximately 99.8%, 99.5% and 99.6% of our total revenues, respectively.
Cost of Revenues
Our cost of revenues are comprised of costs for our SoC products and have historically also included costs for semiconductor product testing services, which consist of depreciation expenses for product testing equipment and costs associated with operating such equipment.
SoCs: Cost of revenues for our SoC products primarily consists of cost of wafers, external testing and packaging fees, royalty payment, and personnel and occupancy expenses associated with our operations. In addition, we include inventory handling costs, inventory write-downs and transportation costs in our cost of revenues. The inventory write-downs are generally immaterial. There can be no assurance, however, that a decrease in the average selling price of our products in the future would not require us to make write-downs in future periods.
In general, our per unit costs, including wafer cost and external testing and packaging fees, declined for the majority of our SoC products beginning from the second quarter of 2004 through the second quarter of 2006 as we increased the volume of our orders and experienced economies of scale. From 2007 to 2010, our per unit costs declined further due to design improvements, wafer processing technology migration, and a decrease in wafer prices, notwithstanding that the volume of orders decreased from 2007 to 2010.
Wafer Pricing: We outsource the manufacturing of our SoC products to contract foundries. Wafer cost, which include both the purchase of raw silicon wafers and the foundries’ processing charges, are the largest component of our cost of revenues. We expect that wafer cost will continue to comprise the largest portion of our cost of revenues for the foreseeable future.
Royalty Payments: We have entered into license agreements with respect to third-party technologies that we use in our products. We generally pay license fees at the time we enter into the license agreement with the technology licensor. In addition, we pay royalty fees to the technology licensors based on a percentage of net revenue of chips sold pursuant to the licensed technologies, which percentage royalty rate varies depending upon the tiers of cumulative unit volume of all chips shipped, subject to an applicable floor.
External Testing and Packaging: We test the silicon wafers used in the production of our SoCs internally or outsource testing operations to third-party testing houses. We manufacture or purchase the testing equipment we use under strict cost-efficiency criteria. We enter into contracts with third-party testing houses whenever our production volume exceeds our testing capacity. After testing, we employ third-party subcontractors to slice wafers into individual die and to assemble and package the die into finished semiconductor packages, which processes are collectively referred to as “packaging”.
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Gross Profit
As the industry in which we compete is characterized by intense competition, integrated platform providers, including our company, must continuously invest in research and development to update and improve product features and functions. As a result, selling prices for products with less advanced features and functions generally decline over time as newer products are introduced. This aspect of the portable media player market means that in order to maintain our competitiveness and overall gross profit margin, we are required to continue to develop and offer products with improved features and additional functionality. We expect that our overall gross profit, as a percentage of revenues, may fluctuate from period to period as a result of shifts in product mix, changes in demand by consumers, changes in our pricing policies and those of our competitors, and new product introductions by us and our competitors.
Other Operating Income
Our other operating income has principally been comprised of subsidies and miscellaneous items. Subsidies include a rent subsidy provided by the Zhuhai municipal government for our headquarters and research facilities, and project awards we have received from the Zhuhai and Shenzhen municipal governments for having undertaken research projects that advance areas of technology favored by the PRC government.
Operating Expenses
Our operating expenses include research and development expenses, selling and marketing expenses and general and administrative expenses.
Research and development expenses: Research and development expenses consist primarily of engineering expenses, costs associated with our electronic design automation software, depreciation on research and development equipment, and the cost of parts and materials for prototypes, as well as salaries, employee benefits and related expenses of employees engaged in research, design and development activities, including certain employees staffing our technology service center. We allocate the salaries, share-based compensation, employee benefits and expenses attributable to field application engineers employed in our technology service center to research and development expenses, as the primary duty of these engineers is to provide customization services to our customers as a part of our integrated platform solutions. Such services are provided to our customers free of charge and prior to our receipt of purchase orders. As such, customers are under no obligation to reimburse us for costs incurred during this process or to actually purchase products from us. We expense all research and development costs as they are incurred.
Research and development expenses comprised 61.7 %, 66.0% and 65.0% of our operating expenses in 2008, 2009 and 2010, respectively. We believe that continued investment in research and development is critical to our ability to meet the changing requirements of our customers and to our overall long-term success. Accordingly, we expect that our research and development expenses will continue to grow both on an aggregate basis and as a percentage of our revenues as we employ additional research and development personnel, and as we seek to introduce more products and as the life cycles of our products shorten.
General and administrative expenses: Our general and administrative expenses consist primarily of salaries, share-basedcompensation, employee benefits, and related expenses for information technology, human resources, finance legal, other administration functions, and senior management. General and administrative expenses comprised 32.9%, 30.2% and 30.5% of our operating expenses in 2008, 2009 and 2010, respectively. We have managed since 2008 and expect to control our general and administrative expenses in a cost effective manner in the future as we have instituted a pay cut on executives and high-level management personnel and frozen hiring of non-engineering employees starting January 2009. Our general and administrative expenses may increase in the future to further expand our business and as we incur additional professional service fees, such as legal and accounting fees, in connection with our obligations as a public company.
Sales and marketing expenses: Our sales and marketing expenses consist primarily of salaries, share-based compensation, employee benefits and related expenses for our sales and marketing department. They also include the direct costs attributable to our sales and marketing activities, such as travel, entertainment and advertising expenses. Sales and marketing expenses comprised 5.4%, 3.8% and 4.5% of our operating expenses in 2008, 2009 and 2010, respectively. We intend to expand our sales and support network to better serve our customer base. As a result, we expect our sales and marketing expenses to increase in the future.
Interest income
We earn interest income from our demand deposit accounts and marketable securities as a part of our cash management activities.
Other income (loss)
Our other income is principally comprised of income related to tax refund and certain foreign exchange gains or losses.
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ACTIONS SEMICONDUCTOR CO., LTD.
Taxation
We and Mavrix are exempted companies incorporated in the Cayman Islands and are not subject to taxation under the current Cayman Islands law.
Under the current Mauritius law and Hong Kong Inland Revenue Rule, Actions Semiconductor Mauritius’ and Artek Microelectronics (HK)’s income are subject to taxation; however, up to and as of December 31, 2010, neither of these two entities has had any taxable profits. Actions Semiconductor Shanghai, Actions Enterprises (HK), Actions Technology (Shanghai), Actions Microelectronics (HK), Actions Capital and Actions Malaysia have been incurring losses since their incorporation. Mavrix Technology (H.K.) Co., Limited and Shanghai Mavrix Electronics, Ltd. have been incurring losses since the date we acquired 93.4% of the outstanding shares of Mavrix in our tender offer for all of the outstanding shares of Mavrix.
Effective January 1, 2008, the EIT Law was implemented in the PRC. The EIT Law provides that:
1. For all PRC resident enterprises, domestic or foreign, the uniform enterprise income tax, or EIT, rate is 25%.
2. Enterprises that are categorized as "High Technology Enterprises" will have a reduced tax rate of 15%.
3. The EIT Law provides a five-year transition period from January 1, 2008 for those companies which were established before the date of the EIT Law and which were entitled to preferential tax rates, such as a reduced tax rate or tax holiday. In addition, based on the Notice of the State Council Concerning Implementation of Transitional Rules for Corporate Income Tax Incentives issue by the State Council on December 26, 2007, or Circular 39, certain specifically listed categories of companies which enjoyed a preferential tax rate of 15% are eligible for a graduated rate increase to 25% over the 5-year period beginning from January 1, 2008.
Under the EIT Law, a preferential income tax rate of 15% will continue to be granted to companies that qualify as “High Technology Enterprises” supported by the government. Where transitional rules overlap with preferential policies provided under the EIT Law, a company may choose to implement the more favorable policy, but shall not enjoy both simultaneously. Once a company chooses which policy to implement, it cannot thereafter change its choice.
Actions Semiconductor (Zhuhai) |
As at December 31, 2008, foreign-invested enterprises in the PRC were generally subject to a 30% national foreign enterprise income tax, or FEIT, and a 3% local income tax, the total of which tax rates was 33%, subject to the application of various preferential tax treatments. Actions Semiconductor (Zhuhai) was entitled to a reduced FEIT rate of 15% as a foreign-invested enterprise established in the Zhuhai Special Economic Zone of China, or Zhuhai Economic Zone, which principally conducts its business operations in this Zhuhai Economic Zone. In addition, Actions Semiconductor (Zhuhai) is a production oriented enterprise and was further exempted from FEIT for its first two years of profitable operations after offsetting prior years' tax losses and entitled to a 50% reduction in its FEIT for the following three years as approved by the tax authorities in accordance with the China Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises and its Implementation Rules issued in 1991. Actions Semiconductor (Zhuhai) is exempt from the 3% local income tax during the preferential tax treatment period of five years commencing from 2004 pursuant to the Rules Concerning Exemption or Reduction of Local Income Tax for Foreign Invested Enterprises issued by the People’s Government of Guangdong Province issued in 1992.
Actions Semiconductor (Zhuhai) had a 50% reduction in FEIT rate, which resulted in an effective FEIT rate of 9%, which was 50% of the statutory tax rate of 18% for the year ended December 31, 2008.
On December 16, 2008, a certificate of "High Technology Enterprise" was granted to Actions Semiconductor (Zhuhai), as a result of which the applicable tax rate was 15% for each of the years ended December 31, 2009 and 2010. Unless Actions Semiconductor (Zhuhai) continues to qualify as a “High Technology Enterprise” in 2011 and beyond, it will be subject to a 24% tax rate in 2011 and a 25% tax rate starting in 2012.
Artek Microelectronics (Shenzhen)
Artek Microelectronics (Shenzhen) was established in the Shenzhen Special Economic Zone, or Shenzhen Economic Zone, of China as a foreign investment enterprise that principally conducts its business operations in the Shenzhen Economic Zone. Therefore, it was subject to a reduced FEIT rate of 15% and is exempted from FEIT in the years ended December 31, 2007 and 2008, which were the first and second years Artek Microelectronics (Shenzhen) had profits after offsetting its prior years' tax losses. From 2009 to 2011, the income tax rate is entitled to reduction by 50% pursuant to the same preferential tax treatment, as in the case of Actions Semiconductor (Zhuhai), as a result of which the income tax rate was 10% and 11% for the years ended December 31, 2009 and 2010, respectively, and 12% for the year ending December 31, 2011. If Artek Microelectronics (Shenzhen) obtains the certificate of "High Technology Enterprise," an income tax rate of 15% will be applied for the years ending 2012, 2013 and 2014. Otherwise, the statutory income tax rate of 25% will apply starting 2012. In addition, Artek Microelectronics (Shenzhen) is exempted from the 3% local income tax during the above preferential tax treatment period of five years commencing from 2007 pursuant to the Rules Concerning Exemption or Reduction of Local Income Tax for Foreign Invested Enterprises issued by the People's Government of Guangdong Province issued in 1992.
Tax Residency
Uncertainties exist with respect to how the EIT Law applies to our overall operations, and more specifically, with regard to our tax residency status. The EIT Law became effective January 1, 2008 and provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise.. Additional guidance is expected to be released by the Chinese government in the near future that may clarify how to apply this standard to taxpayers. Despite the current uncertainties resulting from the limited PRC tax guidance on the issue, we determined that our legal entities organized outside of the PRC should not be treated as PRC tax residents for EIT Law purposes as the places of effective management of such entities are outside of China. If one or more of our legal entities organized outside of the PRC were characterized as a PRC tax resident, then the additional tax cost might be significant. See “Item 3.D. Key Information — Risk Factors —Risks Related to Doing Business in China— We may be deemed a Chinese resident enterprise under the PRC Enterprise Income Tax Law and be subject to the PRC taxation on our worldwide income.”
Our calculation of income taxes generally reflects our status as a non-PRC tax resident company. An additional consequence of us and/or our non-PRC subsidiaries being treated as tax residents in the PRC would be the taxability in the PRC of certain payments we make to the non-PRC tax resident recipients. This may include dividends, interest, and royalties.
We have subsidiaries that are tax residents in the PRC so we will be subject to the PRC dividend withholding tax of 5% when and if undistributed earnings are declared to be paid as dividends commencing on January 1, 2008 to the extent those dividends are paid out of profits that arose on or after January 1, 2008. Our tax provision includes $2,286,000 of income tax expense for the 5% dividend withholding tax on the balance of distributable profits that arose on or after January 1, 2008 within our PRC subsidiaries as of the balance sheet date.
Actions Technology (HK) and Artek Microelectronics (HK) were subject to Hong Kong Profits Tax at a rate of 16.5% for the years ended December 31, 2008, 2009 and 2010, respectively.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our most critical policies include: (a) revenue recognition; (b) allowance for doubtful accounts; (c) write-downs for obsolete inventory; (d) provision for litigation claims; (e) share-based compensation expense; (f) valuation allowance against deferred tax assets; (g) impairment of long-lived assets; and (h) impairment of investments. The following is a discussion of our most critical policies, as well as the estimates and judgments involved.
Revenue Recognition. Our revenues are primarily derived from the sale of SoC products that we design and develop at our own expense. We recognize revenue based on firm customer orders with fixed terms and conditions, including the selling price net of discount and commissions, if any. We recognize revenue when delivery has occurred and collectibility is determined to be reasonably assured. We also provide semiconductor product testing, and revenue is recognized when the services are rendered. We do not provide our customers with price protection and only provide the right of return for defective goods in connection with our warranty policy. To date, the costs of our warranty policy have been insignificant.
Allowance for Doubtful Accounts. We conduct credit evaluations of customers and analyze the payment history of customer accounts, including recent customer purchases. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we will record an allowance against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. We recorded provision (reversal) of allowance for doubtful accounts in the amount of US$0.5, (US$0.1) and (US$0.1) million for the years ended December 31, 2008, 2009 and 2010, respectively.
Write-down for Obsolete Inventories. We value our inventory at the lower of the actual costs of our inventory or its current estimated market value based on the selling prices of our SoCs. We record inventory provisions for estimated obsolescence or unmarketable inventories based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Provision for Litigation Claims. We have been subject to legal proceedings and claims with respect to matters such as patents. Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property.
It is possible that other companies might pursue litigation with respect to any claims such companies purport to have against us. The results of litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to use the technology, pay substantial damages under applicable law, cease the use and sale of infringing products or expend significant resources to develop non-infringing technology. Litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail.
Periodically, we review the status of each significant matter, if any, and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. If we estimate that loss will be within a range, and no amount within the range is considered a better estimate than any other amount, we would record the minimum estimated liability.
Share-based Compensation Expense. We approved our share-based compensation plan and its amendment in May 2007 and on May 21, 2008, pursuant to which we granted options to purchase 8,000,000 of our American Depositary Shares, representing 48,000,000 ordinary shares, to employees at exercise prices of US $3.30 per ADS in exchange for their continuous employment of 4 years after the grant date. We accounted for share-based compensation for employees based on the grant-date fair value of the award determined options using the Black-Scholes option pricing model. That cost will be recognized over the period during which our employees provide services in exchange for the award, which is typically four years. If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, our share-based compensation in future periods may differ significantly and could materially affect our operating results. For example, we reviewed our actual employee terminations in the past two years and changed the estimated employee forfeiture rate from original 5% to 10% to reflect the current competitive environment of talent recruiting and sustaining in China. We estimated forfeitures at the time of grant based on our historical experiences and record share-based compensation expenses only for those awards that are expected to vest. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation expenses to be recognized in future periods.
The exercise prices of the options were reduced to US$1.40 on February 26, 2009, and the first exercise date was postponed to the second anniversary of grant date.
Income Taxes. We record a valuation allowance against deferred tax assets based on taxable income in the future. A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for net operating loss carry forwards. If, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized, we will record a valuation allowance to reduce the net deferred tax asset to the amount that we reasonably believe will be realized.
Uncertainties exist with respect to how the EIT Law applies to our overall operations, and more specifically, our tax residency status. The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Currently no interpretation or application of the EIT Law and its implementing rules is available for non-Chinese enterprise or group enterprise controlled entity. Despite the current uncertainties resulting from the limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC should be treated as residents for the EIT Law’s purposes. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, there would be adverse impact on our results of operation. See “Item 3.D. Key Information — Risk Factors —Risks Related to Doing Business in China— We may be deemed a Chinese resident enterprise under the PRC Enterprise Income Tax Law and be subject to the PRC taxation on our worldwide income.”
Goodwill. We recorded goodwill when we acquired additional interest in Mavrix on August 31st, 2010. The goodwill was recognized as the excess of (i) the total cost of acquisition, fair value of the noncontrolling interests in Mavrix, and the acquisition date fair value of our previous equity interest in Mavrix over (ii) the fair value of the identifiable net assets of Mavrix as of the acquisition date. We test goodwill annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. We perform annual impairment test on December 31 on the reporting unit. We will recognize a goodwill impairment loss in our statements of operations when the carrying amount of goodwill exceeds its implied fair value which is based on discounted cash flows. This analysis requires management to make assumptions and to apply judgment, including forecasting future sales, expenses, and discount rates, which can be affected by economic conditions and other factors that can be difficult to predict.
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Impairment of Long-lived Assets. The valuation of long-lived assets is tested whenever events or changes in circumstance indicate that the carrying amounts may not be recoverable. An impairment assessment has been made on the comparison of the undiscounted future cash flows generated by long-lived assets and their current carrying amounts, and no impairment loss was recognized. If the future economic situation deteriorates and actual cash flows generated from long-lived assets are less than the projected cash flows, impairment loss will be recognized and would adversely impact our future operating results.
Impairment of Investments. Investments in equity method investees and other unlisted equity securities are reviewed for impairment when there is evidence of a loss in value and we prepare annual updates to corporate planning assumptions. Such evidence of a loss in value might include our inability to recover the carrying amount, the lack of sustained earnings capacity which would justify the current investment amount, or a current fair value less than the investment’s carrying amount. When it is determined such a loss in value is other than temporary, an impairment loss is recognized for the difference between the investment’s carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the length of time and extent of the decline, the investee’s financial condition and near-term prospects, and our ability and intention to retain our investment for a period that will be sufficient to allow for any anticipated recovery in the market value of the investment. When quoted market prices are not available, the fair value is usually based on the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market participants, plus market analysis of comparable assets owned by the investee, if appropriate. Differing assumptions could affect the timing and the amount of an impairment of an investment in any period.
We determined that, as of December 31, 2009, our investments in Mavrix, a fabless semiconductor company developing SoC solutions for the emerging Mobile Digital TV market, which became an equity method investee in 2008, and Actar Limited, or Actar, a value added service provider that bridges entertainment with technology, were impaired, and that those impairments were other than temporary. As a result, we recognized a $7.4 million impairment loss in 2009. The determination that these investments were impaired as of December 31, 2009 came as a result of our review of certain financial information, business plans and prospects provided to or disclosed to us during the first three months of 2010.
On August 31, 2010, to expand our research and development capability and explore the competitive potential of our products, we acquired substantially all of the shares of Mavrix, pursuant to a tender offer for all of its outstanding shares, for a total consideration equal to approximately US$1.2 million, as a result of which we now hold 93.4% of the outstanding shares of Mavrix.
Inflation
Inflation in China has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, China’s overall inflation rate, as represented by changes in the Consumer Price Index, was approximately 5.9% in 2008, -0.7% in 2009 and 3.3% in 2010.
Foreign Currency Risk
See “Item 11. Quantitative and Qualitative Disclosures About Market Risk— Foreign Exchange Risk” and “Item 3.D Risk Factors—Risks Related to Doing Business in China —Fluctuations in the value of RMB could negatively impact our results of operations” for information regarding the impact of foreign currency fluctuations on the company.
Government Policies
For information regarding governmental economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, our operations or our shareholders’ investments, see “Item 3.D Risk Factors—Risks Related to Doing Business in China,” “Item 4.B Information on the Company—Business Overview—Regulations,” “Item 5.A Operating and Financial Review and Prospects–Taxation” and “Item 10.E Additional Information—Taxation.”
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 of the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements on a gross basis rather than on a net basis as previously required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which is be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this guidance did not have a significant impact on the our financial statements.
In March 2010, the FASB issued authoritative guidance regarding the effect of denominating the exercise price of an entity’s share-based payment awards in the currency of the market in which the underlying equity securities trades if that currency is different from (1) the entity's functional currency, (2) the functional currency of the foreign operation for which the employee provides services, or (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trade should be considered an equity award assuming all other criteria for equity classification are met. The guidance is effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This adoption of the authoritative guidance is not expected to have a material impact on the our financial statements.
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this pronouncement modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for impairment tests performed during such entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. For nonpublic entities, the guidance is effective for impairment tests performed during such entities’ fiscal years (and interim periods within those years) that begin after December 15, 2011. Early application for nonpublic entities is permitted, and nonpublic entities that elect early application will use the same effective date as that for public entities. This adoption of the authoritative guidance is not expected to have a material impact on our financial statements.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to business combinations included in the reported pro forma revenue and earnings. The amendments are effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted. This adoption of the authoritative guidance is not expected to have a material impact on the our financial statements.
Results of Operations
The following tables set forth selected results of operations data derived from our consolidated financial statements, expressed in thousands of U.S. dollars and as a percentage of revenues, for the periods indicated. Our historical results of operations are not necessarily indicative of the results for any future period.
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For the year ended December 31, | ||||||||||||||||||||||||
2008 | % | 2009 | % | 2010 | % | |||||||||||||||||||
(thousands) | (thousands) | (thousands) | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
System-on-a-chip products | US$ | 94,916 | 99.8 | % | US$ | 43,937 | 99.5 | % | US$ | 37,434 | 99.6 | % | ||||||||||||
Semiconductor product testing services | 214 | 0.2 | % | 203 | 0.5 | % | 151 | 0.4 | % | |||||||||||||||
Total revenues | 95,130 | 100.0 | % | 44,140 | 100.0 | % | 37,585 | 100.0 | % | |||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||
System-on-a-chip products | (47,248 | ) | -49.7 | % | (30,093 | ) | -68.2 | % | (22,846 | ) | -60.8 | % | ||||||||||||
Semiconductor product testing services | (177 | ) | -0.2 | % | (117 | ) | -0.3 | % | (81 | ) | -0.2 | % | ||||||||||||
Total cost of revenues | (47,425 | ) | -49.9 | % | (30,210 | ) | -68.5 | % | (22,927 | ) | -61.0 | % | ||||||||||||
Gross profit | 47,705 | 50.1 | % | 13,930 | 31.5 | % | 14,658 | 39.0 | % | |||||||||||||||
Other operating income | 797 | 0.8 | % | 918 | 2.1 | % | 966 | 2.6 | % | |||||||||||||||
Gain on deemed disposal | — | — | 1,736 | 3.9 | % | — | — | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | (19,477 | ) | -20.5 | % | (19,295 | ) | -43.7 | % | (17,325 | ) | -46.1 | % | ||||||||||||
General and administrative | (10,399 | ) | -10.9 | % | (8,812 | ) | -20.0 | % | (8,125 | ) | -21.6 | % | ||||||||||||
Selling and marketing | (1,694 | ) | -1.8 | % | (1,115 | ) | -2.5 | % | (1,208 | ) | -3.2 | % | ||||||||||||
Total operating expenses | (31,570 | ) | -33.2 | % | (29,222 | ) | -66.2 | % | (26,658 | ) | -70.9 | % | ||||||||||||
Income (loss) from operations | 16,932 | 17.7 | % | (12,638 | ) | -28.6 | % | (11,034 | ) | -29.4 | % | |||||||||||||
Other income (loss) | 1,213 | 1.3 | % | (654 | ) | -1.5 | % | 2,348 | 6.2 | % | ||||||||||||||
Dividend income | 20 | 0.1 | % | 440 | 1.0 | % | — | — | ||||||||||||||||
Fair value change in trading securities | 92 | 0.1 | % | 40 | 0.1 | % | (2 | ) | -0.1 | % | ||||||||||||||
Gain on disposal of other investment | — | — | — | — | 137 | 0.4 | % | |||||||||||||||||
Interest income | 11,912 | 12.5 | % | 10,977 | 24.9 | % | 9,608 | 25.6 | % | |||||||||||||||
Interest expenses | (4 | ) | -0.1 | % | (57 | ) | -0.1 | % | — | — | ||||||||||||||
Other-than-temporary impairment loss on investments | — | — | (7,407 | ) | -16.8 | % | — | — | ||||||||||||||||
Income (loss) before income taxes, equity in net loss of equity method investees and noncontrolling interest | 30,165 | 31.6 | % | (9,299 | ) | -21.1 | % | 1,057 | �� | 2.8 | % | |||||||||||||
Income taxes expense | (3,632 | ) | -3.8 | % | (537 | ) | -1.2 | % | (422 | ) | -1.1 | % | ||||||||||||
Equity in net loss of equity method investees | (576 | ) | -0.6 | % | (826 | ) | -1.9 | % | (781 | ) | -2.1 | % | ||||||||||||
Remeasurement gain on equity interest on acquisition of a subsidiary | — | — | — | — | 494 | 1.3 | % | |||||||||||||||||
Net income (loss) | 25,957 | 27.3 | % | (10,662 | ) | -24.2 | % | 348 | 0.9 | % | ||||||||||||||
Add: Net loss attributable to noncontrolling interest | 166 | 0.2 | % | 264 | 0.6 | % | 36 | 0.1 | % | |||||||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. | US$ | 26,123 | 27.4 | % | US$ | (10,398 | ) | -23.6 | % | US$ | 384 | 1.0 | % |
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ACTIONS SEMICONDUCTOR CO., LTD.
Year ended December 31, 2010 and 2009
Revenues. Revenues decreased by US$6.6 million, or 14.9%, from US$44.1 million in 2009 to US$37.6 million in 2010. The decrease was due to an approximately 31% decline in the average selling price of our SoCs for portable media players in 2010 compared to 2009 as well as an approximately 33% decrease in units shipped compared to last year. The decline in average selling price was primarily the result of our strategy to reduce prices on certain products from time to time in order to maintain our sales volume and market share as well as the product mix adjustment 2010. The decrease in units shipped was mainly due to the drop of market demand after the global financial crisis started in 2008.
Revenues from providing semiconductor products testing services comprised of 0.5% and 0.4% of our total revenue in 2009 and 2010, respectively.
Cost of Revenues. Cost of revenues decreased by US$7.3 million, or 24.1%, from US$30.2 million in 2009 to US$22.9 million in 2010, primarily due to a decrease in units shipped of our SoC products. The decrease in average unit cost, resulting from our cost reduction measures, including design improvements to migrate to smaller processing geometries and decreases in wafer pricing, notwithstanding that the volume of orders decreased in 2010, also caused a drop in cost of revenues in proportion thereto.
Gross Profit. As a result of the decrease in cost of our SoC products, our gross profit increased by US$0.8 million, or 5.2%, from US$13.9 million in 2009 to US$14.7 million in 2010. Our gross profit margin was 39.0% in 2010, compared to 31.6% in 2009. The increase in gross profit margin was due to the decline in average unit cost which was larger than the reduction in average selling price.
Other Operating Income. Other operating income including subsidies from PRC government authorities, royalty income, and intellectual property transfer income increased by US$0.1 million, or 5.2%, from US$0.9 million in 2009 to US$1.0 million in 2010.
Operating Expenses. Total operating expenses decreased by US$2.5 million, or 8.8%, from US$29.2 million in 2009 to US$26.7 million in 2010.
• Research and development. Research and development expenses decreased by US$2.0 million, or 10.2%, from US$19.3 million in 2009 to US$17.3 million in 2010 due primarily to a decrease of US$1.4 million in share-based compensation expense and a decrease of US$0.9 million in the amortization of intangible assets.
• General and administrative expenses. General and administrative expenses decreased by US$0.7 million, or 7.8%, from US$8.8 million in 2009 to US$8.1 million in 2010 due primarily to a decrease of US$1.0 million in staff costs.
• Selling and marketing expenses. Selling and marketing expenses increased by US$0.1 million, or 8.3%, from US$1.1 million in 2009 to US$1.2 million in 2010.
Income (Loss) from Operations. As a result of the foregoing, our loss from operations decreased by US$1.6 million, or 12.7%, from a loss of US$12.6 million in 2009 to a loss of US$11.0 million in 2010.
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Interest Income. The amount of our cash, cash equivalents and time deposits decreased to US$42.9 million as of December 31, 2010, compared to US$87.8 million as of December 31, 2009. While the balance of cash and cash equivalents has decreased, the value of marketable securities has increased to US$189.2 million as of December 31, 2010 compared to US$163.8 million as of December 31, 2009. As capital expenditure expanded approximately by US$16.2 million, our interest income decreased by US$1.4 million, or 12.5%, from US$11.0 million in 2009 to US$9.6 million in 2010.
Other Income (Loss). Other income from operations was US$2.3 million in 2010 compared to other loss excluded from income from operations of US$0.7 million in 2009 due primarily to exchange gain as a result of the rapid appreciation of the RMB against the US dollar in 2010, compared to an exchange loss of significant fluctuations of the US dollar against New Taiwan Dollar in 2009.
Income Tax Expenses. Our subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC. Our income tax expenses were approximately $0.4 million and $0.5 million in 2009 and 2010, respectively.
Years ended December 31, 2009 and 2008
Revenues. Revenues decreased by US$51.0 million, or 53.6%, from US$95.1 million in 2008 to US$44.1 million in 2009. The decrease was due to an approximately 31% decline in the average selling price of our SoCs for portable media players in 2009 compared to 2008 as well as an approximately 33% decrease in units shipped compared to last year. The decline in average selling price was primarily the result of our strategy to reduce prices on certain products from time to time in order to maintain our sales volume and market share as well as the product mix adjustment 2009. The decrease in units shipped was mainly due to the drop of market demand after the global financial crisis started in 2008.
Revenues from providing semiconductor products testing services comprised of 0.2% and 0.5% of our total revenue in 2008 and 2009, respectively.
Cost of Revenue. Cost of revenues decreased by US$17.2 million, or 36.3%, from US$47.4 million in 2008 to US$30.2 million in 2009, primarily due to a decrease in units shipped of our SoC products. The decrease in average unit cost, resulting from our cost reduction measures, including design improvements to migrate to smaller processing geometries and decreases in wafer pricing, notwithstanding that the volume of orders decreased in 2009, also caused a drop in cost of revenues in proportion thereto.
Gross Profit. As a result of the decrease in sales of our SoC products, our gross profit decreased by US$33.8 million, or 70.9%, from US$47.7 million in 2008 to US$13.9 million in 2009. Our gross profit margin was 31.6% in 2009, compared to 50.1% in 2008. The decrease in gross profit margin was due to the decline in average selling price which was larger than the reduction in average unit cost.
Other Operating Income. Other operating income increased by US$0.1million, or 12.5%, from US$0.8 million in 2008 to US$0.9 million in 2009. In 2009, we recognized a US$0.8 million advance subsidy from local authorities of Zhuhai, China. Comparatively, in 2008, we recognized a US$0.6 million advance subsidy from local authorities of Zhuhai.
Gain on Deemed Disposal. The Group’s ownership in Beijing Actions was diluted from 80% to 35% as a result of limiting its participation in an additional round of funding to $1.5 million of an aggregate $7.5 million of new capital injected in 2009. As a result, we lost control of Beijing Actions on September 30, 2009, and a gain on deemed disposal of $1.7 million was recorded in 2009.
Operating Expenses. Total operating expenses decreased by US$2.4 million, or 7.6%, from US$31.6 million in 2008 to US$29.2 million in 2009.
• Research and development. Research and development expenses decreased by US$0.2 million, or 1.0%, from US$19.5 million in 2008 to US$19.3 million in 2009.
• General and administrative expenses. General and administrative expenses decreased by US$1.6 million, or 15.4%, from US$10.4 million in 2008 to US$8.8 million in 2009 due primarily to a decrease of US$0.5 million in allowance for doubtful accounts receivable and decrease of US$0.5 million in audit, consulting and attorney fees.
• Selling and marketing expenses. Selling and marketing expenses decreased by US$0.6 million, or 35.3%, from US$1.7 million in 2008 to US$1.1 million in 2009, due primarily to decrease of US$0.3, US$0.1 and US$0.1 million in bonus, travel costs and advertising expenses respectively.
Income (Loss) from Operations. As a result of the foregoing, our income from operations decreased by US$29.5 million, or 174.6%, from earnings of US$16.9 million in 2008 to a loss of US$12.6 million in 2009.
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Interest Income. The amount of our cash, cash equivalents and time deposits increased to US$87.8 million as of December 31, 2009, compared to US$45.5 million as of December 31, 2008. While the balance of cash and cash equivalents has increased, the value of marketable securities has decreased to US$163.8 million as of December 31, 2009 compared to US$201.2 million as of December 31, 2008. As interest rates declined as a result of the financial crisis in later year 2008, our interest income decreased by US$0.9 million, or 7.6%, from US$11.9 million in 2008 to US$11.0 million in 2009.
Other Income (Loss). Other loss excluded from income from operations was US$0.7 compared to other income US$1.2 million in 2008 due primarily to exchange losses as a result of the significant fluctuations of the US dollar against Taiwan dollar in 2009, compared to an exchange gain of rapid appreciation of RMB versus the US dollar in 2008.
Income Tax Expenses. Our subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC. Our income tax expenses were approximately $0.5 million and $3.6 million in 2009 and 2008, respectively.
Other-than-Temporary Impairment Loss on Investments. In 2009, we recognized impairment losses of US$1.0 million, US$3.4 million and US$3.0 million for our investments in AMC Holding Ltd., Mavrix and Actar, respectively.
B. Liquidity and Capital Resources
The following table sets forth the summary of our cash flows for the periods indicated:
For the year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(thousands) | ||||||||||||
Net cash provided by operating activities | US$ | 9,930 | US$ | 27,637 | US$ | 2,760 | ||||||
Net cash (used in) provided by investing activities | (30,683 | ) | 22,127 | (51,215 | ) | |||||||
Net cash used in financing activities | (8,423 | ) | (7,497 | ) | 2,619 | |||||||
Net (decrease) increase in cash and cash equivalents | (29,176 | ) | 42,267 | (45,836 | ) | |||||||
Cash and cash equivalents, beginning of year | 72,054 | 45,435 | 87,706 | |||||||||
Effect of exchange rate changes on cash | 2,557 | 4 | 1,002 | |||||||||
Cash and cash equivalents, end of year | US$ | 45,435 | US$ | 87,706 | US$ | 42,872 |
On December 31, 2010, we had US$236.8 million of cash, cash equivalents, time deposits and marketable securities. In general, our primary uses of cash were for operating and investment activities, such as the purchase of inventory and financing of construction related to our expansion plans. Our largest source of cash was cash collections from our customers. We have been able to meet our cash needs principally by using cash on hand, a portion of which was generated from our initial public offering in November 2005 and a portion of which was generated by cash from operations. Although we believe that cash generated from operations will be sufficient to fund our expected cash requirements and planned capital expenditure for at least the next 12 months, any worldwide financial market disruption could have a negative impact on our available resources in the future. Our minimum projected obligations for fiscal year 2011 and beyond are set forth below under “contractual obligations.”
Operating Activities
In 2010, net cash provided by operating activities amounted to US$2.8 million. We generated net income during this period of US$0.3 million. We recorded a net purchase of trading securities of US$0.5 million, a decrease of accrued expenses and other current liabilities of US$1.7 million, including $0.7 million in connection with the construction of our new corporate headquarters in Zhuhai and $0.9 million in connection with our investment in Hi-Trend, an increase of prepaid expenses and other current assets of US$1.3 million, a remeasurement gain on the equity interest acquired in a subsidiary of US$0.5 million, equity in net loss of an equity method investee of US$0.8 million, depreciation of property, plant and equipment of US$1.9 million, amortization of acquired intangible assets of US$1.9 million, an increase in shared-based compensation expense of US$1.5 million, and a write-down of inventories of US$0.4 million.
In 2009, net cash provided by operating activities amounted to US$27.6 million while we suffered a net loss during this period of US$10.7 million. We recorded a gain on disposal of a subsidiary of US$1.7 million resulted from the loss of control of Actions Beijing, an increase in accounts receivable of US$1.3 million, a net proceed from the disposal of trading securities of US$19.3 million, an impairment loss of long term investments of US$7.4 million, equity in net loss of an equity method investee of US$0.8 million, depreciation of property, plant and equipment of US$2.1 million, the amortization of acquired intangible assets of US$2.8 million, an increase in share-based compensation expense of US$4.0 million, a decrease in inventory of US$3.2 million and an increase in accrued expenses and other current liabilities of US$1.6 million.
Mavrix, a fabless semiconductor company developing SoC solutions for the emerging mobile digital TV market, became one of our equity method investments due to our holding of 19.8% of its shares in 2008. We made another investment of US$3.0 million in Actar, a value added service provider that bridges entertainment with technology, in 2008. Our 6.8% investment in Actar was accounted for under the cost method. Both Mavrix and Actar experienced various fatal and unexpected business challenges during February and March 2010. As a result of these unexpected business challenges, we determined that our investments in Mavrix and Actar were impaired and that those impairments were other than temporary. As a result, we wrote off our entire investment in these two entities effective as of December 31, 2009 and recognized a $7.4 million impairment loss. In August 2010, to expand our research and development capability and explore the competitive potential of our products in the mobile digital TV market, we acquired substantially all of the outstanding shares of Mavrix pursuant to a tender offer for all of the outstanding shares of Mavrix, for a total consideration equal to approximately US$1.2 million, as a result of which we now hold 93.4% of the outstanding shares of Mavrix.
In 2008, net cash provided by operating activities amounted to US$9.9 million. We generated net income during this period of US$26.1 million. We recorded a decrease in accounts payable of US$9.0 million due to fewer purchases near the end of 2008, a decrease of accrued expenses and other current liabilities of US$5.5 million due principally to the decrease in accrued staff bonus, an increase in trading securities of US$19.3 million for an investment in a bond fund, which was partially offset by depreciation and amortization of US$2.1 million, the amortization of acquired intangible assets of US$3.2 million, an increase in share-based compensation expenses of US$2.3 million, an increase in deferred tax of US$2.1 million, and a decrease in inventory of US$3.6 million as a result of an inventory level adjustment in light of the economic environment, a decrease in accounts receivable of US$2.2 million due to the lower sales in December 2008, a decrease in notes receivable of US$0.3 million, and a decrease in prepaid expenses and other current assets of US$1.6 million.
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Investing Activities
In 2010, net cash used for investing activities was US$51.2 million. We recorded an increase in the value of marketable securities of US$22.8 million, a decrease in net cash and cash equivalent of US$10.1 million due to the disposition and resulting deconsolidation of a subsidiary, an increase of investment in equity method investees of US$5.6 million, an increase in the purchase of intangible assets of US$1.8 million, an increase in the purchase of property, plant, and equipment of US$8.9 million, an increase in deposits paid for acquisition of intangible assets of US$2.4 million, a decrease in net cash and cash equivalent of US$0.9 million in connection with the acquisition of a subsidiary. These cash outflows were partly offset by proceeds from the disposal of other investments of US$1.3 million.
The purchases of additional marketable securities in 2010 mainly included money market deposits and trust financial products issued by PRC commercial banks and financial institution with maturities between three and twelve months. In addition, the increase of investments in equity method investees in 2010 consisted of strategic investments of US$4.4 million in Nann Capital and US$1.2 million in Grand Choice Investment Limited.
In 2009, net cash generated by investing activities was US$22.1 million. We recorded net cash equivalent decrease from disposal of subsidiary of US$2.7 million, an increase in equity method investee of US$1.5 million, an increase in purchase of intangible assets of US$3.1 million, an increase in the purchase of property, plant, and equipment of US$6.6 million, an increase in deposits paid for acquisition of property, plant and equipment of US$1.7 million. These decreases in cash and cash equivalents were offset by a cash increase provided by the net value decrease of marketable securities of US$37.2 million and the decrease of US$0.4 million in restricted cash and time deposits. The decrease in marketable securities of US$37.2 million is the net impact of proceeds from redemption $91.0 million of Marketable securities, and the purchase of $53.8 million of marketable securities.
The decrease in marketable securities in 2009 was mainly due to redemptions at maturity of money market deposits and trust financial products issued by PRC commercial banks and financial institutions with maturities between three and twenty four months. Trust financial products are products or investments in individual funds or pools of funds held by financial institutions in the PRC, who use the funds raised to independently manage a pool of various assets of which the underlying assets are debt instruments. In addition, the increase in equity method investees in 2009 consisted of strategic investments of US$1.5 million in Beijing Actions.
In 2008, net cash used in investing activities was US$30.7 million. We recorded an increase in the value of marketable securities of US$25.6 million, an increase in other investments of US$2.2 million, an increase in equity method investee of US$3.0 million, an increase in purchased intangible assets of US$1.2 million, an increase in purchased equipment of US$2.4 million, and an increase in a deposit paid for acquisition of equipment of US$0.4 million. These increases were offset by a decrease of US$1.4 million in restricted cash, reflecting the maturity of a time deposit placed into an account with the Agriculture Bank of China as collateral for a net short-term loan, and a decrease in time deposits with maturities between three and six months, which provided cash of US$2.7 million for our activities.
The increase in marketable securities in 2008 was mainly due to money market deposits and trust financial products issued by PRC commercial banks and financial institution with maturities between three and twelve months. In 2008, we renewed our holdings in marketable securities immediately upon their maturity and accordingly received no cash proceeds from any such marketable securities. In addition, the increase in long-term financial investments in 2008 consisted of strategic investments of US$3.0 million in Mavrix , an increase in other investments of US$3.0 million in Actar, and US$0.1 million in Unitech Electronics Co., Ltd, a manufacturer and designer of automatic identification and data collection products, a decrease in other investments of US$1.0 million in Bizlink Holdings Inc, a manufacturer of interconnectivity solutions such as cable, wire and connectors, and a decreasein other investments of US$0.5 million in Hi-Trend.
Financing Activities
Net cash generated by financing activities was US$2.6 million in 2010, primarily consisting of receipt of amount due from Action Enterprises (HK) of US$11.0 million, which was a former subsidiary, advance subsidy US$0.3 million from local authorities of Shenzhen and Zhuhai, the PRC, proceeds from exercise of stock options of US$0.3 million. Share repurchases under our repurchase program of ordinary shares in the amount of US$9.0 million.
Net cash used in financing activities was US$7.5 million in 2009, primarily consisting of proceeds from an issuance of shares of a subsidiary of US$1.9 million, and share repurchases under our repurchase program of ordinary shares in the amount of US$10.1 million.
Net cash used in financing activities was US$8.4 million in 2008, consisting of a decrease in short term bank loans of US$1.6 million, an increase in a new loan borrowed from a minority shareholder of Beijing Actions by Beijing Actions in the amount of US$1.5 million for its working capital requirements and payments made in connection with our repurchase program in the amount of US$9.4 million.
Capital Expenditures
We made capital expenditures of US$8.8 million, US$11.2 million and US$16.3 million in 2008, 2009 and 2010, respectively. Our capital expenditures in 2010 consisted principally of US$8.9 million for the purchase of property, plant and equipment, US$1.8 million for the acquisition of intangible assets, and US$5.6 million for investment in equity method investees.
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We are constructing new corporate headquarters in Zhuhai in response to our anticipated growth, and may also establish additional offices in other cities in China, such as Shanghai, to better serve our existing and future customers and establish larger research and development facilities in those areas. We anticipate continuing to invest in improving and upgrading our technology infrastructure, including acquiring additional engineering tools, software and other intangible assets. We continuously evaluate our need to expand our internal testing capacity to fulfill market demands and long-term investments strategies in companies or technologies consistent with our business objectives. Based on the existing plans, we expect to make additional capital expenditures totaling approximately US$16.1 million in 2011 in connection with such efforts, of which US$3.4 million will be made for investment in equity method investees. We will fulfill these additional capital expenditures mainly with our existing RMB cash for expenditures in China.
Capital Requirements
Our capital requirements depend on numerous factors, including:
• | market acceptance of our products; |
• | our expenditures on our planned new headquarters in Zhuhai and facilities at other sites; |
• | our expenditures on research and development activities; |
• | our expenditures on workstations, testing equipment, licenses and royalty payments and electronic design automation tools; |
• | the resources we devote to marketing, selling and supporting our products; |
• | the payment terms we negotiate with our customers; |
• | market prices for our products; and |
• | other working capital requirements. |
We expect to devote substantial capital resources to support our research and development efforts, hire and expand our sales and marketing resources, and for other corporate activities. We believe that our current cash and cash equivalents, cash flow from operations, and the proceeds from the sale of our equity and marketable securities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. We may, however, apply for bank loans in specific currencies or for specific purposes to maximize our cash flow flexibility and yields, or engage in other capital raising transactions if additional cash resources are needed or appropriate due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We cannot assure you that additional capital will be available to us on acceptable terms or at all.
Restricted Net Assets
Relevant PRC laws and regulations permit payments of dividends by our PRC subsidiaries only out of its retained earnings, if any, as determined in accordance with PRC regulations and accounting standards. For example, our principle subsidiaries, Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), as wholly foreign owned enterprises, are required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its after-tax profits each year as a statuory reserve fund and to provide for a staff and workers’ bonus fund at the discretion of its board of directors. Retained earnings calculated under PRC regulations and accounting standards may differ from retained earnings calculated in accordance with U.S. GAAP. In addition to those reserves, the registered capital of our PRC subsidiaries is also restricted. In December 2007, Actions Semiconductor (Mauritius) re-invested the undistributed earnings of approximately US$80.2 million, or 27.8% of our total consolidated net assets from our subsidiary Actions Semiconductor (Zhuhai) back into Actions Semiconductor (Zhuhai) by way of a capital injection. As a result of these and other restrictions under PRC laws and regulations, Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen) are restricted in their ability to transfer a portion of their net assets to us in the form of dividends, loans or advances, which restricted portion amounted to approximately US$115.3 million, or 39.9%, and US$123.0 million, or 45.5%, of our total consolidated net assets, which included approximately US$12.1 million, or 4.2%, and US$12.3 million, or 4.4%, of our total consolidated net assets associated with the statutory reserves as of December 31, 2008 and 2009, respectively.
As of December 31, 2010, the restricted net assets associated with the statutory reserves of Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen) totaled approximately US$12.5million, or 4.6% of our total consolidated net assets. In addition to those reserves, the registered capital of the Company’s PRC subsidiaries is also restricted. Including the additional registered capital of approximately US$80.2 million or 29.6% of our total consolidated net assets re-invested from Actions Semiconductor (Mauritius) back into Actions Semiconductor (Zhuhai) in December 2007, as of December 31, 2010, the total amount of the registered capital and reserves amounted to US$113.9 million, or 42.1% of our total consolidated net assets.
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ACTIONS SEMICONDUCTOR CO., LTD.
Pursuant to the Interim Regulations on Value-added Tax and its Implementation Rules issued in 1993, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value-added tax, or VAT, at a rate of 17% of the gross sales proceeds received. We received a full rebate of the VAT on most of our export sales since the establishment of Actions Semiconductor (Zhuhai) through December 31, 2003. Due to changes in PRC regulations, from January 1, 2004 through October 31, 2004 we received a rebate of approximately 76% of our VAT payments. Beginning November 1, 2004 we resumed receiving a full rebate on our VAT payments. As most of our sales made by Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen) consist of exports, historically we have not incurred significant VAT expense.
We have historically had minimal taxable income in jurisdictions other than China.
Reconciliation between the benefits for FEIT computed by applying the China tax rate to profit before income taxes is as follows:
Year ended December 31, | ||||||||||||||||
2007 | 2008 | 2009 | 2010 | |||||||||||||
PRC tax rate | 15 | % | 18 | % | 25 | % | 25 | % | ||||||||
Tax provision (credit) at PRC enterprise income tax rate | $ | 8,101 | $ | 5,430 | $ | (2,325 | ) | $ | 264 | |||||||
Expenses not deductible for tax purposes | 764 | 1,091 | 2,825 | 260 | ||||||||||||
Share-based compensation not deductible for tax purposes | - | 413 | 601 | 1532 | ||||||||||||
Income not taxable for tax purposes | (2,393 | ) | (431 | ) | (178 | ) | (981 | ) | ||||||||
Net change in valuation allowance | 134 | 570 | (320 | ) | 342 | |||||||||||
Effect of tax exemption and preferential income tax rate granted to PRC subsidiaries | (4,284 | ) | (5,036 | ) | (99 | ) | (473 | ) | ||||||||
Effect of the different income tax rates in other jurisdictions | (121 | ) | (138 | ) | (323 | ) | (145 | ) | ||||||||
Effect of withholding tax on undistributed earnings | - | 1,738 | 320 | 229 | ||||||||||||
Utilization of tax loss previously not recognized | - | - | - | (341 | ) | |||||||||||
Overprovision in prior year | - | - | - | (264 | ) | |||||||||||
Others | 1 | (5 | ) | 36 | (1 | ) | ||||||||||
Income tax expense | $ | 2,202 | $ | 3,632 | $ | 537 | $ | 422 |
C. Research and Development, Patents and Licenses, etc.
Research and Development
We devote a substantial portion of our resources to the development of our SoCs and our ability to provide SDKs and reference designs. We make continuous investments in our design technologies to improve design, fabrication and verification of our products. As of December 31, 2010, we had 522 research and development engineers, including 40 engineers from Mavrix newly acquired in August 2010, who work closely with value-added distributors, contract manufacturers and brand owners in adding new features and functions to our existing products or developing new products.
Our mixed-signal integration expertise enables us to reduce the size and cost of our SoC products. For example, we incorporate standard digital components in these products, including a processor, embedded memory, certain peripheral connections such as a universal serial bus, TV encoder, and analog components, such as analog-to-digital and digital-to-analog converters, audio signal power amplifiers, low dropout regulators (LDOs) and DC-DC regulators. Because we are able to integrate several analog and digital components on the same integrated circuit, our customers can avoid significant design challenges when they use our SoCs and benefit from the competitive BOM cost and customized solution when needed.
Our research and development efforts during 2008, 2009 and 2010 focused principally on increasing the solutions and applications of our ATJ203X series, ATJ200X(car audio) series, ATS250X(boom box audio) series, ATJ227X(PMP) series and G1000(game) series products to enhance their appeal to our customers, and on the development and production of our newest ATJ200X series, ATS230X series, ATJ228X and G101X series products. In addition to pursuing these efforts, we are currently focusing our research and development efforts on gaining know-how and intellectual property in the areas of advanced audio and video technology. Our continuing goal for our research and development efforts is to develop and integrate increasing functionality into our SoCs and integrated platform solutions products while maintaining our competitive pricing structure. Also, we will continue to focus on developing the low power consumption technology and the technology to enhance the quality of sound, image and video. High definition multi-format video, 3D video decoder and encoder, and 3D graphics are other key technologies on which we expect to focus on in the coming year.
We have a stable core team of engineers that have detailed knowledge of our proprietary architecture, algorithms, integrated circuit designs, firmware and software engineering, as well as system-level knowledge of our customers’ manufacturing processes. Our ability to adapt to changing customer requirements and evolving industry standards through the development of new and enhanced products is a significant factor in maintaining our competitive position and our prospects for growth.
See “Item 5.A Operating and Financial Review and Prospects—Operating Results—Financial Operations Overview—Operating Expenses—Research and development expenses” for an information regarding the amount spent by us on research and development activities during the last three fiscal year.
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Licenses
Our products are designed for use in devices manufactured by our customers that comply with international standards. These international standards are often covered by patents or copyrights held by third parties. We have entered into various licensing agreements with major technology companies, including MIPS Technologies International Ltd., Microsoft Corporation, SRS Labs, Inc., Samsung Electronics Co., Ltd., Cambridge Silicon Radio Limited, Dolphin Integration SA and Real Networks Inc. We integrate third-party software or other licensed technology into almost all of our products.
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D. | Trend Information |
Demand for portable media players. Throughout 2004, 2005 and 2006, a combination of factors, including a decrease in the price of portable media players caused by a significant decrease in the price of flash memory, which is a major cost component of many portable media players, and the growing acceptance of digital media distribution channels on the Internet such as Apple iTunes, Yahoo, MusicMatch and Napster, resulted in rapid growth in the demand for portable media players. Because we supply SoCs for use in portable media players, we benefited greatly from the increased demand, and our revenues and profitability grew rapidly during this initial rapid growth period. However, starting in 2007, we have not experienced such rapid growth in revenues and profitability on a percentage basis to continue at its initial pace as the combination of factors that fueled the initial rapid growth of our industry have changed. Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance. Further, in 2008 and 2009, we were negatively impacted by the global economic and financial downturn. We experienced a significant decrease in sales, especially in the fourth quarter of 2009, which resulted in the lowest sales amount in a quarter since we went public in 2005. In addition, we also experienced a decrease in sales to our overseas markets. In the fourth quarter of 2010, we experienced a stable increase in our shipment units. However, due to the cyclical nature of the industry, we can not assure you that such condition will be continued.
Average selling price of our products. The portable media player market has been characterized by rapidly changing technical standards and consumer preferences. Consumers generally expect that new product releases will have more capabilities than previous generations. To succeed in this intensely competitive and quickly evolving market, brand owners must constantly and rapidly introduce portable media players with more functions and enhanced features. As a SoC and integrated platform solutions provider for these brand owners, we usually plan to introduce a new product series every nine to twelve months, and introduce new SoC products within a series with increased functionality, improved cost structure and enhanced features more frequently.
The average selling price of any particular SoC product declines over time after it reaches maturity in the product life cycle. In general, we earn higher margins when a new SoC model is first introduced to the market and experience a corresponding decline in margins as its average selling price declines. For example, we introduced our eleven series SoCs in the second quarter of 2008, which provide more functionality and performance than nine series SoCs and sold at slightly higher prices. From the second quarter of 2008 to the fourth quarter of 2009, we experienced an approximately 37.3% decrease in the average selling price in our eleven series SoCs. We introduced our three series SoCs in the second quarter of 2009, which provide less functionality than eleven series SoCs and sold at slightly lower prices in our lower-end segment. From the second quarter of 2009 to the fourth quarter of 2009, we also experienced an approximately 19.2% decrease in the average selling price in our three series SoCs. While our overall average selling prices generally benefit from the introduction of new SoC products, this benefit may be partially offset by pricing strategies we employ. For example, we experienced a decrease of average selling price in the first and second quarter in 2010 by 6.3%, but a 13.3% increase in the third and fourth quarter in 2010 due to the migration of our product portfolio.
We seek to achieve revenue growth and margin stability through increasing our share of the total volume of units shipped by offering products with high functionality and competitive pricing; continuously integrating additional functionality to improve the value of our products; and reducing costs by achieving smaller die size, greater integration and migration to more advanced process technologies. In the event that we are not able to timely introduce new products, the average selling price of our products will decline and we may not be able to offset such decline by realizing additional production efficiencies.
Seasonality of the demand for our products. Like sales for most consumer electronics products, portable media player sales tend to increase significantly in the fourth quarter to meet the year-end holiday demand. However, this kind of pattern has changed gradually due to the slow economy in US and Europe. Because holiday sales in 2010 were not as strong as in prior years, the increase in year-end sales was not as robust in the fourth quarter of 2010 as compared to prior years.
Foundry capacity and wafer pricing. To maximize our unit sales and profits, we must secure committed foundry capacity that is adequate to produce all of the SoCs that we can sell to our customers at prices that enable us to maintain or increase our profit margins. Wafer pricing is affected by the volume of our purchases and overall market demand, and tends to be cyclical. Because contract foundries have fixed capacities, in times of strong market demand, the prices that contract foundries charge for their wafer products and services generally increase, and correspondingly in times of lesser market demand, the prices that contract foundries charge for their wafer products and services may decrease. As a result, if the overall demand for electronics products is high, contract foundries that manufacture wafers for electronics products may increase the prices that they charge to their customers, including our company. In the past, sales volume increases helped us to negotiate better pricing terms and secure committed capacity with our foundries. Since the fourth quarter of 2008, we have experienced a decline in sales due to the impact of the global economic downturn, which also affected the overall market demand of wafers. If the decrease of our sales volume continues and if it outpaces the overall market demand, we may lose our ability to negotiate favorable terms and secure capacity with our foundries. Further, we are also subject to seasonal and other factors affecting foundry capacity and pricing that are beyond our control.
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Presently, He Jian and UMC manufacture almost all of our mass produced semiconductors. We also maintain relationships with other foundries to help ensure that we have alternative manufacturing capabilities if He Jian and UMC fail to achieve satisfactory yields or is unable to meet our requirements. However, there are many purchasers of foundry products and services that are larger than us, and our ability to source adequate foundry services could be affected by significant increases in demand for electronics products.
E. | Off-balance Sheet Arrangements |
We did not have any significant outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts as of December 31, 2010.
F. | Tabular Disclosure of Contractual Obligations |
The following sets forth information regarding our aggregate payment obligations under our contracts and commercial commitments as of December 31, 2010:
Payments due by period | ||||||||||||||||||||
Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
(thousands) | ||||||||||||||||||||
Operating lease obligations | US$ | 303 | US$ | 264 | US$ | 39 | US$ | — | US$ | — | ||||||||||
Royalty Commitment | 150 | 150 | — | — | — | |||||||||||||||
Purchase Obligations | 1,692 | 1,692 | — | — | — | |||||||||||||||
Capital Commitment | 4,867 | 4,867 | — | — | — | |||||||||||||||
Other Liabilities | 2,585 | 2,502 | 83 | — | — | |||||||||||||||
Total contractual obligations | US$ | 9,597 | US$ | 9,475 | US$ | 122 | — | — |
G. | Safe Harbor |
This report contains forward-looking statements within the meaning of section 27A of the Section Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. See “Introduction-Forward-Looking Statements”.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | Directors and Senior Management |
Directors, Executive Officers and Key Employees
The following table sets forth our executive officers, directors and key employees, their ages as of December 31, 2010 and the positions held by them. The business address for each of our executive officers and directors is c/o Actions Semiconductor Co., Ltd., 15-1, No. 1, HIT Road, Tangjia, Zhuhai, Guangdong, 519085, the People’s Republic of China.
Name | Age | Position | ||
Lee, Hsiang-Wei (David) | 51 | Director, Chairman of the Board | ||
Yeh, Nan-Horng | 52 | Director | ||
Lin, Yu-Hsin Casper (1) | 64 | Director | ||
Chen, Chin-Hsin (Fred) (1) | 68 | Director | ||
Li, Shao Chuan (Shawn) | 43 | Director and Chief Technology Officer | ||
Huang , Jun-Tse (Walter) (1) | 53 | Director | ||
Pan, I-Ming (Robin) (1) | 50 | Director | ||
Chen, Hsuan-Wen (Niccolo) | 47 | Chief Executive Officer | ||
Chou, Pei-Fen (Patricia) | 43 | Chief Financial Officer |
(1) Member of each of the audit committee, compensation committee and nominations committee.
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Lee, Hsiang-Wei (David) has served as our Chairman since October 2007. Previously, Mr. Lee served as our Chief Financial Officer since August 2005. Mr. Lee also currently serves as CEO of Robeco TEDA (Tianjin) Asset Management Co., Ltd, and a director of Pacific Sun Investment Management Co., Ltd. Previously, Mr. Lee was the CEO of ABN AMRO Asset Management (China). From 1995 to 2002 he was the Chairman and CEO of ABN AMRO Asset Management’s Taiwan operations where he managed assets in the amount of US$3.5 billion. Mr. Lee has more than 15 years of experience in corporate finance and investment management. Mr. Lee holds a Master of Business Administration degree from Duke University and a Bachelor of Science degree in biometrics from National Taiwan University.
Yeh, Nan-Horng has served as one of our directors since October 2007. Mr. Yeh also served as our Chief Executive Officer from May 2005 to November 2009 and currently serves as Chairman of the board of Realtek Semiconductor Corp. Previously, Mr. Yeh served as a director and the president of each of Globaltec Management Consulting Corp. and Globaltec Technology Partner I Venture Capital Corp. Mr. Yeh holds a Master in Business Administration degree from Washington University in St. Louis and a Bachelor of Science degree in transportation management from National Chiao Tung University in Taiwan.
Lin, Yu-Hsin (Casper) has served as one of our directors since August 2005. Previously, Mr. Lin served as the chairman and director of Memory Devices, Ltd., a memory module manufacturer, a director of Twinmos Tech. Inc., a network module manufacturer, and a director and the Chief Financial Officer of United Microelectronics, a semiconductor wafer manufacturer. Mr. Lin holds a Master in Business Administration degree from Bloomsbury University of Pennsylvania and a Bachelor of Art degree from the accounting department of Soochow University in Taiwan.
Chen, Chin-Hsin (Fred) has served as one of our directors since October 2007. Mr. Chen also currently serves as an Endowed Chair Professor in Shanghai Jiao Tong University. Previously, Mr. Chen served as Director of the OLED Laboratory, Display Institute, National Chiao Tung University in Hsinchu, Taiwan and Director of the Centre for Advanced Luminescence Materials (CALM) at Hong Kong Baptist University. Mr. Chen was also a group leader and senior scientist at the Display Technology Laboratory of Eastman Kodak Co., in Rochester, New York, USA. Mr. Chen is the co-inventor of the key Doped OLED Guest-Host Emitter Technology and has been awarded more than 35 U.S. patents.
Li, Shao Chuan (Shawn) has served as one of our directors since September 2005 and as our Chief Technology Officer since the establishment of our operations in December 2001. Before joining us, Mr. Li was the director of research and development at Zhuhai Arestek Electronic Co., Ltd. Mr. Li holds a Master of Science degree in electrical engineering from Beijing Institute of Technology.
Huang, Jun Tse (Walter) has served as our director since April 2009. Mr. Jun Tse Huang currently serves as the CEO of Colorwind Technology Corporation, a position he has held since 2004. From 2001 to 2003, he was a Vice President of the Overseas department at the Guangzhou Risun Information Technology Group. Prior to that, starting in 1999, Mr. Huang served as an Executive Vice President at Global Brand Manufacturing Corporation, a Taiwan Stock Exchange listed company. From 1995 to 1998, he served as an Executive Vice President in Proview Group, a Hong Kong Stock Exchange listed company. And prior to that he was as a Vice President of Purchasing at Elitegroup Computer Systems Co., Ltd, a Taiwan Stock Exchange listed company. Mr. Huang holds a Bachelor degree in Electrical Engineering from Tamkang University in Taiwan.
Pan, I-Ming (Robin) has served as our director since November 2009. Mr. Pan also currently serves as the Chief Executive Officer of Ambiwin Technology Inc. He previously served as Vice President of Marketing at PQ International Co. from 2007 to 2008 and Vice President of Sales at Sinostar Technology Ltd. from 2005 to 2006. Mr. Pan also co-founded and served as the President and Chief Operating Officer of GMI Technology Inc. from 1995 to 2005. Mr. Pan holds a Bachelor degree in Electrical Engineering from Chung Yuan Christian University in Taiwan.
Chen, Hsuan-Wen (Niccolo) has served as our Chief Executive Officer since November 2009. Mr. Chen joined Actions in 2007 as General Manager and was promoted to Chief Strategy Officer earlier in 2009. Prior to working at Actions, Mr. Chen held a number of technical positions at Realtek Semiconductor Corp. from 1992 through 2006, recently serving as Chief Technology Officer and Executive Vice President of Realtek's China subsidiary, Realsil. Prior to that, Mr. Chen worked as the engineer of process technology development department at UMC. Mr. Chen received a Bachelor of Science in Electrical Engineering and Master of Science in Electrical Engineering from National Taiwan University.
Chou, Pei-Fen (Patricia) has served as our Chief Financial Officer since October 2007. Ms. Chou currently also serves as an independent director and the chairperson of the audit committee of China Kanghui Holdings, a NYSE-listed orthopedic device company. Previously Ms. Chou was the Vice President of Finance at Actions. Prior to joining Actions in November 2006, Ms. Chou served as the Director of Business Development and then Senior Director of Accounting at Semiconductor Manufacturing International Corporation (SMIC), where she was responsible for establishing a U.S. presence, developing new business initiatives, and leading the company’s global accounting team. She also participated in raising US$650 million in private funds and SMIC’s US$1.6 billion NYSE-listed IPO. From 1996 to 2001, Ms. Chou was the Director of Accounting and Planning of Winbond Electronics Corporation U.S. operation. Prior to that, Ms. Chou worked as a financial auditor in Taiwan, Hong Kong, and the United States with Deloitte. Ms. Chou received a Bachelor of Business Administration from National Taiwan University, Master of Accounting from University of Southern California, and Master of Business Administration from University of California at Berkeley. She is also a Certified Public Accountant in Taiwan, the United States, and China.
There are no family relationships among any of our executive officers and directors. There are no arrangements or understandings with any person pursuant to which any of our executive officers or directors were selected.
B. Compensation
Cash Compensation
Our directors and senior management receive compensation in the form of salaries and annual bonuses. While we do not have a specific bonus plan setting the calculation of our annual bonuses, each director is entitled to receive an annual discretionary bonus of such amount as shall be determined by the board of directors. Additionally, our senior management and employees are entitled to receive an annual discretionary bonus based on their individual performance and our financial performance during the year in question.
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The aggregate amount of salaries and bonuses paid by us to our directors and executive officers during the year ended December 31, 2010 was slightly less than US$1.0 million. None of our directors or executive officers has any employment or service contracts with us providing for benefits upon termination of employment.
Equity Compensation
On May 21, 2008, options to purchase 770,000 of our American Depositary Shares, representing 4,620,000 of ordinary shares, were granted under our 2007 Equity Performance and Incentive Plan, or the 2007 Plan, to our directors and executive officers. The per share exercise price of the options granted to our directors and executive officers was originally set at $3.30 per ADS, or $0.55 per ordinary share, which was the market price on the date of grant.
These options have two sets of vesting schedule. After the options have fully vested, they will be exercisable for an additional two years. Each option vested will have an effective exercise period of two years. Under the equal vesting schedule, 25% of the ADSs underlying the option will vest on each anniversary of the grant date provided that the optionee remains in the continuous service of the Company through each such vesting date. Under the graded vesting schedule, 15% of the ADSs on the first anniversary of the grant date, and 20%, 30% and 35% of the ADSs vest on the next three anniversaries of the grant date, respectively, provided that the optionee remains in the continuous service of the Company through each such vesting date.
On February 26, 2009, our board of directors and Compensation Committee offered to our employees, consultants and non-employee directors the opportunity to amend their outstanding stock options to purchase our American Depositary Shares or ordinary shares that were granted on May 21, 2008, August 4, 2008 or January 21, 2009 (as applicable). Under this offer, outstanding options with an exercise price of US$3.30 per ADS were exchangeable for an equivalent number of options with an exercise price of US$1.40 per ADS. Under this offer, the first vesting date under the options was also extended from May 21, 2009, August 4, 2009, or January 21, 2010, as applicable, to May 21, 2010.
On April 17 and November 5, 2009, 100,000 options granted to former director Mr. Chiu Tzu-Yin and Paul Hsiao were forfeited due to their early resignations. On February 3, 2010, certain directors and executive officers, including Messrs. Lee Hsiang-Wei, Yeh Nan-Horng and Chen Hsuan-Wen, surrendered all the options previously granted to them, the underlying ADSs for which were returned to the pool available for future grants to employees.
Our board of directors and executive officers accepted the offer to amend on February 26, 2009. As a result, the table below summarizes the current terms of stock option granted to each director and executive officer as of March 31, 2010.
Name | Position | Number of Shares Subject to Outstanding Options (in ADSs) | Exercise Price | Grant Date | First Vesting Date | |||||||||||||
Lee, Hsiang-Wei (David) | Director, Chairman of the Board | 0 | - | - | - | |||||||||||||
Yeh, Nan- Horng | Director | 0 | - | - | - | |||||||||||||
Lin, Yu-Hsin (Casper) | Director | 50,000 | $ | 1.40 | May 21, 2008 | May 21, 2010 | ||||||||||||
Chen, Chin-Hsin (Fred) | Director | 50,000 | $ | 1.40 | May 21, 2008 | May 21, 2010 | ||||||||||||
Li, Shao Chuan (Shawn) | Director and Chief Technology Officer | 100,000 | $ | 1.40 | May 21, 2008 | May 21, 2010 | ||||||||||||
Huang , Jun-Tse (Walter) | Director | 0 | - | - | - | |||||||||||||
Pan, I-Ming(Robin) | Director | 0 | - | - | - | |||||||||||||
Chen, Hsuan-Wen(Niccolo) | Chief Executive Officer | 0 | - | - | - | |||||||||||||
Chou, Pei-Fen (Patricia) | Chief Financial Officer | 100,000 | $ | 1.40 | May 21, 2008 | May 21, 2010 |
Indemnification
Cayman Islands law and our articles of association provide that we may indemnify our directors and officers acting in relation to any of our affairs against any liability incurred as a result of any act or failure to act in carrying out their functions other than such liability (if any) that may be incurred by the willful neglect or default of any such persons. No such director or officer shall be liable to the company for any loss or damage in carrying out their functions unless that liability arises through the willful neglect or default of such person.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission, or the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
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2007 Equity Performance and Incentive Plan
In May 2007, our board of directors and shareholders adopted the 2007 Plan, which is intended to attract and retain officers, employees, non-employee directors and consultants for us and our subsidiaries and to provide to such persons incentives to stay with us or our subsidiaries and make superior contributions to us in the future. We have reserved 8 million ADSs upon exercise of awards granted under the 2007 Plan. In November 2011, our board of directors approved a proposal to amend the 2007 Plan by increasing the number of ADSs available for issuance pursuant to the 2007 Plan to 9.4 million, conditional upon the receipt of shareholder approval for such amendment and we expect to submit the amended 2007 Plan for approval by our shareholders at the annual general meeting to be held in May 2011.
Types of Awards. We may grant the following types of awards under our 2007 Plan:
• | Option rights to purchase our ADSs; |
• | Restricted shares, which are non-transferable ADSs, that may be subject to forfeiture; |
• | Restricted Shares Units, which represent the right to receive our ADSs at a specified date in the future, which may be subject to forfeiture; |
Plan Administration . Our board of directors, or our compensation committee (or its subcommittee) designated by our board or directors, will administer the 2007 Plan. A majority of the committee (or subcommittee) will constitute a quorum, and the action of the members of the committee (or subcommittee) present at any meeting at which a quorum is present, or acts unanimously in writing, will be the acts of the committee (or subcommittee).
The interpretation and construction by our board of directors of any provision of the 2007 Plan or of any agreement, notification or document evidencing the grant of option rights, restricted shares or restricted share units and any determination by the board of directors pursuant to any provision of the 2007 Plan or of any such agreement, notification or document will be final and conclusive. No member of our board of directors will be liable for any such action or determination made in good faith.
Amendment. Our board of directors may at any time and from time to time amend the 2007 Plan in whole or in part; provided, however, that any amendment that must be approved by our shareholders in order to comply with applicable law or the rules of the NASDAQ Global Market or, if our ADSs are not quoted on the NASDAQ Global Market, the principal national securities exchange upon which our ordinary shares are traded or quoted, will not be effective unless and until such approval has been obtained. Nothing herein shall be construed to limit our authority to offer similar or dissimilar benefits under other plans or otherwise with or without further shareholder approval.
Generally, Nasdaq Marketplace Rule 5635(c) requires each issuer to obtain shareholders' approval of all equity compensation plans (including stock option plans) and material amendments to such plans. However, pursuant to Nasdaq Market Rule 5255(c), we have elected to follow our home country's practices (in this case, being Cayman Islands’ practices) in lieu of the requirements of Nasdaq Marketplace Rule 5635(c). Our home country practices do not require us to obtain a shareholders' approval for amendments to our existing equity incentive plans.
On February 26, 2009, we initiated an offer to amend (the “Offer to Amend”) the terms of the options previously granted to certain of our employees, consultants, and non-employee directors. On March 20, 2009, we completed our Offer to Amend. As a result, options to purchase approximately 7,742,000 shares of our American Depositary Shares, or approximately 99.9% of all eligible options, were tendered for amendment in accordance with the Offer to Amend. The terms of our Offer to Amend can be found in the Form CB filed with the Securities and Exchange Commission on February 26, 2009.
Our board of directors also may permit participants to elect to defer the issuance of ADSs or the settlement of awards in cash under the 2007 Plan pursuant to such rules, procedures or programs as it may establish for purposes of the 2007 Plan. Our board of directors also may provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferral amounts.
Our board of directors may condition the grant of any award or combination of awards authorized under the 2007 Plan on the surrender or deferral by the participant of his or her right to receive a cash bonus or other compensation otherwise payable by us or one of our subsidiaries to the participant.
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In case of termination of employment by reason of death, disability or normal or early retirement, or in the case of hardship or other special circumstances, of a participant who holds an option right not immediately exercisable in full, or any restricted shares as to which the risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any restricted share units as to which the restriction period has not been completed, or who holds shares subject to any transfer restriction imposed pursuant to the 2007 Plan, the board of directors may, in its sole discretion, accelerate the time at which such option right may be exercised or the time at which such risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such restriction period will end or the time when such transfer restriction will terminate or may waive any other limitation or requirement under any such award.
Our 2007 Plan does not confer upon any participant any right with respect to employment or other service with us or any of our subsidiaries (including, without limitation, continuation of employment), nor does it interfere in any way with any of our rights or the right of any of our subsidiaries would otherwise have to terminate such participant’s employment or other service at any time, with or without cause. The terms of employment of an employee is not affected by the execution of the 2007 Plan. Awards granted under the 2007 Plan do not form a part of the terms of employment of an employee or entitle such employee to take into account awards granted under the 2007 Plan when calculating any compensation or damages upon the termination of such employee’s employment for any reason.
Termination. No grant will be made under this 2007 Plan after January 1, 2020, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of this Plan.
C. Board Practices
Our board of directors currently consists of seven members. Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominations committee. Mr. Lin, Yu-Hsin Casper, Mr. Chen, Chin-Hsin Fred, Mr. Huang, Jun-Tse Walter and Mr. Pan, I-Ming Robin serve as independent board members on our audit committee, nominations committee and compensation committee. There are no family relationships between any of our executive officers and directors.
The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the appointment, compensation and oversight of the work of our independent auditors. Mr. Lin, Yu-Hsin Casper is the Chairman of the audit committee and an “audit committee financial expert” within the meaning of the Sarbanes-Oxley Act of 2002.
The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers. Mr. Pan, I-Ming Robin is the Chairman of the compensation committee.
The nominations committee of the board of directors identifies individuals qualified to become members of the board, consistent with criteria approved by the board and selects or recommends that the board select, the director nominees for the next annual shareholders’ meeting and recommends members of the board to the board for committee membership. Mr. Huang, Jun-Tse Walter is the Chairman of the nominations committee.
None of our directors has contracts with us or any of our subsidiaries providing for benefits upon termination of employment.
Our board of directors is divided into three classes, with each class being up for election every third year. Messrs. Li and Huang have terms that expire at the 2011 annual general meeting of shareholders. Messrs. Lee and Lin have terms that expire at the 2012 annual general meeting of shareholders, Messrs. Yeh, Chen and Pan have terms that expire at the 2013 annual general meeting of shareholders.
D. Employees
As of December 31, 2008 and 2009, we had 658 and 624 full-time employees, respectively. As of December 31, 2010, net of Beijing Actions, we had 679 full-time employees, including 408 dedicated engineers in the research and development department, 114 field application engineers in customer service department, 18 in sales and marketing, 87 in general and administration and 46 in manufacturing and logistics functions. Of these full-time employees, 493 are located in Zhuhai, China, 45 in Shenzhen, China, 135 in Shanghai, China and 6 in Hong Kong. We have never had a work stoppage and none of our employees is covered by a collective bargaining agreement. We believe that the relations between the Company and our employees are healthy.
We adopted an equity incentive plan that is designed to assist us to attract and retain key employees, directors and consultants of outstanding ability and to motivate such employees, directors and consultants to exert their best efforts on our behalf by providing compensation and incentives through the granting of awards.
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Options granted under the 2007 Plan are subject to two sets of vesting schedules. Under the equal vesting schedule, 25% of the ADSs underlying the option will vest on each anniversary of the grant date provided that the optionee remains in the continuous service of the Company through each such vesting date.
Under the graded vesting schedule, 15% of the ADSs on the first anniversary of the grant, 20%, 30% and 35% of the ADSs shall vest on each of the next three anniversaries of the grant, respectively, provided that the optionee remains in the continuous service of the Company through each such vesting date.
As a result of early termination of employment, certain stock options were rendered and the Compensation Committee further granted options to purchase 33,000 and 31,000 ADSs to certain new employees on August 4, 2008 and January 21, 2009.
On February 26, 2009, our board of directors and Compensation Committee offered to our employees, consultants and non-employee directors the opportunity to amend their outstanding stock options to purchase our American Depositary Shares, or ordinary shares that were granted on May 21, 2008, August 4, 2008 or January 21, 2009 (as applicable). This offer replaces the exercise price, as quoted in ADS, of US$3.30 of the outstanding stock options with an exercise price of US$1.40. Further, it also extends the first vesting date from May 21, 2009, August 4, 2009, or January 21, 2010, as applicable, to May 21, 2010.
On May 6, 2009 and August 3, 2009, the Compensation Committee continued to grant options to purchase 87,000 and 262,000 ADSs to certain employees.
Among the options granted on August 3, 2009, options to purchase 60,000 ADSs were granted under an equal vesting schedule of two years in 2012 and 2013 respectively, provided that the optionees remain in the continuous service of the Company and have also met certain performance conditions in 2011 and 2012 respectively.
On February 3, 2010, the Compensation Committee granted options to purchase 989,000 ADSs to certain employees, of which options to purchase 580,000 ADSs were forfeited by a few of our incumbent directors and executives voluntarily on February 3, 2010, and options to purchase 409,000 ADSs had lapsed upon the departure of former employees. Among the options granted on February 3, 2010, options to purchase 777,500 ADSs were granted under a new vesting schedule in three tranches: 30% of the underlying ADSs shall vest on the designated date in 2010, 30% and 40% of the underlying ADSs shall vest on each of the next two anniversaries of the designated date, respectively, provided that the optionees remain in the continuous service of the Company through each such vesting date. Options to purchase 211,500 ADSs were granted under the graded vesting schedule, 15% of the underlying ADSs shall vest on designated date in 2010, 20%, 30% and 35% of the underlying ADSs shall vest on each of the next three anniversaries of the designated date respectively, provided that the optionees remain in the continuous service of the Company through each such vesting date.
On May 13, 2010, August 3, 2010 and November 2, 2010, the Compensation Committee continued to grant options to purchase 393,500, 73,500 and 44,500 ADSs to certain employees, respectively. The underlying ADSs of these options vest in two to four years, provided that the optionees remain in the continuous service of the Company through each vesting date.
On November 12, 2010, the Compensation Committee proposed to amend the 2007 Equity Performance and Incentive Plan by increasing the number of ADSs available for awards to 9.4 million. The Board subsequently approved the amended 2007 Plan and it is expected to be submitted for approval by our shareholders at the annual general meeting to be held in May 2011. On December 15, 2010, the Compensation Committee conditionally granted awards with a total of 1,227,700 underlying ADSs, including options to purchase 1,039,700 ADSs and 188,000 restricted share units, to certain employees, with the underlying ADSs vesting in 3 to 4 years, provided that employees remain in the continuous service of the Company through each vesting date. Such awards were granted conditional upon the receipt of shareholder approval for the amended 2007 plan at the annual general meeting expected to be held in May 2011.
On January 25, 2011, the Compensation Committee further conditionally granted options to purchase 36,000 ADSs to certain employees and the underlying ADSs shall vest in 3 years, provided that the optionees remain in the continuous service of the Company through each vesting date.
After the above continuous granting activities, offset by the forfeitures of the Company management, directors and resigned employees, total ADSs issuable under the outstanding options were 6,960,725 ADSs as of December 31, 2010, excluding the conditional equity awards for a total of 1,227,700 ADSs
E. Share ownership
Our directors and senior management do not own any shares of the Company as of March 31, 2010. For a description of options granted to our directors and executive officers under the 2007 Plan, please see Item 6. Directors, Senior Management and Employees - B. Compensation - Equity Compensation.
The table below sets forth the ordinary shares beneficially owned by each of our directors and executive officers as of March 31, 2011, the most recent practicable date.
Ordinary Shares Beneficially Owned(1) | ||||||||
Name | Number | Percent(2) | ||||||
Lin, Yu-Hsin (Casper) | * | * | ||||||
Chen, Chin-Hsin (Fred) | * | * | * | |||||
Li, Shao Chuan (Shawn) | * | * | ||||||
Chou, Pei-Fen (Patricia) | * | * | ||||||
All directors and executive officers as a group(3) | 810,000 | 0.2% |
* | Represents less than 1% of our ordinary shares. |
(1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting power or investment power with respect to securities. The number of ordinary shares beneficially owned includes options currently exercisable into ordinary shares that will vest within 60 days after March 31, 2011 for the purpose of computing the number of shares beneficially owned by such shareholder. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other shareholder. |
(2) | Percentage of ordinary shares is based on 418,058,664 ordinary shares outstanding as of March 31, 2011. |
(3) | Includes 810,000 ordinary shares issuable upon exercise of options held by our directors and executive officers that are exercisable or will become exercisable within 60 days of March 31, 2011. |
As of March 31, 2011, our directors and executive officers held options to purchase an aggregate of 300,000 ADSs, representing 1,800,000 ordinary shares under our 2007 Plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Based on our Register of Members, as of December 31, 2010, Devon Dragon Trading Limited held 3,840,691 of our ADSs, or approximately 5.5% of our outstanding shares. Devon Dragon Trading Limited does not have voting rights that are different from the voting rights of our other shareholders.
As of March 31, 2011, 418,058,664 of our ordinary shares were issued and outstanding. JPMorgan Chase Bank, N.A., the depositary, has advised us that, as of March 31, 2011, 52,033,308 ADSs, representing 312,199,848 underlying ordinary shares, were held of record by DTC, under the nominee name of Cede & Co., on behalf of DTC participants. We were advised by our depositary that, as of March 31, 2011, ADSs representing approximately 74.7% of our total outstanding ordinary shares were held by DTC and the number of beneficial owners of our ADS in the United States may be larger than the number of record holders of our ordinary shares in the United States.
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B. Related Party Transactions
Details of the ownership by our employees of our ordinary shares as of March 31, 2011 are provided in the following table:
Name of BVI Company | Directors | Shares Beneficially Owned | ||||||||
Fairly Consultants Limited (1) | Wu, Zhang Liang | 2,770,550 | 0.66 | % |
(1) | Fairly Consultants Limited has twenty shareholders, ten of whom are our employees. |
We have been notified by the shareholder named in the table above that its director, who is an employee or otherwise affiliated with us, has sole voting and investment power with respect to all of our ordinary shares shown as beneficially owned by it.
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Transactions with GMI Technology
During the year ended December 31, 2008, 2009 and 2010, we sold products to GMI Technology amounting to US$24.4 million, US$12.5 million and US$7.5 million, respectively. The president of GMI Technology is the elder brother of Mr. Yeh, Nan-Horng, one of our directors.
Our Audit Committee has determined that our transactions with GMI were fair and reasonable to us and on terms comparable to those from unrelated third parties.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial Statements
Please see “Item 18. Financial Statements”. Other than as disclosed elsewhere in this annual report, no significant changes have occurred since the date of our annual financial statements.
Legal Proceedings
On August 17, 2006, two of our former advisors filed a complaint in the U.S. District Court for the Southern District of California against the Company and its subsidiary Actions Mauritius, seeking compensatory damages for services rendered. On April 7, 2008, the Company and its subsidiary filed a motion to dismiss the complaint on the grounds that it is not subject to personal jurisdiction in California and that the Peoples’ Republic of China would be the more appropriate forum for this litigation.
On January 30, 2009, the motion was granted and a judgment of dismissal was entered in favor of the Company and Actions Mauritius on February 4, 2009. The plaintiffs subsequently appealed the dismissal to the United States Court of Appeals for the Ninth Circuit, and on July 6, 2010 the Court of Appeals affirmed the judgment in favor of the Company and its subsidiary.
We do not believe this dispute will have any material impact on our financial conditions or results of operation.
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Dividend Policy
Annual dividends, if any, on our shares and ADSs will be declared by and subject to the discretion of our board of directors. Our board of directors may from time to time pay to the shareholders such interim dividends as appear to our board of directors to be justified by our profits. We may pay dividends to shareholders in the future; however, such payments will depend upon a number of factors, including our results of operations, earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors considered relevant by our board of directors. We currently intend to retain all of our earnings to finance the development and expansion of our business and therefore do not intend to declare or pay cash dividends on our shares and ADSs in the near to medium term.
Our dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which the directors determine is no longer needed or out of our share premium account. We currently have no reserve set aside from profits for the payment of dividends.
Our ability to pay dividends depends substantially on the payment of dividends to us by Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen). Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen) may pay dividends only out of their accumulated distributable profits, if any, determined in accordance with their articles of association, and the accounting standards and regulations in China. In addition, each of Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), as a wholly foreign owned enterprise, is required to provide for a reserve fund and a staff and workers’ bonus fund, and to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its after-tax profits each year at the discretion of its board of directors. Allocations to these statutory reserves and funds can only be used for specific purposes and are not distributable to us in the form of loans, advances, or cash dividends. Any limitation on the payment of dividends by our subsidiaries could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, and otherwise fund and conduct our businesses.
Our subsidiary Actions Semiconductor (Mauritius) declared a special dividend in June 2005 in the amount of US$20 million, which was paid in July 2005. We will not use this dividend distribution as a reference or basis to determine the amount of future dividends, if any. Any future dividends will be paid in accordance with our policy described above.
B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ADSs have been quoted on The NASDAQ Global Market under the symbol ACTS since November 30, 2005. Each ADS represents six ordinary shares. On April 21, 2011, the last reported sale price of our ADSs on the Nasdaq Global Market was US$2.40.
The table below sets forth, for the periods indicated, the highest and lowest closing prices and the average daily volume of trading activities on the NASDAQ Global Market for our ordinary shares represented by ADSs.
Average Daily | ||||||||||||
High | Low | Trading Volume | ||||||||||
2005 | 9.25 | 7.08 | 212,164 | |||||||||
2006 | 12.24 | 6.55 | 226,776 | |||||||||
2007 | 8.50 | 3.98 | 399,942 | |||||||||
2008 | 4.40 | 1.35 | 183,498 | |||||||||
2009 | 2.90 | 1.34 | 156,325 | |||||||||
2010 | 2.54 | 1.95 | 76,043 | |||||||||
First Quarter | 2.54 | 2.07 | 70,730 | |||||||||
Second Quarter | 2.42 | 1.98 | 80,406 | |||||||||
Third Quarter | 2.25 | 1.95 | 64,963 | |||||||||
Fourth Quarter | 2.20 | 1.98 | 87,894 | |||||||||
October | 2.16 | 1.98 | 54,786 | |||||||||
November | 2.20 | 2.06 | 83,090 | |||||||||
December | 2.18 | 2.08 | 124,082 | |||||||||
2011 | ||||||||||||
First Quarter | 2.60 | 2.14 | 115,321 | |||||||||
January | 2.38 | 2.14 | 158,490 | |||||||||
February | 2.56 | 2.32 | 84,921 | |||||||||
March | 2.60 | 2.14 | 102,896 | |||||||||
April (through April 21, 2011) | 2.51 | 2.33 | 58,516 |
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ACTIONS SEMICONDUCTOR CO., LTD.
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs are listed on the Nasdaq Global Market under the symbol “ACTS”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expense of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Company Objects and Purposes
We are a Cayman Islands exempted company and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and the Companies Law (2010 Revision) of the Cayman Islands, which is referred to below as the Companies Law. A Cayman Islands exempted company is a company that conducts its business outside of the Cayman Islands, is exempted from certain requirements of the Companies Law, including a filing of an annual return of its shareholders with the Registrar of Companies, does not have to make its register of shareholders open to inspection and may obtain an undertaking against the imposition of any future taxation. According to our memorandum and articles of association, the objects for which we are established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law or as the same may be revised from time to time, or any other law of the Cayman Islands.
The following are summaries of material terms and provisions of our memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares. These summaries are not complete, and you should read the forms of our memorandum and articles of association, which was filed as exhibits to our registration statement on Form F-1.
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The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs.
Board of Directors
We are managed by a board of directors which currently consists of seven members. Our articles of association provide that the board of directors shall consist of not more than seven directors.
The directors are divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as the then total number of directors permits. At the 2006 annual meeting of shareholders, all directors stood for election. Class I Directors were elected for a one-year term, Class II Directors for a two-year term and Class III Directors for a three-year term. At each succeeding annual meeting of shareholders beginning in 2007, successors to the class of directors whose terms expire at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.
Our shareholders may by special resolution at any time remove any director for negligence or other reasonable cause before the expiration of his period of office notwithstanding anything in the articles of association or in any agreement between us and such director, and may by ordinary resolution elect another person in his stead. Any person so elected will hold office during such term only as the director in whose place he is elected would have held the same if he had not been removed. Subject to our articles of association, the directors will have power at any time and from time to time to appoint any person to be a director, either as an addition to the existing directors or to fill a vacancy resulting from death, resignation, retirement, disqualification, removal from office or any other reason, but so that the total number of directors (exclusive of alternate directors) must not at any time exceed the number fixed in accordance with the articles of association.
There are no share ownership qualifications for directors.
Meetings of our board of directors may be convened at any time deemed necessary by any member of our board of directors. Advance notice of a meeting is not required if all our directors are present or represented at the meeting concerned and consent to the holding of such meeting.
A meeting of our board of directors will be competent to make lawful and binding decisions if any two members of our board of directors are present or represented. At any meeting of our directors, each director, by his or her presence or by his or her alternate, is entitled to one vote. A director may vote in respect of any contract or transaction in which he is interested, provided, (a) such director must, if his interest in such contract or arrangement is material, declare the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice stating that, by reason of the facts specified in the notice, he is to be regarded as interested in any contracts of a specified description which we may subsequently make and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the Audit Committee.
Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent.
Subject to the recommendation of our Compensation Committee, the remuneration to be paid to the directors shall be such remuneration as the directors shall determine. Such remuneration shall be deemed to accrue from day to day. The directors shall also be entitled to be paid their traveling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the directors, or any committee of the directors, or general meetings of the company, or otherwise in connection with our business, or to receive a fixed allowance in respect thereof as may be determined by the directors from time to time, or a combination partly of one such method and partly the other.
Under Cayman Islands laws, our directors have a duty of loyalty and must act honestly and in good faith and in our best interests. Our directors also have a duty to exercise the care, diligence, and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duties to us, our directors must ensure compliance with the memorandum and articles of association and the class rights vested thereunder in the holders of the shares. The Company may in certain circumstances have rights to damages if a duty owed by the directors is breached.
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Voting Rights Attaching to the Shares
Subject to any rights or restrictions attached to any shares, at any general meeting every shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy shall have one vote for each share which such shareholder is the holder. Voting at any meeting of the shareholders is by taking a poll.
Any ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting of our shareholders, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast at a meeting of our shareholders. Holders of our ordinary shares may by ordinary resolution, among other things, elect directors, and make alterations of capital. A special resolution is required for matters such as a change of name.
No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting.
If a recognized clearing house (or its nominee(s)) is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house (or its nominee(s)) including the right to vote individually on a show of hands.
Protection of Minority Shareholders
The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one-fifth of our shares in issue, appoint an inspector to examine our affairs and report thereon in a manner as the Grand Court shall direct.
Any shareholder may petition the Grand Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that it is just and equitable that we should be wound up.
Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our memorandum and articles of association.
The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority.
Pre-emption Rights
There are no pre-emption rights applicable to the issuance of new shares under either Cayman Islands law or our memorandum and articles of association.
Liquidation Rights
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares, if the Company shall be wound up the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Companies Law, divide among the shareholders in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for that purpose value any assets and determine how the division shall be carried out as between the shareholders or different classes of shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator, with the like sanction, shall think fit, but so that no shareholders shall be compelled to accept any asset upon which there is a liability. If the Company shall be wound up, and the assets available for distribution among the shareholders as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if winding up the assets available for distribution among the shareholders shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively.
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Modification of Rights
Except with respect to share capital (as described below) and the location of the registered office, alterations to our memorandum and articles of association may only be made by special resolution of no less than two-thirds of votes cast at a meeting of the shareholders.
Subject to the Companies Law, all or any of the special rights attached to any class, unless otherwise provided for by the terms of issue of the shares of that class, may be varied, modified or abrogated either with the consent in writing of the holders of not less than 75% of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply mutatis mutandis to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting other than an adjourned meeting shall be a person or persons together holding, or represented by proxy, on the date of the relevant meeting not less than one-third of the issued shares of that class, every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder.
The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Meetings
Subject to our articles of association, any meeting shall be called by not less than 20 days’ notice in writing. Notice of every general meeting will be given to all of our shareholders.
Notwithstanding that a meeting is called by shorter notice than that mentioned above, but, subject to our articles of association, it will be deemed to have been duly called, if it is so agreed (1) in the case of a meeting called as an annual general meeting by all of our shareholders (or their proxies) entitled to attend and vote at the meeting; or (2) in the case of any other meeting, by a majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right.
No business other than the appointment of a chairman of the meeting may be transacted at any general meeting unless a quorum is present at the commencement of business. However, the absence of a quorum will not preclude the appointment of a chairman of the meeting. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders’ meetings.
Any member(s) holding in the aggregate not less than one-third of the outstanding voting shares of the company shall constitute a quorum.
A corporation being a shareholder shall be deemed for the purpose of our articles of association to be present in person if represented by its duly authorized representative. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he or she represents as that corporation could exercise if it were our individual shareholder.
The quorum for a separate general meeting of the holders of a separate class of shares is described in “Modification of Rights” above.
Transfer of Shares
Subject to any applicable restrictions set forth in our articles of association, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve.
Our board of directors may, in its absolute discretion, decline to register any transfer of any share without assigning any reasons therefor.
If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
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The registration of transfers may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 45 days in any year.
Share Repurchase
We are empowered by the Companies Law and our articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposed from time to time by the SEC, the Nasdaq Global Market, or by any recognized stock exchange on which our securities are listed.
Dividends
Subject to the Companies Law and to our articles of association, our board of directors may, from time to time, declare dividends (including interim dividends) in any currency. No dividend may be declared or paid other than out of our profits and reserves lawfully available for distribution, including share premium.
Unless and to the extent that the rights attached to any shares or the terms of issue thereof otherwise provide, with respect to any shares not fully paid throughout the period in respect of which the dividend is paid, all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. For these purposes no amount paid up on a share in advance of calls shall be treated as paid up on the share.
Our board of directors may from time to time pay to our shareholders such interim dividends as appear to the directors to be justified by our profits. Our directors may also pay dividends semi-annually or at other intervals to be selected by them at a fixed rate if they are of the opinion that the profits available for distribution justify the payment. The board may also declare and pay special dividends as they think fit.
Our board of directors may retain any dividends or other monies payable on or in respect of a share upon which we have a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. Our board of directors may also deduct from any dividend or other monies payable to any shareholder all sums of money, if any, presently payable by him or her to us on account of calls, installments or otherwise.
No dividend shall carry interest against us.
Any dividend, interest or other sum payable in cash to a holder of shares may be paid by check or warrant sent through the post addressed to the registered address of the shareholder entitled, or in the case of joint holders, to the registered address of the person whose name stands first in our register of shareholders in respect of the joint holding to such person and to such address as the holder or joint holders may in writing direct. Every check or warrant so sent shall be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on our register of shareholders in respect of such shares, and shall be sent at his or their risk and the payment of any such check or warrant by the bank on which it is drawn shall operate as a good discharge to us in respect of the dividend and/or bonus represented thereby, notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement there on has been forged.
Any dividend unclaimed for six years from the date of declaration of such dividend may be forfeited by the board of directors and shall revert to us.
Our board of directors may, with the sanction of the shareholders in general meeting, direct that any dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe securities of any other company, and where any difficulty arises in regard to such distribution our directors may settle it as they think expedient, and in particular may disregard fractional entitlements, round the same up or down or provide that the same shall accrue to our benefit, and may fix the value for distribution of such specific assets and may determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to our board of directors.
Issuance of Additional Ordinary Shares or Preferred Shares
Our articles of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our articles of association authorizes our board of directors to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including:
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• | the designation of the series; |
• | the number of shares of the series; |
• | the dividend rights, dividend rates, conversion rights, voting rights; and |
• | the rights and terms of redemption and liquidation preferences. |
Our board of directors may issue series of preferred shares without action by our shareholders to the extent authorized but unissued. Accordingly, the issuance of preferred shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preferred shares may be used as an anti-takeover device without further action on the part of the shareholders, subject to general principles of Cayman Islands common law, including the duties of our board of directors to exercise their power for a proper purpose. We have no immediate plans to issue any preferred shares.
The listing maintenance requirements of the Nasdaq Global Market, which apply so long as our ADSs are quoted on that market, require shareholder approval of certain issuances of our securities equal to or exceeding 20% of the then outstanding voting power of all our securities or the then outstanding number of our ordinary shares.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements.
Untraceable Shareholders
We are entitled to sell any shares of a shareholder who is untraceable, provided that:
• | all checks or warrants, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of 12 years; |
• | we have not during that time or before the expiry of the three-month period referred to in the last bullet under this section received any indication of the whereabouts or existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of law; |
• | during the 12-year period, at least three dividends in respect of the shares in question have become payable and no dividend during that period has been claimed by the shareholder; and |
• | Upon expiration of the 12-year period, we have caused an advertisement to be published in newspapers (or, by electronic communication in the manner in which notices may be served by us by electronic means as provided in our articles of association), giving notice of its intention to sell these shares, and a period of three months has elapsed since such advertisement. |
The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.
Differences in Corporate Law
The Companies Law distinguishes between ordinary resident companies and exempted companies, and we are an exempted company with limited liability under the Companies Law. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The responsibilities of an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
• | an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
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• | an exempted company’s register of members is not open to inspection; |
• | an exempted company does not have to hold an annual general meeting; |
• | an exempted company may issue no par value, negotiable or bearer shares; |
• | an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
• | an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
• | an exempted company may register as a limited duration company; and |
• | an exempted company may register as a segregated portfolio company. |
The company has not registered as a limited duration company or a segregated portfolio company and could not do so without prior shareholder approval. The company has no intention to seek such shareholder approval.
The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant provisions of the Companies Law applicable to us.
Duties of Directors
Under Cayman Islands law, at common law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements:
• | a duty to act in good faith in the best interests of the company; |
• | a duty not to personally profit from opportunities that arise from the office of director; |
• | a duty to avoid conflicts of interest; and |
• | a duty to exercise powers for the purpose for which such powers were intended. |
In general, the Companies Law imposes various duties on officers of a company with respect to certain matters of management and administration of the company. The Companies Law contains provisions, which impose default fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if he knowingly is guilty of the default or knowingly and willfully authorizes or permits the default.
Interested Directors
The provisions under Cayman Islands law neither require a director who is interested in a transaction entered into by a Cayman company to disclose his interest nor render such director liable to such company for any profit realized pursuant to such transaction.
Voting Rights and Quorum Requirements
Under Cayman Islands law, the voting rights of shareholders are regulated by the company’s articles of association and, in certain circumstances, the Companies Law. The articles of association will govern matters such as quorum for the transaction of business, rights of shares, and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Our articles of association provide that any member(s) holding in the aggregate not less than one-third of the outstanding voting shares of the company shall be a quorum for a general meeting. Under Cayman Islands law, certain matters must be approved by a special resolution which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote. Other than special resolutions, all resolutions shall be passed by a simple majority of those shares voted at a meeting at which a quorum is present.
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Mergers and Similar Arrangements
The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation (a “Plan”), which must then be authorized by either (a) a special resolution of the shareholders of each constituent company voting together as one class if the shares to be issued to each shareholder in the consolidated or surviving company will have the same rights and economic value as the shares held in the relevant constituent company or (b) a shareholder resolution of each constituent company passed by a majority in number representing 75% in value of the shareholders voting together as one class. The Plan must be filed with the Registrar of Companies together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures. In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in-person or by proxy at a meeting, or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:
• | the statutory provisions as to majority vote have been complied with; |
• | the shareholders have been fairly represented at the meeting in question; |
• | the arrangement is one that a businessman would reasonably approve; and |
• | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholder Suits
The Cayman Islands courts can be expected to follow English case law precedents. The common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a minority shareholder to commence a class action against or derivative actions in the name of the Company to challenge (a) an act which is ultra vires to the Company or illegal, (b) an act which constitutes a fraud against the minority where the wrongdoers are themselves in control of the Company, and (c) an action which requires a resolution with a qualified (or special) majority which has not been obtained) have been applied and followed by the courts in the Cayman Islands.
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Under Delaware law, a stockholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation. Delaware law expressly authorizes stockholder derivative suits on the condition that the stockholder either held the stock at the time of the transaction of which the stockholder complains, or acquired the stock thereafter by operation of law and continues to hold it throughout the duration of the suit. An individual may also commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. A plaintiff instituting a derivative suit is required to serve a demand on the corporation before bringing suit, unless such demand would be futile.
Corporate Governance
Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable rules of The Nasdaq Stock Market, Inc. or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement in which he is interested, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.
Indemnification
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for the indemnification of our directors, auditors and other officers against all liabilities incurred by him or her as a result of any act or failure to act in carrying out his or her functions other than such liability (if any) that he or she may incur by his own willful neglect or default.
Approval of Corporate Matters by Written Consent
The Companies Law allows a special resolution to be passed in writing if signed by all the shareholders and authorized by the articles of association.
Calling of Special Shareholders Meetings
The Companies Law does not have provisions governing the proceedings of shareholders meetings which are usually provided in the articles of association.
Staggered Board of Directors
The Companies Law does not contain statutory provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles of association, and we have provided for a staggered board of directors in our articles of association. Pursuant to such provision, one-third of the current members of our board is required to stand for re-election each year.
Issuance of Preferred Stock
The Companies Law allows shares to be, issued with preferred, deferred or other special rights, whether in regard to dividends, voting, return of share capital or otherwise. Our articles of association provide that the directors may allot, issue, grant options over or otherwise dispose of shares (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, in one or more series, whether with regard to dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption and liquidation preferences or otherwise and to such persons, at such times and on such other terms as they think proper.
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Anti-takeover Provisions
The Companies Law does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred stock, removal of directors only for cause and provisions that restrict the rights of shareholders to call meetings and submit shareholder proposals. Our articles of association contain the provisions regarding a staggered board of directors which may be regarded as a defensive measure.
Alteration of Capital
We may from time to time by ordinary resolution:
• | increase the share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as the Company in general meeting may determine; |
• | consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; |
• | by subdivision of its existing shares or any of them divide the whole or any part of its share capital into shares of smaller amount than is fixed by the Memorandum of Association or into shares without par value; and |
• | cancel any shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any person. |
We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve fund in any manner authorized by law.
C. Material Contracts
For a summary of the material terms of our 2007 Equity Performance and Incentive Plan, see Item 6. Directors, Senior Management and Employees – B. Compensation – 2007 Equity Performance and Incentive Plan.
For a summary of the material terms of the Auction Confirmation Letter Relating to Land Use Rights dated March 19, 2010 issued by Shanghai Real Property Transaction Center, see “Item 4.D Information on the Company —Property, Plants and Equipment.”
D. Exchange Controls
Foreign Currency Exchange
Pursuant to the Administrative Regulations on Foreign Exchange amended by the State Council on August 5, 2008 and effective as of the same date and various further regulations issued by SAFE, RMB can be freely converted into foreign currency and remitted out of China through a designated foreign exchange bank for current account transactions, such as payment for purchase of goods and services as long as such payment is supported by bona fide legal transactions, , which shall be examined by the bank. For capital account transactions, such as equity investments and loans, conversion of foreign currency into RMB or RMB into foreign currency, and remittance thereof into or out of China requires approval or registration by SAFE or its local counterparts.
Within China, unless otherwise approved, all payments must be made in RMB. Pursuant to the new amended regulation, Chinese companies may repatriate foreign currency payments received from abroad into China or retain them abroad, the conditions and terms thereof shall be provided by SAFE, in accordance with the balance of payments and the need of foreign currency administration .Foreign invested enterprises, such as Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), are allowed to retain foreign currency in accounts with designated foreign exchange banks, subject to a maximum amount set by SAFE.
Dividend Distribution
The principal regulations governing distribution of dividends by wholly foreign owned enterprises include the Wholly Foreign-owned Enterprise Law amended by SCNPC on October 31, 2000 and effective as of the same date, and its Implementing Rules amended by the State Council on April 12, 2001 and effective as of the same date.
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Under these regulations, a foreign invested enterprise in China may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association, and the accounting standards and regulations in China. In particular, each of our principal PRC subsidiaries, Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen), as wholly foreign owned enterprises, is required to set aside at least 10% of their respective after-tax profits each year, if any, to fund certain reserve funds until such reserves have reached at least 50% of their respective registered capital. These reserves are not distributable as cash.
E. Taxation
Cayman Islands Taxation
The following discussion of the material Cayman Islands tax consequences of an investment in our ordinary shares or ADSs is directly based on the advice of Maples and Calder as to Cayman Islands law. However, it does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law.
The Cayman Islands currently have no exchange control restrictions and no income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax applicable to us or to any holder of ADS or of ordinary shares. Accordingly, any payment of dividends or any other distribution made on the ordinary shares will not be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax will be required on such payments to any shareholder and gains derived from the sale of ordinary shares will not be subject to Cayman Islands capital gains tax. The Cayman Islands are not party to any double taxation treaties.
We have obtained an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from August 9, 2005, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations will apply to us or our operation and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of the estate duty or inheritance tax will be payable (i) on or in respect of our shares, debentures, or other obligations, or (ii) by way of withholding in whole or in part of a payment of dividend or other distribution of income or capital by us.
PRC Tax
If we declare dividends to our ordinary share and ADS holders from income originated from our PRC subsidiaries, it is unclear whether such dividends will be deemed to be derived from sources within the PRC under the EIT Law and be subject to a 10% withholding tax. Accordingly, we may be required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC shareholders and ADS holders. Please see “Item 3.D. Risk Factors – Risks Relating to Doing Business in China – Dividends we receive from our non-PRC resident subsidiaries and dividends payable by us to our foreign investors and gain on the sale of our Shares may become subject to withholding taxes under PRC tax laws.”
United States Federal Income Taxation
The following is a summary of the material United States federal tax consequences relating to the purchase, ownership, and disposition of the ordinary shares or ADSs. The information provided below is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations, proposed Treasury Regulations, Internal Revenue Service, or the IRS, published rulings and court decisions, all as of the date hereof. These authorities may change, possibly on a retroactive basis, or the IRS might interpret the existing authorities differently. In either case, the tax consequences of purchasing, owning or disposing of ordinary shares or ADSs could differ from those described below. We do not intend to obtain a ruling from the IRS with respect to the tax consequences of acquiring or holding the ordinary shares or ADSs.
This description is general in nature and does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor in light of the investor’s particular circumstances, or to certain types of investors subject to special treatment under U.S. federal income tax laws, such as:
• | banks or financial institutions; |
• | life insurance companies; |
• | tax-exempt organizations; |
• | dealers in securities or foreign currencies; |
• | traders in securities that elect to apply a mark-to-market method of accounting; |
• | shareholders that actually or constructively hold 10% or more of the total combined voting power of all of the classes of our stock entitled to vote; |
• | persons holding ordinary shares or ADSs as part of a position in a “straddle” or as part of a “hedging,” “conversion” or “integrated” transaction for U.S. federal income tax purposes; |
• | persons subject to the alternative minimum tax provisions of the Code; and |
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• | persons that have a “functional currency” other than the U.S. dollar. |
This description generally applies to purchasers of the ordinary shares or ADSs as capital assets. This description does not consider the effect of any foreign, state, local or other tax laws that may be applicable to particular investors.
Investors considering the purchase of ordinary shares or ADSs should consult their own tax advisors regarding the application of the U.S. federal income tax laws to their particular situations and the consequences of U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.
U.S. Holders
As used herein, the term “U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is:
• | a citizen or resident of the U.S. for U.S. federal income tax purposes; |
• | a corporation or other entity taxable as a corporation for U.S. federal income tax purposes organized in or under the laws of the U.S. or any political subdivision thereof; |
• | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
• | a trust, if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes, or if (a) a court within the U.S. can exercise primary supervision over its administration and (b) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (including any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of the ordinary shares or ADSs, the U.S. tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of the ordinary shares or ADSs that is a partnership and partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of the ordinary shares or ADSs.
For U.S. federal income tax purposes, U.S. Holders of ADSs will be treated as the beneficial owners of the underlying shares represented by the ADSs. Accordingly, no gain or loss will be recognized upon the exchange of ADSs for the holder’s proportionate interest in the shares, a holder’s tax basis in the withdrawn shares will be the same as its tax basis in the ADSs surrendered in exchange therefor, and the holding period in the withdrawn shares will include the period during which the holder held the surrendered ADSs.
If you are not a U.S. Holder, the following subsection does not apply to you and you should refer to “Non-U.S. Holders” below.
Taxation of Dividends and Other Distributions on Ordinary Shares or ADSs
Subject to the passive foreign investment company rules discussed below, all distributions to a U.S. Holder with respect to the U.S. Holder’s ordinary shares or ADSs, other than certain pro rata distributions of our shares, will be includible in the U.S. Holder’s gross income as ordinary dividend income when received, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits. For this purpose, earnings and profits will be computed under U.S. federal income tax principles. The dividends will not be eligible for the dividends-received deduction allowed to corporations. To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of capital to the extent of the U.S. Holder’s tax basis in the U.S. Holder’s ordinary shares or ADSs, and to the extent the amount of the distribution exceeds the U.S. Holder’s tax basis, the excess will be taxed as capital gain.
If you are an individual U.S. Holder, dividends paid to you in taxable years beginning before January 1, 2009 from a “qualified foreign corporation” will be taxable to you at a maximum tax rate of 15% provided that you meet certain holding period and other requirements. A non-United States corporation (other than a passive foreign investment company) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program or (ii) with respect to any dividend it pays on shares (or ADSs backed by such shares) which is readily tradable on an established securities market in the United States. There is currently no such tax treaty in effect between the United States and the Cayman Islands. Our ADSs have been quoted on the Nasdaq Global Market under the Symbol “ACTS” since November 30, 2005. Each ADS represents six ordinary shares.
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Dividends paid with respect to our ordinary shares could cease to be qualified dividend income if our ordinary shares or ADSs are delisted from The Nasdaq Global Market and do not subsequently become regularly traded on The Nasdaq SmallCap Market or other qualified exchange or market or if we are treated as a passive foreign investment company.
Dividends paid in RMB will be included in each U.S. Holder’s income as a U.S. dollar amount based on the spot rate in effect on the date that the U.S. Holder (or, in the case of a U.S. Holder of ADSs, the Depositary) receives the dividend, regardless of whether the payment is converted into U.S. dollars. If the U.S. Holder (or the Depositary) does not receive U.S. dollars on the date the dividend is distributed, the U.S. Holder will be required to include either gain or loss in income when the U.S. Holder (or the Depositary) later exchanges the RMB for U.S. dollars. The gain or loss will be equal to the difference between the U.S. dollar value of the amount that the U.S. Holder includes in income when the dividend is received and the amount that the U.S. Holder receives on the exchange of the RMB for U.S. dollars. The gain or loss generally will be ordinary income or loss from United States sources. If we distribute non-cash property as a dividend, the U.S. Holder will generally include in income an amount equal to the fair market value, in U.S. dollars, of the property on the date that it is distributed. Dividends will constitute foreign source income for foreign tax credit limitation purposes. The rules relating to the foreign tax credit are complex and U.S. Holders should consult their tax advisors to determine the foreign tax credit implications of owning the ordinary shares or ADSs.
Taxation of Disposition of Ordinary Shares or ADSs
Subject to the passive foreign investment company rules discussed below, a U.S. Holder will recognize taxable gain or loss on any sale or exchange of ordinary shares or ADSs equal to the difference between the amount realized (in U.S. dollars) for the ordinary shares or ADSs and the U.S. Holder’s tax basis (in U.S. dollars) in the ordinary shares or ADSs. The gain or loss recognized generally will be capital gain or loss. Capital gain of an individual U.S. Holder that is recognized before January 1, 2009 generally is taxed at a maximum tax rate of 15% if the property giving rise to the capital gain is held for more than one year. The deductibility of capital loss is subject to limitations.
Any gain or loss that a U.S. Holder recognizes will generally be treated as United States source income or loss for purposes of foreign tax credit limitations, unless it is attributable to an office or other fixed place of business outside the U.S. and certain other conditions are met.
Passive Foreign Investment Company
A company is considered a passive foreign investment company, or PFIC, for any taxable year if either:
• | at least 75% of its gross income is passive income; or |
• | at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. |
For the purpose of applying the income and asset tests described above, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation if we own, directly or indirectly, 25% or more (by value) of the stock of such corporation.
We believe we will be classified as a PFIC, for U.S. federal income tax purposes, for calendar year 2011 and in future years. The determination of whether or not we are classified as a PFIC is a factual determination that is made annually based on the categories and amounts of income that we earn and the categories and valuation of our assets (including goodwill), all of which are subject to change. There is no assurance as to the categories of assets in which we may invest. Moreover, in calculating goodwill, the valuation of our assets may be based on our anticipated total market value, determined with reference to the market price of our ordinary shares or ADSs.
Assuming we are classified as a PFIC for 2011 or in any other future taxable year, you would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States company that does not distribute all of its earnings on a current basis. In such event, you may be subject to tax at ordinary income tax rates on (i) any gain recognized on the sale of the ordinary shares or ADSs and (ii) any “excess distribution” paid on ordinary shares or ADSs (generally, a distribution in excess of 125% of the average annual distributions paid by us in the three preceding taxable years). In addition, you may be subject to an interest charge on such gain or excess distribution. Finally, the 15% maximum rate on our dividends would not apply if we are or become a PFIC.
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Assuming we are a PFIC, you would generally be able to avoid the “excess distribution” rules described above by making a timely so-called “mark-to-market” election with respect to your ADSs and ordinary shares provided our ADSs and ordinary shares are “marketable.” If you made this election in a timely fashion, you would recognize as ordinary income or ordinary loss the difference between the fair market value of your ADSs and ordinary shares on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADSs and ordinary shares would be adjusted to reflect any such income or loss.
We do not intend to provide you with the information you would need to make or maintain a so-called “Qualified Electing Fund” or “QEF” election. Accordingly, if we were a PFIC in any year you would not be able to avoid the “excess distribution” rules described above by making such an election with respect to your ADSs and ordinary shares.
You are urged to consult your tax advisor regarding the potential tax consequences to you assuming we are or become a PFIC, as well as any elections that may be available to you to mitigate such consequences.
Non-U.S. Holders
A Non-U.S. Holder generally will not be subject to U.S. federal income tax on dividends paid by us with respect to our ordinary shares or ADSs unless the income is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States. In such cases, you generally will be taxed in the same manner as a U.S. Holder.
A Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our ordinary shares or ADSs unless such gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States or the Non-U.S. Holder is a natural person who is present in the United States for 183 days or more and certain other conditions exist. In the first case, the Non-U.S. Holder will be taxed in the same manner as a U.S. Holder. In the second case, the Non-U.S. Holder will be subject to U.S. federal income tax at a rate of 30% on the amount by which such Non-U.S. Holder’s U.S.-source capital gains exceed such U.S.-source capital loss.
Dividends and gains that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States generally will be subject to tax in the same manner as they would be if the Non-U.S. Holder were a U.S. Holder, except that the passive foreign investment company rules will not apply. Effectively connected dividends and gains received by a corporate Non-U.S. Holder may also be subject to an additional branch profits tax at a 30% rate or a lower tax treaty rate.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our ordinary shares or ADSs or the proceeds received on the sale, exchange or redemption of our ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup withholding tax may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number (or otherwise establishes, in the manner provided by law, an exemption from backup withholding) or to report interest and dividends required to be shown on the U.S. Holder’s U.S. federal income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as credit against the U.S. Holder’s U.S. federal income tax liability provided that the appropriate returns are filed.
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status to the payer, under penalties of perjury, on IRS Form W-8BEN.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We file annual reports with and furnish other information to the SEC as may be applicable from time to time. You may read and copy any documents filed or furnished by Actions at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
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I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits in banks and other financial institutions. In 2008, 2009 and 2010, the rate of return on cash deposits was 4.7%, 4.3% and 4.9%, respectively. In light of the current global economic recovery and prudent monetary policy, interest rates for cash deposits may stay at relatively high levels during an extended period of time. For example, China’s central bank raised interest rates twice in 2010.As of December 31, 2010, the one-year RMB deposit rate was 2.75% in China, an increase of 0.5% from the beginning of 2010. However, if there were uncertainties in global economic and market conditions, decreased interest rate might adversely affect out interest income and further impact our net income.
We have not used derivative financial instruments in our investment portfolio to hedge interest rate risks or otherwise. Interest-earning instruments carry a degree of interest rate risk. However, historically we have not been exposed to material risks due to changes in interest rates. Our future interest income may fluctuate in line with the changes in interest rates.
Foreign Exchange Risk
Although our reporting currency is the U.S. dollar and virtually all of our sales are denominated in U.S. dollar, our operating expenses and substantially all of our assets and liabilities are denominated in RMB. As a result, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. Generally, if the RMB appreciates against the U.S. dollar, our operating expenses will increase and, as a consequence, our operating margins and net income will likely decline. However, this effect may partially offset by the fact that we also incur expenses and liabilities in U.S. dollar and other foreign currencies and have our major interest-generating financing activities in RMB. Since July 2005 the RMB is no longer pegged solely to the U.S. dollar. Instead, it was reported to be pegged against a basket of currencies, determined by the People’s Bank of China, against which it can rise or fall by as much as 0.3% each day. This volatility range was further expanded by the People’s Bank of China by 0.5% each day since May 21, 2007. If the RMB had been 1% and 5% less valuable against the U.S. dollar than the actual rate as of December 31, 2010 which was used in preparing our audited financial statements as of and for the year ended December 31, 2010, our net asset value, as presented in U.S. dollars, would have been reduced by US$2.4 and US$11.5 million, respectively. Conversely, if the RMB had been 1% and 5% more valuable against the U.S. dollar as of that date, then our net asset value would have increased by US$2.4 and US$12.7 million, respectively.
After a significant appreciation of RMB against US dollar in 2007 and 2008, the exchange rate between RMB and US dollar stabilized during the financial downturn in 2009 and first half of 2010, but in the second half of 2010 RMB further appreciated against US dollar. However, the exchange rates between Taiwan dollar and US dollar fluctuated significantly in the second half of 2008 and 2009, when we held around US$20M in Taiwan dollar after withdrawing an investment in Taiwan. We have experienced foreign exchange gains of US$1.2 and loss of US$0.7 million in 2008 and 2009 respectively, and an exchange gain of US$ 2.3 million in 2010. In addition, we have recognized foreign currency translation adjustments of approximately US$ 11.0, US$ 0.5 and US$4.4 million in 2008, 2009 and 2010, respectively.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
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C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS Holders May Have to Pay
JPMorgan Chase Bank, N.A., the depositary of our ADS program, or the depositary, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary may charge each person to whom ADSs are issued against deposits of shares, including deposits in respect of share distributions, rights and other distributions, and each person surrendering ADSs for withdrawal of deposited securities, US$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered. The depositary may sell (by public or private sale) sufficient securities and property received in respect of share distributions, rights and other distributions prior to such deposit to pay such charge. The address of the depositary’s principal executive office is P.O. Box 64506, St. Paul, Minnesota, U.S.A. 55164-0506.
The following additional charges shall be incurred by the holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the ADSs or the deposited securities or a distribution of ADSs), whichever is applicable:
(i) to the extent not prohibited by the rules of the primary stock exchange upon which the ADSs are listed, a fee of US$0.02 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement,
(ii) to the extent not prohibited by the rules of the primary stock exchange upon which the ADSs are listed, a fee of US$1.50 per ADR or ADRs for certain transfers made,
(iii) a fee for the distribution or sale of securities, such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were our ordinary shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to holders entitled thereto,
(iv) to the extent not prohibited by the rules of the primary stock exchange upon which the ADSs are listed, a fee of US$0.02 per ADS (or portion thereof) per year for the services performed by the depositary in administering the depositary receipt program (which fee shall be assessed against holders as of the record date or dates set by the depositary not more than once each calendar year and shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one or more cash dividends or other cash distributions), and
(v) such fees and expenses as are incurred by the depositary (including without limitation expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the depositary's or its custodian's compliance with applicable law, rule or regulation.
Registered holders of ADSs must pay any tax or other governmental charge payable by the custodian or the depositary on any ADSs, deposited security or distribution.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary, except :
(i) stock transfer or other taxes and other governmental charges (which are payable by holders or persons depositing shares),
(ii) cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or holders delivering shares, ADRs or deposited securities (which are payable by such persons or holders),
(iii) transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities (which are payable by persons depositing shares or holders withdrawing deposited securities),
(iv) expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency), and
(v) any other charge payable by any of the depositary, any of the depositary’s agents, including, without limitation, the custodian, or the agents of the depositary’s agents in connection with the servicing of the shares or other deposited securities (which charge shall be assessed against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions). Such charges may at any time and from time to time be changed by agreement between us and the depositary.
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Fees and Other Payments Made by the Depositary to Us
In 2010, we received from our depositary, JPMorgan Chase Bank, N.A., a reimbursement of approximately US$500,000 for our expenses incurred partially in 2009 and mainly in 2010 in connection with our ADR and investor relations programs, including legal fees, accounting and audit fees, expenses related to investor relations, ADS-related financial advertising and public relations, and other expenses related to our ongoing compliance with Nasdaq and SEC rules and regulations, itemized as follows:
Item | US$ | |||
Reimbursement for accounting and audit fees | 250,339 | |||
Reimbursement for legal fees | 135,417 | |||
Reimbursement for expenses related to investor relations | 84,424 | |||
Reimbursement for ADS-related financial advertising and public relations | - | |||
Reimbursement for other expenses | 29,820 | |||
Total | 500,000 |
Meanwhile we were charged by JPMorgan Chase Bank, N.A. in the amount of US$6,259 related to the maintenance of the ADR program, database subscription fees and other services.
The depositary has agreed to reimburse us for our expenses incurred in connection with our ADR and investor relations programs in the future, which reimbursements will be subject to a 30% withholding tax effective from 2011. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement is not related to the amount of fees the depositary collects from ADS holders.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and terms.
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Disclosure control and procedures. Pursuant to Rules 13a-14(c) of the Securities Exchange Act of 1934, as amended. An evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of December 31, 2010.
Management‘s Annual Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. As of December 31, 2010, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2010 is effective.
Changes in Internal Control Over Financial Reporting. During 2010, no change to our internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of internal control over financial reporting as of December 31, 2010 has been audited by Deloitte Touche Tohmatsu, an independent registered public accounting firm with a report to the shareholders and the Board of Directors of the Company included herein.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Lin, Yu-Hsin Casper, the chairman of our Audit Committee and an independent, non-executive director, is an “audit committee financial expert” as defined under the applicable rules of the SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Ethics that applies to all of our directors, officers and employees. We have never granted a waiver for non-compliance with the policies and procedures set forth in the code of ethics for any director, officer or employee of our company or any of our subsidiaries.
A copy of our Code of Ethics is available at our website at www.action-semi.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The table below summarizes the fees that we paid or accrued for services provided by Deloitte Touche Tohmatsu for the years ended December 31, 2009, and 2010.
For the year ended December 31, | ||||||||||||||||
2009 | % | 2010 | % | |||||||||||||
(thousands) | (thousands) | |||||||||||||||
Audit Fees | US$ | 490 | 99.6 | % | US$ | 496 | 99.6 | % | ||||||||
Tax Fees | 2 | 0.4 | % | 2 | 0.4 | % | ||||||||||
Audit Related Fees | Nil | - | Nil | - | ||||||||||||
All Other Fees | Nil | - | Nil | - | ||||||||||||
Total | US$ | 492 | 100.0 | % | US$ | 498 | 100.0 | % |
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Audit Fees. This category includes the audit of our annual financial statements and services that are normally provided by Deloitte Touche Tohmatsu in connection with statutory and regulatory filings or engagements for those fiscal years.
Tax Fees. This category consists of professional services rendered by the Deloitte Touche Tohmatsu for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees. There were no other fees billed by Deloitte Touche Tohmatsu for the fiscal years ended December 31, 2009 and 2010, respectively.
All non-audit services need to be pre-approved by the Audit Committee on a case-by-case basis. Accordingly, we have not established any pre-approval policies and procedures. All audit and non-audit services performed by the Deloitte Touche Tohmatsu were pre-approved by the Audit Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In May 2007, our board of directors authorized a program to repurchase up to 8 million of our American Depositary Shares (ADSs) representing 48 million ordinary shares. Any shares acquired will be used in connection with our employee benefit plans and other general corporate purposes. We may repurchase shares in the open market or through privately negotiated transactions. The timing and actual number of ADSs repurchased will depend upon market conditions and other factors, in accordance with Securities and Exchange Commission requirements.
As of January 21, 2009, the initial 8 million ADS repurchase program has been completed and our board of directors approved an add-on share repurchase program under which we may repurchase up to 12 million additional ADSs through December 31, 2010.
The following table sets forth our share repurchase activities as of March 31, 2011
Period | Total Number of ADSs Purchased | Average Price Paid per ADS | Total Number of ADSs Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of ADSs that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
2007 | 1,303,647 | US$ | 5.09 | 1,303,647 | 6,696,353 | |||||||||||
2008 | 3,779,374 | 2.46 | 5,083,021 | 2,916,979 | ||||||||||||
2009 | 5,823,033 | 1.72 | 10,906,054 | 9,093,946 | ||||||||||||
2010 | 4,035,453 | 2.22 | 14,941,507 | 5,058,493 | ||||||||||||
January | 467,747 | 2.44 | 11,373,801 | 8,626,199 | ||||||||||||
February | 315,182 | 2.30 | 11,688,983 | 8,311,017 | ||||||||||||
March | 308,861 | 2.34 | 11,997,844 | 8,002,156 | ||||||||||||
April | 300,639 | 2.37 | 12,298,483 | 7,701,517 | ||||||||||||
May | 330,567 | 2.23 | 12,629,050 | 7,370,950 | ||||||||||||
June | 428,872 | 2.14 | 13,057,922 | 6,942,078 | ||||||||||||
July | 308,485 | 2.19 | 13,366,407 | 6,633,593 | ||||||||||||
August | 423,880 | 2.17 | 13,790,287 | 6,209,713 | ||||||||||||
September | 213,920 | 2.07 | 14,004,207 | 5,995,793 | ||||||||||||
October | 220,427 | 2.06 | 14,224,634 | 5,775,366 | ||||||||||||
November | 281,108 | 2.10 | 14,505,742 | 5,494,258 | ||||||||||||
December | 435,765 | 2.12 | 14,941,507 | 5,058,493 | ||||||||||||
2011 | ||||||||||||||||
January | 559,822 | 2.29 | 15,501,329 | 4,498,671 | ||||||||||||
February | 331,187 | 2.40 | 15,832,516 | 4,167,484 | ||||||||||||
March | 491,040 | 2.45 | 16,323,556 | 3,676,444 |
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ACTIONS SEMICONDUCTOR CO., LTD.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not Applicable.
ITEM 16G. CORPORATE GOVERNANCE
Generally, Nasdaq Marketplace Rule 5635(c) requires each issuer to obtain shareholders' approval of all equity compensation plans (including stock option plans) and material amendments to such plans. However, pursuant to Nasdaq Market Rule5255(c), we have elected to follow our home country's practices (in this case, being Cayman Islands’ practices) in lieu of the requirements of Nasdaq Marketplace Rule 5635(c). Our home country practices do not require us to obtain a shareholders' approval for amendments to our existing equity incentive plans.
On February 26, 2009, we initiated an offer to amend the terms of the options previously granted to certain of our employees, consultants, and non-employee directors (the “Offer to Amend”). On March 20, 2009, we completed our Offer to Amend. As a result options to purchase approximately 7,742,000 shares of our ADSs, or approximately 99.9% of all eligible options, were tendered for amendment in accordance with the Offer to Amend. The terms of our Offer to Amend can be found in the Form CB filed with the Securities and Exchange Commission on February 26, 2009.
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
(a) The following information attached hereto starting from page F-2 are hereby incorporated by reference:
Report of Independent Registered Public Accounting Firm | F - 2 |
Consolidated Balance Sheets as of December 31, 2009 and 2010 | F - 5 |
Consolidated Statements of Operations for the years ended December 31, 2008, 2009 and 2010 | F - 6 |
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31, 2008, 2009 and 2010 | F - 7 |
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2009 and 2010 | F - 8 |
Notes to the Consolidated Financial Statements | F - 10 |
Schedule 1 - Actions Semiconductor Co., Ltd. - condensed financial information as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 | F - 37 |
ITEM 19. EXHIBITS
(a) | See Item 18 for a list of the financial statements filed as part of this annual report. |
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ACTIONS SEMICONDUCTOR CO., LTD.
(b) | Exhibits to this Annual Report: |
1.1 | Memorandum of Association of the Registrant, as amended (incorporated by reference to Exhibit 4.1 of Form S-8 (File No. 333-152490) filed with the Securities and Exchange Commission on July 24, 2008) |
1.2 | Articles of Association of the Registrant, as amended (incorporated by reference to Exhibit 99.2 of Form 6-K (File No. 000-51604 filed with the Securities and Exchange Commission on May 20, 2010) |
2.1 | Registrant’s Specimen Share Certificate (incorporated by reference to Exhibit 4.1 of Form F-1 (File No. 333-129208) filed with the Securities and Exchange Commission on October 24, 2005) |
2.2 | Form of Deposit Agreement among the Registrant, JP. Morgan Chase Bank, N.A., as depositary, and holders from time to time of the American Depositary Shares issued thereunder (incorporated by reference to Exhibit (a) of Form F-6 (File No. 333-129375) filed with the Securities and Exchange Commission on November 2, 2005) |
2.3 | Form of American Depositary Receipt (incorporated by reference to Exhibit (a)(2) of Form F-6 (File No. 333-152447) filed with the Securities and Exchange Commission on July 22, 2008) |
4.1 | Amended and Restated 2007 Equity Performance and Incentive Plan (incorporated by reference to Exhibit 4.1 of the Registrant’s annual report on Form 20-F for the year ended December 31, 2009 (File No. 000-51604) (filed with the Securities and Exchange Commission on April 30, 2010) |
4.2 | English Summary of Auction Confirmation Letter Relating to Land Use Rights for land located in Zhangjiang, Shanghai, dated as of March 19, 2010, between Actions Technology (Shanghai) Co., Ltd. and Shanghai Real Property Transaction Center (incorporated by reference to Exhibit 4.2 of Form 20-F (File No. 000-51604) filed with the Securities and Exchange Commission on April 30.) |
8.1 | List of Subsidiaries |
12.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act. |
12.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act. |
13.1 | Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
15.1 | Consent of Independent Registered Public Accounting Firm |
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ACTIONS SEMICONDUCTOR CO., LTD.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Actions Semiconductor Co., Ltd. | |
By: | /s/ PEI-FEN (PATRICIA) CHOU |
Name: | Pei-Fen (Patricia) Chou |
Title: | Chief Financial Officer |
Date: April 22, 2011
81
ACTIONS SEMICONDUCTOR CO., LTD.
ACTIONS SEMICONDUCTOR CO., LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONTENTS | PAGE(S) | ||
Report of Independent Registered Public Accounting Firm | F - 2 | ||
Consolidated Balance Sheets as of December 31, 2009 and 2010 | F - 5 | ||
Consolidated Statements of Operations for the years ended | |||
December 31, 2008, 2009 and 2010 | F - 6 | ||
Consolidated Statements of Equity and Comprehensive Income | |||
for the years ended December 31, 2008, 2009 and 2010 | F - 7 | ||
Consolidated Statements of Cash Flows for the years ended | |||
December 31, 2008, 2009 and 2010 | F - 8 | ||
Notes to the Consolidated Financial Statements | F - 10 | ||
Schedule 1 - | Actions Semiconductor Co., Ltd. - condensed financial information | F - 37 | |
as of December 31, 2009 and 2010 and for the years ended | |||
December 31, 2008, 2009 and 2010 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ACTIONS SEMICONDUCTOR CO., LTD.
We have audited the accompanying consolidated balance sheets of Actions Semiconductor Co., Ltd. and subsidiaries (the "Group") as of December 31, 2009 and 2010, and the related consolidated statements of operations, equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules included in Schedule 1. These consolidated financial statements and the financial statement schedules are the responsibility of the Group's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Actions Semiconductor Co., Ltd. and subsidiaries as of December 31, 2009 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group's internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 22, 2011, expressed an unqualified opinion on the Group's internal control over financial reporting.
Deloitte Touche Tohmatsu
Hong Kong
April 22, 2011
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ACTIONS SEMICONDUCTOR CO., LTD.
We have audited the internal control over financial reporting of Actions Semiconductor Co., Ltd. and its subsidiaries (the "Group") as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in the Management's Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Mavrix Technology, Inc. and its subsidiaries (the "Mavrix Group"), which was acquired on August 19, 2010 and whose financial statements constitute 0.6% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at the Mavrix Group. The Group's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ACTIONS SEMICONDUCTOR CO., LTD. - continued
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2010 of the Group and our report dated April 22, 2011 expressed an unqualified opinion on those financial statements and financial statement schedules.
Deloitte Touche Tohmatsu
Hong Kong
April 22, 2011
F - 4
CONSOLIDATED BALANCE SHEETS |
(In thousands of U.S. dollars, except share and per share data) |
At December 31, | ||||||||
2009 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 87,706 | $ | 42,872 | ||||
Time deposits | 62 | 34 | ||||||
Marketable securities | 139,984 | 164,336 | ||||||
Trading securities | - | 535 | ||||||
Accounts receivable, net | 1,891 | 1,844 | ||||||
Amount due from a related party | 530 | 559 | ||||||
Amount due from equity method investees | 492 | 104 | ||||||
Inventories | 4,501 | 4,832 | ||||||
Prepaid expenses and other current assets | 1,258 | 3,242 | ||||||
Deferred tax assets | 371 | 399 | ||||||
Total current assets | 236,795 | 218,757 | ||||||
Investment in equity method investees | 1,577 | 6,401 | ||||||
Other investments ($420 and NIL carried at fair value as of December 31, 2009 and 2010 respectively) | 3,258 | 2,764 | ||||||
Marketable securities (NIL and $14,296 carried at fair value as of December 31, 2009 and 2010 respectively) | 23,773 | 24,831 | ||||||
Rental deposits | 46 | 40 | ||||||
Property, plant and equipment, net | 14,437 | 24,604 | ||||||
Land use right | 1,546 | 1,554 | ||||||
Acquired intangible assets, net | 3,625 | 4,318 | ||||||
Deposit paid for acquisition of intangible assets | - | 2,408 | ||||||
Deferred tax assets | 149 | 88 | ||||||
Goodwill | - | 468 | ||||||
TOTAL ASSETS | $ | 285,206 | $ | 286,233 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,355 | $ | 2,850 | ||||
Accrued expenses and other current liabilities | 4,626 | 7,247 | ||||||
Other liabilities | 2,124 | 2,502 | ||||||
Income tax payable | 129 | 140 | ||||||
Deferred tax liabilities | 284 | 446 | ||||||
Total current liabilities | 9,518 | 13,185 | ||||||
Other liabilities | 319 | 83 | ||||||
Deferred tax liabilities | 2,058 | 2,286 | ||||||
Total liabilities | 11,895 | 15,554 | ||||||
Commitments and contingencies (Note 19) | ||||||||
Equity: | ||||||||
Ordinary shares of par value $0.000001: 2,000,000,000 shares authorized 427,705,308 (2009: 450,563,676) shares issued and outstanding | $ | 1 | $ | 1 | ||||
Additional paid-in capital | 31,423 | 24,252 | ||||||
Accumulated other comprehensive income | 20,239 | 24,420 | ||||||
Retained earnings | 221,648 | 222,032 | ||||||
Total Actions Semiconductor Co. Ltd. shareholders' equity | 273,311 | 270,705 | ||||||
Non-controlling interest | - | (26 | ) | |||||
Total equity | 273,311 | 270,679 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 285,206 | $ | 286,233 |
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
CONSOLIDATED STATEMENTS OF OPERATIONS |
(In thousands of U.S. dollars, except share and per share data) |
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Revenues: | ||||||||||||
Third-parties: | ||||||||||||
System-on-a chip products | 70,528 | 31,482 | 29,939 | |||||||||
Semiconductor product testing services | 214 | 203 | 151 | |||||||||
70,742 | 31,685 | 30,090 | ||||||||||
Related-parties: | ||||||||||||
System-on-a chip products | 24,388 | 12,455 | 7,495 | |||||||||
Total revenues | 95,130 | 44,140 | 37,585 | |||||||||
Cost of revenue: | ||||||||||||
Third-parties: | ||||||||||||
System-on-a chip products | (35,090 | ) | (21,322 | ) | (18,521 | ) | ||||||
Semiconductor product testing services | (177 | ) | (117 | ) | (81 | ) | ||||||
(35,267 | ) | (21,439 | ) | (18,602 | ) | |||||||
Related parties: | ||||||||||||
System-on-a-chip products | (12,158 | ) | (8,771 | ) | (4,325 | ) | ||||||
Total cost of revenues | (47,425 | ) | (30,210 | ) | (22,927 | ) | ||||||
Gross profit | 47,705 | 13,930 | 14,658 | |||||||||
Other operating income | 797 | 918 | 966 | |||||||||
Gain on deemed disposal | - | 1,736 | - | |||||||||
Operating expenses: | ||||||||||||
Research and development | (19,477 | ) | (19,295 | ) | (17,325 | ) | ||||||
General and administrative | (10,399 | ) | (8,812 | ) | (8,125 | ) | ||||||
Selling and marketing | (1,694 | ) | (1,115 | ) | (1,208 | ) | ||||||
Total operating expenses | (31,570 | ) | (29,222 | ) | (26,658 | ) | ||||||
Income (loss) from operations: | 16,932 | (12,638 | ) | (11,034 | ) | |||||||
Other income (loss) | 1,213 | (654 | ) | 2,348 | ||||||||
Dividend income | 20 | 440 | - | |||||||||
Fair value change in trading securities | 92 | 40 | (2) | |||||||||
Gain on disposal of other investment | - | - | 137 | |||||||||
Interest income | 11,912 | 10,977 | 9,608 | |||||||||
Interest expense | (4 | ) | (57 | ) | - | |||||||
Other-than-temporary impairment loss on investments | - | (7,407 | ) | - | ||||||||
Income (loss) before income taxes, equity in net loss of equity method investees and noncontrolling interest | 30,165 | (9,299 | ) | 1,057 | ||||||||
Income tax expense | (3,632 | ) | (537 | ) | (422 | ) | ||||||
Equity in net loss of equity method investees | (576 | ) | (826 | ) | (781 | ) | ||||||
Remeasurement gain on equity interest on acquisition of a subsidiary | - | - | 494 | |||||||||
Net income (loss) | 25,957 | (10,662 | ) | 348 | ||||||||
Add: Net loss attributable to noncontrolling interest | 166 | 264 | 36 | |||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. | $ | 26,123 | $ | (10,398 | ) | $ | 384 | |||||
Net income (loss) per share: Basic | ||||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. shareholders | $ | 0.052 | $ | (0.023 | ) | $ | 0.001 | |||||
Net income (loss) per share: Diluted | ||||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. shareholders | $ | 0.052 | $ | (0.023 | ) | $ | 0.001 | |||||
Weighted-average shares outstanding used in computation: | ||||||||||||
Basic | 501,763,805 | 460,812,477 | 438,401,072 | |||||||||
Diluted | 501,763,805 | 460,812,477 | 454,568,850 |
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (LOSS) |
(In thousands of U.S. dollars, except share and per share data)
Attributable to the shareholders of the Actions Semiconductor Co., Ltd. | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
other | Non | |||||||||||||||||||||||||||||||||||
Ordinary shares | Additional | comprehensive | Retained | controlling | Comprehensive | |||||||||||||||||||||||||||||||
Number | Amount | paid-in capital | income | earnings | Total | interest | Total | income (loss) | ||||||||||||||||||||||||||||
Balance at January 1, 2008 | 508,178,118 | $ | 1 | $ | 43,679 | $ | 9,628 | $ | 205,923 | $ | 259,231 | $ | 204 | $ | 259,435 | $ | 56,873 | |||||||||||||||||||
Repurchase of ordinary shares | (22,676,244 | ) | - | (9,368 | ) | - | - | (9,368 | ) | - | (9,368 | ) | - | |||||||||||||||||||||||
Share-based compensation | - | - | 2,295 | - | - | 2,295 | - | 2,295 | - | |||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | 10,951 | - | 10,951 | (3 | ) | 10,948 | 10,951 | ||||||||||||||||||||||||||
Unrealized loss on other investments | - | - | - | (96 | ) | - | (96 | ) | - | (96 | ) | (96 | ) | |||||||||||||||||||||||
Net income (loss) | - | - | - | - | 26,123 | 26,123 | (166 | ) | 25,957 | 26,123 | ||||||||||||||||||||||||||
Balance at December 31, 2008 | 485,501,874 | $ | 1 | $ | 36,606 | $ | 20,483 | $ | 232,046 | $ | 289,136 | $ | 35 | $ | 289,171 | $ | 36,978 | |||||||||||||||||||
Repurchase of ordinary shares | (34,938,198 | ) | - | (10,130 | ) | - | - | (10,130 | ) | - | (10,130 | ) | - | |||||||||||||||||||||||
Share-based compensation | - | - | 4,006 | - | - | 4,006 | - | 4,006 | - | |||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | (509 | ) | - | (509 | ) | - | (509 | ) | (509 | ) | |||||||||||||||||||||||
Change in Company's ownership interest in subsidiary | - | - | 941 | - | - | 941 | 229 | 1,170 | - | |||||||||||||||||||||||||||
Unrealized loss on other investments | - | - | - | 265 | - | 265 | - | 265 | 265 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | (10,398 | ) | (10,398 | ) | (264 | ) | (10,662 | ) | (10,398 | ) | ||||||||||||||||||||||
Balance at December 31, 2009 | 450,563,676 | $ | 1 | $ | 31,423 | $ | 20,239 | $ | 221,648 | $ | 273,311 | $ | - | $ | 273,311 | $ | (10,642 | ) | ||||||||||||||||||
Repurchase of ordinary shares | (24,212,718 | ) | - | (9,019 | ) | - | - | (9,019 | ) | - | (9,019 | ) | - | |||||||||||||||||||||||
Exercise of stock option | 1,354,350 | - | 316 | - | - | �� | 316 | - | 316 | - | ||||||||||||||||||||||||||
Share-based compensation | - | - | 1,532 | - | - | 1,532 | - | 1,532 | - | |||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | 4,350 | - | 4,350 | - | 4,350 | 4,350 | |||||||||||||||||||||||||||
Acquisition of a Subsidiary | - | - | - | - | - | - | 10 | 10 | - | |||||||||||||||||||||||||||
Unrealized loss on other investments | - | - | - | (169 | ) | - | (169 | ) | - | (169 | ) | (169 | ) | |||||||||||||||||||||||
Net Income (loss) | - | - | - | - | 384 | 384 | (36 | ) | 348 | 384 | ||||||||||||||||||||||||||
Balance at December 31, 2010 | 427,705,308 | $ | 1 | $ | 24,252 | $ | 24,420 | $ | 222,032 | $ | 270,705 | $ | (26 | ) | $ | 270,679 | $ | 4,565 |
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(In thousands of U.S. dollars) |
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Operating activities: | ||||||||||||
Net income (loss) | $ | 25,957 | $ | (10,662 | ) | $ | 348 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation of property, plant and equipment | 2,047 | 2,073 | 1,929 | |||||||||
Allowance for doubtful accounts receivable | 496 | (56 | ) | (101 | ) | |||||||
Land use right | 38 | 34 | 33 | |||||||||
Amortization of acquired intangible assets | 3,232 | 2,833 | 1,901 | |||||||||
Utilization of subsidy from local authorities of Beijing, Shenzhen and Zhuhai, the People's Republic of China (the "PRC") | (602 | ) | (226 | ) | (225 | ) | ||||||
Write down of inventories | 901 | 294 | 378 | |||||||||
Loss (gain) on disposal of property, plant and equipment | 70 | (5 | ) | 42 | ||||||||
Fair value change in trading securities | (92 | ) | (40 | ) | (2 | ) | ||||||
Gain on disposal of other investments | (6 | ) | - | (137 | ) | |||||||
Share-based compensation | 2,295 | 4,006 | 1,532 | |||||||||
Deferred tax | 2,083 | 484 | 422 | |||||||||
Equity in net loss of equity method investees | 576 | 826 | 782 | |||||||||
Remeasurement gain on equity interest on acquisition of a subsidiary | - | - | (494 | ) | ||||||||
Gain on deemed disposal of a subsidiary | - | (1,736 | ) | - | ||||||||
Other-than-temporary impairment loss on investments | - | 7,407 | - | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Proceeds from disposal of trading securities | 17,111 | 30,649 | 5 | |||||||||
Purchase of trading securities | (36,318 | ) | (11,310 | ) | (470 | ) | ||||||
Accounts receivable | 2,169 | (1,305 | ) | 150 | ||||||||
Amounts due from a related party | (554 | ) | 967 | (39 | ) | |||||||
Notes receivable | 315 | 74 | - | |||||||||
Inventories | 3,611 | 3,152 | 222 | |||||||||
Prepaid expenses and other current assets | 1,601 | (526 | ) | (1,326 | ) | |||||||
Amount due from an equity method investee | 52 | (492 | ) | 410 | ||||||||
Accounts payable | (8,999 | ) | (301 | ) | (32 | ) | ||||||
Accrued expenses and other current liabilities | (5,522 | ) | 1,597 | (1,680 | ) | |||||||
Income tax payable | (576 | ) | (93 | ) | 14 | |||||||
Deposit paid for acquisition of land use right | - | - | (901 | ) | ||||||||
Rental deposit refunded (paid) | 45 | (7 | ) | (1 | ) | |||||||
Net cash provided by operating activities | 9,930 | 27,637 | 2,760 | |||||||||
Investing activities: | ||||||||||||
Investment in equity method investees | (3,000 | ) | (1,500 | ) | (5,606 | ) | ||||||
Proceeds from the disposal of other investments | - | 44 | 1,251 | |||||||||
Purchase of other investments | (2,215 | ) | - | - | ||||||||
Proceeds from disposal of property, plant and equipment | 18 | 30 | 21 | |||||||||
Increase in deposit paid for acquisition of property, plant and equipment | (368 | ) | (1,733 | ) | - | |||||||
Proceeds from redemption of marketable securities | - | 91,066 | 77,657 | |||||||||
Purchase of marketable securities | (25,575 | ) | (53,833 | ) | (100,498 | ) | ||||||
Purchase of property, plant and equipment | (2,429 | ) | (6,613 | ) | (8,851 | ) | ||||||
Purchase of intangible assets | (1,194 | ) | (3,074 | ) | (1,762 | ) | ||||||
Deposit paid for acquisition of intangible assets | - | - | (2,408 | ) | ||||||||
(Increase) decrease in restricted cash | 1,389 | 440 | - | |||||||||
Decrease in time deposits | 2,691 | 7 | 28 | |||||||||
Acquisition of a subsidiary, net of cash and cash equivalent acquired | - | - | (937 | ) | ||||||||
Disposal of a subsidiary, net of cash equivalent disposed | - | (2,707 | ) | (10,110 | ) | |||||||
Net cash (used in) provided by investing activities | (30,683 | ) | 22,127 | (51,215 | ) |
F - 8
CONSOLIDATED STATEMENTS OF CASH FLOWS – continued |
(In thousands of U.S. dollars) |
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Financing activities: | ||||||||||||
Repayment of short-term bank loans | (1,580 | ) | (2 | ) | - | |||||||
Receipt of amount due from a former subsidiary | - | - | 11,020 | |||||||||
Proceeds from loan from non-controlling interest | 1,500 | - | - | |||||||||
Advance subsidy from local authorities of Beijing, Shenzhen and Zhuhai, the PRC | 1,025 | 750 | 302 | |||||||||
Repurchase of ordinary shares | (9,368 | ) | (10,130 | ) | (9,019 | ) | ||||||
Proceeds from exercise of stock options | - | - | 316 | |||||||||
Proceeds on issue of shares of subsidiary | - | 1,885 | - | |||||||||
Net cash (used in) provided by financing activities | (8,423 | ) | (7,497 | ) | 2,619 | |||||||
Net (decrease) increase in cash and cash equivalents | (29,176 | ) | 42,267 | (45,836 | ) | |||||||
Cash and cash equivalents at the beginning of the year | 72,054 | 45,435 | 87,706 | |||||||||
Effect of exchange rate changes on cash | 2,557 | 4 | 1,002 | |||||||||
Cash and cash equivalents at the end of the year | $ | 45,435 | $ | 87,706 | $ | 42,872 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | (4 | ) | $ | (59 | ) | $ | - | ||||
Income taxes | $ | (2,110 | ) | $ | (144 | ) | $ | (180 | ) | |||
Non-cash investing activities | ||||||||||||
Purchases of intangible assets | $ | (1,071 | ) | $ | (161 | ) | $ | 536 | ||||
Purchase of property, plant and equipment | $ | - | $ | (928 | ) | $ | 2,305 |
The accompanying notes are an integral part of these consolidated financial statements.
F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2010 |
(In thousands of U.S. dollars, except share and per share data, share related data and unless otherwise stated)
1 | ORGANIZATION AND PRINCIPAL ACTIVITIES |
Actions Semiconductor Co., Ltd ("Actions Semiconductor Cayman Islands" or "the Company") is a holding company incorporated in the Cayman Islands on July 27, 2005.
At December 31, 2010, the subsidiaries of the Company include the following:
Name of Company | Place and date of incorporation/establishment | Attributable equity interest held | Principal activities | ||||
Actions Semiconductor Co., Ltd. ("Actions Semiconductor Mauritius") | Republic of Mauritius ("Mauritius") November 16, 2001 | 100 | % | Investment holding | |||
Actions Semiconductor Co., Ltd. ("Actions Semiconductor Zhuhai") | PRC December 28, 2001 | 100 | % | Design and manu-facture of system-on-a-chip products | |||
Shanghai Actions Semiconductor Co., Ltd. ("Actions Semiconductor Shanghai ") | PRC March 27, 2008 | 100 | % | Design and manu-facture of system-on-a-chip products | |||
Actions Technology (HK) Company Limited ("Actions Hong Kong") | Hong Kong January 13, 1999 | 100 | % | Trading of system-on-a-chip products | |||
Actions Microelectronics Co., Ltd. | Hong Kong August 17, 2007 | 100 | % | Trading of system-on-a-chip products and investment holding | |||
Artek Microelectronics (HK) Co., Limited | Hong Kong January 16, 2006 | 100 | % | Trading of system-on-a-chip products and investment holding | |||
Artek Microelectronics Co., Ltd. ("Artek Microelectronics Shenzhen") | PRC March 14, 2006 | 100 | % | Design and manu-facture of system-on-a-chip products | |||
Actions Capital Investment Inc. | The BVI February 10, 2006 | 100 | % | Investment holding | |||
Actions Capital Investment (Malaysia) Inc. Co., Ltd. ("Actions Malaysia ") | Republic of Malaysia January 13, 2009 | 100 | % | Inactive | |||
Mavrix Technology, Inc. (“Mavrix”) | Cayman Islands June 20, 2006 | 93.40 | % | Investment holding | |||
Mavrix Technology (H.K.) Co., Limited (“Mavrix HK”) | Hong Kong August 17, 2007 | 93.40 | % | Manufacturing and trading of system-on-a-chip products | |||
Shanghai Mavrix Electronics, Ltd. (“Mavrix Shanghai”) | PRC October 23, 2006 | 93.40 | % | Design and manufacture of system-on-a-chip products |
Actions Semiconductor Cayman Islands and its subsidiaries (the "Group") are principally engaged in the design and development of System-on-a-chip ("SoC") products and total solutions for the development and manufacture of portable media players ("PMPs") and the provision of testing solutions. The Group's total solutions include SoCs, solution development kits and detailed specifications of other required components and the providers' information of those components. The Group's total solutions enable its customers to quickly introduce new portable media players, which play multimedia files by compressing to a fraction of their size using any one of a number of audio and video compression technologies, into the mainstream market worldwide.
F - 10
2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP").
Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances are eliminated on consolidation. The result of a subsidiary acquired has been consolidated from the date of acquisition.
Business Combination
The Group accounts for its business combination using the acquisition method of accounting. This method requires that the acquisition cost to be allocated to the assets, including separately identifiable intangible assets acquired, and liabilities the Group assumed base on their estimated fair values.
The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interest. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Group determines discount rates to be used based on the risk inherent in the related activity's current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although the Group believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. The significant accounting estimates, which have had an impact on the consolidated financial statements, include allowances for doubtful receivables, write down of slow moving and obsolete inventories, deferred tax valuation allowance, useful lives of property, plant and equipment and intangible assets, impairment of long-lived assets and indefinitive-lived intangible assets, impairment of goodwill, provision for litigation claims and valuation of stock option expenses.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid interest-earning deposits which are unrestricted as to withdrawal and use, and which have maturities of three months or less when purchased, and are readily convertible to known amount of cash.
Time deposits
Time deposits consist of deposits placed with financial institutions with original maturity terms of greater than three months but less than one year.
F - 11
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
Marketable debt securities
Marketable debt securities are highly liquid investments purchased by the Group from banks or independent financial institutions in the PRC. Those investments mainly include money market deposits and trust financial products with market based interest rates that have maturities anywhere between three to twenty-four months when purchased.
Marketable debt securities are classified as held to maturity as the Group has the positive intent and ability to hold the securities to maturity. All of the Group's held-to-maturity securities are stated at amortized cost.
Trust financial products are investments in individual funds or in pools of funds held by financial institutions, who in turn use the funds raised to independently manage a pool of various assets of which the underlying investments are debt instruments. Such investments carry market based interest rates and have maturities anywhere between three to twenty-four months.
As of December 31, 2010, the Group has elected the fair value option for one of its investment in a trust financial product. The Group determined that the fair value of this investment to be $14,296.
Trading securities
The Group's trading securities comprised investments in publicly traded mutual funds in Taiwan. The investments are reported at fair value and its unrealized gains and losses are included in earnings. No trading securities were held as of December 31, 2009. Trading securities were purchased during 2010 and an unrealized gain of $2 had been recognized as of December 31, 2010.
Research and development
Research and development costs are expensed as incurred.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method and mainly comprise cost of materials and sub-contract service fee. Write down of potentially obsolete or slow moving inventories is recorded based on management's assumptions about future demand and market conditions.
F - 12
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
Investments under equity method
The investments for which the Group has the ability to exercise significant influence are accounted for using the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Group's share of undistributed earnings or losses of the entities, by dividend distributions or subsequent investments. All unrecognized inter-company profits and losses have been eliminated under the equity method.
When the estimated amount to be realized from the investments falls below its carrying value, an impairment charge is recognized in the consolidated statements of operations when the decline in value is considered other than temporary.
Other investments
Other investments comprise investments in equity securities and are classified as available-for-sale securities. Investments that have readily determinable fair values are reported at fair value and unrealized gains and losses are excluded from earnings and reported in a separate component of shareholder's equity. Equity securities that do not have readily determinable market values are carried at cost. Fair values of equity securities carried at cost are estimated if there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.
When the estimated amount to be realized from the investments falls below its carrying value, an impairment charge is recognized in the consolidated statements of operations when the decline in value is considered other than temporary.
Property, plant and equipment and land use right
Property, plant and equipment, net are carried at cost less accumulated depreciation. Cost includes professional fees and, for assets constructed by the Group, any related works to the extent that these are directly attributable to the construction of the asset. Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Gains and losses on disposal of property, plant and equipment and land use right are included in the consolidated statement of operations.
Depreciation rates computed using the straight-line method are as follows:
Buildings | 20 years |
Leasehold improvements | Shorter of lease term or 3 years |
Furniture, fixtures and equipment | 5 years |
Motor vehicles | 5 years |
Plant and machinery | 3 to 5 years |
All land in the PRC is owned by the government. According to PRC law, the government may sell the right to use of the land for a specified period of time. Thus, all of the Group's land, which were all purchased in the PRC, are considered to be prepaid leasehold land and classified as land use right. These are expensed on a straight-line basis over the respective term of the right to use the land. Expense for years ended December 31, 2008, 2009 and 2010 were $38, $34 and $34 respectively.
F - 13
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
Acquired intangible assets – definite live, net
Acquired intangible assets - definite live comprising purchased software and technology licenses. Purchased software and technology licenses are amortized on a straight-line basis over their expected useful economic lives, both ranged from two to five years.
Goodwill and other intangible assets
The Group records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. In-process research and development ("IPR&D") is recognized separately from goodwill at fair value of acquisition date, IPR&D is not subjected to amortization until research and development efforts are completed and assets are ready for their intended use. Goodwill is tested for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. IPR&D is tested for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying amount of the IPR&D may no longer be recoverable.
The Group primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units and the fair value of the IPR&D.
Impairment of long-lived assets
The Group reviews for impairment or obsolescence annually, long-lived assets including property, plant and equipment and acquired intangible assets - definite live, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss by which the carrying value of the assets exceeds their recoverable amount. The recoverable amount is based on the fair value of the assets.
The Group's stock is acquired for purposes other than retirement, the cost of acquired stock is shown separately as a deduction from the total of capital stock, capital surplus, and retained earnings.
Revenue recognition
The Group's revenues are primarily derived from sale of SoC products and their total system solutions. The Group recognizes revenue based on firm customer orders with fixed terms and conditions, including price net of discount and commission, if any. The Group recognizes revenue when delivery has occurred and collectability is determined to be reasonably assured. The Group also provides semiconductor product testing, and revenue is recognized when the services are rendered. The Group does not provide its customers with any price protection and only provides the right of return for defective goods in connection with its warranty policy. The costs of the Group's warranty policy to-date are insignificant.
Government subsidies
Government subsidies include cash subsidies and advance subsidies received from the local PRC governments in Zhuhai by Actions Semiconductor Zhuhai, in Shenzhen by Artek Microelectronics Shenzhen and in Shanghai by Actions Semiconductor Shanghai. Advance subsidies are recognized as other income when received and when all the conditions for their receipt have been met. Advance subsidies recognized as income were $602, $226 and $225 for the years ended December 31, 2008, 2009 and 2010, respectively.
Advance subsidies received from the government have been recorded in other liabilities. The advance subsidies are repayable unless the conditions attached to the grant use satisfied, the respective subsidies will be recognized as other income (see note 11 for additional details).
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities.
F - 14
Advertising costs
Advertising costs are expensed as incurred and are included in general and administrative expense, and selling and marketing expenses. Total advertising expenses were approximately $142, $98, and $199 for the years ended December 31, 2008, 2009 and 2010 respectively.
Comprehensive income (loss)
Accumulated other comprehensive income (loss) include unrealized gains on other investments and foreign currency translation adjustments and is reported as a separate component in the statement of equity and comprehensive income.
Foreign currency translation
All transactions in currencies other than functional currencies during the year are converted at the exchange rates prevailing on the respective transaction dates. Foreign currency monetary assets and liabilities at the balance sheet date are remeasured at the exchange rates existing on that date. Exchange differences are recorded in the consolidated statement of operations.
The financial statements of all subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollar. All assets and liabilities are translated at the rates of exchange prevailing at the balance sheet date, and all income and expense items are translated at the average rates of exchange over the year. All exchange differences arising from the translation of subsidiaries' financial statements are recorded as a component of comprehensive income.
F - 15
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
Fair value of financial instruments
Fair values of cash and cash equivalents, time deposits, marketable securities, accounts receivable, amount due from a related party, amount due from equity method investees, accounts payable, and accrued expenses approximate their carrying amounts due to their short-term maturities.
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, time deposits, restricted cash, marketable securities, trading securities, accounts receivable, amount due from a related party, amount due from an equity method investee. The Group places its cash and cash equivalents, time deposits, marketable securities and trading securities with financial institutions with high-credit ratings and quality.
The Group conducts credit evaluations of customers and generally does not required collateral or other security from its customers. The Group establishes an allowance for doubtful accounts based upon estimates, factors surrounding the credit risk of specific customers and other information. For the years ended December 31, 2008, 2009 and 2010, allowance for doubtful accounts of $496, $(56), and $(101) was recorded by the Group respectively.
Movements in allowances for doubtful accounts receivable are as follows:
Year ended | Beginning | Credit | Closing | |||||||||
December 31 | balance | to expense | balance | |||||||||
2009 | $ | 778 | $ | ( 56 | ) | $ | 722 | |||||
2010 | $ | 722 | $ | (101 | ) | $ | 621 |
Net income (loss) per share
Basic net income (loss) attributable to the Company per share is computed by dividing net income attributable to the Company by the weighted average number of ordinary shares outstanding during the year. Diluted net income (loss) attributable to the Company per share give effect to all dilutive potential common shares outstanding during the year. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.
F - 16
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
The Group measures the cost of employee services received in exchange for share-based compensation at the grant date fair value of the award. The Group recognizes the compensation costs on a straight-line over the vesting period. Share-based compensation cost with a graded vesting schedule is recognized on a straight-line basis over the requisite service period of the entire award.
For the year ended December 31, 2009 the compensation costs of Nil, $2,475, $1,335 and $196 have been included as cost of revenue, research and development expenses, general and administrative expenses, and selling and marketing expenses, respectively.
For the year ended December 31, 2010 the compensation costs of $2, $1,067, $404 and $59 have been included as cost of revenue, research and development expenses, general and administrative expenses, and selling and marketing expenses, respectively.
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this guidance did not have a significant impact on the Group's financial statements.
In March 2010, the FASB issued authoritative guidance regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The guidance will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This adoption of the authoritative guidance is not expected to have a material impact on the Group's financial statements.
F - 17
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued |
Recently issued accounting pronouncements – continued
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for impairment tests performed during entities' fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. For nonpublic entities, the guidance is effective for impairment tests performed during entities' fiscal years (and interim periods within those years) that begin after December 15, 2011. Early application for nonpublic entities is permitted; nonpublic entities that elect early application will use the same effective date as that for public entities. This adoption of the authoritative guidance is not expected to have a material impact on the Group's financial statements.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments will be effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted. This adoption of the authoritative guidance is not expected to have a material impact on the Group's financial statements.
3. | INVENTORIES |
Inventories consisted of the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Raw materials | $ | 2,589 | $ | 1,984 | ||||
Work in progress | 235 | 909 | ||||||
Finished goods | 1,677 | 1,939 | ||||||
$ | 4,501 | $ | 4,832 |
Slow moving inventories amounting to $901, $294, and $378 were written down for the year ended December 31, 2008, 2009 and 2010, respectively.
4. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consisted of the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Prepaid expenses | $ | 223 | $ | 401 | ||||
Value added tax refundable | 686 | 1,448 | ||||||
Interest receivable | 113 | 1,038 | ||||||
Dividend receivable | - | 150 | ||||||
Others | 236 | 205 | ||||||
$ | 1,258 | $ | 3,242 |
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5. | INVESTMENT IN EQUITY METHOD INVESTEES |
Actions Microelectronics Co., Ltd (Beijing) ("Beijing Actions")
Beijing Actions is a private company which design and manufactures SoC products for portable media players and digital photo frames.
As of December 31, 2008, Beijing Actions was an 80% owned subsidiary of the Group. As part of the capital injection plan of Beijing Actions, Beijing Actions increased its injected capital from $2,500 to $4,800, resulting in dilution of the Group's ownership interest to 45.6% as at June 30, 2009. However, since the Group retained control over Beijing Actions through contractual arrangement with the other shareholders of Beijing Actions, the change in the Group's ownership interest in Beijing Actions was accounted for as an equity transaction.
As of September 30, 2009, Beijing Actions further increased its injected capital to $10,000, of which the Group invested $1,500 of this capital injection. The Group's ownership interest in Actions Beijing was further diluted from 45.6% to 35%, and ceased control over Beijing Actions but retained with significant influence. Gain of $1,700 was recorded for the deconsolidation of Beijing Actions within continuing operations for the year ended December 31, 2009. As of December 31,2010, the Group continues to hold 35% ownership interest in Beijing Actions.
The effect of changes in the Company's ownership interest in Beijing Actions on the Company's equity is as below:
2008 | 2009 | 2010 | ||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd | $ | 26,123 | $ | (10,398 | ) | $ | 384 | |||||
Transfers to the noncontrolling interest | ||||||||||||
Increase in Actions Semiconductor Co., Ltd's additional paid-in capital for deemed dilution of Beijing Actions | - | 941 | - | |||||||||
Change to net income (loss) attributable to Actions Semiconductor Co., Ltd and transfers from noncontrolling interest | $ | 26,123 | $ | (9,457 | ) | $ | 384 |
Grand Choice Investment Limited (“Grand Choice”)
Grand Choice is a private company established in February 2010 which designs and manufactures software and hardware for electronic books.
Upon establishment, the Group purchased 20% of interest in Grand Choice for $600. The Group exercised significant influence but does not control Grand Choice which was accounted for under the equity method of accounting.
In December 2010, the Group invested a further $600 to maintain its 20% interest due to a capital contribution by all shareholders.
Nann Capital Corporation ("Nann Capital")
Nann Capital is a private investment holding company. Its wholly owned subsidiaries include Actions Enterprise (HK) Co., Ltd and Actions Technology (Shanghai) Co., Ltd. Both are disposed by the Group in July 2010.
Subsequent to the disposal, the Group purchased 40% of equity interest in Nann Capital for $4,406. The Group exercises significant influence but does not control Nann Capital which is accounted for under the equity method of accounting.
F - 19
5. | INVESTMENT IN EQUITY METHOD INVESTEES – continued |
The summarized financial information of equity method investees is illustrated as below:
2009 | 2010 | |||||||
Balance sheets | ||||||||
Current assets | $ | 10,807 | $ | 11,075 | ||||
Non-current assets | 3,222 | 12,519 | ||||||
Current liabilities | 3,525 | 1,499 | ||||||
Non-current liabilities | - | 28 | ||||||
Redeemable shares | 7,198 | - | ||||||
Non-controlling interest | - | - |
2008 | 2009 | 2010 | ||||||||||
Results of operations | ||||||||||||
Revenues | $ | 295 | $ | 3,582 | $ | 6,255 | ||||||
Gross profit | 16 | 985 | 2,134 | |||||||||
Loss from continuing operations | (4,457 | ) | (4,430 | ) | (2,666 | ) | ||||||
Net loss | $ | (4,427 | ) | $ | (4,291 | ) | $ | (2,293 | ) |
6. | OTHER INVESTMENTS |
At December 31, | ||||||||
2009 | 2010 | |||||||
Listed investments: | ||||||||
- Equity securities listed in Taiwan | $ | 420 | $ | - | ||||
Unlisted securities at cost | 6,848 | 6,774 | ||||||
Less: other-than-temporary impairment losses recognized (note 15) | (4,010 | ) | (4,010 | ) | ||||
$ | 3,258 | $ | 2,764 |
As of December 31, 2009, the Group intended to hold the listed available-for-sale securities for long term and the investment was reported at fair value of which unrealized gains of $(170) were excluded from earnings and reported in a separate component of shareholder's equity.
In March 2010, the Group disposed of all of its listed available-for-sale securities. Accordingly, the unrealized gains accumulated in a separate component of shareholder's equity are reversed into earnings. Again on disposal of $137 has been recognized in the consolidated statement of operations for the year ended December 31, 2010.
The unlisted investments represent investments in unlisted equity securities issued by private entities.
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7. | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be carried at fair value, the Group considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
FASB ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. FASB ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The following table summarizes the Group's assets and liabilities measured at fair value on a recurring basis:
Fair value measurements at December 31, 2010
Quoted Prices in Active Markets (Level l) | Significant Other Observable Inputs (Level 2) | Total | ||||||||||
Publicly traded mutual funds in Taiwan | $ | 535 | $ | - | $ | 535 | ||||||
Marketable securities | - | 14,296 | 14,296 | |||||||||
$ | 535 | $ | 14,296 | $ | 14,831 |
Fair value measurements at December 31, 2009
Quoted Prices in Active Markets (Level l) | ||||
Available-for-sale securities | $ | 420 |
Marketable securities represent a trust financial product with an independent financial institution in the PRC.
F - 21
8. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment, net consist of the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Buildings | $ | 34 | $ | 48 | ||||
Leasehold improvements | 319 | 504 | ||||||
Furniture, fixtures and equipment | 2,890 | 3,135 | ||||||
Motor vehicles | 629 | 620 | ||||||
Plant and machinery | 8,132 | 8,750 | ||||||
Total | 12,004 | 13,057 | ||||||
Less: Accumulated depreciation | (7,421 | ) | (9,329 | ) | ||||
Construction in progress | 9,854 | 20,876 | ||||||
Property, plant and equipment, net | $ | 14,437 | $ | 24,604 |
The Group recorded depreciation expense of $$2,047, $2,073, and $1,929 for the years ended December 31, 2008, 2009 and 2010, respectively.
9. | ACQUIRED INTANGIBLE ASSETS, NET |
Acquired intangible assets, net consist of the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Cost: | ||||||||
Purchased software | $ | 5,328 | $ | 4,806 | ||||
Technology licenses | 4,198 | 5,141 | ||||||
9,526 | 9,947 | |||||||
Accumulated amortization: | ||||||||
Purchased software | (3,921 | ) | (3,218 | ) | ||||
Technology licenses | (1,980 | ) | (2,831 | ) | ||||
(5,901 | ) | (6,049 | ) | |||||
In-process research and development not subject to amortization | - | 420 | ||||||
Acquired intangible assets, net | $ | 3,625 | $ | 4,318 |
The intangible assets of the Group mainly consist of purchased software which is used to support the business administration and the electronic design automation, and technology licenses acquired for the purpose of utilizing certain intellectual property held by third parties.
The Group recorded amortization expense of $3,232, $2,833, and $1,901 for the years ended December 31, 2008, 2009 and 2010, respectively. Intangible asset amortization expense is estimated to be $2,044, $2,155, $1,451 and $897 for the 2011, 2012, 2013 and 2014 fiscal years, respectively.
F - 22
10. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Accrued wages and bonuses | $ | 2,023 | $ | 2,518 | ||||
Accrued legal and professional fees | 158 | 260 | ||||||
Accrued insurance expenses | 120 | - | ||||||
Payables for construction in progress | 928 | 2,305 | ||||||
Payables for acquisition of intangible assets | 161 | 536 | ||||||
Royalty fees payable | 291 | 359 | ||||||
Accrued consulting fees | 375 | 375 | ||||||
Accrued commission expenses | 123 | 7 | ||||||
Share repurchase fee payable | - | 143 | ||||||
Payable for insurance premium | - | 100 | ||||||
Others | 447 | 644 | ||||||
$ | 4,626 | $ | 7,247 |
11. | OTHER LIABILITIES |
The local authorities in Beijing, Shenzhen and Zhuhai, PRC, operate certain government subsidy programs which are intended to encourage companies to invest in the high technology industry in Zhuhai and Beijing.
For the year ended December 31, 2009, Actions Semiconductor Zhuhai and Artek Microelectronics Shenzhen were granted $633 and $117 advances subsidies respectively, the total liabilities amounted to $2,443, in which $2,124 was repayable within one year and $319 was repayable after 2010 and therefore recorded in non-current liabilities.
For the year ended December 31, 2010, Actions Semiconductor Zhuhai and Artek Microelectronics Shenzhen were further granted $302 and nil advance subsidies respectively, the total liabilities amounted to $2,585, in which $2,502 was repayable within one year and $83 are repayable after 2011 and therefore are recorded in non-current liabilities.
The estimated fair value of the advances granted to Actions Semiconductor Zhuhai and Artek Microelectronics Shenzhen, based on the Group's borrowing interest rate from independent financial institutions, was approximately $2,330 and $2,447 at December 31, 2009 and 2010, respectively.
12 | ACQUISITION OF A SUBSIDIARY |
As of December 31, 2008, the Group owned 19.67% of equity interest in Mavrix. Since the Group had the ability to exercise significant influence over the operating and financial policies of Mavrix through representation on the board of directors which comprised five directors, Mavrix was an equity method investee of the Group.
In 2009, the Group recorded an other-than-temporary impairment loss of $3,397 (note 15) related to the investment in Mavrix, as a result, the net carrying amount of this investment was written down to nil as of December 31, 2009.
In 2010, Mavrix started to change its primary line of business from designing and selling fabless semiconductors for portable media players to develop the applications for Android, a platform widely used in smart phones and multimedia internet devices. The Group considered this change in Mavrix's business as a potential opportunity.
In July 2010, the Group offered a tender to other shareholders of Mavrix to acquire the remaining equity interest in Mavrix. A majority of shareholders of Mavrix accepted the offer and the transaction was completed in August 2010. As a result, the Group's ownership interest in Mavrix increased from 19.67% to 92.94% and control was obtained. The total consideration paid for the purchase was $1,170. This transaction was considered as an acquisition of business achieved in stages and accordingly the purchase method of accounting has been applied. The previously held equity interest has been remeasured with fair value of $494 with reference to the offering price of the shares in the tender offer, and recognized as "Remeasurement gain on equity interest on acquisition of a subsidiary" in the consolidated income statement. The acquired net assets were recorded at their fair value at the date of acquisition.
In November 2010, the Group has further acquired 0.46% interest in Mavrix. As a result, the Group’s ownership interest in Mavrix was increased from 92.94% to 93.4% as at December 31, 2010.
F - 23
12 | ACQUISITION OF A SUBSIDIARY - continued |
The purchase price was allocated as follows:
As of acquisition date | ||||
Intangible assets: | ||||
License | $ | 142 | ||
In-process research and development (note) | 420 | |||
Goodwill | 468 | |||
Net tangible assets acquired | 644 | |||
Remeasurement gain on equity interest | (494 | ) | ||
Noncontrolling interest | (10 | ) | ||
Total purchase consideration | $ | 1,170 | ||
Less: cash and cash equivalent acquired | (233 | ) | ||
Net cash inflow arising on acquisition | $ | 937 |
Note: In-process research and development ("IPR&D") represents the value assigned to acquired research and development project in relation to the Android platform that, as of the date of the acquisition, had not established technological feasibility and had no alternative future use. The IPR&D outlined above is included in "Acquired intangible assets, net" (note 9) in the consolidated balance sheet.
Net sales and results of operations from Mavrix included in the Company's 2010 results since acquisition date as of August 19, 2010 are as follow:
August 19 – December 31, 2010 | ||||
Total revenue | $ | 209 | ||
Net loss | $ | (527 | ) |
The following provides unaudited pro forma net sales and results of operations for the years ended December 31, 2010 and December 31, 2009, as if Mavrix had been acquired on January 1 of each year. The unaudited pro forma results reflect certain adjustments, such as share of loss of Mavrix and impairment loss recognized for Mavrix in 2009. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Mavrix. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of the future operating results of the combined company.
2009 | 2010 | |||||||
(unaudited) | (unaudited) | |||||||
Total revenue | $ | 36,844 | $ | 38,156 | ||||
Net loss attributable to Actions Semiconductor Co., Ltd. | $ | (9,138 | ) | $ | (2,021 | ) | ||
Loss per share attributable to Actions Semiconductor Co., Ltd. | $ | (0.020 | ) | $ | (0.005 | ) |
13. | STOCK OPTIONS |
In May 2007, the Board of Directors approved a stock option plan and reserved 8,000,000 ADSs for issuance upon exercise of awards granted under the plan to the directors of the Company and senior officers, employees, and consultants of the Group. On May 21, 2008, August 4, 2008 and January 21, 2009, the Board of Directors granted to the directors of the Company and senior officers, employees and consultants of the Group options to purchase in the aggregate 8,000,000 ADSs. The options granted under this plan have a requisite service period of mainly four years. The Board of Directors also has the right to terminate any unvested options.
The options vest over four years and expire six years from grant date. For some of the employees, twenty-five percent of the options vest on each of the four years following the grant date. For the other employees, fifteen, twenty, thirty and thirty five percent, respectively, will vest on each of the four years following the grant date.
On February 26, 2009, the Board of directors modified the option plan to reduce the option exercise price from $3.30 to $1.40 and extended the first vesting period to May 21, 2010 for all granted options and as a result extended the vesting period to 5 years from grant date and contractual maturity to 7 years from grant date. The incremental increase in the fair value of the options as a result of the modification of approximately $2,614 is amortized over the remaining vesting period.
In July 2010, the Group revised its estimate of the number of options that are expected to ultimately vest. The number of share options granted expected to vest has been reduced to reflect historical experience of forfeiture of 5% to 10% of options granted prior to completion of vesting period and accordingly the share option expense has been adjusted.
F - 24
13. | STOCK OPTIONS – continued |
A summary of stock option activity is as follows:
For the year ended | ||||||||||||
December 31, 2010 | ||||||||||||
Weighted | Weight | |||||||||||
average | average | |||||||||||
Number | exercise price | fair value | ||||||||||
of options | per option | at grant date | ||||||||||
Outstanding at December 31, 2009 | 7,598,000 | $ | 1.40 | $ | 1.68 | |||||||
Granted on February 3, 2010 | 989,000 | $ | 1.40 | $ | 1.27 | |||||||
Granted on May 13, 2010 | 139,000 | $ | 1.40 | $ | 1.08 | |||||||
Granted on August 3, 2010 | 73,500 | $ | 1.40 | $ | 1.01 | |||||||
Granted on November 2, 2010 | 44,500 | $ | 1.40 | $ | 0.94 | |||||||
Exercised | (225,725) | $ | 1.40 | $ | 1.22 | |||||||
Forfeited | (1,655,600) | $ | 1.40 | $ | 1.71 | |||||||
Outstanding at December 31, 2010 | 6,962,675 | $ | 1.40 | $ | 1.22 |
The following table summarizes information with respect to stock options outstanding at December 31, 2009 and 2010:
Options exercisable | |||||||||||||||||||||||||
Options outstanding as of December 31, 2009 | as of December 31, 2009 | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Weighted | average | average | |||||||||||||||||||||||
average | exercise | Aggregate | Number | exercise | Aggregate | ||||||||||||||||||||
Number | contractual | price | intrinsic | of | price | intrinsic | |||||||||||||||||||
of option | period | per option | value | options | per option | value | |||||||||||||||||||
Ordinary shares | 7,598,000 | 5 years | $ | 1.40 | $ | 1.51 | - | - | - |
Options exercisable | |||||||||||||||||||||||||
Options outstanding as of December 31, 2010 | as of December 31, 2010 | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Weighted | average | average | |||||||||||||||||||||||
average | exercise | Aggregate | Number | exercise | Aggregate | ||||||||||||||||||||
Number | contractual | price | intrinsic | of | price | intrinsic | |||||||||||||||||||
of option | period | per option | value | options | per option | value | |||||||||||||||||||
Ordinary shares | 6,962,675 | 5 years | $ | 1.40 | $ | 4.97 | 1,098,300 | $ | 1.40 | $ | 1.27 |
As at December 31, 2010, 1,373,325 options to purchase ordinary Shares were available for future grant.
F - 25
13. | STOCK OPTIONS - continued |
The fair value of each option award is estimated at grant date during 2010 using the Black-Scholes option-pricing model based on the following assumptions:
Year ended December 31 | 2010 | 2009 | |||
Risk-free interest rate (1) | 0.34% - 2.66% | 0.96% - 2.66% | |||
Expected life (2) | 2-5 years | 2-5 years | |||
Expected volatility (3) | 44.12%-48.30% | 47.41% - 48.30% | |||
Dividend yield (4) | Nil | Nil |
(1) | Risk-free interest rate |
Risk-free interest rate adopted the yield to maturity of United States government bonds with the same maturity as the respective expected term of the options.
(2) | Expected life |
The expected life was estimated as the average between the vesting term of the options and the original contractual term.
(3) | Expected volatility |
The expected volatility of the underlying ADS during the life of the options was calculated based on the Company's historical stock price volatility over the period from initial public offering through to the grant date.
(4) | Dividend yield |
The dividend yield was expected to be nil based on the Company's historical dividend distribution record and its policy.
(5) | Share price |
The fair value of the ordinary shares on the grant date was the closing price of the Company's stock at each grant date.
For the year ended December 31, 2010, the Group recognized $2, $1,067, $404, $59, of compensation expense in cost of revenue, research and development expenses, general and administrative expenses, and selling and marketing expenses, respectively. A total of $2,364 of unrecognized compensation expense related to non-vested stock options as of December 31, 2010 are expected to be recognized over a weighted-average period of 2.7 years on a straight-line basis.
F - 26
14. | OTHER INCOME/LOSS |
Other income for 2008 and 2010 mainly consisted of foreign exchange gain of $1,159 and $2,348 respectively, while the other loss for 2009 mainly represented foreign exchange loss of $654.
15. | OTHER-THAN-TEMPORARY IMPAIRMENT |
All investments are evaluated for impairment periodically or if the Group becomes aware of an event that indicates that the carrying amount of the asset may not be recoverable. To determine whether a decline in value below the carrying amount of an asset is other-than-temporary, the Group considers whether it has the ability and intent to hold the debt instrument until a market price recovery occurs or whether evidence indicating that the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the decline in fair value, the severity and duration of the decline in realizable value below cost, changes in value subsequent to the balance sheet date, as well as forecasted performance of the investee. If a decline in value below the carrying amount is determined to be other-than-temporary, the asset is written down to fair value through an impairment charge recognized in the earnings and a new cost basis is established.
In 2009, the Group recorded other-than-temporary impairment losses related to two unlisted equity securities issued by two private entities ("Investees"). The management of the Group has assessed that the decline in value is other-than-temporary, thus impairment losses of approximately $1,010 and $3,000 have been recognized respectively and the investments in these unlisted equity securities are written down to approximately $1,740 and nil as of December 31, 2009. The Group also assessed that there was a decline in value of the investment in a former equity method investee, Mavrix (note 12), which is determined to be other-than-temporary, thus, an impairment loss of approximately $3,397 has been recognized and the investment in Mavrix was written down to nil as at December 31, 2009.
No further other-than-temporary impairment loss was recognized as at December 31, 2010.
F - 27
16. | INCOME TAXES |
The components of income before income taxes, equity in net loss of equity method investees and noncontrolling interest are as follows:
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Domestic | $ | (2,183 | ) | $ | (5,811 | ) | $ | (3,593 | ) | |||
Foreign | 32,348 | (3,488 | ) | 4,650 | ||||||||
$ | 30,165 | $ | (9,299 | ) | $ | 1,057 |
The Company and Mavrix are tax exempt in the Cayman Islands.
Under the current Mauritius law and Hong Kong Inland Revenue Rule, Actions Semiconductor Mauritius' and Artek Microelectronics (HK) Co., Limited's income are subject to taxation; however, up to and as of December 31, 2010, both entities have not had any taxable profits. Actions Semiconductor Shanghai, Actions Enterprise (HK) Co., Ltd., Actions Technology Shanghai, Actions Microelectronics Co., Ltd, Actions Capital Investment Inc. and Actions Malaysia have been loss making since their incorporation. Mavrix HK and Mavrix Shanghai have been loss making since the date of acquisition.
Effective January 1, 2008, the new "Law of the People's Republic of China on Enterprise Income Tax" was implemented. The new law requires that:
1. | For all resident enterprises, domestic or foreign, the unified Enterprise Income Tax rate is unified 25%. |
2. | Enterprises that are categorized as the "High Tech Enterprise" will have a reduced tax rate of 15%. |
3. | From January 1, 2008 onwards, enterprises that enjoyed a preferential tax rate will need to adopt the new law over the next five years. Enterprises with a current preferential tax rate of 15% were subject to tax rates of 18% and 20% for the years ended December 31, 2008 and 2009 and will be subject to 22%, 24% and 25% for the years ending December 31, 2010, 2011 and 2012 respectively. |
The new law allows the preferential tax treatment to be continued by enterprises up until the year when it expires. For enterprises that have preferential tax treatment, all preferential tax treatments were required to be commenced in 2008.
F - 28
16. | INCOME TAXES - continued |
Actions Semiconductor Zhuhai
As at December 31, 2008, companies in PRC were generally subject to a 30% foreign enterprise income tax ("FEIT"), and a 3% local income tax. However, Actions Semiconductor Zhuhai was established in the Zhuhai Special Economic Zone ("Zhuhai Economic Zone") of China as a foreign investment enterprise and principally conducts its business operations in this Zhuhai Economic Zone. Therefore, it was subject to a reduced EIT rate of 15%. In addition, Actions Semiconductor Zhuhai is a production oriented enterprise and exempted from FEIT for its first two years of profitable operations after offsetting prior years' tax losses and entitled to 50% reduction in its FEIT for the following three years as approved by the tax authorities in accordance with the China Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises and its Implementation Rules issued in 1991. Actions Semiconductor Zhuhai was exempt from 3% local income tax during the above preferential tax treatment period of five years pursuant to the Rules Concerning Exemption or Reduction of Local Income Tax for Foreign Invested Enterprises issued by the People's Government of Guangdong Province issued in 1992.
Actions Semiconductor Zhuhai had a 50% reduction in EIT rate, which resulted in 9% from the statutory tax rates of 18% for the year ended December 31, 2008.
On December 16, 2008, certificate of "Hi-Tech Enterprises" was granted to Actions Semiconductor Zhuhai. As a result, the applicable tax rates were 15% for the years ended December 31, 2009 and 2010, respectively. Unless Actions Semiconductor Zhuhai continues its certification as a “Hi-Tech Enterprise” by the end of 2011, it will be subject to a 24% tax rate in 2011 and a 25% tax rate starting in 2012.
Artek Microelectronics Shenzhen
Artek Microelectronics Shenzhen was established in the Shenzhen Special Economic Zone ("Shenzhen Economic Zone") of China as a foreign investment enterprise and principally conducts its business operations in this Shenzhen Economic Zone. Therefore, it was subject to the reduced FEIT rate of 15% and is exempted from FEIT or EIT in the years ended December 31, 2007 and 2008, which were the first and second year Artek Microelectronics Shenzhen had profits after offsetting prior years' tax losses. Artek Microelectronics Shenzhen started using the tax preferential treatment in 2007. As such, it was exempted from income tax in 2007 and 2008. From 2009 to 2011, the income tax rate started to be reduced by 50%. Thus the income tax were 10% and 11%, and will be 12% for the years ended December 31, 2009, 2010, and 2011, respectively. If Artek Microelectronics Shenzhen obtains the certificate of "Hi-Tech Enterprise" by the end of 2012, an income tax rate of 15% will be applied for the years ended 2012, 2013 and 2014. Otherwise, the statutory income tax rate of 25% will applying starting 2012. In addition, Artek Microelectronics Shenzhen is exempted from 3% local income tax during the above preferential tax treatment period of five years pursuant to the Rules Concerning Exemption or Reduction of Local Income Tax for Foreign Invested Enterprises issued by the People's Government of Guangdong Province issued in 1992.
F - 29
16. | INCOME TAXES - continued |
Tax residency
Uncertainties exist with respect to how China's current income tax law applies to our overall operations, and more specifically, with regard to tax residency status. China's Enterprise Income Tax Law ("EIT Law") became effective January 1, 2008 and includes a provision specifying that legal entities organized outside China will be considered residents for Chinese income tax purposes if their place of effective management or control is within China. The Implementation Rules to the EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. occurs within China. Additional guidance is expected to be released by the Chinese government in the near future that may clarify how to apply this standard to taxpayers. The Group determined that legal entities organized outside China should not be treated as China tax residents for EIT Law purposes as the places of effective management are outside China. If one or more of our legal entities organized outside China were characterized as China tax resident, then the additional tax cost might be insignificant.
The Company's calculation of income taxes generally reflects the Company's status as a non-PRC tax resident company. The tax residency of a company is normally a question of fact. For a company which has been established outside the PRC, will be treated as a PRC tax resident if the location of effective management of the Company is in the PRC. PRC for this purpose does not include Hong Kong, Macao, or Taiwan.
An additional consequence of the Company and/or its non-PRC subsidiaries being tax resident in the PRC would be the taxability in the PRC of the non-PRC tax resident recipients of certain payments made by the Company. This may include dividends, interest, and royalties.
The Company, which has subsidiaries that are tax resident in the PRC, will be subject to the PRC dividend withholding tax of 5% when and if undistributed earnings are declared to be paid as dividends commencing on January 1, 2008 to the extent those dividends are paid out of profits that arose on or after January 1, 2008. The Company's tax provision includes $2,286 of income tax expense for the 5% dividend withholding tax on the balance of distributable profits that arose on or after January 1, 2008 within its PRC subsidiaries as of the balance sheet date.
Actions Hong Kong and Artek Microelectronics (HK) Co., Limited are subjected to Hong Kong Profits Tax at a rate of 16.5% for the year ended December 31, 2008, 2009 and 2010 respectively.
The current and deferred components of the income tax expense appearing in the consolidated statements of operations are as follows:
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Current tax | $ | 1,521 | $ | 53 | $ | 3 | ||||||
Deferred tax | 2,111 | 484 | 419 | |||||||||
$ | 3,632 | $ | 537 | $ | 422 |
F - 30
16. | INCOME TAXES – continued |
Tax residency – continued
The Group's deferred tax assets and liabilities as at December 31, 2009 and 2010 are attributable to the following:
At December 31, | ||||||||
2009 | 2010 | |||||||
Expenditures deductible for tax purpose in future years | ||||||||
- Accrued legal and professional fees | $ | 12 | $ | 28 | ||||
- Accrued bonus | 197 | 261 | ||||||
- Other | 105 | 48 | ||||||
Tax losses | 660 | 1,002 | ||||||
Depreciation and amortization | 206 | 150 | ||||||
Total deferred tax assets | $ | 1,180 | $ | 1,489 | ||||
Valuation allowance | (660 | ) | (1,002) | |||||
Deferred tax assets | 520 | 487 | ||||||
Income taxable for tax purpose in future years | ||||||||
- Interest income | (284 | ) | (446 | ) | ||||
Deferred tax liability arising from withholding tax on undistributed profits | (2,058 | ) | (2,286 | ) | ||||
Total deferred tax liabilities | (2,342 | ) | (2,732 | ) | ||||
Deferred tax assets (liabilities), net | $ | (1,822 | ) | $ | (2,245 | ) |
The following is the analysis of deferred tax balances for reporting purposes:
At December 31, | ||||||||
2009 | 2010 | |||||||
Deferred tax assets | ||||||||
Current | $ | 371 | $ | 399 | ||||
Non-current | 149 | 88 | ||||||
$ | 520 | $ | 487 | |||||
Deferred tax liabilities | ||||||||
Current | $ | (284 | ) | $ | (446 | ) | ||
Non-current | (2,058 | ) | (2,286 | ) | ||||
$ | (2,342 | ) | (2,732 | ) | ||||
Deferred tax assets (liabilities), net | $ | (1,822 | ) | $ | (2,245 | ) |
A valuation allowance has been provided for the tax loss of $2,593, $1,212 and $1,042 of Actions Semiconductor Shanghai, Actions Semiconductor Zhuhai and Actions Hong Kong respectively since realization of the recorded deferred tax assets is dependent on generating sufficient taxable income. The tax loss of Actions Semiconductor Shanghai, Actions Semiconductor Zhuhai and Actions Hong Kong may carry forward till 2013 to 2015, 2014 to 2015 and indefinitely, respectively. As the management does not believe that it is more likely than not that all of the deferred tax asset attributable to Actions Semiconductor Shanghai, Actions Semiconductor Zhuhai and Actions Hong Kong will be realized, valuation allowance of $660 and $1,002 has been established as of December 31, 2009 and December 31, 2010, respectively for the related deferred tax asset of these subsidiaries.
F - 31
16. | INCOME TAXES – continued |
Tax residency – continued
The additional tax that would have been payable in the absence of the tax exemption and preferential income tax rate amounts to approximately $5,036, $99, and $473 for the years ended December 31, 2008, 2009 and 2010, respectively. It represents a decrease in the basic and diluted earnings per ordinary share of $0.010, $0.001 and $0.001 for the years ended December 31, 2008, 2009 and 2010, respectively
The Group has made its assessment of the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical merits, and has measured the unrecognized tax benefits associated with the tax positions. Based on the evaluation by the Group, it is concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements. The Group classifies interest and/or penalties related to unrecognized tax benefits as a component of income tax expense; however, as of December 31, 2009 and 2010, there is no interest and penalties related to uncertain tax positions. The Group has no material unrecognized tax benefit which would favorably affect the effective income tax rate in next 12-months periods. The Group does not anticipate any significant increases or decreases to its liability for unrecognized tax benefit within the next twelve months. The tax positions for the years 2008 to 2010 may be subject to examination by the PRC and Hong Kong tax authorities.
A reconciliation between the provision for income tax computed by applicable PRC enterprise income tax rate to income before income taxes, equity in net loss of equity method investees and noncontrolling interest, and actual provision for income taxes is as follows:
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
PRC tax rate | 18 | % | 25 | % | 25 | % | ||||||
Tax provision (credit) at PRC enterprise income tax rate | $ | 5,430 | $ | (2,325 | ) | $ | 264 | |||||
Expenses not deductible for tax purpose | 1,091 | 2,825 | 260 | |||||||||
Share-based compensation not deductible for tax purpose | 413 | 601 | 1,532 | |||||||||
Income not taxable for tax purposes | (431 | ) | (178 | ) | (981 | ) | ||||||
Net change in valuation allowance | 570 | (320 | ) | 342 | ||||||||
Effect of tax exemption and preferential income tax rate granted to PRC subsidiaries | (5,036 | ) | (99 | ) | (473 | ) | ||||||
Effect of the different income tax rates in other jurisdictions | (138 | ) | (323 | ) | (145 | ) | ||||||
Effect of withholding tax on undistributed earnings | 1,738 | 320 | 229 | |||||||||
Utilization of tax loss previously not recognized | - | - | (341 | ) | ||||||||
Overprovision in prior year | - | - | (264 | ) | ||||||||
Others | (5 | ) | 36 | (1 | ) | |||||||
Income tax expense | $ | 3,632 | $ | 537 | $ | 422 |
F - 32
17. | NET INCOME (LOSS) PER SHARE |
The calculations of basic and diluted earnings per share are computed as follows:
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Net income (loss) attributable to Actions Semiconductor Co., Ltd. | $ | 26,123 | $ | (10,398 | ) | $ | 384 | |||||
Shares: | ||||||||||||
Weighted average shares outstanding used in computing basic net income (loss) per share | 501,763,805 | 460,812,477 | 438,401,072 | |||||||||
Effect of dilutive securities: | ||||||||||||
Weighted average shares from assumed exercise of stock options and issuance of ordinary shares | - | - | 16,167,778 | |||||||||
Weighted average shares outstanding used in computing diluted net income (loss) per share | 501,763,805 | 460,812,477 | 454,568,850 | |||||||||
Net income (loss) per share, basic | $ | 0.052 | $ | (0.023 | ) | $ | 0.001 | |||||
Net income (loss) per share, diluted | $ | 0.052 | $ | (0.023 | ) | $ | 0.001 |
The Company has no dilutive potential shares that are outstanding for the years ended December 31, 2008.
The calculation of the diluted loss per share for the year ended December 31, 2009 excluded options to purchase 7,598,000 shares because their effects were anti-dilutive.
18. | SEGMENT AND GEOGRAPHIC INFORMATION |
The Group's chief operating decision maker has been identified as the Chief Executive Officer. The Group does not specifically identify and allocate any assets by operating segment nor does management evaluate operating segment using discrete asset information. The chief operating decision maker uses gross profit margin of different products and services when making decisions about allocating resources and assessing performance of the Group so as to allocate operating expenses to each reporting segment.
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Revenue: | ||||||||||||
SoC for portable media players | $ | 94,916 | $ | 43,937 | $ | 37,434 | ||||||
Testing solutions | 214 | 203 | 151 | |||||||||
$ | 95,130 | $ | 44,140 | $ | 37,585 | |||||||
Gross profit: | ||||||||||||
SoC for portable media players | $ | 47,668 | $ | 13,844 | $ | 14,588 | ||||||
Testing solutions | 37 | 86 | 70 | |||||||||
$ | 47,705 | $ | 13,930 | $ | 14,658 |
Geographic information
The Group operates in China/Hong Kong and all of the Group's long-lived assets are located in China/Hong Kong and substantially all of our sales are made in China/Hong Kong.
19. | COMMITMENTS AND CONTINGENCIES |
(a) | Operating leases |
The Group leases certain office premises under non-cancelable leases with terms that range from one to two years and are renewable subject to negotiation. Rental expense under operating leases for the years ended December 31, 2008, 2009 and 2010 was $885, $904 and $648, respectively.
Future minimum lease payments under non-cancelable operating lease agreements as of December 31, 2010 were $303 of which $264 and $39 are payable in the years ended December 31, 2011 and 2012, respectively.
(b) | Capital commitments |
Capital commitments for purchase of property, plant and equipment as of December 31, 2009 and 2010 was $8,374 and $4,866 respectively.
F - 33
19. | COMMITMENTS AND CONTINGENCIES - continued |
(c) | Royalty fee commitments |
The Group has entered into two royalty agreements for the use of certain technology knowhow ("Technology Knowhow") used in the Group's products.
Technology Knowhow A
As of December 31, 2009, the agreement with Technology Knowhow A provider allowed the Group to have unlimited use of Technology Knowhow A for a sum of $615. The royalty fee was based on the total number of units shipped by the Company. The agreement was effective until June 23, 2010.
In June 2010, the Group revised its agreement, which allowed the Company to have unlimited use of Technology Knowhow A for a sum of $1,100. The royalty fee is based on the total number of units shipped by the Company. The June 2010 New Agreement is effective for period from June 24, 2010 to June 23, 2011.
Technology Knowhow B
As of December 31, 2009, the agreement with Technology Knowhow B provider allowed the Group to have unlimited use of Technology Knowhow B with minimum quarterly royalty-fee commitment of $50. The agreement was effective until September 30, 2010.
In October 2010, the Group revised the agreement, whose terms and conditions were the same as the 2009 agreements. The October 2010 New Agreement is effective for period from October 1, 2010 to September 30, 2011.
The Group's total royalty expenses paid for the use of all Technology Knowhow for the years ended December 31, 2008, 2009 and 2010 amounted to $426, $536 and $360, respectively. Royalty commitment as of December 31, 2009 and 2010 was same as $150.
F - 34
19. | COMMITMENTS AND CONTINGENCIES - continued |
(d) | Contingencies |
Two of the Group's former advisors have filed a compliant in the U.S. District Court for the Southern District of California against the Group on August 17, 2006, seeking compensatory damages for services rendered. The Group has filed a motion to dismiss the complaint on the grounds that it is not subject to personal jurisdiction in California and that the Peoples' Republic of China would be the more appropriate forum for this litigation. The motion was granted on January 30, 2009 and a judgment of dismissal was entered in favor of the Group and its subsidiaries on February 4, 2009 by District Court for the Southern District of California. The former advisors have appealed the dismissal to the United States Court of Appeals.
On July 6, 2010, the United States Court of Appeals issued a memorandum which affirmed the District Court for the Southern District of California has correctly discussed the case of lack of personal jurisdiction in California.
The Group has assessed the legal position and believed that the probability of re-opening the case is remote. Accordingly, no provision has been made in the consolidated financial statements.
20. | MAJOR CUSTOMERS |
The Group primarily sells to customers located in China/Hong Kong.
The following table summarizes net revenues and accounts receivable for customers, which accounted for 10% or more of the Group's net revenues and accounts receivable:
Net revenues | ||||||||||||
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Customer A | 17 | % | - | - | ||||||||
Customer B | 26 | % | 28 | % | 20 | % | ||||||
Customer C | - | - | 10 | % | ||||||||
Customer D | - | - | 15 | % | ||||||||
Customer E | - | - | 20 | % | ||||||||
43 | % | 28 | % | 65 | % |
Accounts receivable | ||||||||
At December 31, | ||||||||
2009 | 2010 | |||||||
Customer A | 14 | % | - | |||||
Customer B | 22 | % | 23 | % | ||||
Customer C | 18 | % | 18 | % | ||||
Customer D | 20 | % | 24 | % | ||||
Customer E | 13 | % | - | |||||
Customer F | - | 10 | % | |||||
87 | % | 75 | % |
F - 35
21. | EMPLOYEE BENEFIT PLAN |
Full time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries. Employees of the Group in Hong Kong have joined the Mandatory Provident Fund ("MPF") Scheme which is also a defined contribution plan. The contribution to the MPF Scheme is calculated based on the rules set out in the MPF Ordinance in Hong Kong which is 5% on the relevant income of the employee with a specific ceiling. The total provisions for these employee benefits were $1,665, $2,059 and $1,918 for the years ended December 31, 2008, 2009 and 2010, respectively.
22. | RELATED PARTY TRANSACTIONS |
During the year ended December 31, 2009 and 2010, the Group recognized net sales of $12,455 and $7,495 from G.M.I. Technology Inc. ("GMI") respectively. As of December 31, 2009 and 2010, amount due from a related party represented an account receivable from GMI of $530 and $559 respectively. GMI's president is a family member of one of the Group's Directors.
As of December 31, 2009 and 2010, the Group had an amount due from an equity method investee, Beijing Actions, of $492 and $94, respectively.
23. | SUBSEQUENT EVENTS |
In February 2011, Beijing Actions increased its injected capital and of which the Group further invested $2,600. Upon the completion of this capital injection process, the Group's ownership interest in Beijing Actions is increased from 35% to 45.8% and continues its significant influence in Beijing Actions.
24. | MAINLAND CHINA PROFIT APPROPRIATION AND RESTRICTION ON CAPITAL REPATRIATION |
Pursuant to the laws applicable to the PRC's Foreign Investment Enterprises, the Company's subsidiaries in the PRC registered as foreign-owned enterprise must make appropriations from after-tax profit to non-distributable reserve funds as determined by the Board of Directors of the relevant PRC subsidiary. These reserves include a (1) general reserve, (2) enterprise expansion fund and (3) staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each year-end); the other fund appropriations are at the Group's discretion. These reserve funds can only be used for specific purposes and are not distributable as cash dividends. As of December 31, 2009 and 2010, the balance of these of the Company's PRC subsidiaries reserves amounted to $12,294 and $12,499, respectively.
In addition to these reserves, the registered capital of the Company's PRC subsidiaries is also restricted. As of December 31, 2009 and 2010, the total amount of the restricted capital and reserves amounted to $123,834 and $113,941, respectively.
F - 36
SCHEDULE 1
BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data)
At December 31, | ||||||||
2009 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,166 | $ | 1,068 | ||||
Amounts due from subsidiaries | 12,273 | 12,648 | ||||||
Prepaid expenses and other current assets | 123 | 35 | ||||||
Total current assets | 13,562 | 13,751 | ||||||
Investments in subsidiaries | 364,969 | 377,620 | ||||||
Deposit paid for acquisition of property, plant and equipment | - | 1,100 | ||||||
TOTAL ASSETS | 378,531 | 392,471 | ||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accrued expenses and other current liabilities | $ | 769 | $ | 799 | ||||
Amounts due to subsidiaries | 104,451 | 120,967 | ||||||
Total liabilities | $ | 105,220 | $ | 121,766 | ||||
Equity: | ||||||||
Ordinary shares of par value $0.000001: | ||||||||
2,000,000,000 shares authorized 427,705,308 (2009: 450,563,676) shares issued and outstanding | $ | 1 | $ | 1 | ||||
Additional paid-in capital | 31,423 | 24,252 | ||||||
Accumulated other comprehensive income | 20,239 | 24,420 | ||||||
Retained earnings | 221,648 | 222,032 | ||||||
Total equity | 273,311 | 270,705 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 378,531 | $ | 392,471 |
F - 37
STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data)
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Operating expenses: | ||||||||||||
Research and development | $ | (387 | ) | $ | (2,751 | ) | $ | (1,004 | ) | |||
General and administrative | (4,240 | ) | (3,186 | ) | (2,357 | ) | ||||||
Selling and marketing | - | (196 | ) | (46 | ) | |||||||
Total operating expenses | (4,627 | ) | (6,133 | ) | (3,407 | ) | ||||||
Loss from operations | (4,627 | ) | (6,133 | ) | (3,407 | ) | ||||||
Interest income | 206 | 5 | - | |||||||||
Loss before income taxes | (4,421 | ) | (6,128 | ) | (3,407 | ) | ||||||
Share of net loss of an equity method investee | - | - | (81 | ) | ||||||||
Share of net income (loss) of subsidiaries, net of taxes | 30,531 | (4,586 | ) | 4,058 | ||||||||
Investment income(loss) | 13 | 316 | (186 | ) | ||||||||
Net income (loss) | $ | 26,123 | $ | (10,398 | ) | $ | 384 |
F - 38
STATEMENTS OF EQUITY
AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data)
Accumulated | Accumulated | |||||||||||||||||||||||||||
other | (deficit) | |||||||||||||||||||||||||||
Ordinary shares | Additional | comprehensive | retained | Comprehensive | ||||||||||||||||||||||||
Number | Amount | paid-in capital | income | earnings | Total | income (loss) | ||||||||||||||||||||||
Balance at January 1, 2008 | 508,178,118 | $ | 1 | $ | 43,679 | $ | 9,628 | $ | 205,923 | $ | 259,231 | $ | 56,873 | |||||||||||||||
Repurchase of ordinary shares | (22,676,244 | ) | - | (9,368 | ) | - | - | (9,368 | ) | - | ||||||||||||||||||
Share-based compensation | - | - | 2,295 | - | - | 2,295 | - | |||||||||||||||||||||
Share of subsidiaries reserve | - | - | - | 10,855 | - | 10,855 | 10,855 | |||||||||||||||||||||
Net income | - | - | - | - | 26,123 | 26,123 | 26,123 | |||||||||||||||||||||
Balance at December 31, 2008 | $ | 485,501,874 | $ | 1 | $ | 36,606 | $ | 20,483 | $ | 232,046 | $ | 289,136 | $ | 36,978 | ||||||||||||||
Repurchase of ordinary shares | (34,938,198 | ) | - | (10,130 | ) | - | - | (10,130 | ) | - | ||||||||||||||||||
Share-based compensation | - | - | 4,006 | - | - | 4,006 | - | |||||||||||||||||||||
Share of subsidiaries reserve | - | - | - | (244 | ) | - | (244 | ) | (244 | ) | ||||||||||||||||||
Dilution of subsidiary share | - | - | 941 | - | - | 941 | - | |||||||||||||||||||||
Net income | - | - | - | - | (10,398 | ) | (10,398 | ) | (10,398 | ) | ||||||||||||||||||
Balance at December 31, 2009 | 450,563,676 | $ | 1 | $ | 31,423 | $ | 20,239 | $ | 221,648 | $ | 273,311 | $ | (10,642 | ) | ||||||||||||||
Repurchase of ordinary shares | (24,212,718 | ) | - | (9,019 | ) | - | - | (9,019 | ) | - | ||||||||||||||||||
Exercise of stock option | 1,354,350 | - | 316 | - | - | 316 | - | |||||||||||||||||||||
Share-based compensation | - | - | 1,532 | - | - | 1,532 | - | |||||||||||||||||||||
Share of subsidiaries reserve | - | - | - | 4,181 | - | 4,181 | 4,181 | |||||||||||||||||||||
Net income | - | - | - | - | 384 | 384 | 384 | |||||||||||||||||||||
Balance at December 31, 2010 | 427,705,308 | $ | 1 | $ | 24,252 | $ | 24,420 | $ | 222,032 | $ | 270,705 | $ | 4,565 |
F - 39
STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Operating activities: | ||||||||||||
Net income (loss) | $ | 26,123 | $ | (10,398 | ) | $ | 384 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Amortisation of acquired intangible assets | 387 | 276 | - | |||||||||
Share-based compensation | 2,295 | 4,006 | 1,532 | |||||||||
Share of net (income) loss of subsidiaries | (30,531 | ) | 4,586 | (4,058 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Prepaid expenses and other current assets | 26 | 31 | 88 | |||||||||
Accrued expenses and other current liabilities | (531 | ) | (49 | ) | 30 | |||||||
Amounts due to subsidiaries | 13,302 | 57,465 | 16,516 | |||||||||
Net cash provided by operating activities | 11,071 | 55,917 | 14,492 | |||||||||
Investing activities: | ||||||||||||
Capital contribution in subsidiaries | (11,588 | ) | (36,714 | ) | (4,412 | ) | ||||||
Increase in amounts due from subsidiaries | (782 | ) | (10,875 | ) | (375 | ) | ||||||
(Increase) decrease in deposit paid for acquisition of property, plant and equipment | (275 | ) | 275 | (1,100 | ) | |||||||
Net cash used in investing activities | (12,645 | ) | (47,314 | ) | (5,887 | ) | ||||||
Financing activities: | ||||||||||||
Repurchase of ordinary shares | (9,368 | ) | (10,130 | ) | (9,019 | ) | ||||||
Proceeds from exercise of stock options | - | - | 316 | |||||||||
Net cash used in financing activities | (9,368 | ) | (10,130 | ) | (8,703 | ) | ||||||
Net decrease in cash and cash equivalents | (10,942 | ) | (1,527 | ) | (98 | ) | ||||||
Cash and cash equivalents at the beginning of the year | 13,635 | 2,693 | 1,166 | |||||||||
Cash and cash equivalents at the end of the year | 2,693 | 1,166 | 1,068 |
F - 40
NOTES TO SCHEDULE 1
1. | Schedule 1 |
Schedule 1 has been provided pursuant to the requirements of Rule 12-04(a) and 4-08(e)(3) of Regulation S-X, which require condensed financial information as to financial position, changes in financial position and results and operations of a parent company as of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of the consolidated and unconsolidated subsidiaries together exceed 25 percent of consolidated net assets as of end of the most recently completed fiscal year.
As of December 31, 2009 and 2010, $123,834 and $113,941 of the restricted capital and reserves are not available for distribution, and as such, the condensed financial information of the Company has been presented for the years ended December 31, 2008, 2009 and 2010.
2. | Basis of preparation |
The condensed financial information has been prepared using the same accounting policies as set out in the Group's consolidated financial statements except that the parent company has used equity method to account for its subsidiaries.
F - 41