Securities and exchange commission


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For the years ended December 31, 2008, 2009, and 2010, our net sales of Network Security Group were mainly  derived from Asia and amounted to $3,774,000, $3,104,000, and $1,946,000, respectively.
The table below sets forth, for the periods indicated, the dollar amount of our net sales by category of activity.
 

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Years Ended December 31

 

 

 

2008

 

 

2009

 

 

2010

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Integrated Circuit Group

 

$

135,438

 

 

$

124,294

 

 

$

137,789

 

Network Security Group

 

 

3,387

 

 

 

3,204

 

 

 

1,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

138,825

 

 

$

127,498

 

 

$

139,735

 

 

In November 2010, we commenced a plan to terminate our Network Security Group and initiated shutdown activities associated with this group and therefore, the result of our Network Security Group was reported as discontinued operations in the consolidated financial statements for the years ended December 31, 2008, 2009, and 2010.

 

We generally extend to our customers credit terms varying from 40 to 60 days. We may adjust our usual credit terms according to each customer’s credit history as well as local market practice. Our customers generally pay us either by direct wire transfer or under letter of credit arrangement. To date, we have not experienced any material problems relating to customer payments or material write-offs of accounts receivable due to uncollectability.

 

Manufacturing

 

We subcontract the manufacture of our products and most of the testing for our products to semiconductor foundries, assembly and testing service providers. This “fabless” approach allows us to focus on product development, reduce fixed costs and capital expenditures, and access diverse manufacturing technologies.

 

We use established mainstream processes for the manufacture of our products. This approach reduces our technical risks and minimizes the risks related to production capacity constraints.

 

Wafer Manufacturing

 

Wafer manufacturing is a capital intensive and complex operation which takes place at dedicated facilities of semiconductor foundries. After we have designed our integrated circuits, we place orders with a semiconductor foundry to fabricate wafers with our integrated circuits embedded in them. The semiconductor foundry purchases raw unprocessed wafers, or silicon substrates, and processes them according to mutually agreed manufacturing specifications to fabricate the wafers used in our products. Currently, the majority of our wafers are fabricated using 0.18 to 1.0 micron CMOS semiconductor processes. The wafer fabrication process generally takes 6 to 10 weeks. Fabricated wafers are then shipped by the semiconductor foundry, according to our instructions, to either an assembly service provider or to an electrical wafer sort service provider.

Our major semiconductor foundry providers are CR Micro, X-FAB, and SMIC. We do not enter into long-term contracts with our semiconductor foundry providers. They manufacture our products on a purchase-order basis in accordance with our specifications and requirements. In general, the cost charged to us for the foundry services depends on the manufacturing process technologies as well as order size and foundry capacity utilization.

 

Assembly and Testing

 

The fabricated wafers may or may not require electrical wafer sort prior to assembly. The completed wafers are either sent to an assembly service provider for assembly or held at our warehouse facilities, or an “inventory hub,” for assembly at a later date. An inventory hub is a provider of warehousing services. We often hold inventory of our semi-finished products in wafer form because it is at this manufacturing stage that most time has been invested, with much of the cost not yet incurred, and we then have the flexibility of choosing the type of packaging into which they are to be assembled. The wafer sort and assembly process generally takes three to six weeks.

 

         Once our integrated circuits are assembled and packaged, they are ready for final electrical testing. We instruct the assembly service provider to send our packaged integrated circuits to a testing service provider for final testing or our warehouse facilities (or an inventory hub) for testing at a later date. The electrical testing process generally takes a few days. Once our products have been tested, they are ready for use by our customers.

 

Finished products may be sent to our customers or their designees such as third party service providers that manufacture their products or a portion of their products containing our integrated circuits. Our customers may request for our integrated circuits to be shipped in plastic tubes or trays, several to a tube or tray, or use a form of packaging called “tape and reel” that more readily provides for automated assembly of our integrated circuits into their products. If a customer orders “tape and reel” packaging, this is done either at a testing service provider or a “tape and reel” service provider prior to shipment of our products to the customer.

 

We utilize several assembly and testing service providers in Taiwan, China and other parts of Asia on a purchase order basis. They assemble and test our products based on our specifications and requirements. In general, the cost charged to us for these assembly and testing services depends on prevailing market rates for these services and our relationship with the service provider. Typically analog and mixed-signal products have a greater portion of their product cost associated with product testing

 

 

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than digital products. We also operated a semiconductor testing facility to test a portion of our products prior to shipment.

 

Our current credit terms with our foundry, assembly and testing service providers vary from 30 to 45 days, depending on our relationships with each of them. We generally pay our service providers by direct wire transfer.

 

We also have made investments in certain of our current suppliers and potential future suppliers, including software developers, foundries and testing service providers. These investments enable us to enhance our business relationships with these suppliers to ensure the adequacy of foundry capacity allocation and quality of services provided to us. We plan to continue to evaluate additional investment opportunities in our supply chain.

 

Competition

 

We compete in the market for analog and mixed-signal integrated circuits based on such factors as product performance, power efficiency, new technologies, functional innovation, reliability, price and availability. We believe our principal competitors include Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc., Microsemi Corporation, Monolithic Power Systems, Inc., Ricoh Company, Ltd., Richtek Technology Corporation, Rohm Co., Ltd and Texas Instruments Incorporated.  There is also competition from internal integrated circuit design and manufacturing capabilities of some of our existing and potential customers, such as Toshiba and Fujitsu.  In addition to these competitors, other integrated circuit companies may decide to enter the market with analog and mixed-signal integrated circuit products that compete with our products or incorporate functions similar to those provided by our products.
Intellectual Property

 

Our intellectual property is primarily developed in-house. We do, from time to time, acquire intellectual property from third parties which we believe is instrumental or complementary to our business. We also on occasion license our intellectual property to third parties in exchange for royalties or other consideration.  From time to time, we may seek acquisitions to acquire businesses or technologies where synergies exist. Our success depends significantly upon our ability to protect our intellectual property.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.  Competitors may recruit our employees who have access to our proprietary technologies, processes and operations.

 

We rely in part on patents to protect our intellectual property.  As of December 31, 2010, we had approximately 269 patents issued in the United States and approximately 494 patents issued in other countries.  In addition, we had approximately 226 patent applications pending in the United States Patent and Trademark Office, and approximately 578 patent applications pending in various countries other than the United States which may or may not be issued. Even if these patents are issued, taken together with our existing patents, they may not be sufficiently broad to protect all of our proprietary rights, or they may prove to be unenforceable.  To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions, licenses and mask work protection under the Federal Semiconductor Chip Protection Act of 1984, and similar laws in other jurisdictions.  We also enter into confidentiality agreements with our employees, consultants and customers, and we seek to control access to, and distribution of, our proprietary information.  We may from time to time grant rights to third parties for our patents and other intellectual property.

 

The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and many companies have encountered substantial infringement problems in these countries, including countries in which we have sold and continue to sell a significant portion of our products.  There is a risk that our means of protecting our proprietary rights may not be adequate.  For example, our competitors may independently develop similar technology, duplicate our products, or design around our patents and our other intellectual property rights.  If we fail to protect our intellectual property adequately, it would make it easier for our competitors to sell competing products.

 

We are involved in a variety of litigation matters involving intellectual property. For example, we have initiated and are pursuing certain patent infringement actions in the United States and Taiwan. As of December 31, 2009, we deposited an amount of New Taiwan dollars equivalent to approximately $1.4 million with the Taiwan court for court bonds, which was accounted for as restricted assets, in connection with those actions and related preliminary injunction actions.  The court bonds provide security for the enjoined party to claim damages against us incurred from the preliminary injunctions or the provision of a counter security in the event we do not ultimately succeed in the underlying infringement actions. All the court bonds have been retrieved back from the Taiwan court during the year of 2010 as related actions were closed.

 

We have several patent litigation matters in the United States.  Monolithic Power Systems, Inc. v. O2Micro International Limited , Case No. C 08-4567 CW.    On October 1, 2008, MPS filed a complaint in the United States District Court in the Northern District of California for declaratory judgment that certain claims of our patents are invalid and not infringed.  We have filed counterclaims for patent infringement. The matter was scheduled for trial in July 2010; however we dismissed the case in June 2010, and agreed to assert the patent in dispute for this matter against MPS.  MPS moved for costs and attorneys fees.  In March 2011, the Court ruled that we should pay MPS approximately $339,000, but deferred to rule on attorneys fees.  We intend to appeal this ruling.  O 2 Micro International Limited v. HonHai Precision Industry, Ltd., et al. , Case No. C -08-CV-466DF.   On December 9, 2008, we filed a suit against HonHai Precision Industry for breach of a settlement agreement entered into by the parties in October 2007, terminating an earlier patent infringement action initiated by us. We alleged fraud, misrepresentation and interference with business relationships by HonHai.  The case was scheduled to go to trial in November 2010, but the parties mutually settled the case before trial pursuant to a confidential settlement agreement. O 2 Micro

 

 

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  International Ltd. v. Beyond Innovation Technology Co. et al., Case No. 2:04-CV-32 (TJW).   On April 3, 2008, the United States Court of Appeals for the Federal Circuit vacated a jury verdict and final judgment of infringement, including a permanent injunction, against defendants Beyond Innovation Technology Company Limited, SPI Electronic Company Limited and FSP Group, and Lien Chang Electronic Enterprise Company Limited.  The Federal Circuit further remanded the case to the Eastern District of Texas, and the case was tried and submitted to the court in July 2009, and in 2010, the court ruled again in favor of O2Micro.  Beyond Innovation Technology Company is appealing the judgment.  Powertech Association LLC v.  O 2 Micro International Limited, et al., Case No. 09-4391.   On August 7, 2009, Powertech Association LLC, an entity formed by MPS and Microsemi, filed a complaint in the United States District Court in the Eastern District of New York, alleging certain products manufactured by us infringe upon three of their patents. We have not been served by the Plaintiffs to date, and it currently has no obligation to defend such at this point in time.
In Europe, we have one trademark dispute pending.  In O2 Holdings Limited v. O2Micro International Ltd., Germany, District of Hamburg.  On August 20, 2008, the Regional Court of Hamburg issued a temporary restraining order prohibiting us from using the trademark “O2Micro” and “O2Micro Breathing Life into Mobility” in Germany.  A hearing was held, and on November 4, 2009, the initial order was upheld. We are appealing this ruling before the Court of Appeals in Hamburg.
In China, we have a breach of contract dispute pending.  In ECS International Trading (Shanghai) Co. Ltd v. O2Security (Wuhan) Ltd. ECS International Trading (Shanghai) Co. Ltd (“ECS”) filed the arbitration case with China International Economic and Trade Arbitration Commission (“CIETAC”) in Beijing (Case No. DX20100430) for breach of contract relating to local compliance issues, requesting termination of the agreement between the parties, and demanding a refund of approximately $387,000 (RMB 2,560,000) from O2Security (Wuhan) Ltd (“OSW”).  The case was served on November 15, 2010, and the tribunal is set but the hearing has not yet been scheduled. In addition, on November 11, 2010, ECS posted a bond of RMB 2,649,641 and applied an order for provisional seizure of RMB 2,560,240 from OSW’s bank accounts before the Honshan District Court in Wuhan (Case No. Honchungbo Tzu No 5). OSW moved the court to lift the said seizure but the court has yet to reach a decision on OSW’s request.
Given the inherent uncertainties in litigation, there cannot be any assurance that we will prevail in any of the pending litigation matters, and we cannot predict the outcome of any such litigation. Litigation is costly, time consuming, and may distract management from other important tasks and, in patent litigation where we are the plaintiff, there is a risk that our patents may be held invalid or unenforceable. In addition, in any litigation arising from claims that we infringe on the intellectual property rights of others, an adverse result could involve an injunction to prevent the sales of a material portion of our products, a reduction or the elimination of the value of related inventories, and the assessment of a substantial monetary award for damages related to past sales, any of which could have a material adverse effect on our result of operations and financial condition.

 
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