ACTS Actions Semiconductor Co., Ltd. ADS, Each Representing Six Ordinary Shares

 

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, 2014

 

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)

No. 1, Ke Ji Si Road, Technology Innovation Coast of Hi-Tech Zone

Zhuhai, Guangdong, 519085

The People’s Republic of China

(Address of principal executive offices)

 

I-Hung (Nigel) Liu, 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		NASDAQ—Global Market System
Ordinary Shares, par value US$0.000001 per share
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). x Yes ¨ 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

¨ International Financial Reporting Standards as issued by the International Accounting Standards Board

¨ 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, or ADSs, pursuant to the requirements of the Securities and Exchange Commission, or the SEC.

 

**

The total number of Ordinary Shares outstanding as of December 31, 2014 includes 7,821,882, 22,676,244, 34,938,198, 24,212,718, 16,594,848, 14,812,056, 11,772,294 and 70,774,015 Ordinary Shares underlying the ADSs, that the Registrant repurchased during 2007, 2008, 2009, 2010, 2011, 2012, 2013 and 2014, respectively.

 

 

TABLE OF CONTENTS

 

CERTAIN DEFINED TERMS				1
FORWARD-LOOKING STATEMENTS				2
PART I				3
	ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			3
	ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE			3
	ITEM 3. KEY INFORMATION			3
		A.	Selected Financial Data	3
		B.	Capitalization and Indebtedness	4
		C.	Reasons for the Offer and Use of Proceeds	4
		D.	Risk Factors	4
	ITEM 4. INFORMATION ON THE COMPANY			26
		A.	History and Development of the Company	26
		B.	Business Overview	28
		C.	Organizational Structure	40
		D.	Property, Plants and Equipment	41
	ITEM 4A. UNRESOLVED STAFF COMMENTS			42
	ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS			42
		A.	Operating Results	42
		B.	Liquidity and Capital Resources	53
		C.	Research and Development, Patents and Licenses, etc.	56
		D.	Trend Information	57
		E.	Off-balance Sheet Arrangements	59
		F.	Tabular Disclosure of Contractual Obligations	59
		G.	Safe Harbor	59
	ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			59
		A.	Directors and Senior Management	59
		B.	Compensation	60
		C.	Board Practices	62

 

 

		D.	Employees	63
		E.	Share ownership	63
	ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			64
		A.	Major Shareholders	64
		B.	Related Party Transactions	64
		C.	Interests of Experts and Counsel	64
	ITEM 8. FINANCIAL INFORMATION			64
		A.	Consolidated Statements and Other Financial Information	64
		B.	Significant Changes	65
	ITEM 9. THE OFFER AND LISTING			65
		A.	Offer and Listing Details	65
		B.	Plan of Distribution	66
		C.	Markets	66
		D.	Selling Shareholders	66
		E.	Dilution	66
		F.	Expense of the Issue	66
	ITEM 10. ADDITIONAL INFORMATION			66
		A.	Share Capital	66
		B.	Memorandum and Articles of Association	67
		C.	Material Contracts	75
		D.	Exchange Controls	75
		E.	Taxation	75
		F.	Dividends and paying agents	78
		G.	Statement by experts	78
		H.	Documents on display	78
		I.	Subsidiary Information	79
	ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			79
	ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			79
		A.	Debt Securities	79
		B.	Warrants and Rights	79
		C.	Other Securities	80
		D.	American Depositary Shares	80

 

  

PART II		81
	ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	81
	ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	81
	ITEM 15. CONTROLS AND PROCEDURES	81
	ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	82
	ITEM 16B. CODE OF ETHICS	82
	ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	82
	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
	ITEM 16H. MINE SAFETY DISCLOSURE	84
PART III		84
	ITEM 17. FINANCIAL STATEMENTS	84
	ITEM 18. FINANCIAL STATEMENTS	84
	ITEM 19. EXHIBITS	84

 

  

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, 2014 and April 17, 2015, the exchange rate for one U.S. dollar was RMB 6.2046 and RMB 6.1976, 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
2010			6.6000				6.7603				6.6000				6.8330
2011			6.2939				6.4475				6.2939				6.6364
2012			6.2301				6.2990				6.2221				6.3879
2013			6.0537				6.1412				6.0537				6.2438
2014			6.2046				6.1704				6.0402				6.2591
October 2014			6.1124				6.1251				6.1107				6.1385
November 2014			6.1429				6.1249				6.1117				6.1429
December 2014			6.2046				6.1886				6.1490				6.2256
January 2015			6.2495				6.2181				6.1870				6.2535
February 2015			6.2695				6.2518				6.2399				6.2695
March 2015			6.1990				6.2386				6.1955				6.2741
April (through April 17, 2015)			6.1976				6.2010				6.1930				6.2152

 

1 The annual average rates are calculated using the exchange rates on the last day of each month during the applicable year and the monthly average rates are calculated using the daily rates during the relevant period.

 

  

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, or 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.

 

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 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.

 

  

PART I

 

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, 2010, 2011, 2012, 2013 and 2014 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, 2012, 2013 and 2014 and selected balance sheet data as of December 31, 2013 and 2014 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, 2010 and 2011 and selected balance sheet data as of December 31, 2010, 2011 and 2012 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,
		2010				2011				2012				2013				2014
		(thousands, except share and per share data)
Revenues:
System-on-a-chip products		US$	37,434			US$	47,168			US$	54,150			US$	69,256			US$	50,143
Semiconductor product testing services			151				317				179				135				117
Total revenues			37,585				47,485				54,329				69,391				50,260
Cost of revenues:
System-on-a-chip products			(22,846	)			(28,821	)			(35,007	)			(47,907	)			(46,148	)
Semiconductor product testing services			(81	)			(176	)			(100	)			(58	)			(46	)
Total cost of revenues			(22,927	)			(28,997	)			(35,107	)			(47,965	)			(46,194	)
Gross profit			14,658				18,488				19,222				21,426				4,066
Other operating income			966				1,523				896				2,170				890
Operating expenses:
Research and development			(17,325	)			(22,086	)			(23,739	)			(25,994	)			(31,124	)
General and administrative			(8,125	)			(8,786	)			(8,573	)			(8,764	)			(10,330	)
Selling and marketing			(1,208	)			(1,195	)			(1,281	)			(2,057	)			(2,175	)
Impairment on intangible assets			—				(888	)			—				—				(820	)
Total operating expenses			(26,658	)			(32,955	)			(33,593	)			(36,815	)			(44,449	)
Loss from operations			(11,034	)			(12,944	)			(13,475	)			(13,219	)			(39,493	)
Other income (expense)			2,348				4,066				1,547				2,336				(2,736	)
Dividend income from an other investment			—				889				—				493				423
Investment income from an other investment			—				268				—				—				—
Fair value change in trading securities			(2	)			4				2				—				—
Gain on disposal of an other investment			137				195				—				—				—
Interest income			9,608				12,668				13,240				12,358				9,611
Interest expense			—				(144	)			(250	)			(498	)			(530	)
Other-than-temporary impairment loss on investments			—				—				(2,543	)			(681	)			—
Income (loss) before income taxes, equity in net (loss) income of equity method investees and non-controlling interest			1,057				5,002				(1,479	)			789				(32,725	)
Income tax (expense) credit			(422	)			(879	)			(772	)			(403	)			1,796
Equity in net (loss) income of equity method investees			(781	)			(1,113	)			41				(264	)			566
Remeasurement gain on equity interest on acquisition of a subsidiary			494				—				—				—				—
Net  income (loss)			348				3,010				(2,210	)			122				(30,363	)
Add: Net income (loss)  attributable to non-controlling interest			36				(5	)			8				2				12
Net income (loss) attributable to Actions Semiconductor Co., Ltd. shareholders		US$	384			US$	3,005			US$	(2,202	)		US$	124			US$	(30,361	)
Net income (loss) per share attributable to Actions Semiconductor Co., Ltd. shareholders
Basic		US$	0.001			US$	0.007			US$	(0.005	)		US$	0.000			US$	(0.077	)
Diluted		US$	0.001			US$	0.007			US$	(0.005	)		US$	0.000			US$	(0.077	)
Net income (loss) per ADS attributable to Actions Semiconductor Co., Ltd. shareholders
Basic		US$	0.005			US$	0.043			US$	(0.032	)		US$	0.002			US$	(0.461	)
Diluted		US$	0.005			US$	0.042			US$	(0.032	)		US$	0.002			US$	(0.461	)
Weighted-average shares used in computation:
Basic			438,401,072				418,499,545				412,706,341				412,103,255				395,380,921
Diluted			454,568,850				433,983,105				412,706,341				425,415,011				395,380,921

 

  

CASH FLOW DATA

 

		For the year ended December 31,
		2010				2011				2012				2013				2014
		(thousands)
Cash provided by (used in):
Operating activities		US$	2,763			US$	7,265			US$	(3,296	)		US$	(7,560	)		US$	(19,140	)
Investing activities			(51,215	)			(26,658	)			33,791				(26,178	)			61,721
Financing activities			2,619				7,131				6,936				13,902				(16,628	)

 

BALANCE SHEET DATA

 

		As of December 31,
		2010				2011				2012				2013				2014
		(thousands)
Cash and cash equivalents		US$	42,872			US$	33,207			US$	71,336			US$	53,263			US$	78,177
Time deposit			34				—				—				347				5
Restricted deposits			—				—				10,000				27,161				51,590
Marketable securities ( $14,296, NIL, NIL,NIL and NIL carried at fair value as of December 31, 2010, 2011, 2012, 2013 and 2014, respectively)			164,336				186,890				130,721				126,607				38,384
Trading securities			535				530				76				74				70
Accounts receivable, net of allowance for doubtful accounts of $621, $621, NIL, NIL and $558 as of December 31, 2010, 2011, 2012, 2013 and 2014 respectively			1,844				2,794				5,950				5,782				2,832
Amount due from a related party			559				9				340				1,301				1,650
Notes receivable			—				—				—				—				161
Amount due from an equity method investee			104				64				79				38				41
Inventories			4,832				7,477				11,979				20,278				13,970
Prepaid expenses and other current assets			3,242				1,675				4,288				3,972				4,511
Income tax recoverable			—				—				189				67				186
Deferred tax assets			399				430				504				416				1,179
Total current assets			218,757				233,076				235,462				239,306				192,756
Investment in equity method investees			6,401				14,246				14,329				17,843				27,352
Other investments (NIL, NIL, NIL, NIL and NIL carried at fair value as of December 31, 2010, 2011, 2012, 2013 and 2014 respectively)			2,764				17,334				16,305				15,648				15,627
Marketable securities			24,831				—				11,239				17,139				—
Rental deposits			40				49				49				61				54
Property, plant and equipment, net			24,604				32,939				32,321				31,896				30,327
Land use right			1,554				1,593				1,584				1,588				1,514
Acquired intangible assets, net			4,318				9,859				10,819				12,218				16,459
Deposit paid for acquisition of intangible assets			2,408				—				—				145				538
Deferred tax assets			88				27				80				99				53
Goodwill			468				—				—				—				—
Total assets		US$	286,233			US$	309,123			US$	322,188			US$	335,943			US$	284,680
Total current liabilities			13,185				27,466				39,623				49,397				61,536
Other liabilities			83				458				13				412				—
Payable for acquisition of intangible assets			—				153				603				—				155
Deferred tax liabilities			2,286				2,840				3,189				3,589				919
Total liabilities			15,554				30,917				43,428				53,398				62,610
Total equity			270,679				278,206				278,760				282,545				222,070
Total liabilities & equity		$	286,233			$	309,123			$	322,188			$	335,943			$	284,680

 

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 United States Securities and Exchange Commission, or the SEC, 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 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.

 

  

Risks Related to Our Company

 

 

We derive substantially all of our revenues from our Systems-on-a-Chip, or SoCs, for tablets and portable media players, and we cannot be sure that sales of these products will be successful. 

  

We derive substantially all of our revenues from the sales of our SoCs for tablets and portable media player applications. We cannot be sure that our SoCs will continue to be successful in the markets in which we compete, or those applications will continue to remain popular with retail customers. Meanwhile, we attempt to exploit new application markets to bring us additional revenues, such as Over-the-Top (“OTT”) boxes. We continuously 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, the migration and adoption of smart phones have resulted in the increasing popularity of embedding portable media player functionality directly into smart phones. In addition, the rapid growth of smart phones and tablets has changed the market of higher end portable media players, so we consolidated our SoCs for portable media players in mainstream and entry-level segments, and have spent most of our resources to accelerate the addition of SoCs for tablets into our product portfolio in 2012, sales of which generated almost 28% of our 2014 revenues. However, we may not be able to compete with providers of SoCs for smart phones that combine mobile phone and portable media player functionality into one SoC if such providers expand their product portfolio and compete with us in our target markets. We may also 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 new 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;

 

·

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 and trends.

 

  

The selling prices of existing 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 existing 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;

 

·

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.

 

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:

 

·

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, tablets, OTT boxes 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 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 eighteen 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, license of intellectual property 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. 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. These factors could cause 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.

 

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, United Microelectronics Corporation, or UMC, and Taiwan Semiconductor Manufacturing Company Limited, or TSMC, manufacture almost all of our semiconductors. As a result, if these foundries were to experience any catastrophic or other event that disrupted 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 unable to manufacture our semiconductors with the same yield rate, as we currently have with He Jian, UMC, and TSMC. As a result, we depend significantly on maintaining a strong relationship with these foundries and their continued ability to manufacture our semiconductor products, in order to maintain our revenues and customer relationships. For example, beginning in the third quarter of 2014, due to limited capacity at our foundries, we have experienced a shortage in the wafers needed for our PMP products thus limiting the revenue from our PMP business.

 

We provide our foundries 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;

 

·

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, Nantong Fujitsu Microelectronics and Shen Zhen Hua Yu Semiconductor. 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. 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.

 

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 customers, suppliers and know-how, which may lead to a significant adverse impact on our business, and cause us to incur additional expenses to recruit and train personnel. Currently, we do not maintain life insurance for any of our key executives.

 

  

We also rely on a number of key technology and engineering staff for the operation of our company. Given the intense competition for the services of these personnel in the semiconductor industry, the risk of key technology and engineering staff leaving our company is high. In addition, we expect demand for skilled and experienced technology and engineering personnel in China to increase in the future as new semiconductor fabless design and other similar high technology businesses are established there. If we lose the services of key members of our technology and engineering staff, it could be difficult to locate, hire and integrate new staff with comparable semiconductor design experience and educational background. Our inability to retain our existing technology and engineering personnel, or to timely attract, assimilate and retain new qualified personnel in the future, could adversely affect our operations and delay or restrict the growth of our business.

 

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 have different kinds of SoCs for tablets, portable media players and OTT boxes and currently most of these SoCs are utilizing the processing technologies ranging from 0.18 micro to 28 nanometer. We continue to focus our efforts on transitioning our SoCs to smaller process geometry technologies in order to achieve better performance or lower cost. 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.

 

Failure of innovation initiatives could impact our long-term success.

 

We have been gradually moving away from our traditional portable media player products and exploring newer product lines such as tablets and OTT boxes with which we hope to differentiate ourselves through innovation and by leveraging our investments in research and development. If we are unable to commercialize such innovations, expand and scale them with sufficient speed, we could fail in our ongoing efforts to maintain and increase our market share and profit margins. In addition, if we do not continue to be recognized as a strong player in our industry because of, among other things, our failure in successfully commercializing our new product lines or if our brand image is tarnished by negative perceptions, our ability to attract and retain customers could be impacted.

 

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 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.

 

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 principal 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.

 

  

Our principal contract foundries, 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 as well as risk of regional conflicts due to territorial disputes.

 

The principal contract foundries that manufacture 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 foundries 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. In addition, the relationship between China and Japan, which is often strained due to historical reasons, in 2012 reached reportedly the lowest point since the end of World War II due to territorial disputes surrounding what are called by China as the Diaoyu Islands but known in Japan as the Senkaku Islands. There have been signs of improvement but sustained cycles of tension continue to be the theme of the bilateral relationship. If the tension between the two countries escalates or even results in regional military conflicts, the availability of raw materials such as monocrystalline silicon from Japan could be materially disrupted. If Japan were to limit the export of, or China were to limit the import of, such raw materials from Japan, due to the political or military tension between the two countries, we and the entire semiconductor industry may encounter supply delays, disruptions and shortages.

 

Any disruption resulting from the above events could cause significant delays in the production or shipment of our products until we are able to shift our raw material sourcing, manufacturing, assembling, packaging or production testing from the affected supplier or 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, causing 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.

 

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 worldwide. Our principal competitors include ALi, AllWinner, Amlogic, Anyka, BestRely, Buildwin/Appotek, RDA, Freescale, Infotmic, Intel, JieLI, MediaTek, MVSilicon, Rockchip, CSR, ISSC and WonderMedia.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.

 

  

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.

 

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 2014 and in future years. Assuming we are a PFIC, U.S. investors of our ADSs are 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 2014 and believe we will be a PFIC in 2015 and for 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 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, 2014 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.

 

A worldwide economic downturn could adversely affect the demand for our products, and in turn, our business and results of operations.

 

The economic and financial downturn beginning in 2009 which affected the global business, banking and financial sectors adversely affected the consumer electronics market, especially in the United States and Europe in 2011. As a result of the economic and financial downturn, there has been depreciation of certain foreign currencies in 2014 that would adversely impact the purchasing power in these areas and result in a decrease in demand for consumer electronics. From 2012 to 2014, Western Europe experienced instability, resulting in reduced demand. The Chinese economy is also facing certain challenges such as inflation and concerns over the possibility of a bubble in the real estate market, which may result in the suspension or decrease of consumer electronics market demand. 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.

 

  

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.

To resolve any claim made against us, we may be required to develop alternative 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 alternative 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, tablet and OTT box 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.

 

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, tablets or OTT boxes, 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.

 

We are subject to the highly cyclical nature of the semiconductor industry.

 

The semiconductor industry is highly cyclical. The industry has experienced periods of both 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.

 

 

The SEC’s “conflict minerals” rule has caused us to incur additional expenses, could limit the supply and increase the cost of certain minerals used in manufacturing our products, and could make us less competitive in our target markets.  

 

On August 22, 2012, the SEC adopted a rule requiring disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to obtain sourcing data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. The rule could limit our ability to source at competitive prices and to secure sufficient quantities of certain minerals used in the manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. We may incur material costs associated with complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, we may risk losing them to our competitors.  We continue to monitor and investigate the presence of conflict materials within our supply chain.

 

Any new regulations or customer requirements related to climate change or environmental protection could negatively impact our operating results.

 

There is global concern that an increase in global average temperatures due to emissions of greenhouse gases (GHG) and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of natural disasters. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. Climate change could have a material adverse effect on our results of operations, financial condition, and liquidity by increasing our manufacturing costs or limiting the products we can manufacture.

 

We may become subject to legislation and regulation addressing climate change and Chinese air quality, and compliance with any new rules could be difficult and costly. Concerned parties, such as legislators and regulators, shareholders and non-governmental organizations, as well as companies in many business sectors, are considering ways to reduce GHG emissions. Legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating GHG emissions and energy policies. If such legislation is enacted, we could incur increased energy, environmental and other costs and capital expenditures to comply with the limitations. Due to the uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our operations. Moreover, serious air pollution in Chinese cities where we operate could pose long-term health risks to our employees and increase the difficulty of recruiting and retaining key employees from overseas.

 

Further, we could face increased costs related to defending and resolving legal claims and other litigation related to climate change and the alleged impact of our operations on climate change.

 

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 and amended on June 22, 2009. In addition, on February 3, 2011, the General Office of the State Council 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 Rule, which became effective on March 5, 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 Rule 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 Rule 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 tablets, portable media players and OTT boxes 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.

 

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 cross-border direct investments or loans unless the prior approval of or registration with the State Administration of Foreign Exchange, or SAFE, 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 capital account 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.

 

  

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,” or High Technology Enterprises, whether foreign-invested enterprises or domestic enterprises. In addition, if recognized as a “Key Software Enterprise” or a “Key Integrated Circuit Design Enterprise,” a company is entitled to enjoy, among other things, 10% tax preference on EIT if no tax exemption preference is enjoyed in the current year.

 

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. According to the EIT Law, entities that qualify as High Technology Enterprises are expected to benefit from a tax rate of 15%, as compared to the uniform tax rate of 25%. In December 2008 and August 2011, Actions Semiconductor (Zhuhai) was certified as a High Technology Enterprise by the relevant tax authorities and became entitled to a preferential EIT rate of 15% until December 31, 2014. In December 2013, Actions Semiconductor (Zhuhai) was certified as a Key Integrated Circuit Design Enterprise by the relevant tax authorities and became entitled to a preferential EIT rate of 10% until December 31, 2014. Artek Microelectronics (Shenzhen) was also certified as a High Technology Enterprise by the relevant tax authorities and became entitled to a preferential EIT rate of 15% from January 1, 2012 to December 31, 2014.

 

Due to a preferential tax policy that provides for tax exemption for two years starting from the first profitable year of operation after taking into account any tax losses brought forward from prior years and a 50% tax rate reduction for the succeeding three years, Actions Semiconductor (Zhuhai) benefited from an EIT rate of 9% for the year ended December 31, 2008, which was the fifth year after it had profits after offsetting its prior years’ tax losses, which EIT rate would otherwise have been 18% during the first year of the five-year EIT transition period. In addition, due to its certification as a High Technology Enterprise and a Key Integrated Circuit Design Enterprise, Actions Semiconductor (Zhuhai) benefited from a 15.0% EIT rate for each of the years ended December 31, 2009, 2010, 2011 and 2012, and a 10% EIT rate for the year ended December 31, 2013 and 2014.

 

Due to a preferential tax policy that provides for tax exemption for the first two years starting from the first profitable year of operation after taking into account any tax losses brought forward from prior years, and a 50% tax rate reduction for the succeeding three years, Artek Microelectronics (Shenzhen) was exempted from income tax for the year ended December 31, 2008, which was the second year it had profits after offsetting its prior years’ tax losses, and benefited from a 10.0%, 11.0% and 12.0% EIT rate, which would otherwise be the interim 20.0%, 22.0% and 24.0% EIT rates during the five-year transition period, for the years ended December 31, 2009, 2010 and 2011, respectively. In addition, due to its certification as a High Technology Enterprise, Artek Microelectronics (Shenzhen) was entitled to a 15.0% EIT rate for the year ended December 31, 2012, 2013 and 2014.There can be no assurances that any of our PRC subsidiaries will continue to qualify as High Technology Enterprises in the future and benefit from such preferential EIT rate. For more information regarding the impact of the EIT Law on us, see also “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Taxation.”

 

We may be deemed a Chinese resident enterprise under the EIT 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 EIT 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 seal 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. On July 27, 2011, the SAT issued Administrative Measures of Enterprise Income Tax of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial), or Bulletin 45, which became effective on September 1, 2011, to provide further guidance on the implementation of the April Notice. Bulletin 45 clarifies certain issues related to determining PRC resident enterprise status of PRC controlled enterprises, post-determination administration and which competent tax authorities are responsible for determining offshore incorporated PRC resident enterprise status. Bulletin 45 specifies that when provided with a copy of a Chinese tax resident determination certificate issued by the competent tax authorities from an offshore incorporated PRC resident enterprise, the payer should not withhold 10% income tax when paying Chinese-sourced dividends, interest and royalties to the offshore incorporated PRC resident enterprise. Because the April Notice was issued to regulate PRC tax resident determination 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 with respect to the resident enterprise determination is available for overseas companies like ours that are not established or controlled by PRC companies. 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 EIT 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 EIT 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, 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 EIT. 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 EIT rate 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.

 

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.

 

PRC regulations relating to offshore investment activities by PRC residents may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our shareholders who are PRC residents fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

 

On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles (“SAFE Circular 37”), which replaced the former circular known as the Notice of the State Administration of Foreign Exchange on the Administration of Foreign Exchange Involved in Financing and Roundtrip Investment Conducted by PRC Residents via Special-Purpose Companies promulgated on October 21, 2005 (“SAFE Circular 75”). SAFE Circular 37 requires PRC residents (which include PRC individual residents and PRC-incorporated corporate entities) to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity (which entity is referred to as “special purpose vehicle” in SAFE Circular 37) with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests for the purpose of overseas investment and financing. SAFE Circular 37 applies to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

 

Under SAFE Circular 37, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register with local branches of SAFE in connection with their incorporation or control of the offshore company established for the special purpose of offshore investment or overseas equity financing involving a roundtrip investment whereby the offshore company acquires or controls onshore assets or equity interests held by the PRC residents. In addition, such PRC residents are required to file or update the registration with the local branch of SAFE in the event of any material change with respect to that special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or swap, merger, division, or other material event. If any PRC resident shareholder holding interests in a special purpose vehicle fails to make the required SAFE registration or file or update the registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from distributing their profits and the proceeds from any reduction in capital, or liquidation, to their offshore parent company, and the special purpose vehicle may also be prohibited from contributing additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

We cannot provide any assurances that all of our shareholders who are PRC residents have made or obtained any applicable registrations or approvals required by SAFE Circular 37. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-denominated loans to our company.

 

As SAFE Circular 37 was recently promulgated and it is uncertain how SAFE Circular 37, and any future regulation concerning offshore or cross-border transactions, will be interpreted or implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

Any failure to comply with PRC regulations regarding our employee equity incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

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. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options are subject to the Stock Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.

 

  

On February 15, 2012, SAFE promulgated the Circular on Certain Foreign Exchange Issues Relating to Domestic Individuals’ Participation in Stock Incentive Plan of Overseas Listed Company, or the New Stock Option Rule. Upon the effectiveness of the New Stock Option Rule on February 15, 2012, the Stock Option Rule became void, although the basic requirements and procedures provided under the Stock Option Rule remain unchanged in the New Stock Option Rule, i.e., the domestic employees participating in stock incentive plan of an overseas listed company shall appoint the PRC subsidiary of the overseas listed company or a domestic qualified agent to make the registration of the stock incentive plan with SAFE and handle all foreign exchange-related matters of the stock incentive plan through the special bank account approved by SAFE. The New Stock Option Rule clarifies that the domestic subsidiary of an overseas listed company shall include the limited liability company, partnership and the representative office directly or indirectly established by such overseas listed company in China and the domestic employees shall include the directors, supervisors, the senior management and other employees of the domestic subsidiary, including the foreign employees of the domestic subsidiary who continuously reside in China for at least one year.

 

Similar with the Stock Option Rule, the New Stock Option Rule requires that the annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises shall be subject to the approval of SAFE. The New Stock Option Rule further requires that the material amendments of the stock incentive plan shall be filed with SAFE within three months following the occurrence of the material amendments. The domestic agent shall also make a quarterly update to SAFE to disclose the information with respect to the stock option exercises, the stock holding and foreign exchange matters. If the domestic employees or the domestic agent fails to comply with the requirements of the New Stock Option Rule, SAFE may demand compliance and even impose administrative penalties that SAFE deems appropriate.

 

Prior to the effectiveness of the New Stock Option Rule, we completed the registration with SAFE for our Chinese employees who participate in our equity incentive plan and have maintained the update to SAFE in accordance with the Stock Option Rule. Under the New Stock Option Rule, we do not need to re-register but must comply with the requirements applicable to companies which have completed the registration, including the quarterly update to SAFE, registration for material amendments of our equity incentive plan and the registration for the foreign employees of our PRC subsidiaries who continuously reside in China for at least one year.

 

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 was 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.

 

On February 3, 2015, the SAT released the Bulletin on Several Issues of Enterprise Income Tax on Income Derived from Indirect Transfers of Property by Non-resident Enterprises, or Bulletin 7, which also mainly addresses the indirect transfers of equity interests and other properties in resident enterprises by non-resident enterprises but has substantially supplemented Circular 698. As provided in Bulletin 7, if the indirect China taxable property transfer income is generated from buying and then selling the shares of a listed offshore enterprise in the public securities market, it shall not be regarded as transactions without a reasonable business or commercial purpose, and therefore such transfer incomes are not subject to PRC taxes. We believe such provisions should apply in a transfer of our ordinary shares or ADSs by our non-PRC shareholders, and therefore such transfer should not be subject to the reporting or filing obligations otherwise stipulated in Bulletin 7. However, we cannot assure you that the PRC tax authorities will necessarily agree with our interpretation of Bulletin 7.

 

In addition, 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, 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 or Bulletin 7 will affect our financial conditions or operations. For example, we may be required to expend valuable resources on complying with Circular 698 or Bulletin 7 or establishing that we should not be taxed under Circular 698 or Bulletin 7, 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.

 

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 33.4% appreciation of the RMB against the U.S. dollar between July 21, 2005 and December 31, 2014. 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 be 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) for, among other items, working capital, distributions to other subsidiaries and capital to make acquisition and investments, 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 2012, 2013 and 2014, the rate of return on our RMB cash deposit was 6.2%, 5.6% and 5.1%, respectively. As a result of the Chinese government’s alternate efforts to curb inflation or stimulate economy, interest rates have often fluctuated. For example, China’s central bank raised interest rates three times in 2011 due to China’s relatively high inflation rate in 2011 but then decreased interest rates twice in 2012. At the beginning of 2012, the China Banking Regulatory Commission imposed certain limitations on the amount of new loans to be granted by commercial banks in China to minimize the risk of defaults. In 2013, the money market was further tightened, resulting in a shortage of funds for many banks in June and December. In addition, China’s central bank launched interest rate liberalization in July 2013 and cancelled the ceiling and floor which used to limit the fluctuation of commercial banks’ lending rates. In November 2014, China’s central bank reduced interest rate for the first time since July 2012. Changes in policies and market conditions such as the above may have a direct or indirect material adverse impact on the interest rates offered by banks and other financial institutions and in turn may adversely affect the interest income generated from our financial investments in financial institutions. Further, if there is any future uncertainty in global economic and market conditions, a decreasing interest rate might adversely affect our interest income and in turn 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, 2014, we had marketable securities of US$38.4 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. The 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 the 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.

 

The audit report included in this annual report is prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (“the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.

 

Because we have substantial operations within the People’s Republic of China and the PCAOB is currently unable to conduct inspections of the work of our auditors as it relates to those operations without the approval of the Chinese authorities, our auditors are not currently inspected fully by the PCAOB.

 

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct full inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

  

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.

 

Starting in 2011 the Chinese affiliates of the ‘‘Big Four’’ accounting firms, (including our independent registered public accounting firm) were affected by a conflict between US and Chinese law. Specifically, for certain US listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission ("CSRC").

 

 

In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, (including our independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC's internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.  Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

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, as amended and restated from time to time, the Companies Law (2013 Revision) of the Cayman Islands 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 duties 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 duties 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, our 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.

 

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), Actions (Zhuhai) Technology, Actions (Zhuhai) Microelectronics, Artek Microelectronics (Shenzhen) and Shanghai Actions Semiconductor Co., Ltd., or Shanghai Actions. Most or all 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 effect service of process within the United States upon us or these persons or 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. In addition, there is uncertainty as to whether the courts of the Cayman Islands or China would recognize or enforce judgments of United States courts against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or Chinese courts would be competent to hear original actions brought in the Cayman Islands or China against us or our directors and officers predicated upon the securities laws of the United States or any state, on the ground that such provisions are penal in nature.

 

 

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$1.34 per ADS and the last reported sale price on April 21, 2015 was US$1.55. 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 the ordinary shares underlying your ADSs 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 the ordinary shares underlying your ADSs. 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.

 

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 (2013 Revision), as amended, 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 (Zhuhai), a subsidiary incorporated on December 28, 2001 in Zhuhai, China. We conducted substantially all of our operations through Actions Semiconductor (Zhuhai) until 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 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) Co., Ltd., or 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 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$6.1 million 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 never engaged in any substantial operation. 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. 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 as a result became the sole shareholder of Artek Microelectronics (HK).

 

On March 27, 2008, Actions Semiconductor (Zhuhai) established Shanghai Actions, a subsidiary in Shanghai, China, 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.

 

For the purpose of constructing a new building complex in Shanghai Zhangjiang High-Tech Park to satisfy our research and development needs, and considering that we would only have a limited use for a large new building complex and to fund only a part of its land purchase and construction costs, we decided to form a strategic alliance with Nann Capital and we would only invest and own 40% of the construction project.  On August 20, 2009, Actions Enterprises (HK) established a 100% owned subsidiary in Shanghai, China, Actions Technology (Shanghai) and we subsequently transferred our entire ownership interest in Actions Enterprises (HK), a holding company with zero net value, to Nann Capital for a nominal consideration of US$1.00. We further then made a capital injection of US$4.4 million to Nann Capital, in exchange for 40% of its equity interest in July 2010, while other third-party investors of Nann Capital contributed US$6.6 million for its initial US$11.0 million capital funding to purchase and construct the new building complex. To continue to maintain our 40% equity interest in Nann Capital, we also made further capital injections from time to time as the need arises to pay for the land purchase or fund the construction costs at each subsequent round of pro rata capital call, including US$7.1 million in June 2011, US$3.7 million in April 2014 and US$9.0 million in May 2014. As of December 31, 2014, we have maintained our 40% equity interest in Nann Capital and our investment in Nann Capital is accounted for under the equity method of accounting.

 

On August 19, 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, a Cayman Islands company, for approximately US$1.2 million. As a result, Mavrix, together with its wholly owned subsidiaries, Mavrix Technology (HK) Co., Ltd. and Shanghai Mavrix Technology Co., Ltd., or Shanghai Mavrix, became a 93.4% owned subsidiary subject to consolidation.

 

On June 5, 2014, Actions Semiconductor (Zhuhai) established Actions (Zhuhai) Technology, a subsidiary in Zhuhai, China. Most of the assets, employees and business of Actions Semiconductor (Zhuhai) then started to be transferred to Actions (Zhuhai) Technology in August 2014.

 

On June 5, 2014, Actions (Zhuhai) Technology established Actions (Zhuhai) Microelectronics, a subsidiary in Zhuhai, China, as a software development and distribution company.

 

In order to streamline our corporate structure by placing most of our manufacturing, research and sales entities under common control, 100% of the equity of Shanghai Actions, Actions Technology(HK) and Artek Microelectronics were transferred to Actions (Zhuhai) Technology in September 2014.

 

By streamlining our reporting lines, we can more thoroughly assess our intellectual property portfolio, set clearer goals and responsibilities for our engineers and design better incentive system to reward our employees. A streamlined corporate structure may also open opportunities for us to license our intellectual property, enter into joint ventures and otherwise better monetize our intellectual property portfolio and talent pool.

 

 

Our principal executive offices are located at No. 1, Ke Ji Si Road, Technology Innovation Coast of Hi-Tech Zone , 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, 44th 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 and smart handheld devices, such as Bluetooth audio and music devices, tablets and OTT boxes. We provide integrated platform solutions to tablet, portable media player and OTT box manufacturers, brand owners and value-added distributors that enable them to accelerate the time-to-market for their products. Due to the following reasons, our integrated platform solutions enable our customers to rapidly bring their final products 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 tablets, portable media players and OTT boxes and presence in the rapidly evolving China market for tablets, portable media players and OTT boxes 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 tablets, portable media players and OTT boxes 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

 

Tablets and portable media players are both battery-powered, portable consumer electronic devices that can capture, store and play digital media files such as compressed audio, image and video files. OTT boxes are devices delivering audio, video, and other media data to home entertainment devices through the Internet.

 

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.264/265, MPEG2/4 and WMV. Portable media players are consumer electronics products with dedicated audio players and integrated digital audio/video players currently being the two most popular products in this category. In addition to the traditional portable media player features, Bluetooth audio and music devices are featured with a wireless technology standard for exchanging data over short distances from fixed and mobile devices, and building personal area network.

 

Compared with portable media players whose functions are traditionally limited to playing digital media files, tablets have become increasingly popular because they further equip consumers with the capability of browsing the internet or downloading software applications through, for example, WiFi, 3G or 4G networks with the help of operation systems such as the Android and iOS operating systems. In order to provide better web-browsing user experience, tablets are usually equipped with touchscreen displays that are larger than displays of the average portable media players. On the other hand, OTT boxes equip consumers with the ability to enjoy audio and video content from the Internet on their regular TV screens without the involvement of a multiple-system operator in the control or distribution of such content .

 

 

While we still gained steadily a majority of our revenue and profit from the portable media player market in recent annual periods, including 2014, this market has witnessed a decrease in demand since 2009. Even though traditional portable media player market decreased rapidly in 2014, with the growing popularity of smartphones, we believe the market for wireless connectivity enabled portable media players that connect via Bluetooth and WiFi present major growth opportunities. In the first quarter of 2014, we launched a Bluetooth dual mode 4.0 product (ATS2805) and in the first quarter of 2015, we launched our first single chip Bluetooth dual mode 4.0 product (ATS2829). The tablet market entered a period of rapid growth in 2012 and 2013, but the market also faced competition from smart phones with large screens. The WiFi only tablet market also faced pressure from tablet with cellular connectivity and experienced intense competition in 2014 which resulted in relatively flat growth in demand and low ASPs. We believe that several factors had driven this growth in demand in 2012 and 2013 and the climate change in 2014 for tablets, including:

 

·

Product Awareness: Due to the promotional and marketing efforts of internationally recognized manufacturers such as Apple and Samsung, consumers worldwide have started to recognize the concept and benefit of tablets. We believe this influence has expanded from the U.S. and European Union markets to various emerging markets, and that this has driven significant increased demand for tablets in 2012 and 2013. However, smart phones with large screen also posed competition to tablets, resulting in relatively flat growth in demand for tablets in 2014. In addition, within the tablet market, demand in the WiFi only tablet market, which was the area we focused on,  was under pressure from the cellular tablet market. Above all, 2014 was marked by intense competition from global players in the tablet market, resulting in low ASPs.

 

·

Software Applications: The rapid growth of tablets and smartphones has resulted in the development of a rapidly growing ecosystem of software applications geared towards this market, with an increasing amount of software companies entering and developing their own software applications. We believe that the tablets’ ability to download and utilize software applications coupled with a rapidly developing software application ecosystem will continue to stimulate consumer demand for tablets.

 

·

Supply Chain and Price Point: The components used in tablets are in many respects similar to those used in portable media players, with the major difference being the tablets’ larger screen size, touch panel and WiFi/3G RF module. While the tablets do require more precise production quality, this supply chain has been rapidly developing, particularly in Southern China, since the second half of 2011, and is maturing rapidly. With a mature supply chain, the industry is able to deliver 7-inch tablets at a retail price point below US$50 each with good performance and stable quality. Together with the above two factors, this price point has stimulated increasing user demand from consumers who cannot afford higher-end tablets produced by manufacturers such as Apple and Samsung, especially in the emerging markets.

 

In order to keep up with the trend in the current market, in 2012 we started to add SoCs for tablets to our product line. In the first quarter of 2012, we launched the first single-core tablet SoC (ATM7013) and, to quickly catch up with the multi-core trend in the tablet market, we also designed and launched the first multi-core tablet SoC (ATM7029) before the end of 2012. In the second half of 2013, we launched our dual-core tablet SoC (ATM7021) for the entry segment and another high performance quad-core tablet SoC (ATM7039) to penetrate the high-end market segment. In the second half of 2014, we launched our first 28nm chipset for tablets (ATM7059) and OTT boxes (ATM7039s) to penetrate the mid-tier market segment. In the first quarter of 2015, we launched our first 64bit chipset for tablets (ATM9009) and OTT boxes (GT9) to target the high-end market segment..

 

Portable Media Player, Tablet and OTT box Design and Manufacturing Value Chain

 

The portable media player, tablet and OTT box industry, like many other segments of the consumer electronics industry, is increasingly centered in China. Portable media players, tablets and OTT boxes 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, tablets and OTT boxes. 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, tablet and OTT box design and manufacturing value chain:

 

 

In order to differentiate their products, brand owners of portable media players, tablets and OTT boxes 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.

 

 

Products and Technology

 

We provide a variety of solutions along the portable media player, tablet and OTT box 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, or tablet or OTT box.

 

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, tablets and OTT boxes is largely determined by the SoC controller, which together with memory components constitute a significant portion of a portable media player’s or a tablet’s or OTT boxes’ total cost. The slim size and the drive to minimize cost for portable media players, ,tablets and OTT boxes usually require the manufacturers to use as few SoCs as possible. In addition, the entire system still requires other digital components such as a processor, embedded memory and peripheral connections as well as analog components including codec, power management and audio signal amplifiers. We are one of the few fabless SoC design companies who owns mixed mode and power management unit, or PMU, design capability. Our SoCs for portable media players are integrated circuits that incorporate a digital signal processor, a micro controller unit, embedded memory, codec, a PMU and other components all within one chip. With respect to SoCs for the tablet and OTT box market, we provide a primary SoC and a companion chip which integrates audio codecs and a PMU as a bundled set. By providing this bundled set, we are able to provide customers with slim and cost effective products, while maintaining good performance and low power consumption.

 

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 2012 to the first quarter of 2015

 

Targeted Application		Product No.		Key Features		Month Introduced
Tablet		ATM9009		1.8GHz quad-core 64-bit CPU,  PowerVR G6230 3D graphic, Android OS 5.0 or higher, HEVC 4K x 2K@30fps / H.264 FHD 1080P@60fps video decoder, up to 2560x1600@60fps LCD display with Ultra HD(4K) @30fps external HDMI TV display, Internal ISP up to 13M pixels camera, USB 3.0, and eDP、MHL、MIPI CSI/DSI、HDMI, TrustZoneTM Security system,TFBGA642 packaging, 28nm process technology		January 2015
		ATM7059		1.6G quad-core CPU, SGX544 3D graphic, Android OS 5.0 or higher, 1080P@60fps/4k@30fps video decoder, 1080P@60fps video encoder, HDMI1.4, CMOS sensor,60bit ECC, 32 bit DDR up to 533Mhz, BGA496 packaging, 28nm process technology		December 2014
		ATM7029B		1.3GHz quad-core CPU, SGX540 3D GPU up to 550Mhz, Android OS 4.4 or higher, 1080P@60fps video decoder/encoder,BGA359 packaging		December 2013
		ATM7039		1.6G quad-core CPU, SGX544 3D graphic, Android OS 4.4 or higher, 1080P@60fps video decoder/encoder, HDMI1.4, CMOS sensor,60bit ECC, 64 bit DDR up to 533Mhz, BGA544 packaging		October 2013

 

 

		ATM7021		1.3G dual-core CPU,SGX540 3D graphic up to 500Mhz, Android OS 4.4 or higher, 1080P@30fps video decoder/encoder, HDMI1.4, CMOS sensor, 60bit ECC, LQFP176EPAD packaging		July 2013
		ATM7013		1.2G CPU+3D graphic, Android OS, 1080P video decoder/encoder, AVOUT/HDMI, CMOS sensor, 60bit ECC, LQFP216 packaging		March 2012
MP4		ATV6003		720P Video Decoder, HDMI, 40bit ECC, LQFP128 packaging		December 2013
		ATJ2273C		720P Video Decoder, CPU / RGB LCD + AV/YPbPr, 60bit ECC NAND Flash supporting, LQFP128 packaging		December 2012
MP3		AK2119C		MP3, WMA, FM Radio, Voice Recording, Picture browse, AMV, AVI (MJPEG), LQFP64 (7*7mm), 8wire-card, 40bit ECC flash		August 2013
		ATJ3310C		MP3, WMA, USB high speed, LQFP48 (7*7mm), 40bit ECC flash		March 2013
		AK2117C		MP3, WMA, FM Radio, Voice Recording, Picture browse, AMV, AVI (MJPEG), LQFP64 (7*7mm), 4wire-card, 40bit ECC flash		March 2013
		ATJ3315C		LQFP64 card, 40bit ECC flash, Li(7*7mm), 4wire		December 2012
		ATJ2127		Full Audio format decode, 60bit ECC NAND Flash support		November 2012
Car Audio Dongle		ATJ3003C		MP3, WMA, FM Transmit I/F, Host, Nand flash, Card, 40Bit ECC, LQFP48 packaging		August 2013
Boom-Box		ATS2511		MP3, WMA, FM Receiver I/F, RTC (Real-Time Clock), REC (Record), Nor Flash, Host, 1wire-card, LQFP32 packaging, TTS function , no display		February 2014
		ATS2513		MP3, WMA, FM Receiver I/F, RTC (Real-Time Clock), REC (Record), Nor Flash, Host, 1wire-card, LQFP64 packaging, TTS function		February 2014
		ATS2500		MP3, WMA, FM Receiver I/F, RTC (Real-Time Clock), REC (Record), Nor Flash, Host, 4wire-card, LQFP48 packaging, Karaoke & TTS function		April 2012
		ATS2506		MP3, WMA, FM Receiver I/F, RTC (Real-Time Clock), REC (Record), Nor Flash, Host, 4wire-card, LQFP64 packaging, Karaoke & TTS function		January 2012
Bluetooth		ATS2805A		Bluetooth2.1+EDR ( A2DP, HFP, AVRCP ), MP3, WMA, APE, FLAC, WAV, FM reserver I/F, RTC (Real-Time Clock,Alarm), SD/MMC Card reader, Host, NorFlash, QFN56 packaging		August 2013
		ATS2805B		Bluetooth 4.0 Dual mode, MP3, WMA, APE, FLAC, WAV, FM reserver I/F, RTC (Real-Time Clock,Alarm), SD/MMC Card reader, Host, I2S, NorFlash, LQFP64 packaging		June 2014
OTT box		GT9		1.7GHz quad-core 64-bit CPU,  PowerVR G6230 3D graphic, Android OS 5.0 or higher, HEVC 4K x 2K@30fps video decoder, Ultra HD(4K) TV display with internal HDMI 1.4, Internal ISP, USB 3.0, 100M Ethernet , TFBGA642 packaging, 28nm process technology		January 2015

 

		ATM7039S		1.6G quad-core CPU, SGX544 3D graphic, Android OS 4.4 or higher, 1080P@60fps/4k@30fps video decoder, HDMI1.4, CMOS sensor,60bit ECC, 32 bit DDR up to 533Mhz, BGA359 packaging, 28nm process technology		December 2014
		ATM7029		1.2GHz quad-core CPU, GC1000 GPU up to 650Mhz, Android OS 4.4, 1080P@60fps video decoder/encoder,BGA359 packaging		March 2014

  

 

Solution Development Kits

 

Our solution development kits, or SDKs, include the embedded firmware code, software tools and documentation necessary to utilize our SoCs in tablets, portable media players and OTT boxes. 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:

 

•

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 tablet or portable media player or OTT box. 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 tablet, portable media player and OTT box 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.

 

In 2013, our top five customers included LXD (HK) Technology, YuCheng (HK) Technology, TCH (HK) Technology, LingXin Tech and XinLianXin Tech, all of which are value-added distributors and collectively accounted for approximately 60% of our revenues. In 2014, our top five customers included GMI Technology, LianLiWei Tech, Tongchuanghui Tech, Xinlian Tech, LingXin Tech.

 

 

Our sales to customers in the PRC accounted for approximately 13.0%, 22.5% and 32.0% of our revenues in 2012, 2013 and 2014, respectively. Export sales to our customers in Hong Kong accounted for approximately 87.0%, 77.5% and 68.0% of our revenues in 2012, 2013 and 2014, respectively. We anticipate that all of our revenue will continue to be represented by sales to customers in Hong Kong and the PRC.

 

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. In addition, through in-person visits and participation at international expositions and trade shows like Hong Kong Electronic Show, Computex and CES, our marketing group interacts frequently with owners of brands ranging from first-tier international brands to local white box brands in China, Taiwan, US, Europe and Southern Asia. We also hold product introduction seminars with our value-added distributor, contract manufacturer 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, tablet and OTT box design and manufacturing value chain to organize group purchases and negotiate volume discounts for our downstream customers who require other portable media player or tablet or OTT box components, such as flash memory, LCD or OLED displays, touch panels, WiFi/3G modules 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, 2014, we had a total of 33 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, tablets and OTT boxes 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, 2014, our technology service center employed 373 field application engineers, 262 of whom were located in Zhuhai, 62 of whom were located in Shanghai, and 49 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 have implemented an ERP (Oracle E-Business Suite) system so that we can successfully conduct data mining on 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, UMC and TSMC 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 major raw materials in use are silicon wafers, which are procured by our third-party foundries and are widely available commodity in the semiconductor supply chain. 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, starting from 2010, certain international Integrated Device Manufacturers (IDMs) released large orders to foundries, which resulted in foundry capacity being tied up and little flexibility in wafer prices.

 

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, assembled into finished semiconductor packages and then tested. Final products testing may also be conducted by another testing service provider or by us.

 

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 approximately 97%, 84% and 83% of the testing of our silicon wafers internally in 2012, 2013 and 2014, respectively, and approximately 70%, 76% and 86% of the testing of our final SoC products internally in 2012, 2013 and 2014, 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 and are certified to the ISO9000 series standard. All our products are in compliance with the requirements from ROHS (The Restriction of the use of Certain Hazardous Substances in Electrical and Electronic Equipment) and REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) issued by the European Union. 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, 2014, we held 153 issued patents and had 96 pending patent applications in the PRC, 11 issued patents and 9 pending patent applications in the United States, and 4 issued patent and 13 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 have 8 layout design applications and own 20 registered layout designs, 4 registered works of fine art copyright and 31 registered computer software copyrights in the PRC.

 

We held 54 registered trademarks and 15 pending trademark applications in the PRC as of December 31, 2014. In addition, we also held 7 registered trademarks in Hong Kong, 4 in Taiwan, 3 in the United States, 4 in the European Union, 3 in Australia, 3 in Russia, 2 in Brazil, 3 in Korea, 3 in Singapore, 2 in Japan, 3 in Canada and 1 in India and 4 pending trademark applications in India and 2 in Brazil, 1 in United States, 1 in the European Union, 1 in Malaysia, 1 in Indonesia, 1 in Taiwan, 1 in Thailand, 1 in Canada, 1 in Argentina and 7 in Hong Kong as of December 31, 2014. Our trademarks include Actions, Actions Semiconductor, and the 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, 2014, we had 6 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, tablets and OTT boxes 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/Appotek, RDA, Freescale, Infotmic, Intel, JieLI, MediaTek, MVSilicon, Rockchip, CSR, ISSC and WonderMedia. 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 tablets, portable media players and OTT boxes 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:

 

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ability to deliver integrated platforms solutions that support a wide variety of industry standards;

 

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design flexibility that allows customers to differentiate their products;

 

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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;

 

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competitive pricing; and

 

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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, or the Guidance Catalogue, issued on December 24, 2011 by the PRC Ministry of Commerce and the PRC National Development and Reform Commission, or the NDRC, and went effective on January 30, 2012, digital audio and video codec equipment, 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 above-mentioned business activities 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, or the Encouragement Policies, promulgated by the PRC State Council on June 24, 2000 and effective as of the same date, certified software enterprises can enjoy various incentive polices 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 formerly 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 2012, and is subject to annual inspection.

 

The Administrative Measures on Certification of Software Enterprises, or the New Software Certification Measures, was issued by the MIIT, the NDRC, the PRC Ministry of Finance, or the MOF, and the PRC State Administration of Taxation, or SAT, on February 26, 2013 and became effective on April 1, 2013. The New Software Certification Measures included, among other things, changes to the definition of software enterprises and the removal of software industrial associations as certification authorities. The Software Certification Measures remain effective, provided that the New Software Certification Measures shall prevail to the extent there is any inconsistency with the Software Certification Measures.

 

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 Old IC Design Certification Measures, issued by the MIIT and the SAT on March 27, 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.

 

On December 3, 2013, MIIT, the NDRC, Ministry of Finance and SAT jointly issued a new measure on the IC design certification, or the New IC Design Certification Measure, which came into effect on January 1, 2014 and abolished the Old IC Design Certification Measures on the same day. The New IC Design Certification Measures included, among other things, changes to the requirement for the recognition of IC design enterprise. Actions Semiconductor (Zhuhai) has been certified as an integrated circuit design enterprise from 2005 to 2014, and is subject to annual inspection.

 

NDRC, MIIT, Ministry of Finance, Ministry of Commerce and SAT jointly issued the Trial Measures for the Administration over the Recognition of Key Software Enterprises and Integrated Circuit Design Enterprises under State Planned Layout on August 9, 2012, or the Recognition of Key Integrated Circuit Design Enterprises, pursuant to Taxation on Enterprise Income Tax Policies for Further Encouraging the Development of the Software Industry and the Integrated Circuit Industry which was jointly issued by Ministry of Finance and SAT on April 20, 2012 and became effective retrospectively on January 1, 2011. Once recognized as a Key Software Enterprise or a Key Integrated Circuit Design Enterprise, a company is entitled to enjoy, among other things, 10% tax preference on EIT if no tax exemption preference is enjoyed in the current year. Actions Semiconductor (Zhuhai) has been certified as a Key Integrated Circuit Design Enterprise for year 2011-2012 and 2013-2014 consecutively.

 

 

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. In order to implement Circular 4, the PRC General Administration of Customs, or GAC, has promulgated an announcement and released policies and measures to support the development of software industry and integrated circuit industry. According to such announcement, policies and measures of GAC, the imported materials and parts of certified integrated circuit design enterprises and qualified software enterprises which meet requirements of current laws, regulations and policies may enjoy exemption of import duties.

 

In June 2014, China’s State Council publicly issued the Outline for the Development of Integrated Circuit Industry, or the IC Development Outline, reflecting its decision to focus on the development of the integrated circuit design industry. Further, the IC Development Outline sets forth several measures, including the establishment of a National Development of Integrated Circuit Industry Leader Group to better coordinate resources and top-level design, and also a National Industrial Investment Fund to support the development.

 

Intellectual Property Rights

 

China has adopted comprehensive legislation governing intellectual property rights, including trademarks, patents, copyrights, trade secrets, trade name, domain name 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 their Implementation Rules issued by the PRC State Intellectual Property Office, or the SIPO, on September 18, 2001 and effective as of October 1, 2001. The integrated circuit diagram designs, which are eligible to obtain protection in China, need to satisfy the character of inventiveness. In the meantime, only the integrated circuit diagram designs that have been registered with the relevant Chinese intellectual property authorities are protectable under the Protection Regulations for Integrated Circuit Diagram Design. The protection period of an integrated circuit diagram design is ten years from the earlier of (i) the date of filing application for such protection or (ii) the date of such integrated circuit diagram design is first put into commercial use. However, an integrated circuit diagram design will not be protected under the regulations after fifteen years of its invention, regardless of whether it has been registered or put into commercial use.

 

Registered trademarks are protected under the Trademark Law amended by the Standing Committee of National People’s Congress, or the SCNPC, on August 30, 2013 and effective as of May 1, 2014. A trademark registration is valid for ten years, and such ten-year period can be renewed. The Chinese trademark law adopts a first-to-file policy, exception only allows to well-known trademark.

 

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 invention patent, utility model patent and design patent, which can be applied for protection with the SIPO. The protection period for invention patent is 20 years, and the protection period for utility model patent and design patent is 10 years. Unlike trademark registration, patent rights could not be renewed.

 

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 for Computer Software issued by the State Council on December 20, 2001 and amended on January 30, 2013. An author of work will own the copyright of his work once it is completed, regardless of whether it is registered. However, the China Copyright Protection Center does provide an option to copyright owners for voluntary registration of copyright ownership of their work and/or computer software. The term of a copyright is the author’s life plus fifty years. Where a work is created jointly, such term shall be fifty years after the death of the last surviving author.

 

The PRC Anti-Unfair Competition Law provides protection to trade secret, know-how, trade name and remedies against any unfair competition behaviors. Under the law, if there is no registered intellectual property right that can be relied on, a court would examine whether there is any act of unfair competition in which scenario there needs to be a high threshold of evidence in order for the court to reach a conviction.

 

 

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, whether foreign invested enterprises or domestic enterprises. For the potential effects of the EIT Law on our preferential tax treatment, see also “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% EIT 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 with respect to the resident enterprise determination is available for overseas companies such as ours that are not established or controlled by PRC companies. Therefore, it is unclear whether PRC tax authorities would treat us as a PRC resident enterprise. Please also 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 EIT 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, 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 EIT. 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 EIT rate 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 also 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 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.

 

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.

 

We and our PRC employees who had been granted stock options became subject to the Stock Option Rule commencing from the date on which we became an overseas listed company.

 

On February 15, 2012, SAFE promulgated the Circular on Certain Foreign Exchange Issues Relating to Domestic Individuals’ Participation in Stock Incentive Plan of Overseas Listed Company, or the New Stock Option Rule. Upon the effectiveness of the New Stock Option Rule on February 15, 2012, the Stock Option Rule became void, although the basic requirements and procedures provided under the Stock Option Rule are kept unchanged in the New Stock Option Rule, i.e., the domestic employees participating in a stock incentive plan of an overseas listed company shall appoint the PRC subsidiary of such overseas listed company or a domestic qualified agent to make the registration of such stock incentive plan with SAFE and handle all foreign exchange-related matters of the stock incentive plan through the special bank account approved by SAFE. The New Stock Option Rule clarifies that the domestic subsidiary of an overseas listed company shall include any limited liability company, partnership and the representative office directly or indirectly established by such overseas listed company in China and the domestic employees shall include the directors, supervisors, senior management and other employees of the domestic subsidiary, including the foreign employees of the domestic subsidiary who continuously reside in China for at least one year.

 

Similar to the Stock Option Rule, the New Stock Option Rule requires that the annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises be subject to the approval of SAFE. The New Stock Option Rule further requires that the material amendments of the stock incentive plan shall be filed with SAFE within three months following the occurrence of the material amendments. The domestic agent shall also make a quarterly update to SAFE to disclose the information with respect to the stock option exercises, the stock holding and foreign exchange matters. If the domestic employees or the domestic agent fails to comply with the requirements of the New Stock Option Rule, SAFE may take regulatory measures and even impose administrative penalties that SAFE deems appropriate.

 

In addition, on March 28, 2005, the MOF and the SAT issued the Circular on Issues Regarding Assessment of Individual Income Tax in respect of Stock Options Granted to Individuals. On September 30, 2006, the SAT issued the Supplemental Circular on Issues Regarding Assessment of Individual Income Tax in respect of Stock Options Granted to Individuals. 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.

 

M&A Rules

 

On August 8, 2006, the Ministry of Commerce, the CSRC and four other PRC authorities at the state level promulgated the M&A Rules, which came into effect on September 8, 2006. The M&A Rules were later revised and amended on June 22, 2009.

 

Under the M&A Rules, equity or assets merger and acquisition of PRC enterprises by foreign investors shall be subject to the approval from the Ministry of Commerce or its competent local branches. In particular, a share swap between a foreign investor and a PRC enterprise shall be subject to the approval of the Ministry of Commerce, and the share swap would not be approved unless such foreign investor is a listed company or an offshore special purpose vehicle, or SPV. As defined in the M&A Rules, an SPV is an offshore company that is directly or indirectly, established or controlled by PRC entities or individuals for the purposes of an overseas listing. In addition, the listing of the SPV shall be completed within one year after the issuing date of the business license of the PRC enterprise acquired by the SPV.

 

 

On February 3, 2011, the General Office of the State Council promulgated the M&A Security Review Rule, which became effective on March 5, 2011. The M&A Security Review Rule provides for certain circumstances under which foreign investors’ acquisition of domestic enterprises shall be subject to security review of the PRC governments. The security review assesses the impact of the acquisition on national security, stable operation of national economy, basic livelihood of the people, and research and development capacity for key technologies related to the national security.

 

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 and which was amended on December 28, 2012 with effectiveness from July 1, 2013. 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, labor dispatch and collective bargaining. According to the Labor Contract Law, at the request of an employee, 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 or if the employee continues to work for the employer consecutively over 10 years, under which circumstances the employee can still be terminated for a cause permitted by law. 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. All the terminations initiated by the employer before the expiration of a labor contract shall be conducted with a cause permitted by law and follow legally required procedures. If the employer terminates a labor contract without a cause permitted by law or the legally required procedures are not properly followed, the employee has the right to file a case against the employer and claim either the restatement of the employment relationship or double severance payment as compensation. 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. On November 30, 2011, the PRC Ministry of Human Resources and Social Security issued the Rules on Labor Dispute and Mediation of Enterprises, which became effective on January 1, 2012. These rules encourage large and medium-size enterprises to establish a mediation committee to deal with the employer-employee disputes. We are considered a large-size enterprise under these rules, and presently we have not established such a mediation committee.

 

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, 2015.

 

 

 

D.	Property, Plants and Equipment

 

With support from subsidiaries in Shanghai and Shenzhen, China, our corporate headquarters facilitate the majority of our semiconductor design operation, 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. The construction of our new headquarters at this location began in June 2008 and was completed in May 2011. The total construction cost was approximately US$30 million. We believe our current facilities are adequate and that additional space will be available on commercially reasonable terms for the foreseeable future.

 

Our other 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
Hong Kong		Export trade office and warehouse		2,061		March 2017
Shenzhen, PRC		Sales office and technology service center		13,546		May 2015
Shanghai, PRC		Research and development and management service center		12,036		March 2016
Taipei		Research and development		2,976		July 2015

 

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 entered into a land transfer contract with the Pudong District government after paying the full bidding price on July 23, 2010. After Actions Cayman transferred Actions Enterprise (HK), the holding company of Actions Technology (Shanghai), to Nann Capital and invested in 40% of Nann Capital, Actions Technology (Shanghai) has become one of our indirect equity method investments. Actions Technology (Shanghai) plans to construct a research and development center, or R&D Center, on this parcel of land and expects to fund the bulk of the construction with capital injection from its shareholders, including us. In May 2012, Actions Technology (Shanghai) obtained the approval for the construction plan and commenced construction work. The total cost of the R&D Center is estimated to be approximately RMB 378 million and, as of December 31, 2014, expenditures for the construction totaled approximately RMB 270 million. The construction of the R&D Center is expected to be completed in March 2016.

 

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

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, tablets and OTT boxes. We provide integrated platform solutions to portable media player, tablet and OTT box 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.

 

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, tablets and OTT boxes. 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 from providing semiconductor product testing services to our investee companies, such as Actions Beijing and Hi-Trend Technology (Shanghai), or Hi-Trend, which is an investee we have accounted for using the cost method, at times when we had excess capacity in our semiconductor testing operations.

 

Revenues from our SoCs for portable media players, tablets and OTT boxes 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 and tablets 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 2012, 2013 and 2014, sales of SoCs for portable media players, tablets and OTT boxes accounted for approximately 99.7%, 99.8% and 99.8% 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 2012, our per unit costs declined further due to design improvements, wafer processing technology migration, and a decrease in wafer prices. Then, as SoCs for tablets account for a higher proportion of our products, our per unit costs increased in 2013 and 2014.

 

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 a technology licensor. In addition, we pay royalty fees to the technology licensors based on a percentage of net revenue generated from sales of the chips incorporating 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”.

 

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, tablet and OTT boxes markets 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 70.7%, 70.6% and 70.0% of our operating expenses in 2012, 2013 and 2014, 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-based compensation, employee benefits, and related expenses for information technology, human resources, finance, legal, other administration functions, and senior management. General and administrative expenses comprised 25.5%, 23.8% and 23.2% of our operating expenses in 2012, 2013 and 2014, respectively. We have managed since 2008, and expect to continue in the future, to control our general and administrative expenses in a cost effective manner, which includes a pay cut on executives and high-level management personnel and a hiring freeze of non-engineering employees we instituted in January 2009 that currently remain in effect. In addition, we have continued to improve our working processes and efficiency to lower general and administrative expenses. 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.

 

 

Selling and marketing expenses: Our selling 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. Selling and marketing expenses comprised 3.8%, 5.6% and 4.9% of our operating expenses in 2012, 2013 and 2014, respectively. We intend to expand our sales and support network to better serve our customer base. As a result, we expect our selling 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

 

Our other income is principally comprised of income related to certain foreign exchange gains.

 

Taxation

 

The Cayman Islands currently does not levy taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company or Mavrix levied by the government of the Cayman Islands, except for stamp duties that may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands is not a party to any double taxation treaties that are applicable to any payments made to or by our company or Mavrix. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

Under the current Mauritius law and Hong Kong Inland Revenue Ordinance, Actions Semiconductor Mauritius’ and Artek Microelectronics (HK)’s income are subject to taxation in Mauritius and Hong Kong, respectively; however, up to and as of December 31, 2014, both entities have not had any taxable profits. Shanghai Actions, Actions Microelectronics (HK), 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 EIT Law in China was implemented. Under the law:

 

1.

all resident enterprises, domestic or foreign, are subject to the unified EIT rate of 25%.

 

2.

companies that are categorized as High Technology Enterprises are entitled to a reduced tax rate of 15%.

 

3.

Starting from January 1, 2008, enterprises that enjoyed a preferential tax rate had a five-year phase-in period after which they all became subject to the unified EIT rate of 25%. Enterprises with a then current preferential tax rate of 15%, would be subject to tax rates of 18%, 20%, 22%, 24% and 25% for the years ended December 31, 2008, 2009, 2010, 2011 and 2012 respectively.

 

The new law allows the preferential tax treatment to be continued to be enjoyed by companies up until the year when such preferential tax treatment expires. For those companies whose tax holiday had 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.

 

Actions Semiconductor (Zhuhai)

 

As at December 31, 2007, foreign-invested enterprises in the PRC were generally entitled to various preferential tax treatment which led to their effective EIT rate being significantly lower than the otherwise applicable total tax rate of 33%, the sum of a 30% national tax rate and a 3% local tax rate. Actions Semiconductor (Zhuhai) was entitled to a reduced national tax rate of 15% as a foreign-invested enterprise established in the Zhuhai Special Economic Zone of China, or Zhuhai Economic Zone, principally conducting its business operations in this Zhuhai Economic Zone. In addition, as a production-oriented enterprise, Actions Semiconductor (Zhuhai) was further exempted from the EIT for two years since its first year of profitable operations , which were 2004 and 2005, after offsetting prior years' tax losses and entitled to a 50% reduction in its EIT rate for the following three years, which were 2006, 2007 and 2008, 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.

 

 

With a then-effective 15% tax rate, Actions Semiconductor (Zhuhai) was eligible for an 18% transitional EIT rate for the year ended December 31, 2008. Because Actions Semiconductor (Zhuhai) was also enjoying the further 50% reduction in its EIT rate for a last year in 2008, its effective EIT rate became 9% 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 of Actions Semiconductor (Zhuhai) was 15% for the years ended December 31, 2009, 2010 and 2011.

 

On August 23, 2011, Actions Semiconductor (Zhuhai) successfully renewed its certificate of “High Technology Enterprise” effective from January 1, 2011. In addition, Actions Semiconductor (Zhuhai) was named as a “Key Integrated Circuit Design Enterprise” effective from December 2013. As a result, the applicable tax rate were 15% and 10% for the years ended December 31, 2012 and 2013 and 10% for the year ending December 31, 2014, respectively, and 25% thereafter unless Actions Semiconductor (Zhuhai) continues its status and receives certification as a “High Technology Enterprise” and a “Key Integrated Circuit Design Enterprise” by the end of 2015.

 

Artek Microelectronics (Shenzhen)

 

Artek Microelectronics (Shenzhen) was established in the Shenzhen Special Economic Zone, or Shenzhen Economic Zone, of China as a foreign-invested enterprise that principally conducts its business operations in the Shenzhen Economic Zone. Therefore, it was subject to a reduced EIT rate of 15% and was exempted from the EIT 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, during which the EIT rate had initially been changed to the unified transitional rates of 20%, 22% and 24%, respectively, Artek Microelectronics (Shenzhen)was in addition entitled to a 50% tax rate reduction pursuant to the same preferential tax treatment, as in the case of Actions Semiconductor (Zhuhai), as a result of which the effective income tax rate became 10%, 11% and 12% for the years ended December 31, 2009, 2010 and 2011, respectively. Artek Microelectronics (Shenzhen) was no longer entitled to a 50% reduction to the EIT rate in 2012 but it successfully obtained a certificate of "High Technology Enterprise" in 2012, resulting in an income tax rate of 15% being applied for the years ended December 31, 2013, December 31, 2014 and December 31, 2015.

 

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% EIT 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, except Mavrix whose place of effective management is in Shanghai, 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 also “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 10% 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 $919 of income tax expense for the 10% dividend withholding tax on the balance of distributable profits that arose on or after January 1, 2008 within our PRC subsidiaries as of December 31, 2014.

 

Actions Technology (HK), Artek Microelectronics (HK) and Actions Microelectronics Co., Ltd were subject to Hong Kong Profits Tax at a rate of 16.5% for the years ended December 31, 2012, 2013 and 2014, respectively.

 

 

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) write-downs for obsolete inventory; (c) share-based compensation expense; (d) valuation allowance against deferred tax assets; (e) impairment of long-lived assets; (f) impairment of investments; and (g) dividend withholding tax treatment for PRC subsidiaries’ undistributed profit. 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 collectability is determined to be reasonably assured. Since all of our product sales have destination shipping terms and no rights of return, we determine that delivery has occurred when the goods are delivered to the customers and we receive acknowledgment of receipt, which occur simultaneously. We further determine that collectability is reasonably assured by performing an assessment of credibility of our customers based on their operating results and past payment records. We only sell products to customers that are determined to have the ability to make payments and have not had material collectability defaults in the past. 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.

 

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.

 

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 ADSs, 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. 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. On November 12, 2010 and April 1, 2013, we further amended the plan to increase the number of shares available for grant by 1,400,000 ADSs, representing 8,400,000 ordinary shares, and 2,000,000 ADSs, representing 12,000,000 ordinary shares, respectively. 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. For any awards that are modified, we calculate the incremental fair value of the award resulting from the modification. Such incremental value is calculated as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms are modified and it is further amortized over the remaining vesting period of the award. 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 15% to 11% 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.

 

On April 1, 2013, we granted certain performance-based share awards the underlying ADSs of which will vest in accordance with performance milestones. We recognize share-based compensation expense associated with such options after an evaluation on the likelihood of achieving the performance milestones. No share-based compensation was accrued as the probability that these performance conditions will be achieved was remote as at December 31, 2014.

 

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% EIT 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 with respect to the resident enterprise determination is available for overseas companies like ours that are not established or controlled by PRC companies. 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 also “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.”

 

Impairment of Long-lived Assets (Property, plant and equipment and acquired intangible assets). The valuation of long-lived assets is tested whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. An impairment assessment has been made on the comparison of the estimated undiscounted future cash flows generated by long-lived assets and their current carrying amounts. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we 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. In 2014, US$0.8 million impairment of intangible assets 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 would 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.

 

In 2013, we recorded other-than-temporary impairment losses related to one unlisted equity securities issued by a private entity. Our management has assessed that the decline in value is other-than-temporary, thus impairment losses of approximately $681,000 have been recognized and the investment in this unlisted equity securities was written down to approximately $819,000 as of December 31, 2013. No impairment of Investments was recorded for the year ended December 31, 2014.

 

Dividend withholding tax treatment for PRC subsidiaries' undistributed profit. The subsidiaries located at PRC have discretion to decide whether the undistributed profit should be declared as dividend to the holding company. Tax would be withheld on the undistributed profit that is yet to be declared as a temporary difference unless the local tax law provides a means by which the investment in domestic subsidiary could be recovered tax free.

 

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 2.6% in 2012, 2.6% in 2013 and 2.0% in 2014.

 

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 (Adopted)

 

In March 2013, the Financial Accounting Standards Board ("FASB") issued an authoritative pronouncement related to a parent company’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the amendments in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption. The adoption of this guidance did not have a significant effect on the Company's consolidated financial statements.

 

In July 2013, the FASB issued an Accounting Standard Update ("ASU") which provides guidance on financial statement presentation of an unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. The adoption of this guidance did not have a significant effect on the Company's consolidated financial statements.

 

Recent Accounting Pronouncements (Not Yet Adopted)

 

In April 2014, the FASB issued a new pronouncement which amends to change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

 

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

 

In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.

 

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

In May 2014, the FASB issued a new pronouncement which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

An entity should apply the amendments in this ASU using one of the following two methods:

 

 

1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

 

For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

 

For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.

 

For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

 

2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

 

The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.

 

For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Group is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows and has not yet determined the transition method it will use.

 

In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

 

Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.

 

The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Group is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows and has not yet determined whether ASU will be early adopted.

 

In August, 2014, the FASB issued a new pronouncement which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern." The new standard is effective for fiscal years ending after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

In January 2015, the FASB issued a new pronouncement which eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item.

 

 

If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

 

The FASB heard from stakeholders that the concept of extraordinary items causes uncertainty because it is unclear when an item should be considered both unusual and infrequent. Additionally, some stakeholders said that although users find information about unusual or infrequent events and transactions useful, they do not find the extraordinary item classification and presentation necessary to identify those events and transactions. Other stakeholders noted that it is extremely rare in current practice for a transaction or event to meet the requirements to be presented as an extraordinary item.

 

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

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.

 

		For the year ended December 31,
		2012				%				2013				%				2014				%
		(thousands)								(thousands)								(thousands)
Revenues:
System-on-a-chip products		US$	54,150				99.7	%		US$	69,256				99.8	%		US$	50,143				99.8	%
Semiconductor product testing services			179				0.3	%			135				0.2	%			117				0.2	%
Total revenues			54,329				100.0	%			69,391				100.0	%			50,260				100.0	%
Cost of revenues:
System-on-a-chip products			(35,007	)			-64.4	%			(47,907	)			-69.0	%			(46,148	)			-91.8	%
Semiconductor product testing services			(100	)			-0.2	%			(58	)			-0.1	%			(46	)			-0.1	%
Total cost of revenues			(35,107	)			-64.6	%			(47,965	)			-69.1	%			(46,194	)			-91.9	%
Gross profit			19,222				35.4	%			21,426				30.9	%			4,066				8.1	%
Other operating income			896				1.6	%			2,170				3.1	%			890				1.8	%
Operating expenses:
Research and development			(23,739	)			-43.7	%			(25,994	)			-37.5	%			(31,124	)			-61.9	%
General and administrative			(8,573	)			-15.8	%			(8,764	)			-12.6	%			(10,330	)			-20.6	%
Selling and marketing			(1,281	)			-2.4	%			(2,057	)			-3.0	%			(2,175	)			-4.3	%
Impairment on intangible assets			—				—				—				—				(820	)			-1.6	%
Total operating expenses			(33,593	)			-61.8	%			(36,815	)			-53.1	%			(44,449	)			-88.4	%
Loss from operations			(13,475	)			-24.8	%			(13,219	)			-19.1	%			(39,493	)			-78.6	%
Other income (expense)			1,547				2.8	%			2,336				3.4	%			(2,736	)			-5.4	%
Dividend income from an other investment			—				—				493				0.7	%			423				0.8	%
Fair value change in trading securities			2				0.0	%			—				—				—				—
Interest income			13,240				24.4	%			12,358				17.8	%			9,611				19.1	%
Interest expense			(250	)			-0.5	%			(498	)			-0.7	%			(530	)			-1.1	%
Other-than-temporary impairment loss on investments			(2,543	)			-4.7	%			(681	)			-1.0	%			—				—
(Loss) income before income taxes, equity in net income (loss) of equity method investees and non-controlling interest			(1,479	)			-2.7	%			789				1.1	%			(32,725	)			-65.1	%
Income tax (expense) credit			(772	)			-1.4	%			(403	)			-0.6	%			1,796				3.6	%
Equity in net income (loss) of equity method investees			41				0.1	%			(264	)			-0.4	%			566				1.1	%
Net (loss) income			(2,210	)			-4.1	%			122				0.2	%			(30,363	)			-60.4	%
Add: Net loss  attributable to non-controlling interest			8				0.0	%			2				0.0	%			2				0.0	%
Net (loss) income  attributable to Actions Semiconductor Co., Ltd. shareholders		US$	(2,202	)			-4.1	%		US$	124				0.2	%			(30,361	)			-60.4	%

 

 

Year ended December 31, 2014 and 2013

 

Revenues.

 

Revenues decreased by US$19.1 million, or 27.6%, from US$69.4 million in 2013 to US$50.3 million in 2014. The decrease was primarily due to an approximately 25% decrease in the average selling price compared to 2013, as well as a decline of approximately 6% in units shipped of our SoCs for portable media players in 2014 compared to 2013. The decrease in the average selling price was primarily due to the change of product mix, revenues from sales of SoCs for tablets shrink around one-tenth in total sales in year 2014 compared to 2013. The decrease in units shipped was mainly due to the drop in market demand for consumer electronics and media player products and, to a lesser extent, limited production capacity at our third-party foundries, which limited the revenue generated from our PMP business over the last two quarters of 2014.

 

Revenues from sales of SoCs for tablets, our new products that were launched in 2012, contributed 28% of our total revenue in 2014 compared to 42% in 2013.

  

Revenues from sales of OTT boxes, our new products that were launched in 2014, contributed less than 5% of our total revenue in 2014.

 

Revenues from providing semiconductor products testing services comprised 0.2% of our total revenue in both 2013 and 2014.

 

 

Cost of Revenues. Cost of revenues decreased by US$1.8 million, or 3.7%, from US$48.0 million in 2013 to US$46.2 million in 2014, primarily due to the decrease in sales volume.

 

Gross Profit. Gross profit decreased by US$17.4 million, or 81.0%, from US$21.4 million in 2013 to US$4.1 million in 2014. Our gross margin was 8.1% in 2014, compared to 30.9% in 2013. The decrease in gross profit was due to lower sales of SoCs for tablets, the impact of which was compounded by the decline in the average selling price of these SoCs, as well as inventory write-downs of certain lower margin, slower moving inventory. The decrease in gross margin was due to the decrease of unit price of SoCs for tablets and the negative margin of our new products for OTT boxes.

 

Other Operating Income. Other operating income including subsidies from PRC government authorities, royalty income, and intellectual property transfer income decreased by US$1.3 million, or 59.0%, from US$2.2 million in 2013 to US$0.9 million in 2014.

 

Operating Expenses. Total operating expenses increased by US$7.6 million, or 20.7%, from US$36.8 million in 2013 to US$44.4 million in 2014.

 

 

•          Research and development. Research and development expenses increased by US$5.1 million, or 19.7%, from US$26.0 million in 2013 to US$31.1 million in 2014 due primarily to an increase of US$2.3 million in salary, bonus and social insurance contribution for research and development personnel due to headcount and salary increases, an increase of US$1.3 million in mask expense and an increase of US$1.4 million in the amortization of intangible assets.

 

•          General and administrative expenses. General and administrative expenses increased by US$1.6 million, or 17.9%, from US$8.8 million in 2013 to US$10.3 million in 2014 due primarily to an increase of US$0.9 million in consulting expenses and an increase of US$0.6 million in bad debt provision.

 

•          Selling and marketing expenses. Selling and marketing expenses increased by US$0.1 million, or 5.7%, from US$2.1 million in 2013 to US$2.2 million in 2014 due primarily to an increase of US$0.2 million in salary which was partially offset by US$0.1 million decrease in advertisement expense.

 

Impairment on intangible assets. On December 31, 2014, we recorded an impairment charge of US$0.8 million for those intangible assets which have no recoverable amounts.

 

Loss from Operations. As a result of the foregoing, our loss from operations increased by US$26.3 million, or 198.8%, from a loss of US$13.2 million in 2013 to a loss of US$39.5 million in 2014.

 

Interest Income. The amount of our cash, cash equivalents, time deposit and restricted deposits increased to US$129.8 million as of December 31, 2014, compared to US$80.8 million as of December 31, 2013. Our investment in marketable securities has decreased to US$38.4 million as of December 31, 2014 compared to US$143.7 million as of December 31, 2013. In order to minimize the increasing market risk, we invested in safer financial products and forwent part of our interest income that would otherwise be available. As a result, our interest income decreased by US$2.7 million, or 22.2%, from US$12.4 million in 2013 to US$9.6 million in 2014.

 

OtherIncome (Expense). Other expense from operations was US$2.7 million in 2014 compared to other income from operations of US$2.3 million in 2013 due primarily to foreign exchange loss as a result of the 2.4% depreciation of the RMB against the US dollar in 2014 compared to the 2.9% appreciation of the RMB against the US dollar in 2013.

 

Income Tax (Expense) Credit. Our subsidiaries incorporated in the PRC are subject to EIT in the PRC. Our income tax benefit was $1.8 million in 2014 compared to income tax expense of US$0.4 million in 2013.

 

Year ended December 31, 2013 and 2012

 

Revenues. Revenues increased by US$15.1 million, or 27.7%, from US$54.3 million in 2012 to US$69.4 million in 2013. The increase was primarily due to an approximately 51% increase in the average selling price compared to 2012 which was partially offset by an approximately 15% decrease in units shipped of our SoCs for portable media players in 2013 compared to 2012. The increase in the average selling price was primarily the result of our product mix adjustment in 2013, with revenues from sales of SoCs for tablets having become a significant part of our total sales. The decrease in units shipped was mainly due to the shrink of demand in media player products.

 

 

 

Revenues from sales of SoCs for tablets, our new products launched in 2012, contributed 42% of our total revenue in 2013.

 

Revenues from providing semiconductor products testing services comprised of 0.3% and 0.2% of our total revenue in 2012 and 2013, respectively.

 

Cost of Revenues. Cost of revenues increased by US$12.9 million, or 36.8%, from US$35.1 million in 2012 to US$48.0 million in 2013, primarily due to the product mix adjustment in 2013 as sales of SoCs for tablets, which cost more than other products, grew rapidly.

 

Gross Profit. Our gross profit increased by US$2.2 million, or 11.5%, from US$19.2 million in 2012 to US$21.4 million in 2013. Our gross profit margin was 30.9% in 2013, compared to 35.4% in 2012. The increase in gross profit was due to the increase in the sales of SoCs for tablets which are more expensive than video and audio products. The decrease in gross profit margin was due to the increased average unit cost compared with that of 2012.

 

Other Operating Income. Other operating income including subsidies from PRC government authorities, royalty income, and intellectual property transfer income increased by US$1.3 million, or 142.2%, from US$0.9 million in 2012 to US$2.2 million in 2013.

 

Operating Expenses. Total operating expenses increased by US$3.2 million, or 9.6%, from US$33.6 million in 2012 to US$36.8 million in 2013.

 

• Research and development. Research and development expenses increased by US$2.3 million, or 9.5%, from US$23.7 million in 2012 to US$26.0 million in 2013 due primarily to an increase of US$1.1 million in mask expense and an increase of US$0.7 million in the amortization of intangible assets.

 

• General and administrative expenses. General and administrative expenses increased by US$0.2 million, or 2.2%, from US$8.6 million in 2012 to US$8.8 million in 2013 due primarily to the cease of reimbursement by JPMorgan Chase Bank, N.A., our ADS depositary, in 2013 of US$0.5 million in our expenses incurred in connection with our ADR and investor relations programs, and an increase of US$0.2 million in consulting expenses, which was partially offset by US$0.5 million in salary, bonus and social insurance contribution for general and administrative personnel.

 

• Selling and marketing expenses. Selling and marketing expenses increased by US$0.8 million, or 60.6%, from US$1.3 million in 2012 to US$2.1 million in 2013 due primarily to an increase of US$0.5 million in advertisement expense.

 

Loss from Operations. As a result of the foregoing, our loss from operations decreased by US$0.3 million, or 1.9%, from a loss of US$13.5 million in 2012 to a loss of US$13.2 million in 2013.

 

Interest Income. The amount of our cash, cash equivalents, time deposit and restricted deposits decreased to US$80.8 million as of December 31, 2013, compared to US$81.3 million as of December 31, 2012. Our investment in marketable securities has increased to US$143.7 million as of December 31, 2013 compared to US$142.0 million as of December 31, 2012. In order to minimize the increasing market risk, we invested in safer financial products and forwent part of our interest income that would otherwise be available. As a result, our interest income decreased by US$0.8 million, or 6.7%, from US$13.2 million in 2012 to US$12.4 million in 2013.

 

Other Income. Other income from operations was US$2.3 million in 2013 compared to other income from operations of US$1.5 million in 2012 due primarily to foreign exchange gain as a result of the 2.9% appreciation of the RMB against the US dollar in 2013 compared to the 1.0% appreciation of the RMB against the US dollar in 2012.

 

Income Tax Expense. Our subsidiaries incorporated in the PRC are subject to EIT in the PRC. Our income tax expense was approximately $0.8 million and $0.4 million in 2012 and 2013, 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,
		2012				2013				2014
		(thousands)
Net cash used in operating activities		US$	(3,296	)		US$	(7,560	)			(19,140	)
Net cash provided (used in) by investing activities			33,791				(26,178	)			61,721
Net cash provided by (used in) financing activities			6,936				13,902				(16,628	)
Net increase (decrease) in cash and cash equivalents			37,431				(19,836	)			25,953
Cash and cash equivalents, beginning of year			33,207				71,336				53,263
Effect of exchange rate changes on cash			698				1,763				(1,039	)
Cash and cash equivalents, end of year		US$	71,336			US$	53,263				78,177

  

On December 31, 2014, we had US$168.2 million of cash, cash equivalents, time deposit, restricted deposits and current marketable securities. In general, our primary uses of cash were for operating and investing activities, such as the purchase of inventory and purchase of property, plant and equipment and intangible assets. 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, including our ADS repurchase program 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. Excluding our commitments under our ongoing share repurchase program, our minimum projected obligations for fiscal year 2015 and beyond are set forth below under “contractual obligations.”

 

Operating Activities

 

In 2014, net cash used in operating activities amounted to US$19.1 million while we had a net loss during this period of US$30.4 million. We recorded a net decrease in accounts receivable of US$2.3 million, write down of inventories of US$6.2 million, amortization of acquired intangible assets of US$5.0 million, depreciation of property, plant and equipment of US$1.9 million and deferred tax of US$3.6 million.

 

In 2013, net cash used in operating activities amounted to US$7.6 million. We generated net income during this period of US$0.1 million. We recorded a net increase in inventory of US$7.8 million, a decrease of accrued expenses and other current liabilities of US$3.7 million, a decrease of accounts payable of US$2.2 million, a decrease of prepaid expenses and other current assets of US$0.9 million, impairment loss recognized in respect of other investments of US$0.7 million, depreciation of property, plant and equipment of US$2.1 million, amortization of acquired intangible assets of US$3.5 million and utilization of subsidy from local authorities of Zhuhai, the PRC of US$1.1 million.

 

In 2012, net cash used in operating activities amounted to US$3.3 million while we suffered a net loss during this period of US$2.2 million. We recorded a net increase of inventory of US$4.3 million, a decrease of accrued expenses and other current liabilities of US$3.5 million, an increase of prepaid expenses and other current assets of US$2.5 million, an increase of accounts payable of US$3.6 million, an increase of accounts receivable of US$3.2 million, impairment loss recognized in respect of other investments of US$2.5 million, depreciation of property, plant and equipment of US$2.3 million, amortization of acquired intangible assets of US$3.1 million and an increase of share-based compensation expense of US$1.5 million.

 

Investing Activities

 

In 2014, our net cash provided by investing activities was US$61.7 million. We recorded a net decrease of marketable securities of US$105.0 million, investment in an equity method investee of US$9.0 million, and purchase of intangible assets of US$8.0 million, purchase of property, plant, and equipment of US$1.2 million, deposit paid for acquisition of intangible assets of US$0.5 million and an increase in restricted deposits of US$25.0 million.

 

  

In 2013, our net cash used in investing activities was US$26.2 million. We recorded a net increase of marketable securities of US$0.4 million, investment in an equity method investee of US$3.7 million, and purchase of intangible assets of US$4.1 million, purchase of property, plant, and equipment of US$0.7 million, deposit paid for acquisition of intangible assets of US$0.2 million and an increase in restricted deposits of US$16.8 million.

 

In 2012, net cash provided by investing activities was US$33.8 million. We recorded a net decrease of marketable securities of US$46.6 million, investment in cost method investee of US$1.5 million, and purchase of intangible assets of US$1.1 million, purchase of property, plant, and equipment of US$0.2 million, and an increase in restricted deposits of US$10.0 million.

 

The purchases of additional marketable securities in 2012, 2013 and 2014 mainly included money market deposits and trust financial products issued by PRC commercial banks and financial institutions with maturities between three and twelve months. The money market deposits are foreign currency deposits which have market-based interest rates with principal that is protected. The trust financial products are investments in individual funds or in pools of funds held by financial institutions, which in turn use the funds to invest in debt instruments. The underlying debt securities have favorable fixed interest rates and maturities between three to twenty-four months when purchased. Such marketable securities are classified as held to maturity because we have the intention and the ability to hold the securities to maturity. The percentage of our assets held as money market deposits and trust financial products was 44.1%, 42.8% and 13.5% in 2012, 2013 and 2014, respectively. Because we have sufficient cash on hand to meet the demands from our day-to-day operations, we chose to hold a portion of our cash assets in the form of money market deposits and trust financial products to ensure the security and appreciation of our cash assets. Such investments are low risk capital preservation investments that are liquid and are issued and managed by well-regarded state-owned banks or independent financial institutions with high credit ratings in the PRC. The fair value of the investments may fluctuate depending on the applicable interest rate, which is determined primarily by the monetary policies adopted by the Chinese government. In the past, the Chinese government has closely supervised its state-owned banks and financial institutions and minimized delinquencies in their credit portfolios. We did not have any material exposure to the changes in the fair value of our investment portfolio as a result of changes in interest rates in 2012, 2013 and 2014. Future changes in Chinese monetary policy may affect the value of our investments and could have a material impact on our financial condition. However, due to the nature of these investments and relatively short maturity periods of three to twenty-four months from the time of purchase, we believe that we will remain free of any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

 

Financing Activities

 

Net cash used in financing activities was US$16.6 million in 2014, primarily consisting of a short-term bank loan of US$9.5 million obtained from HSBC Taiwan Branch and EFG BANK AG Hong Kong Branch, advance subsidies of US$0.2 million from local authorities of Zhuhai, the PRC, proceeds of US$2.5 million from exercises of stock options, and ADS and ordinary shares repurchases in the aggregate amount of US$28.9 million, of which US$3.9 million was under our repurchase program, US$ 25.0 million was under a tender offer launched in August 2014.

 

Net cash generated by financing activities was US$13.9 million in 2013, primarily consisting of a short-term bank loan of US$15.0 million obtained from HSBC Taiwan Branch, advance subsidies of US$0.7 million from local authorities of Zhuhai, the PRC, proceeds of US$3.0 million from exercises of stock options, and ordinary shares repurchases under our repurchase program in the amount of US$4.9 million.

 

Net cash generated by financing activities was US$6.9 million in 2012, primarily consisting of a short-term bank loan of US$8.5 million obtained from EFG BANK AG, Hong Kong Branch, advance subsidies of US$0.3 million from local authorities of Zhuhai, the PRC, proceeds of US$2.3 million from exercises of stock options, and ordinary shares repurchases under our repurchase program in the amount of US$4.2 million.

 

Capital Expenditures

 

We made capital expenditures of US$2.8 million, US$8.5 million and US$18.2 million in 2012, 2013 and 2014, respectively. Our capital expenditures in 2014 consisted principally of US$1.2 million for the purchase of property, plant and equipment, US$8.0 million for the acquisition of intangible assets and US$9.0 million for investment in a cost method investee.

 

After moving into our new corporate headquarters in Zhuhai in response to our anticipated growth, we may also establish additional offices in other cities in China, such as Shanghai, to better serve our existing and future customers or 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 no additional capital expenditures in 2015 in connection with such efforts. We will fulfill these additional capital expenditures with our existing RMB cash or will obtain US dollar loan(s), which will allow for lower interest rates, 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 offices and facilities at multiple 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 principal 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 their after-tax profits each year as a statutory reserve fund and to provide for a staff and workers’ bonus fund at the discretion of their boards 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, our PRC subsidiaries are also not permitted to distribute their registered capital as dividends. As a result of these and other restrictions under PRC laws and regulations, Actions Semiconductor (Zhuhai), Artek Microelectronics (Shenzhen), and Shanghai Mavrix 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$124.1 million, or 44.5%, and US$134.6 million, or 47.6% of our total consolidated net assets, which included approximately US$13.7 million, or 4.9%, and US$14.3 million, or 5.1% and of our total consolidated net assets associated with the statutory reserves as of December 31, 2012 and 2013, respectively.

 

As of December 31, 2014, the restricted net assets associated with the statutory reserves of Actions Semiconductor (Zhuhai) and Artek Microelectronics (Shenzhen) totaled approximately US$14.3 million, or 6.4% of our total consolidated net assets. In addition to those reserves, the registered capital of the Company’s PRC subsidiaries is also restricted in that it cannot be used to pay dividends. As of December 31, 2014, the total amount of the registered capital and reserves of the Company’s PRC subsidiaries reached US$166.9 million, or 75.2% of our total consolidated net assets.

 

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 EIT computed by applying the EIT rate to profit before income taxes is as follows:

 

		Year ended December 31,
		2012				2013				2014
PRC tax rate			25	%			25	%			25
Tax (credit) provision at PRC enterprise income tax rate		$	(370	)		$	197			$	(8,181	)
Expenses not deductible for tax purposes			1,224				403				3,701
Share-based compensation not deductible for tax purposes			366				123				11
Income not taxable for tax purposes			(599	)			(1,005				(5,146
Net change in valuation allowance			1,623				1,682				4,299
Effect of tax exemption and preferential income tax rate granted to PRC subsidiaries			(911	)			(930				3,857
Effect of the different income tax rates in other jurisdictions			21				204				301
Effect of withholding tax on undistributed earnings			349				400				(2,670	)
Withholding tax levied on distributed earnings				-				-			1,908
Effect of withholding tax on American Depository Shares ("ADS") reimbursement income			150				-				-
Utilization of tax loss previously not recognized			(979	)			(685				-
Overprovision in prior year			(81	)			(78				(90	)
Others			(21	)			92				214
Income tax expense		$	772			$	403			$	(1,796	)

 

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, 2014, we had 478 research and development engineers, 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 CODEC), 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 2012, 2013 and 2014 focused principally on: (i) the development of tablets and OTT boxes solutions and applications including ATM7029, ATM7021, ATM7039, ATM 7029B, ATM7059/ATM7039s and ATM9009/GT9, as well as Bluetooth audio and music solutions and applications incluing ATS2805A and ATS2805B, (ii) the improvement of traditional portable media player and boombox solutions including ATJ331X/AK211X/ATJ212X series, ATJ225X/ATJ227X series and ATS25XX/ATS26XX series. In addition to these efforts, we are also currently focusing on gaining know-how and intellectual property in the areas of the most advanced CPU and Graphic technology. The 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 while the technologies 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 in 2015.

 

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 also “Item 5.A Operating and Financial Review and Prospects—Operating Results—Financial Operations Overview—Operating Expenses—Research and development expenses” for information regarding the amount spent by us on research and development activities during the last three fiscal years.

 

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, ARM Limited, Imagination Technologies Limited, Lineo Solutions, Inc., CEVA Ireland Limited, Arteris, Inc., and Real Networks Inc. We integrate third-party software or other licensed technology into almost all of our products.

 

D.

Trend Information

 

Demand for portable media players, tablets and OTT boxes. As mentioned earlier, the portable media player market experienced rapid growth from 2004 to 2008, but has witnessed demand decrease since the economic crisis at the end of 2008. Though we have continued to derive steady revenue and profit from this market in recent annual periods, including in 2014, we do not expect another period of rapid growth in this mature market in the future mostly because of consumers’ migration to alternative devices such as tablets. Starting in the third quarter of 2014, due to limited capacity of 8-inch wafers at our foundries, there has been a shortage in wafer supply of PMP products that limited the revenue of our PMP business. While we anticipate slower sales of certain traditional PMP products, we expect a strong trend of market growth in the wireless connectivity enabled multimedia market, such as products enabled with Bluetooth and Wifi.

 

The tablet market entered into a rapid growth period starting in 2012, especially for the low-end and low-cost tablets, which are also widely known as “white box” tablets, manufactured in China. Due to the marketing and promotional efforts of international companies such as Apple and Samsung, consumers are quickly becoming aware of the benefits of tablets. At the same time, the rapid maturation of the software applications market for smartphones and tablets provides end users with more incentives to purchase tablets. However, the high price point of certain tablets, such as Apple’s iPad and Samsung’s Galaxy series, does not appeal to all consumers, and determining the optimal price point is a key factor in this rapidly expanding market. The consumer electronics industry in Southern China, which historically has focused heavily on production of MP3 and portable media players, already has the infrastructure and resources in place to support the production of tablets that are more affordable than many existing products currently being offered in the market. In 2014, smart phones with large screens posed pressure on the overall tablet market and resulted in relatively flat growth in demand for tablets in 2014. In addition, within the tablet market, demand in the WiFi only tablet market, which was our primary area of focus, was under pressure from the cellular tablet market. Above all, 2014 was marked by intense competition from global players rapidly taking tablet market share, resulting in rapidly decreasing average selling prices. In 2014, China’s OTT market was still in a very early stage, and policy changes and restrictions imposed by the PRC government impacted the upside, resulting in slower than expected growth in OTT box market.

 

According to a research conducted in January 2015 by Digitimes, a daily publication covering the semiconductor, electronics and computer industries, the worldwide tablet shipping numbers for 2013 and 2014 was 248.6 million units and 251.7 million units, respectively, which represented a growth rate of 1.2% for the tablet market in 2014. If we break down the shipping numbers into Apple, non-Apple and white box segments, the white box segment growing from 92 million units in 2013 to 94.4 million units in 2014, which represented a growth rate of 2.6%. Digitimes forecast global tablet shipments at 221.4 million units in 2015.

 

We foresaw this trend in the end of 2010, and significantly increased our investment in tablet SoCs since 2011. As a result, we were able to launch the single core tablet SoC ATM701x in the first half of 2012, and the multi-core tablet SoC ATM7029 (OWL Series) toward the end of 2012. In view of the trend towards multi-core products, we also launched our dual-core tablet SoC ATM7021 (OWL Series) for the entry market and another high-performance quad-core ATM7039 (OWL Series) to penetrate the high end segment in 2013. We launched our first 28nm SoC ATM7059 (OWL Series) for tablets and OTT boxes for the mid-tier market in 2014. In early 2015, we launched our first 64bit SoC to target the high end segment of the tablets (ATM9009) and OTT boxes (GT9) market.

 

We have entered into the tablet market and are continuing to invest in research, development and marketing in connection with this strategic move. There are no assurances that our endeavor in this market will succeed. Therefore, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance.

 

Average selling price of our products. The tablet and portable consumer electronics 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 tablets, portable media players and OTT boxes 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 tends to decline by approximately 15% annually after it reaches maturity in the product life cycle. Since our overall average selling prices depend on our product portfolio, they generally benefit from the introduction of new SoC products, which benefit may partially offset the impact of seasonality. However, we did not benefit from this effect in 2014 due to intense competition from global players rapidly taking tablet market share, which caused an acceleration in the decline of the averages selling prices of SoCs for tablets, which was our primary area of focus. In the first half of 2014, the average selling price of our products decreased by approximately 17% because of the decrease in sales of SoCs for tablets and increased sales of portable media player products. In the second half of 2014, similar product sales mix caused our average selling price to approximate the first half of 2014.

 

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, tablet and OTT box sales tend to increase significantly in the end of the third quarter and the first half of the fourth quarter to meet the year-end holiday demand. However, this pattern has varied due in part to the following reasons:

 

·

U.S. and European Economy: In the past few years, the recession in the U.S. and European markets has resulted in lower demand for consumer electronics products and has impacted the shipment amounts prepared for holiday sales. We believe there continues to be weakness in holiday demand in those markets.

 

·

Chinese New Year: Usually, the Chinese New Year falls within the period from the end of January to the middle of February. The holiday usually causes, for factories in China, production to slow down for at least four weeks, or even causes a complete shutdown of production before and after the Chinese New Year holiday, especially for consumer electronics manufacturers. On the demand side, areas outside of China like Korea or certain countries in Southeast Asia also celebrate Chinese New Year, which leads to an increase in demand during the holiday. Given the effect of the Chinese New Year on both the supply and demand sides, this period has become increasingly critical for the consumer electronics industry. If the Chinese New Year occurs in the middle of February, the shipments in December of the earlier year is usually not particularly strong because the factories still have enough time to produce in January. However, if the Chinese New Year occurs at the end of January, manufacturers will increase the shipment in December before they have to be shut down in the one or two weeks leading to the start of the holiday, and thus increase the sales in the fourth quarter.

 

·

Growing Popularity: Following the rapid growth in 2012, tablets remained a particularly popular item within the global consumer electronics market in 2013. However, due to the increasing popularity of smartphones with large screens, pressure from cellular tablets and intensified competition from global players, growth in demand in the tablet market has slowed significantly comparing to the prior year.

 

As a general matter, demand for consumer electronics will still be subject to seasonality, but the traditionally large impact of the U.S. and European holiday season on demand has seen a downward trend over recent years.

 

Accordingly, you should not rely on the results of any prior quarterly or annual periods as an indication of our future operating performance.

 

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, at times of strong market demand, the prices that contract foundries charge for their wafer products and services generally increase, and correspondingly at 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 electronic products is high, contract foundries that manufacture wafers for electronics products may increase the prices that they charge to their customers, including our company. Further, we are also subject to seasonal and other factors affecting foundry capacity and pricing that are beyond our control.

 

Presently, He Jian, UMC and TSMC 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, UMC and TSMC fail to achieve satisfactory yields or are 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, 2014.

 

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, 2014:

 

		Payments due by period																More
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				than 5 years
		(thousands)
Operating lease obligations		US$	216			US$	210			US$	6			US$	—			US$	—
Royalty Commitment			—				—				—				—				—
Purchase Obligations			7,748				7,748				—				—				—
Capital Commitment			35				35				—				—				—
Other Liabilities			1,929				1,929				—				—				—
Total contractual obligations		US$	9,928			US$	9,922			US$	6				—				—

 

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, 2014 and the positions held by them. The business address for each of our executive officers and directors is c/o Actions Semiconductor Co., Ltd., No. 1, Ke Ji Si Road, Technology Innovation Coast of Hi-Tech Zone, Zhuhai, Guangdong, 519085, the People’s Republic of China.

 

Name		Age		Position
Lee, Hsiang-Wei (David)		55		Director, Chairman of the Board
Yeh, Nan-Horng		56		Director
Lin, Yu-Hsin Casper (1)		68		Director
Chen, Chin-Hsin (Fred) (1)		72		Director
Huang , Jun-Tse (Walter) (1)		57		Director
Zhou, Zhenyu		50		Chief Executive Officer
Liu, I-Hung (Nigel)		43		Chief Financial Officer

 

 

(1) Member of each of the audit committee, compensation committee and nominations committee.

 

Lee, Hsiang-Wei (David) has served as our Chairman since October 2007. Previously, Mr. Lee served as our Chief Financial Officer since October 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 October 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. Previously, Dr. Chen has served as an endowed Chair Professor in Shanghai Jiao Tong University, Director and Professor of OLED Laboratory of Display Institute, National Chiao Tung University in Taiwan and Director of Centre for Advanced Luminescence Materials (CALM) at Hong Kong Baptist University. Dr. Chen was also a group leader and senior scientist at Display Technology Laboratory of Eastman Kodak Co., in Rochester, New York, USA. He is the co-inventor of the Doped OLED Guest-Host Emitter and has been awarded more than 35 U.S. patents as well as a Fellow in SID (Society for Information Displays) for his contribution in education and display technology.

  

Huang, Jun-Tse (Walter) has served as our director since April 2009. Mr. Jun Tse Huang serves as the CEO of Colorwind Technology Corporation, a position he has held from 2004 to 2014. 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.

 

Zhou, Zhenyu has served as our Chief Executive Officer since December 2011. Dr. Zhou has over 17 years of senior management experience, with expertise in establishing R&D teams, setting strategy and product road maps, and driving revenue growth through design win activity. Dr. Zhou founded Mavrix in 2005 and became Actions’ Senior Vice President when Mavrix was acquired by Actions in 2010. Prior to that, Dr. Zhou served as Senior Vice President of digital imaging products at Fremont, California-based ESS Technology, Inc. after it acquired in February 2000 Irvine, California-based NetRidium Communications, Inc., or NetRidium, which Dr. Zhou founded in January 1999 and which was a developer of CMOS sensors for cell phone makers such as Motorola, Samsung and LG. Prior to founding NetRidium, Dr. Zhou held multiple senior-level engineering positions at Conexant/Rockwell in Newport Beach, California. Dr. Zhou graduated with a master's degree and a PhD from the Signal and Image Processing Institute at the University of Southern California, Viterbi School of Engineering. Dr. Zhou holds a master's degree and a bachelor's degree from Zhejiang University in Hangzhou, China.

 

Liu, I-Hung (Nigel) has served as our Chief Financial Officer since September 2011. Mr. Liu has over 15 years of accounting and finance experience and has been with Actions since 2007. He is a Certified Public Accountant, a Qualified Internal Auditor (QIA), and a Certified Internal Auditor in Taiwan. Previously, Mr. Liu spent seven years in multiple management positions, most recently as Senior Manager at PricewaterhouseCoopers. Mr. Liu received a bachelor’s degree in Accounting from Fu Jen Catholic University in Taiwan and a Master of Business Administration degree from National Taiwan University.

 

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.

 

Mr. Li, Shao Chuan (Shawn) was not reelected to our board of directors in 2014.

 

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.

 

  

The aggregate amount of salaries and bonuses paid by us to our current directors and executive officers during the year ended December 31, 2014 was approximately US$1 million. None of our directors or executive officers has any employment or service contracts with us providing for benefits upon termination of employment.

 

We do not, nor do any of our subsidiaries, provide pension, retirement or similar benefits to our executive officers and directors.

 

Equity Compensation

 

In 2014, no option or restricted share unit, or RSU, was granted under our 2007 Equity Performance and Incentive Plan, as amended, or the 2007 Plan, to our current directors and executive officers.

 

Indemnification

 

As permitted by Cayman Islands law, our articles of association provide that we shall indemnify each of our directors and officers acting in relation to any of our affairs against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own willful neglect or default. No such director or officer shall be liable to our company for any loss or damage in carrying out his functions unless that liability arises through the willful neglect or default of such person.

 

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 2010, 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. In April 2013, our board of directors approved a proposal to further amend the 2007 Plan by increasing the number of ADSs available for issuance pursuant to the 2007 Plan to 11.4 million and allowing for the grants of options which may be considered “incentive stock options” as such term is defined under Section 422 of the United States Internal Revenue Code of 1986, as amended.

 

Types of Awards. We may grant the following types of awards under our 2007 Plan:

 

•

Incentive stock options to purchase our ADSs;

 

•

Nonstatutory stock options 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, administers the 2007 Plan. A majority of the board of directors or the committee (or subcommittee) constitutes a quorum, and the action of the members of the board of directors or committee (or subcommittee) present at any meeting at which a quorum is present, or acts unanimously in writing, will be the acts of the board of directors or 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 such amendment is subject to approval by our shareholders in the manner and to the degree required under 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. 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.

 

  

On February 26, 2009, we initiated an offer to amend, or 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 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 SEC on February 26, 2009.

 

Our board of directors may also 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 may also 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.

 

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 April 1, 2023 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 five 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, and Mr. Huang, Jun-Tse Walter 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. Chen, Chin-Hsin Fred 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 elected, at succeeding annual general meetings of shareholders, for a term of three years. Messrs. Lee and Lin have terms that expire at the 2015 annual general meeting of shareholders. Messrs. Yeh and Chen have terms that expire at the 2016 annual general meeting of shareholders. Mr. Huang has a term that expires at the 2017 annual general meeting of shareholders.

 

  

D.

Employees

 

As of December 31, 2012 and 2013, we had 614 and 621 full-time employees, respectively. As of December 31, 2014, we had 657 full-time employees, including 478 dedicated engineers in the research and development department, 19 field application engineers in customer service department, 33 in sales and marketing, 81 in general and administration and 46 in manufacturing and logistics functions. Of these full-time employees,465 are located in Zhuhai, China, 74 in Shenzhen, China, 96 in Shanghai, China, 6 in Hong Kong, and 16 in Taiwan. We have never had a work stoppage and none of our employees are covered by a collective bargaining agreement. We believe that the relations between the Company and our employees are healthy.

 

We adopted the 2007 Plan which 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.

 

Options granted under the 2007 Plan are mostly 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.

 

Additionally, we grant options under the 2007 Plan that are subject to performance-based vesting schedules as approved by our board of directors.

 

The total ADSs available for future grant were 1,236,600 ADSs as of December 31, 2014.

 

E. Share ownership

 

The table below sets forth the ordinary shares beneficially owned by each of our directors and executive officers as of March 31, 2015, the most recent practicable date

 

		Ordinary Shares Beneficially Owned(1)
Name		Number				Percent(2)
Lee, Hsiang-Wei (David)				*				*
Lin, Yu-Hsin (Casper)				*				*
Chen, Chin-Hsin (Fred)				*				*
Zhou, ZhenYu				*				*
Liu, I-Hung (Nigel)				*				*
All directors and executive officers as a group(3)				*				*

 

*

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 and RSUs that will vest within 60 days after March 31, 2015 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 213,530,033 ordinary shares outstanding as of March 31, 2015.

 

(3)

There are no ADSs issuable upon exercise of options and RSUs held by our directors and executive officers that are exercisable or will become exercisable within 60 days of March 31, 2015.

 

As of March 31, 2015, our directors and executive officers held options to purchase an aggregate of 92,000 ADSs, and RSUs representing 552,000 ordinary shares, under our 2007 Plan.

 

For a description of RSUs granted to our directors and executive officers under the 2007 Plan in 2014, please see “Item 6. Directors, Senior Management and Employees - B. Compensation - Equity Compensation.”

 

For information concerning the details of our 2007 Plan, pursuant to which we issue options, RSUs or other securities to our employees, please see “Item 6.B. Directors, Senior Management and Employees — Compensation” and “Item 6.D. Directors, Senior Management and Employees — Employees.”

 

  

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

Based on our Register of Members and the latest filing of 13G, as of March 31, 2015, Accretive Capital Partners, LLC and its managing member totally held 5,443,254 ADSs, approximately 9.3% of our total outstanding ordinary shares, and Meva Group Limited held 17,640,000 ordinary shares, approximately 5.02% of our total outstanding ordinary shares.

 

As of March 31, 2015, 213,530,033 of our ordinary shares were issued and outstanding. JPMorgan Chase Bank, N.A., our depositary, has advised us that, as of March 31, 2015, 33,909,471 ADSs, representing 203,456,826 underlying ordinary shares, were held of record by DTC, under the nominee name of Cede & Co., on behalf of DTC participants. To our knowledge, as of March 31, 2015, approximately 39.3% of our total outstanding ordinary shares (excluding 10,848,898 ADSs repurchased by us on the open market that have not yet been transferred or cancelled) were held by over 1,700 record holders in the form of ADSs in the record held by DTC in the United States and the actual number of beneficial owners of our ADS in the United States may be larger.

 

B. Related Party Transactions

 

Details of the ownership by our employees of our ordinary shares as of March 31, 2015 are provided in the following table:

 

Name of BVI Company		Directors		Shares Beneficially Owned
Fairly Consultants Limited (1)		Zhu, Wen Ge			9,420,625				2.68	%

 

(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.

 

Transactions with GMI Technology

 

During the year ended December 31, 2012, 2013 and 2014, we sold products to GMI Technology amounting to US$1.8 million, US$4.6 million and US$9.2 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.

 

Transaction with Realtek Semiconductor Corporation

 

During the year ended December 31, 2014, we purchased products from Realtek Semiconductor Corporation ("Realtek") amounting to US$0.8 million.   Realtek's president is Mr. Yeh, Nan-Horng, one of our directors.

 

 Our Audit Committee has determined that our transactions with Realtek 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

 

As of December 31, 2014, there were no legal or arbitration proceedings that have had in the recent past, or to our knowledge, may have, material effects on our financial position, profitability or cash flows.

 

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, subject to certain restrictions under Cayman Islands Law and our memorandum and articles of association. 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), Artek Microelectronics (Shenzhen) and Actions Shanghai. Actions Semiconductor (Zhuhai), Artek Microelectronics (Shenzhen) and Actions Shanghai 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), Artek Microelectronics (Shenzhen) and Actions Shanghai 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

 

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

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, 2015, the last reported sale price of our ADSs on the NASDAQ Global Market was US$1.55.

 

The table below sets forth, for the periods indicated, the highest and lowest trading prices on The NASDAQ Global Market for our ordinary shares represented by ADSs.

 

  

		High				Low
2010			2.54				1.95
2011			2.60				1.67
2012			1.92				1.46
2013			3.40				1.62
2014			2.98				1.58
First Quarter 2013			2.63				1.62
Second Quarter 2013			3.40				2.60
Third Quarter 2013			2.95				2.15
Fourth Quarter 2013			3.00				2.35
First Quarter 2014			2.98				2.26
Second Quarter 2014			2.48				1.58
Third Quarter 2014			2.50				1.94
Fourth Quarter 2014			2.30				1.60
October 2014			2.30				1.80
November 2014			1.85				1.60
December 2014			2.01				1.73
2015
January 2015			1.99				1.86
February 2015			1.92				1.45
March 2015			1.73				1.46
April (through April 21, 2015)			1.70				1.47

 

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, the Companies Law (2013 Revision) of the Cayman Islands, which is referred to below as the Companies Law, and the common law of the Cayman Islands. 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.

 

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 five members. Our second amended and restated articles of association provide that the board of directors shall consist of not more than five 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 were or 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 or any alternate director, by giving at least two days' notice in writing to every director and alternate director, provided that notice of a meeting is not required if all our directors (or their alternates) waive such notice either at, before or after the meeting.

 

The quorum necessary for the transaction of business at any meeting of our board of directors may be fixed by our directors, and unless so fixed shall be a majority of the then existing directors. 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 shall not be disqualified by his office from contracting with our company, nor shall any such contract or arrangement entered into by our company with any person, company or partnership in which a director shall be a member or otherwise interested be capable on that account of being avoided, nor shall a director so contracting or being so interested be liable to account to our company for any profit so realized by any such contract or arrangement by reason only of such director holding that office , 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 our 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 fiduciary duty to act honestly and in good faith and in our best interests. Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duties to us, our directors must ensure compliance with our memorandum and articles of association (as amended and restated from time to time) and the class rights vested thereunder in the holders of the shares. Our company may in certain circumstances have rights to damages if a duty owed by the directors is breached.

 

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 share 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 our 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 our 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 on a winding up of our company 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.

 

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 general meeting of our shareholders shall be called by not less than 20 days’ (but not more than 60 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 our company present in person or by proxy 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.

 

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 for more than 45 days in any year and the register of members shall not be closed for more than 40 days.

 

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.

 

Subject to the rights of persons, if any, entitled to shares with special rights as to dividends or distributions, if dividends are to be declared on a class of shares they shall be declared and paid according to the amounts paid or credited as paid on the shares of such class outstanding on the record date for such dividend but no amount paid or credited as paid on a share in advance of calls shall be treated as paid up on the share.

 

Our board of directors may deduct from any dividend or other distribution 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:

 

•

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 and for what they believe in good faith to be in the best interests of our company. 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 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 does not have to hold an annual general meeting;

 

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an exempted company may issue no par value, negotiable or bearer shares;

 

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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);

 

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an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;

 

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an exempted company may register as a limited duration company; and

 

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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 certain 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:

 

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a duty to act in good faith in the best interests of the company;

 

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a duty not to personally profit from opportunities that arise from the office of director;

 

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a duty to avoid conflicts of interest; and

 

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a duty to exercise powers for the purpose for which such powers were intended.

 

In general, the Companies Law imposes various obligations on directors 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 Companies Law does not 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 our company present in person or by proxy 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 a majority of at least two-thirds of the votes cast by shareholders entitled to vote who are present in person or by proxy at a meeting. 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.

 

  

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 (a) a special resolution of the shareholders of each constituent company voting together as one class if, and (b) such other authorization, if any, as may be specified in such constituent company's articles of association. 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 declaration as to 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 that notice of the merger or consolidation will be 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 to the statutory merger provisions, 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:

 

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the statutory provisions as to majority vote have been complied with;

 

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the shareholders have been fairly represented at the meeting in question;

 

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the arrangement is one that a businessman would reasonably approve; and

 

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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 affected within four months, the offeror 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 a company to challenge (a) an act which is ultra vires to the Company or illegal and is therefore incapable of ratification by the shareholders, (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.

 

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., a director shall not be disqualified by his office from contracting with our company, nor shall any such contract or arrangement entered into by our company with any person, company or partnership in which a director shall be a member or otherwise interested be capable on that account of being avoided, nor shall a director so contracting or being so interested be liable to account to our company for any profit so realized by any such contract or arrangement by reason only of such director holding that office , 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.

 

 

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

 

As permitted by the Companies Law, our articles of association allow both ordinary resolutions and special resolutions to be passed in writing if signed by all our shareholders.

 

Calling of Shareholders Meetings

 

As a Cayman Islands exempted company, we are not obliged by the Companies Law to call shareholders’ annual general meetings. Our articles of association provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our directors.

 

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, the term of office of one class of the current members of our board shall terminate (but such directors shall be eligible to stand for re-election) at each annual general meeting of our company.

 

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.

 

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

 

Our company may from time to time by ordinary resolution:

 

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increase our share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as our company in general meeting may determine;

 

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consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;

 

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by subdivision of our existing shares or any of them divide the whole or any part of our share capital into shares of smaller amount than is fixed by our memorandum of association or into shares without par value; and

 

  

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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

 

Not applicable.

 

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 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.

 

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 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 that are applicable to any payments made by or to our company.

 

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 thereafter 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, 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:

 

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banks or financial institutions;

 

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life insurance companies;

 

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tax-exempt organizations;

 

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dealers in securities or foreign currencies;

 

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traders in securities that elect to apply a mark-to-market method of accounting;

 

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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;

 

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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;

 

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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 U.S. Holders (as defined below) of the ordinary shares or ADSs who hold 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:

 

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a citizen or resident of the U.S. for U.S. federal income tax purposes;

 

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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;

 

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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

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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.

 

Passive Foreign Investment Company

 

A company is considered a passive foreign investment company, or PFIC, for any taxable year if either:

 

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at least 75% of its gross income is passive income; or

 

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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 were classified as a PFIC for calendar year 2014 and we expect to be classified as a PFIC for calendar year 2015 and for the foreseeable future. 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 at any time during a U.S. Holder’s holding period in ordinary shares or ADSs, 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 20% maximum rate on our dividends would not apply if we are or become a PFIC.

 

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.

 

Another potential election, the so called “Qualified Electing Fund,” or QEF, election is also available to U.S. shareholders of a PFIC, but only if the PFIC provides the U.S. shareholders with certain information. However, we do not intend to provide you with the information you would need to make or maintain a 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.

 

A U.S. Holder is required to file an IRS Form 8621 for any year in which our ordinary shares or ADSs constitute stock in a PFIC.

 

  

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.

 

Taxation of Dividends and Other Distributions on Ordinary Shares or ADSs

 

Subject to the PFIC rules discussed above, 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.

 

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 PFIC rules discussed above, 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 is taxed at a maximum tax rate of 20% 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.

 

Medicare Tax. Certain U.S. Holders who are individuals, estates or trusts may be required to pay up to an additional 3.8% tax on, among other things, capital gains and dividends. You are urged to consult your tax advisor regarding the potential tax consequences to you from the Medicare Tax, also called the Net Investment Income Tax.

 

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.

 

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.

 

  

In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at http://actions-semi.investorroom.com

 

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 RMB cash deposits in banks and other financial institutions. We have no derivative financial instruments in our investment portfolio to hedge interest rate risks. In 2012, 2013 and 2014, the rate of return on our RMB cash deposit was 6.2%, 5.6% and 5.1%, respectively. As a result of the Chinese government’s alternate efforts to curb inflation or stimulate economy, interest rates have often fluctuated. For example, China’s central bank raised interest rates three times in 2011 due to China’s relatively high inflation in 2011 but then decreased interest rates twice in 2012. At the beginning of 2012, the China Banking Regulatory Commission imposed certain limitations on the amount of new loans to be granted by commercial banks in China to minimize the risk of defaults. In 2013, the money market was further tightened, resulting in a shortage of funds for many banks in June and December. In addition, China’s central bank launched interest rate liberalization in July 2013 and cancelled the ceiling and floor which used to limit the fluctuation of commercial banks’ lending rates. In November 2014, China’s central bank reduced interest rate for the first time since July 2012. Changes in policies and market conditions such as the above may have a direct or indirect material adverse impact on the interest rates offered by banks and other financial institutions and in turn may adversely affect the interest income generated from our financial investments in financial institutions. In addition, if there were further uncertainties in global economic and market conditions, interest rates could further decrease and might adversely affect out interest income and in turn impact our net income.

 

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 be 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, 2014 which was used in preparing our audited financial statements as of and for the year ended December 31, 2014 our net asset value, as presented in U.S. dollars, would have been reduced by US$1.4 and US$6.5 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$1.4 and US$7.2 million, respectively.

 

The RMB appreciated against the US dollar in 2007 and 2008 significantly and then stabilized during the financial downturn in 2009 and the first half of 2010 before further appreciating against the US dollar from the second half of 2010 through the end of 2013. In the first quarter of 2014, the RMB depreciated against the US dollar by almost 3%, and then fluctuated for the rest of 2014. Meanwhile, the exchange rate between the New Taiwan dollar and the US dollar fluctuated significantly in the second half of 2008 and 2009, when we held around US$20 million in New Taiwan dollars after withdrawing from an investment in Taiwan. We have experienced a gain of US$1.5 million and US$2.3 million in 2012 and 2013, respectively, and an exchange loss of US$2.7 million in 2014. In addition, we have recognized foreign currency translation adjustments of approximately US$3.2, US$5.0 and US$3.8 million in 2012, 2013 and 2014, respectively.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A. Debt Securities

 

Not applicable.

 

B. Warrants and Rights

 

Not applicable.

 

  

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.

 

Fees and Other Payments Made by the Depositary to Us

 

Starting in 2013, JPMorgan Chase Bank, N.A. no longer reimbursed us for our expenses incurred 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. Meanwhile, the charge of US$500,000 related to the maintenance of the ADR program, database subscription fees and other services was also waived by JPMorgan Chase Bank, N.A. for both 2013 and future periods.

 

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 SEC’s rules and terms.

 

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, 2014.

 

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, 2014, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control Integrated Framework (2013) 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, 2014 is effective.

 

Changes in Internal Control over Financial Reporting. There is no change in company’s internal control over financial reporting that occurred during 2014 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, 2014 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, 2013 and 2014.

 

		For the year ended December 31,
		2013					%				2014					%
		(thousands)									(thousands)
Audit Fees		US$		614				99.5	%		US$		598				99.8	%
Tax Fees				3				0.5	%				1				0.2	%
Audit-Related Fees				Nil				-					Nil
All Other Fees				Nil				-					Nil
Total		US$		617				100.0	%		US$		599				100.0	%

 

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, 2013 and 2014, 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 ADSs representing 48 million ordinary shares. We repurchased shares in the open market and through privately negotiated transactions. As of January 21, 2009, the initial 8 million ADS repurchase program was completed, and our board of directors approved an add-on share repurchase program pursuant to which we were authorized to repurchase up to 12 million additional ADSs through December 31, 2010. Our board of directors subsequently approved on August 13, 2010 to extend the authorization through December 31, 2012. Further, on August 7, 2012, our board of directors authorized an increase, by 10 million ADSs, from 20 million ADSs to 30 million ADSs, for the share repurchase program through December 31, 2015. On May 6, 2014, our board of directors authorized an increase, by 20 million ADSs, from 30 million ADSs to 50 million ADSs, for the share repurchase program through December 31, 2016.

 

  

The following table sets forth our share repurchase activities as of March 31, 2015.

 

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
2014
January			162,625				2.72				162,625				7,699,335
February			248,900				2.46				248,900				7,450,435
March			—				—				—				7,450,435
April			—				—				—				7,450,435
May			260,612				1.81				260,612				7,189,823
June			479,765				2.17				479,765				6,710,058
July			322,715				2.15				322,715				6,387,343
August			82,580				2.08				82,580				6,304,763
September
October			—				—				—				6,304,763
November			139,017				1.75				139,017				6,165,746
December			99,278				1.94				99,278				6,066,468
2015
January			104,616				1.94				104,616				5,961,852
February			119,996				1.57				119,996				5,841,856
March			151,834				1.53				151,834				5,690,022

 

On August 20, 2014, we announced the commencement of a tender offer to purchase up to 60,000,000 of our issued and outstanding ordinary shares (including ordinary shares represented by our ADSs), at a purchase price not greater than $7/15 per share (or $2.80 per ADS) nor less than $5/12 per share (or $2.50 per ADS). On September 26, 2014, we announced that a total of 192,940,159 ordinary shares (including ordinary shares represented by ADSs) had been properly tendered and not withdrawn and we accepted for purchase 60,001,063 ordinary shares (including ordinary shares represented by ADSs) at a price of $5/12 per share (or $2.50 per ADS), for an aggregate cost of approximately $25.0 million, excluding fees and expenses relating to the tender offer. The depositary for the tender offer has made all payment for ordinary shares (including ordinary shares represented by our ADSs) validly tendered and accepted for purchase and returned all other ordinary shares tendered. The tender offer was completed in the third quarter of 2014.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G. CORPORATE GOVERNANCE

 

We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. In addition, because our ADSs are listed on The NASDAQ Global Market, we are subject to NASDAQ’s corporate governance requirements.

 

NASDAQ Marketplace Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement.

 

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 5615(a)(3), 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 offered to certain of our employees, consultants and non-employee directors the opportunity to amend their outstanding stock options to purchase our ADSs 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 March 20, 2009, we completed our offer to amend, as a result of which options to purchase approximately 7,742,000 shares of our ADSs, or approximately 99.9% of all eligible options, were tendered for amendment. The terms of our offer to amend can be found in the Form CB filed with the SEC on February 26, 2009. Following our home country practice, we did not seek to obtain our shareholders’ approval for these amendments to option terms.

 

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

 

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, 2013 and 2014	F-5
Consolidated Statements of Operations for the years ended December 31, 2012, 2013 and 2014	F-6
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2013 and 2014	F-7
Consolidated Statements of Changes in Equity for the years ended December 31, 2012, 2013 and 2014	F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014	F-9
Notes to the Consolidated Financial Statements	F-11
Schedule 1 - Actions Semiconductor Co., Ltd. - condensed financial information as of December 31, 2013 and 2014 and for the years ended December 31, 2012, 2013 and 2014	F-42

 

ITEM 19.

EXHIBITS

 

(a)	See Item 18 for a list of the financial statements filed as part of this annual report.
(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	Second Amended Articles of Association of the Registrant
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	Third Amended and Restated 2007 Equity Performance and Incentive Plan (incorporated by reference to Exhibit 4.1 of Form 20-F for the year ended December 31, 2012 (File No. 000-51604) filed with the Securities and Exchange Commission on April 25, 2013)
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

 

101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Presentation Linkbase Document.

 

  

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/ I-Hung (Nigel) Liu
	Name:	I-Hung (Nigel) Liu
	Title:	Chief Financial Officer

 

Date: April 24, 2015

 

  

ACTIONS SEMICONDUCTOR CO., LTD.

 

ACTIONS SEMICONDUCTOR CO., LTD.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

CONTENTS			PAGE(S)
Reports of Independent Registered Public Accounting Firm			F - 2
Consolidated Balance Sheets as of December 31, 2013 and 2014			F - 5
Consolidated Statements of Operations for the years ended December 31, 2012, 2013 and 2014			F - 6
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2013 and 2014			F - 7
Consolidated Statements of Changes in Equity for the years ended December 31, 2012, 2013 and 2014			F - 8
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014			F - 9
Notes to Consolidated Financial Statements			F - 11
Schedule 1 -	Actions Semiconductor Co., Ltd. - condensed financial information as of December 31, 2013 and 2014 and for the years ended December 31, 2012, 2013 and 2014		F - 42

 

  

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 its subsidiaries (the "Group") as of December 31, 2013 and 2014, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. 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 its subsidiaries as of December 31, 2013 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 24, 2015, expressed an unqualified opinion on the Group's internal control over financial reporting.

 

/s/Deloitte Touche Tohmatsu
Hong Kong
April 24, 2015

 

  

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, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 Annual 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.

 

  

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, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) 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, 2014 of the Group and our report dated April 24, 2015 expressed an unqualified opinion on those consolidated financial statements and financial statement schedules.

 

/s/Deloitte Touche Tohmatsu
Hong Kong
April 24, 2015

 

  

 

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars, except share and per share data)

 

		At December 31,
		2013				2014
ASSETS
Current assets:
Cash and cash equivalents		$	53,263			$	78,177
Time deposit			347				5
Restricted deposits			27,161				51,590
Marketable securities			126,607				38,384
Trading securities			74				70
Accounts receivable, net of allowance for doubtful accounts of nil and $558 as of December 31, 2013 and 2014 respectively			5,782				2,832
Amount due from a related party			1,301				1,650
Notes receivable			-				161
Amount due from an equity method investee			38				41
Inventories, net of inventory written-down of $1,558 and $7,718 as of December 31, 2013 and 2014, respectively			20,278				13,970
Prepaid expenses and other current assets			3,972				4,511
Income tax recoverable			67				186
Deferred tax assets			416				1,179
Total current assets			239,306				192,756
Investments in equity method investees			17,843				27,352
Other investments			15,648				15,627
Marketable securities			17,139				-
Rental deposits			61				54
Property, plant and equipment, net			31,896				30,327
Land use right			1,588				1,514
Acquired intangible assets, net			12,218				16,459
Deposit paid for acquisition of intangible assets			145				538
Deferred tax assets			99				53
TOTAL ASSETS		$	335,943			$	284,680
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	6,016			$	5,790
Amount due to a related party			-				259
Accrued expenses and other current liabilities			6,127				8,349
Short-term bank loans			35,500				45,000
Other liabilities			1,362				1,929
Income tax payable			49				49
Deferred tax liabilities			343				160
Total current liabilities			49,397				61,536
Other liabilities			412				-
Payable for acquisition of intangible assets			-				155
Deferred tax liabilities			3,589				919
Total liabilities			53,398				62,610
Commitments and contingencies (note 19)
Equity:
Ordinary shares of par value $0.000001: 2,000,000,000 shares authorized 353,016,455 (2013: 411,474,516) shares issued and outstanding		$	1			$	1
Additional paid-in capital			63,001				63,046
Treasury Stock			(44,119	)			(70,479	)
Accumulated other comprehensive income			40,734				36,937
Retained earnings			222,959				192,598
Total Actions Semiconductor Co., Ltd. shareholders' equity			282,576				222,103
Non-controlling interest			(31	)			(33	)
Total equity			282,545				222,070
TOTAL LIABILITIES AND EQUITY		$	335,943			$	284,680

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except share and per share data)

 

		Year ended December 31,
		2012				2013				2014
Revenues:
Third-parties:
System-on-a chip products			52,356				64,617				40,932
Semiconductor product testing services			179				135				117
			52,535				64,752				41,049
Related-parties:
System-on-a chip products			1,794				4,639				9,211
Total revenues			54,329				69,391				50,260
Cost of revenue:
Third-parties:
System-on-a chip products			(33,814	)			(44,324	)			(37,743	)
Semiconductor product testing services			(100	)			(58	)			(46	)
			(33,914	)			(44,382	)			(37,789	)
Related parties:
System-on-a-chip products			(1,193	)			(3,583	)			(8,405	)
Total cost of revenues			(35,107	)			(47,965	)			(46,194	)
Gross profit			19,222				21,426				4,066
Other operating income			896				2,170				890
Operating expenses:
Research and development			(23,739	)			(25,994	)			(31,124	)
General and administrative			(8,573	)			(8,764	)			(10,330	)
Selling and marketing			(1,281	)			(2,057	)			(2,175	)
Impairment on intangible assets			-				-				(820	)
Total operating expenses			(33,593	)			(36,815	)			(44,449	)
Loss from operations			(13,475	)			(13,219	)			(39,493	)
Other income (expense)			1,547				2,336				(2,736	)
Dividend income from an other investment			-				493				423
Fair value change in trading securities			2				-				-
Interest income			13,240				12,358				9,611
Interest expense			(250	)			(498	)			(530	)
Other-than-temporary impairment loss on investments			(2,543	)			(681	)			-
(Loss) income before income taxes, equity in net income (loss) of equity method investees and non-controlling interest			(1,479	)			789				(32,725	)
Income tax (expense) credit			(772	)			(403	)			1,796
Equity in net income (loss) of equity method investees			41				(264	)			566
Net (loss) income			(2,210	)			122				(30,363	)
Add: Net loss attributable to non-controlling interest			8				2				2
Net (loss) income attributable to Actions Semiconductor Co., Ltd. shareholders		$	(2,202	)		$	124			$	(30,361	)
Net (loss) income per share: Basic
Net (loss) income attributable to Actions Semiconductor Co., Ltd. shareholders		$	(0.0053	)		$	0.0003			$	(0.0768	)
Net (loss) income per share: Diluted
Net (loss) income attributable to Actions Semiconductor Co., Ltd. shareholders		$	(0.0053	)		$	0.0003			$	(0.0768	)
Weighted-average shares outstanding used in computation:
Basic			412,706,341				412,103,255				395,380,921
Diluted			412,706,341				425,415,011				395,380,921

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars, except share and per share data)

 

		Year ended December 31,
		2012				2013				2014
Net (loss) income			(2,210	)			122				(30,363	)
Other comprehensive income (loss), net of tax:
Change in cumulative foreign currency translation adjustments			3,162				4,983				(3,797	)
Total comprehensive income (loss)			952				5,105				(34,160	)
Comprehensive loss attributable to the non-controlling interest			8				2				2
Total comprehensive income (loss) attributable to Actions Semiconductor Co., Ltd. shareholders		$	960			$	5,107			$	(34,158	)

 

  

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands of U.S. dollars, except share and per share data)

 

		Attributable to the shareholders of Actions Semiconductor Co., Ltd.
																		Accumulated
										Additional								other												Non-
		Ordinary shares								paid-in				Treasury				comprehensive				Retained								controlling
		Number				Amount				Capital				Stock				income				earnings				Total				interest				Total
Balance at January 1, 2012			413,985,636			$	1			$	61,044			$	(40,444	)		$	32,589			$	225,037			$	278,227			$	(21	)		$	278,206
Repurchase of ordinary shares			(14,812,056	)			-				-				(4,166	)			-				-				(4,166	)			-				(4,166	)
Share-based compensation			-				-				1,465				-				-				-				1,465				-				1,465
Exercise of share-based awards			9,811,512				-				-				2,303				-				-				2,303				-				2,303
Foreign currency translation adjustments			-				-				-				-				3,162				-				3,162				-				3,162
Net loss			-				-				-				-				-				(2,202	)			(2,202	)			(8	)			(2,210	)
Balance at December 31, 2012			408,985,092			$	1			$	62,509			$	(42,307	)		$	35,751			$	222,835			$	278,789			$	(29	)		$	278,760
Repurchase of ordinary shares			(11,772,294	)			-				-				(4,853	)			-				-				(4,853	)			-				(4,853	)
Share-based compensation			-				-				492				-				-				-				492				-				492
Exercise of share-based awards			14,261,718				-				-				3,041				-				-				3,041				-				3,041
Foreign currency translation adjustments			-				-				-				-				4,983				-				4,983				-				4,983
Net income (loss)			-				-				-				-				-				124				124				(2	)			122
Balance at December 31, 2013			411,474,516			$	1			$	63,001			$	(44,119	)		$	40,734			$	222,959			$	282,576			$	(31	)		$	282,545
Repurchase of ordinary shares			(70,774,015	)			-				-				(28,902	)			-				-				(28,902	)			-				(28,902	)
Share-based compensation			-				-				45				-				-				-				45				-				45
Exercise of share-based awards			12,315,954				-				-				2,542				-				-				2,542				-				2,542
Foreign currency translation adjustments			-				-				-				-				(3,797	)			-				(3,797	)							(3,797	)
Net loss			-				-				-				-				-				(30,361	)			(30,361	)			(2	)			(30,363	)
Balance at December 31, 2014			353,016,455			$	1			$	63,046			$	(70,479	)		$	36,937			$	192,598			$	222,103			$	(33	)		$	222,070

  

 The accompanying notes are an integral part of these consolidated financial statements.

  

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

 

		Year ended December 31,
		2012				2013				2014
Operating activities:
Net (loss) income		$	(2,210	)		$	122			$	(30,363	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation of property, plant and equipment			2,290				2,072				1,949
Amortization of land use right			36				36				36
Amortization of acquired intangible assets			3,056				3,480				4,991
Allowance for doubtful accounts receivable			-				-				558
Write down of inventories			180				857				6,160
Utilization of subsidy from local authorities of Zhuhai, the People's Republic of China (the "PRC")			(674	)			(1,068	)			-
Loss (gain) on disposal of property, plant and equipment			5				-				(1	)
Loss on disposal of intangible assets			-				-				420
Impairment loss recognized in respect of intangible assets			-				-				820
Fair value change in trading securities			(2	)			-				-
Share-based compensation			1,465				492				45
Deferred tax			454				279				(3,576	)
Proceeds from disposal of trading securities			459				-				-
Share of net (income) loss of equity method investees			(41	)			264				(566	)
Dividend income from an other investment			-				(493	)			(423	)
Impairment recognized in respect of other investments			2,543				681				-
Changes in operating assets and liabilities:
Accounts receivable			(3,150	)			195				2,349
Amount due from a related party			(331	)			(961	)			(349	)
Inventories			(4,510	)			(8,678	)			(256	)
Prepaid expenses and other current assets			(2,549	)			922				(750	)
Amount due from an equity method investee			(14	)			41				(3	)
Accounts payable			3,598				(2,198	)			(173	)
Amount due to a related party			-				-				259
Accrued expenses and other current liabilities			(3,526	)			(3,717	)			(415	)
Income tax recoverable			(189	)			123				(122	)
Income tax payable			(190	)			2				1
Rental deposit received (paid)			4				(11	)			5
Note Receivables			-				-				(161	)
Dividend received			-				-				425
Net cash used in operating activities			(3,296	)			(7,560	)			(19,140	)
Investing activities:
Purchase of marketable securities			(132,376	)			(113,329	)			(54,290	)
Purchase of property, plant and equipment			(249	)			(706	)			(1,156	)
Investment in an equity method investee			(1,500	)			(3,712	)			(9,016	)
Deposit paid for acquisition of intangible assets			-				(145	)			(457	)
Purchase of intangible assets			(1,081	)			(4,134	)			(8,044	)
Proceeds from disposal of property, plant and equipment			22				41				20
(Increase) decrease in time deposit			-				(340	)			318
Increase in restricted deposits			(10,000	)			(16,819	)			(24,974	)
Proceeds from the disposal of intangible assets			-				-				24
Proceeds from redemption of marketable securities			178,975				112,966				159,296
Net cash provided by (used in) investing activities			33,791				(26,178	)			61,721

 

  

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(In thousands of U.S. dollars)

 

		Year ended December 31,
		2012				2013				2014
Financing activities:
Proceeds from exercise of share-based awards			2,289				3,041				2,542
Advance subsidy from local authorities of Zhuhai, the PRC			299				714				232
Raise of short-term bank loans			8,500				15,000				31,500
Repayment of short-term bank loans			-				-				(22,000	)
Repurchase of ordinary shares			(4,152	)			(4,853	)			(28,902	)
Net cash provided by (used in) financing activities			6,936				13,902				(16,628	)
Net increase (decrease) in cash and cash equivalents			37,431				(19,836	)			25,953
Cash and cash equivalents at the beginning of the year			33,207				71,336				53,263
Effect of exchange rate changes on cash			698				1,763				(1,039	)
Cash and cash equivalents at the end of the year		$	71,336			$	53,263			$	78,177
Supplemental cash flow information:
Cash paid during the period for:
Interest		$	(250	)		$	(498	)		$	(531	)
Income taxes		$	(312	)		$	(90	)		$	-
Non-cash investing activities
Purchases of intangible assets		$	(2,786	)		$	(1,112	)		$	(2,807	)
Purchases of property, plant and equipment		$	(898	)		$	(156	)		$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014

 

(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, 2014 and 2013, 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 manufacture of system-on-a-chip products
Actions (Zhuhai) Microelectronics Co., Ltd.		PRC June 5, 2014		100%		Design and manufacture of system-on-a-chip products
Actions (Zhuhai) Technology Co., Ltd.  ("Actions Technology Zhuhai")		PRC June 5, 2014		100%		Design and manufacture of system-on-a-chip products
Shanghai Actions Semiconductor Co., Ltd.  ("Actions Semiconductor Shanghai ")		PRC March 27, 2008		100%		Design and manufacture 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 manufacture of system-on-a-chip products
Actions Capital Investment Inc.		British Virgin Islands 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		93.4%		Investment holding
Mavrix Technology (H.K.) Co., Limited  (“Mavrix HK”)		Hong Kong August 17, 2007		93.4%		Manufacturing and trading of system-on-a-chip products
Shanghai Mavrix Electronics, Ltd. (“Mavrix Shanghai”)		PRC October 23, 2006		93.4%		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"), tablets 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 PMPs, which play multimedia files by compressing to a fraction of their size using any one of a number of audio and video compression technologies, and tablet, which equip consumers with the capability of browsing the internet respectively into the mainstream market worldwide.

 

  

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 subsidiaries. All intercompany transactions and balances are eliminated on consolidation. 

 

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 write down of slow moving and obsolete inventories, useful lives of property, plant and equipment and intangible assets, impairment of cost and equity method investees, impairment of long-lived assets, definite-lived intangible assets and the probability of meeting the share based awards’ performance condition for vesting.

 

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 deposit

 

Time deposit consists of deposit placed with financial institution with original maturity terms of greater than three months but less than one year.

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Restricted deposits

 

Restricted deposits represent deposits pledged as securities for outstanding bank loans to financial institution.

 

Marketable securities

 

Marketable securities are 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 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.

 

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.  Unrealized gain of $2, nil and nil had been recognized for the years ended December 31, 2012, 2013 and 2014, respectively.

 

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.

 

  

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. No impairment charge is recognized for the years ended December 31, 2012, 2013 and 2014.

 

Other investments

 

Other investments comprise investments in equity securities. 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. Impairment charges of $2,543, $681 and nil are recognized for the years ended December 31, 2012, 2013 and 2014 respectively.

 

 

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.  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	30 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, 2012, 2013 and 2014 were $36, $36 and $36 respectively.

 

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 one to nine years.

 

In-process research and development ("IPR&D")

 

IPR&D is recognised 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. 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. When these events occur, the Group measures impairment by comparing the carrying value of the IPR&D to the estimated discounted cash flow expected. If the sum of the expected discounted cash flow is less than the carrying amount of the IPR&D, the Group would recognize impairment loss by which the carrying value of the IPR&D exceeds their recoverable amount. The recoverable amount is based on fair value of the IPR&D.

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

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.

 

Government subsidies

 

Government subsidies include cash subsidies and advance subsidies received from the local PRC governments in Zhuhai by Actions Semiconductor Zhuhai. Advance subsidies are recognized as other operating income when received and when all the conditions for their receipt have been met. Advance subsidies recognized as income were $674, $1,068 and nil for the years ended December 31, 2012, 2013 and 2014, 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 satisfied, the respective subsidies will be recognized as other income (see note 11 for additional details).

 

Fair value measurement

 

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.

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

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. All of the Group's product sales have destination shipping terms and no rights of return, the Group determined that delivery has occurred when the goods are delivered to the customers and the Group receives acknowledgment of receipts, which occur simultaneously. The Group further determined that collectability is reasonably assured by performing an assessment of credibility of its customers based on their operating results and past payment records. The Group only sells products to customers that are determined to have the ability to make payments and have not had material collectability defaults in the past. 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.

 

Purchase of ordinary shares

 

Except for the 60,001,062 number of ordinary shares repurchased under the Dutch auction tender offer during the year ended December 31, 2014, 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. For the years ended December 31, 2012, 2013 and 2014, 14,812,056, 11,772,294 and 70,774,015 number of ordinary shares were repurchased by the Company respectively.

  

Income taxes

 

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.

 

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 $106, $666 and $604 for the years ended December 31, 2012, 2013 and 2014 respectively.

 

Comprehensive income

 

Comprehensive income includes net (loss) income and foreign currency translation adjustments. Comprehensive income is reported in the statements of 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 statements of operations.

 

The financial statements of all subsidiaries with functional currencies other than the U.S. dollars, are translated into U.S. dollars.  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.  

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Fair value of financial instruments

 

Fair values of cash and cash equivalents, time deposit, restricted deposits, trading securities, accounts receivable, amount due from a related party, notes receivable, amounts due from an equity method investee, accounts payable, amount due to a related party and short-term bank loans 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 deposit, restricted deposits, marketable securities, trading securities, accounts receivable, amount due from a related party and amount due from an equity method investee.  The Group places its cash and cash equivalents, time deposit, restricted 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 require collateral or other security from its customers. The Group establishes an allowance for doubtful accounts receivable based upon estimates, factors surrounding the credit risk of specific customers and other information. Allowance for doubtful accounts receivable of nil, nil and $558 was recorded by the Group for the year ended December 31, 2012, 2013 and 2014 respectively. Allowances for doubtful accounts receivable of $558 have been written down against respective accounts receivable for the year ended December 31, 2014.

 

Movements in allowances for doubtful accounts receivable are as follows:

 

Year ended		Beginning				(Write Off) Write down during				Closing
December 31		Balance				the year				balance
2012		$	621			$	(621	)		$	-
2013		$	-			$	-			$	-
2014		$	-			$	558			$	558

 

Net (loss) income per share

 

Basic net (loss) income attributable to the Company per share is computed by dividing net (loss) income attributable to the Company by the weighted average number of ordinary shares outstanding during the year. Diluted net (loss) income 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.

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Share-based compensation

 

The Group issued stock options under its share incentive plan during the years ended December 31, 2013 and 2014 and restricted stock units during the years ended December 31, 2012, 2013 and 2014.

 

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. Forfeitures are estimated at the time of grant with such estimate updated periodically and with actual forfeitures recognised currently to the extent they differ from the estimate.

 

For any awards that are modified during a relevant period, the Group calculates the incremental fair value of the award resulting from the modification, at the excess of the fair value of the modified award over the fair value of the original award immediately before its terms are modified and it is further amortized over the remaining vesting period of the award.

  

For the year ended December 31, 2012, the compensation cost of $10, $1,091, $312 and $52 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, 2013, the compensation cost of $49, $347, $79 and $17 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, 2014, the compensation cost of $28, $10, $5 and $2 have been included as cost of revenue, research and development expenses, general and administrative expenses and selling and marketing expenses, respectively.

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recently issued accounting pronouncements adopted

 

In March 2013, the Financial Accounting Standards Board ("FASB") has issued an authoritative pronouncement related to parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the amendments in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption. The adoption of this guidance did not have a significant effect on the Company's consolidated financial statements.

 

In July 2013, the FASB issued an Accounting Standard Update ("ASU") which provides guidance on financial statement presentation of an unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. The adoption of this guidance did not have a significant effect on the Company's consolidated financial statements. 

 

  

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recently issued accounting pronouncements not yet adopted

 

In April 2014, the FASB issued a new pronouncement which amends to change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

 

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

 

In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.

 

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

In May 2014, the FASB issued a new pronouncement which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

An entity should apply the amendments in this ASU using one of the following two methods:

 

1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

 

For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.

 

For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

 

2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application.

 

If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

 

The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.

  

 

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Group is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows and has not yet determined the transition method it will use.

 

In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

 

The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Group is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows and has not yet determined whether ASU will be early adopted.

 

Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.

 

In August, 2014, the FASB issued a new pronouncement which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern." The new standard is effective for fiscal years ending after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

In January 2015, the FASB issued a new pronouncement which eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item.

 

If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

 

The FASB heard from stakeholders that the concept of extraordinary items causes uncertainty because it is unclear when an item should be considered both unusual and infrequent. Additionally, some stakeholders said that although users find information about unusual or infrequent events and transactions useful, they do not find the extraordinary item classification and presentation necessary to identify those events and transactions. Other stakeholders noted that it is extremely rare in current practice for a transaction or event to meet the requirements to be presented as an extraordinary item.

 

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial results or disclosures.

 

 

3

INVENTORIES

 

Inventories consisted of the following:

 

		At December 31,
		2013				2014
Raw materials		$	10,702			$	8,104
Work in progress			1,950				562
Finished goods			7,626				5,304
		$	20,278			$	13,970

 

Slow moving inventories amounting to $180, $857, and $6,160 were written down for the years ended December 31, 2012, 2013 and 2014, respectively.

 

4

PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

		At December 31,
		2013				2014
Prepaid expenses		$	1,135			$	497
Value added tax refundable			2,213				3,108
Interest receivables			462				591
Others			162				315
		$	3,972			$	4,511

 

 

5

INVESTMENT IN EQUITY METHOD INVESTEES

 

Actions Microelectronics Co., Ltd (Beijing) ("Beijing Actions")

  

Beijing Actions is a private company which designs and manufactures SoC products for portable media players and digital photoframe.

 

As of December 31, 2013 and 2014, the Group owned 45.8% interest of equity interest in Beijing Actions.

 

No change in ownership interest and no additional capital injection were noted for 2012, 2013 and 2014 and the Group continues its significant influence in Beijing Actions as of December 31, 2013 and 2014.

 

Nann Capital Corporation ("Nann Capital")

 

Nann Capital is a private investment holding company and the Group owned 40% interest of equity interest in Nann Capital. The Group exercise significant influence but did not control Nann Capital and the investment in Nann Capital is accounted for under the equity method of accounting.

 

In April 2013, the Group further invested $3,712 to maintain its 40% interest due to a capital contribution by all shareholders.

 

In May 2014, the Group further invested $9,016 to maintain its 40% interest due to a capital contribution by all shareholders.

 

The carrying value of equity method investees is illustrated as below:

 

		At December 31,
		2013				2014
Beijing Actions		$	2,856			$	3,332
Nann Capital			14,987				24,020
		$	17,843			$	27,352

  

The summarized financial information prepared in accordance with U.S.GAAP of equity method investees is illustrated as below:

 

		2013				2014
Balance sheets
Current assets		$	13,714			$	24,187
Non-current assets			31,909				44,439
Current liabilities			583				1,200
Non-current liabilities			-				-

 

		2012				2013				2014
Results of operations
Revenues		$	4,904			$	5,446			$	9,144
Gross profit			2,700				3,056				5,478
(Loss) income from operations			(555	)			(933	)			653
Net (loss) income		$	(9	)		$	(787	)		$	1,093

 

 

6

OTHER INVESTMENTS

 

		At December 31,
		2013				2014
Unlisted securities at cost		$	22,883			$	19,862
Less: other-than-temporary impairment losses recognized			(7,235	)			(4,235	)
		$	15,648			$	15,627

 

Other investments solely represent cost method investments in equity securities of five unlisted entities as the following:

 

In 2007, the Group acquired 5% equity interest in AMC Holding Limited ("AMC") at a consideration of $27,000. AMC was established in Taiwan and engages in manufacturing printed circuit board (PCB) laminate and providing other related sub-contractor service. As the Group does not have any voting power in board meetings of AMC, the Group cannot exercise significant influence over AMC’s operating and financial activities. The Group accounts for this investment using the cost method of accounting. The investment cost of Actar has been fully impaired during the year ended December 31, 2012. Nil carrying value is noted for AMC as at December 31, 2013 and 2014 respectively.

 

In 2008, the Group acquired 7% equity interest in Actar Limited ("Actar") at a consideration of $3,000. Actar was established in the PRC and engages in the entertaiment media industry. As the Group does not have any voting power in board meetings of Actar, the Group cannot exercise significant influence over Actar’s operating and financial activities. The investment cost of Actar has been fully impaired during the year ended December 31, 2009. Actar has completed its liquidation process during the year ended December 31, 2014 and the cost and impairment loss have been written off accordingly. Nil carrying balance is noted for Actar as at December 31, 2013 and 2014 respectively.

 

In 2010, the Group acquired 10% equity interest in Hi-Trend Investment Holdings Co., Ltd ("Hi-Trend") at a consideration of $800. Hi-Trend was established in the PRC and engages in developing and manufacturing of integrated circuit and chips. During the year ended December 31, 2010, Hi-Trend increased its issued share capital by capital injection and six new investors made an additional capital injection. The Company also made an additional capital injection of $202 and the shareholding of the Company has been diluted to 9%. As the Group does not have any voting power in board meetings of Hi-Trend, the Group cannot exercise significant influence over Hi-Trend’s operating and financial activities. The Group accounts for this investment using the cost method of accounting. The carrying value of Hi-Trend is $1,102 and $1,081 for the years ended December 31, 2013 and 2014 respectively.

 

Grand Choice Investment Limited ("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 for $600. The Group exercises significant influence but does not control Grand Choice, which is 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.

 

In March and April 2011, Grand Choice further increased its capital to $7,986 and $10,000, respectively, of which the Group did not participate in this capital injection, resulting in dilution of the Group's ownership interest to 15% and 12%, respectively and ceased significant influence over Grand Choice. Accordingly, the carrying value of Grand Choice of $804 is transferred to other investments and Grand Choice is accounted for under the cost method of accounting as of December 31, 2011.

 

In September 2012, the Group further invested $1,500 into Grand Choice which accounted for under the cost method of accounting. The capital injection resulted in increase of the Group’s ownership interest from 12% to 19%. No change in ownership interest is noted for the years ended December 31, 2013 and 2014. As the Group does not exercise significant influence over Grand Choice, the investment is accounted for under the cost method of accounting for the years ended Dcecmber 31, 2013 and 2014. The carrying value of Grand Choice is $819 and $819 for the years ended December 31, 2013 and 2014 respectively.

 

In 2011, the Group acquired 19% equity interest in OCTT Asia Limited ("OCTT") at a consideration of $13,727. OCTT was established in Mauritius and set up as an investment fund management company. As the Group does not have any voting power in board meetings of OCTT, the Group cannot exercise significant influence over OCTT’s operating and financial activities. The Group accounts for this investment using the cost method of accounting. The carrying value of OCTT is $13,727 and $13,727 for the years ended December 31, 2013 and 2014 respectively.

  

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 and unlisted equity securities 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 2012, the Group recorded other-than-temporary impairment losses related to the investment in AMC and Grand Choice. The management of the Group has assessed that the decline in value is other-than-temporary, thus impairment losses of approximately $803 and $1,740 have been recognized respectively and the investments in these unlisted equity securities are written down to approximately $1,500 and nil as of December 31, 2012.

 

In 2013, the Group further recorded other-than-temporary impairment losses related to the investment in Grand Choice. The management of the Group has assessed that the decline in value is other-than-temporary, thus impairment losses of approximately $681 have been recognized and the investments in this unlisted equity securities are written down to approximately $819 as of December 31, 2013.

 

No other-than-temporary impairment loss was recognized for the year ended December 31, 2014.

 

 

7

FAIR VALUE MEASUREMENTS

 

Measured on recurring basis

 

The Company measured its financial assets at fair value on a recurring basis as of December 31, 2013 and 2014.

 

Trading securities are stated at fair value. The Company classified such financial assets as investments within Level 1 of the fair value hierarchy because they are valued based on the quoted market price in an active market.

 

The Company did not have Level 2 and Level 3 investments as of December 31, 2013 and 2014.

 

The following table shows the fair value of the Company's financial assets and liabilities measured at recurring basis as of December 31, 2013 and 2014:

 

		As of December 31, 2013																As of December 31, 2014
		Fair Value Measurements at the Reporting Date Using																Fair Value Measurements at the Reporting Date Using
		Quoted prices in				Significant												Quoted prices in				Significant
		active markets				other				Significant								active markets				other				Significant
		for identical				observable				unobservable								for identical				observable				unobservable
		instruments				inputs				inputs				Total				instruments				inputs				inputs				Total
		(level 1)				(level 2)				(level 3)				balance				(level 1)				(level 2)				(level 3)				balance
Trading Securities:
Publicly traded mutual funds  in Taiwan		$	74			$	-			$	-			$	74			$	70			$	-			$	-			$	70
Total		$	74			$	-			$	-			$	74			$	70			$	-			$	-			$	70

 

 Measured on nonrecurring basis

 

The Group measured the fair value of intangible assets using income approach method based on which to recognize the impairment loss in 2014. These intangible assets are considered Level 3 assets because the Company used unobservable inputs, such as forecast financial performance of the businesses or assets and discount rates to determine the fair value of these purchased assets.

 

Equity method and cost method investments are measured at fair value on a nonrecurring basis when impairment is recognized.

 

The Company measured the fair value of cost method investment in AMC and Grand Choice using income approach method based on which to recognize the impairment loss in 2012 and 2013, respectively. The cost method investment in AMC and Grand Choice are considered as Level 3 assets because the Company used unobservable inputs, such as forecast financial performance and future cash flow to determine the fair value of the cost method investment.

 

 

8

PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consisted of the following:

 

		At December 31,
		2013				2014
Buildings		$	31,454			$	30,744
Leasehold improvements			948				929
Furniture, fixtures and equipment			4,461				4,593
Motor vehicles			538				556
Plant and machinery			11,105				11,569
Total			48,506				48,391
Less: Accumulated depreciation			(16,610	)			(18,064	)
Property, plant and equipment, net		$	31,896			$	30,327

 

The Group has recorded depreciation expense of $2,290, $2,072 and $1,949 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

9

ACQUIRED INTANGIBLE ASSETS, NET

 

Acquired intangible assets, net consisted of the following:

 

		At December 31,
		2013				2014
Cost:
Purchased software		$	9,647			$	8,654
Technology licenses			17,640				23,154
			27,287				31,808
Accumulated amortization:
Purchased software			(7,054	)			(6,961	)
Technology licenses			(8,015	)			(7,568	)
			(15,069	)			(14,529	)
Impairment loss recognised:
Purchased software			-				(168	)
Technology licenses			-				(652	)
			-				(820	)
IPR&D not subject to amortization			420				420
Less: Impairment loss in respect of IPR&D recognized			(420	)			(420	)
Acquired intangible assets, net		$	12,218			$	16,459

 

The intangible assets of the Group mainly consisted 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 has recorded amortization expense of $3,056, $3,480 and $4,991 for the years ended December 31, 2012, 2013 and 2014, respectively.  Intangible asset amortization expense is estimated to be $5,275, $4,560, $2,989, $2,236 and $1,765 for the 2015, 2016, 2017, 2018 and 2019 fiscal years, respectively.

 

The Group has disposed intangible assets with carrying value $43, $16 and $ 444 and recorded a loss on disposal of intangible assets of nil, nil and $420 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

In 2014, the Group recognized an impairment loss of $820 as carrying amount of the intangible assets exceeded the fair value of the assets based on a discounted cash flow method using assumptions about revenue growth rates and the appropriate discount rates. No impairment loss for the intangible assets was recognized for the years ended December 31, 2012 and 2013.

 

 

10

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following:

 

		At December 31,
		2013				2014
Accrued wages and bonuses		$	2,244			$	2,323
Accrued legal and professional fees			301				511
Payables for acquisition of properly, plant and equipment			156				-
Payables for acquisition of intangible assets			1,112				2,807
Value added tax payable for acquisition of intangible assets			105				-
Royalty fees payable			791				1,382
Accrued consulting fees			188				188
Share repurchase fee payable			170				29
Accrued sales discount			254				148
Others			806				961
		$	6,127			$	8,349

 

11

OTHER LIABILITIES

 

The local authorities in Zhuhai, PRC, operate certain government subsidy programs which are intended to encourage companies to invest in the high technology industry in Zhuhai.

 

For the year ended December 31, 2013, Actions Semiconductor Zhuhai were further granted $714 advance subsidies, the total liabilities amounted to $1,774, of which $1,362 was repayable within one year, subject to the acknowledgement by the local authorities that all conditions attached to the grant are satisfied, and $412 are repayable after 2013 and therefore are recorded in non-current liabilities.

 

For the year ended December 31, 2014, Actions Semiconductor Zhuhai were further granted $232 advance subsidies, the total liabilities amounted to $1,929, which was repayable within one year, subject to the acknowledgement by the local authorities that all conditions attached to the grant are satisfied.

 

The estimated fair value of the advances granted to Actions Semiconductor Zhuhai based on the Group's borrowing interest rate from independent financial institution was approximately $1,970, $1,666 and $1,831 at December 31, 2012, 2013 and 2014, respectively.

 

 

12

SHORT-TERM BANK LOANS

 

Balances comprised bank loans with two different banks located in Taiwan and Hong Kong.

 

Loan from bank A in Taiwan

 

The Group has entered into loan facility agreement with a bank in Taiwan during July 2014 and is available for the Group to draw on within a year. In September 2014, the Group has drawn down the full amount of loan of $15,000 in two tranches of $10,000 and $5,000 respectively. This bank borrowing is denominated in US Dollars, which carries floating interest rate at 0.8% higher than the London Interbank Offered Rate ("LIBOR") at date of inception of loan facility agreement. The first tranche of loan drawn down in September 2014 has been rolled-over in December 2014 with floating interest rate remains at 0.8% higher than LIBOR. Effective interest rate of the loan was 1.55% per annum as at December 2014. The first tranche and second tranche of the loan are repayable on January 26, 2015.

 

In December 2014, the Group has further drawn down the full amount of loan of $10,000 in two tranches of $5,000 in each tranche. This bank borrowing is denominated in US Dollars, which carries floating interest rate at 0.8% higher than the London Interbank Offered Rate ("LIBOR") at date of inception of loan facility agreement. Effective interest rate of the loan was 1.55% per annum as at December 2014. The first tranche and second tranche of the loan are repayable on March 31, 2015.

 

Loan from bank B in Hong Kong

 

The Group has entered into loan facility agreement with a bank in Hong Kong during December 2012 and drawn down a loan of $8,500. This bank borrowing is denominated in US Dollars, which carries fixed interest rate at 1.84% at date of inception of loan facility agreement. The Group has renewed the full amount of loan of $8,500 with fixed interest rate at 1.15% on December 30, 2013. The loan have been rolled-over in March, June, September and December 2014 with fixed interest rate at 1.24%, 1.28%, 1.25% and 1.36% respectively. The loan is repayable on March 31, 2015. 

 

During December 2014, the Group has further drawn down a loan of $11,500. This bank borrowing is denominated in US Dollars, which carries fixed interest rate at 1.33% at date of inception of loan facility agreement. The loan is repayable on January 28, 2015.

 

There were no restrictive financial covenants associated with these loans. 

 

 

13

TIME DEPOSIT

 

The time deposit was denominated in Renminbi, which carried fixed interest rate at 2.8% per annum and will mature before December 31, 2015.

 

14

SHARE-BASED COMPENSATION

 

Share-based Compensation Plan A - for options granted from 2007 up to March 2013

 

In May 2007, the Board of Directors approved a share incentive plan, in which the Group may grant either restricted stock units (“RSU”) or options to purchase the Company's ordinary shares. A maximum of 8,000,000 stock options or RSU were authorized to be granted to the directors of the Company and senior officers of the Group to subscribe 48,000,000 shares of the Company. The share based awards granted under this plan have a requisite service period of four years. The Board of Directors also has the right to terminate any unvested share based awards.

 

The share based awards vest over four years and expire six years from grant date. For some of the employees, twenty-five percent of the share based awards 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.

 

 

14

SHARE-BASED COMPENSATION - continued

 

The Group reviewed the actual employee terminations in the past and changed the estimated employee forfeiture rate to reflect the current competitive environment of talent recruiting and sustaining in China. The Group estimated forfeitures at the time of grant based on 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.

 

Share-based Compensation Plan B - for options granted since April 2013

 

On April 1, 2013, the Board of Directors approved another share incentive plan, which the Group may grant either RSU or options to purchase the Company’s ordinary shares. A maximum of 2,000,000 stocks options or RSU were authorized to grant to the directors of the Company and senior officers of the Group to subscribe to 12,000,000 shares of the Company. The share based awards granted under this plan, were under performance condition for vesting. Under this incentive plan, the Board of Directors granted 280,000 stock options to subscribe 1,680,000 shares of the Company and 1,217,600 RSU to subscribe 7,305,600 shares (collectively referred as “Shares”). The option exercise price was $2.58.The employee's ability to earn the award was conditioned on the Group's ability in attaining specified performance targets. Details of the performance conditions were noted below:

 

1)

When the 4-quarter gross profit reaches or exceeds $31.5 million ("Milestone One") for the first time, then 20% of the Shares subject to the share incentive plan shall be vested and 20% of the Shares subject to the share incentive plan shall vest 1 year after.

 

2)

After meeting Milestone One, when the 4-quarter gross profit reaches or exceeds $44.5 million ("Milestone Two") for the first time, then an additional 15% of the Shares subject to the share incentive plan shall be vested and an additional fifteen percent 15% of the Shares subject to the share incentive plan shall vest 1 year after.

 

3)

After meeting Milestone One and Milestone Two, when the 4-quarter gross profit reaches or exceeds $55.5 million ("Milestone Three") for the first time, then an additional 15% of the Shares subject to the share incentive plan shall be vested and an additional 15% of the Shares subject to the share incentive plan shall vest 1 year after.

 

No share-based compensation was accrued as the probability that these performance conditions will be achieved was remote as at December 31, 2014.

 

 

14

SHARE-BASED COMPENSATION - continued

 

The fair value of each share-based award is estimated at grant date for the years ended 2012, 2013 and 2014 using the Black-Scholes option-pricing model based on the following assumptions:

 

Year ended December 31		2012		2013		2014
Risk-free interest rate (1)		0.11% - 2.66%		0.11% - 2.66%		0.11% - 2.66%
Expected life (2)		2-5 years		2-5 years		2-5 years
Expected volatility (3)		39.97% - 42.04%		39.17% - 42.04%		38.15% - 42.04%
Dividend yield (4)		Nil		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.

 

 

14

SHARE-BASED COMPENSATION – continued

 

Stock options

 

A summary of stock option activity is as follows:

 

						Weighted				Weighted
						average				average
		Number				exercise price				fair value
		of options				per option				at grant date
Outstanding at December 31, 2011			7,356,249			$	1.40			$	1.01
Exercised			(1,635,252	)		$	1.40			$	1.01
Forfeited			(751,425	)		$	1.40			$	1.01
Expired			(91,475	)		$	1.40			$	1.01
Outstanding at December 31, 2012			4,878,097			$	1.40			$	1.01
Granted on April 1, 2013			280,000			$	2.58			$	0.05
Exercised			(2,172,103	)		$	1.40			$	1.21
Forfeited			(68,005	)		$	1.40			$	1.12
Expired			(21,650	)		$	1.40			$	1.27
Outstanding at December 31, 2013			2,896,339			$	1.51			$	0.77
Exercised			(1,815,259	)		$	1.40			$	1.20
Forfeited			(10,000	)		$	1.40			$	1.28
Expired			(96,796	)		$	1.40			$	1.09
Outstanding at December 31, 2014			974,284			$	1.73			$	0.86

  

The following table summarizes information with respect to stock options outstanding at December 31, 2013 and 2014:

 

Options exercisable

Options outstanding as of December 31, 2013

as of December 31, 2013

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

2,896,339

5 years

$

1.51

$

22,301

2,677,154

$

1.40

$

2,154

 

Options exercisable

Options outstanding as of December 31, 2014

as of December 31, 2014

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

974,284

5 years

$

1.73

$

8,117

694,284

$

1.40

$

648

 

 

14

SHARE-BASED COMPENSATION - continued

 

As at December 31, 2014, there was nil (2013: $2) of unrecognized compensation expense related to non-vested stock options.

 

RSU

 

The fair value of each RSU is estimated based on the market price at granted date. RSU were first grant to the directors of the Company and senior management of the Group since May 2011. A summary of RSU activity is as follows:

 

		Number
		of RSU
Outstanding at December 31, 2011			234,000
Granted on January 17, 2012			100,000
Granted on May 8, 2012			313,250
Exercised			(31,500	)
Forfeited			(34,100	)
Outstanding at December 31, 2012			581,650
Granted on April 1, 2013			1,217,600
Exercised			(173,350	)
Forfeited			(51,900	)
Outstanding at December 31, 2013			1,574,000
Granted on November 4, 2014			20,000
Exercised			(237,400	)
Expired			(26,500	)
Forfeited			(227,900	)
Outstanding at December 31, 2014			1,102,200

  

As at December 31, 2014, there was $22 (2013: 19) of unrecognized compensation expenses related to non-vested RSU that are expected to be recognized over a weighted-average period of 2 years (2013: 1 years) on a straight-line basis.

 

The total share-based compensation expense in relation to options and RSU recognized in the consolidated statements of operations for the years ended December 31, 2012, 2013 and 2014 were $1,465, $492 and $45, respectively.

 

As at December 31, 2014, 9,323,516 (2013: 6,929,661) options to purchase ordinary shares or RSU were available for future grant.

 

 

15

OTHER INCOME

 

Other income for 2012, 2013 and 2014 included foreign exchange gain (loss) were $1,547, $2,336 and $(3,039), respectively.

 

16

INCOME TAXES

 

The components of income (loss) before income taxes, equity in net income (loss) of equity method investee and non-controlling interest are as follows:

 

		Year ended December 31,
		2012				2013				2014
Domestic		$	(3,182	)		$	(522	)		$	(40,612	)
Foreign			1,703				1,311				7,887
		$	(1,479	)		$	789			$	(32,725	)

 

The Company is tax exempt in the Cayman Islands.

 

Under the current Mauritius law and Hong Kong Inland Revenue Ordinance, Actions Semiconductor Mauritius', Actions Hong Kong and Artek Microelectronics (HK) Co., Limited's income are subject to taxation in Mauritius and Hong Kong, respectively; however, up to and as of December 31, 2014, the entities have not had any taxable profits.  Actions Semiconductor 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 Enterprise Income Tax of the People’s Republic of China (“EIT Law”) was implemented. The new law requires that:

 

1.

For all resident enterprises, domestic or foreign, the unified Enterprise Income Tax (“EIT”) rate is 25%.

 

2.

Enterprises that are categorized as the "High Tech Enterprise" can enjoy 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% would be subject to tax rates of 18%, 20%, 22%, 24% and 25% for the years ended December 31, 2008, 2009, 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.

 

 

16

INCOME TAXES - continued

 

Actions Semiconductor Zhuhai

 

On August 23, 2011, Actions Semiconductor Zhuhai successfully renewed its certificate of "High Tech Enterprises" with effect from January 1, 2011. As a result, the applicable tax rate continued to be 15% for the years ended December 31, 2011, 2012 and 2013, and 25% thereafter, unless the Group continues its status and receives certification as a “High Tech Enterprises” by the end of 2014.

 

In December 2013, Actions Semiconductor Zhuhai was named as “Key Integrated Circuit Design Enterprise” by PRC Tax authority with effective from December 2014. As a result, the applicable tax rate is 10% for the years ended December 31, 2013 and 2014.

 

Artek Microelectronics Shenzhen

 

On November 5, 2012, certificate of "High Tech Enterprises" was granted to Artek Microelectronics Shenzhen. As a result, the applicable tax rate was 15% for the years ended December 31, 2012, 2013 and 2014, and 25% thereafter, unless the Group continues its status and receives certification as a "High Tech Enterprises" by the end of 2015.

 

Tax residency

 

Uncertainties exist with respect to how the EIT applies to our overall operations, and more specifically, with regard to tax residency status. EIT Law 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 as PRC tax 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. Except Mavrix, whose place of effective management is in Shanghai, the Group determined that the legal entities organized outside China should not be treated as PRC tax residents for EIT Law purposes as the places of effective management are outside China. If one or more of other legal entities organized outside China were characterized as PRC tax resident, then the additional tax cost might be significant.

 

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 residents in the PRC, will be subject to the PRC dividend withholding tax of 10% 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 $3,189, $3,589 and $919 of income tax expense for the 5%, 5% and 10% 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 for the years ended December 31, 2012, 2013 and 2014 respectively.

 

Actions Hong Kong, Artek Microelectronics (HK) Co., Limited and Actions Microelectronics Co., Ltd. are subject to Hong Kong Profits Tax at a rate of 16.5% for the years ended December 31, 2012, 2013 and 2014 respectively.

 

 

16

INCOME TAXES - continued

 

The current and deferred components of the income tax expense appearing in the consolidated statements of operations are as follows:

 

		Year ended December 31,
		2012				2013				2014
Current tax		$	318			$	124			$	1,780
Deferred tax			454				279				(3,576	)
		$	772			$	403			$	(1,796	)

 

The Group's deferred tax assets and liabilities as at December 31, 2013 and 2014 are attributable to the following:

 

		At December 31,
		2013				2014
Expenditures deductible for tax purpose in future years
- Accrued legal and professional fees		$	30			$	14
- Accrued bonus			165				56
- Other			238				1,098
Tax losses			5,217				9,516
Depreciation and amortization			82				64
Total deferred tax assets		$	5,732			$	10,748
Valuation allowance			(5,217	)			(9,516	)
Deferred tax assets			515				1,232
Interest income taxable for tax purpose in future years			(343	)			(160	)
Deferred tax liability arising from withholding tax on undistributed profits			(3,589	)			(919	)
Total deferred tax liabilities			(3,932	)			(1,079	)
Deferred tax (liabilities) assets, net		$	(3,417	)		$	153

 

The following is the analysis of deferred tax balances for reporting purposes:

 

		At December 31,
		2013				2014
Deferred tax assets
Current		$	416			$	1,179
Non-current			99				53
		$	515			$	1,232
Deferred tax liabilities
Current		$	(343	)		$	(160	)
Non-current			(3,589	)			(919	)
			(3,932	)			(1,079	)
Deferred tax (liabilities) assets, net		$	(3,417	)		$	153

 

Movement of valuation allowance:

 

		2012				2013				2014
At the beginning of the year		$	1,912			$	3,535			$	5,217
Change for the year			1,623				1,682				4,299
At the end of the year		$	3,535			$	5,217			$	9,516

 

A valuation allowance has been provided for the tax loss of $19,806, $8,653, $603, $9,271 and $7,836 of Actions Semiconductor Shanghai, Actions Semiconductor Zhuhai, Artek Microelectronics Shenzhen, Actions Technology Zhuhai and Actions Hong Kong respectively since realization of the recorded deferred tax assets is dependent on generating sufficient taxable income. Tax loss of $6,051, $3,818, $7,037, $7,930, $42,544 and $7,836 may carry forward till 2015, 2016, 2017, 2018, 2019 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 the tax losses of Actions Semiconductor Shanghai, Actions Semiconductor Zhuhai and Actions Hong Kong will be realized, valuation allowance of $3,535, $5,217 and $9,516 has been established as of December 31, 2012, 2013 and 2014, respectively for the related deferred tax asset of these subsidiaries.

 

 

16

INCOME TAXES - continued

 

The additional tax that would have been payable in the absence of the tax exemption and preferential income tax rate amounts to approximately $911, $930, and nil for the years ended December 31, 2012, 2013 and 2014, respectively. It represents a decrease in the basic and diluted earnings per ordinary share of $0.002 for the years ended December 31, 2013; and an increase in the basic and diluted loss per ordinary share of $0.002 for the year ended December 31, 2012.

 

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, 2013 and 2014, there were 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 the next twelve months. 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 2012 to 2014 and years 2008 to 2014 may be subject to examination by the PRC and Hong Kong tax authorities, respectively.

 

A reconciliation between the provision for income tax computed by applicable PRC enterprise income tax rate to (loss) income before income taxes, equity in net income (loss) of equity method investees and non-controlling interest, and actual provision for income taxes is as follows:

 

		Year ended December 31,
		2012				2013				2014
PRC tax rate			25	%			25	%			25	%
Tax (credit) provision at PRC enterprise income tax rate		$	(370	)		$	197			$	(8,181	)
Expenses not deductible for tax purpose			1,224				403				3,701
Share-based compensation not deductible for tax purpose			366				123				11
Income not taxable for tax purposes			(599	)			(1,005	)			(5,146	)
Net change in valuation allowance			1,623				1,682				4,299
Effect of tax exemption and preferential income tax rate granted to PRC subsidiaries			(911	)			(930	)			3,857
Effect of the different income tax rates in other jurisdictions			21				204				301
Effect of withholding tax on undistributed earnings			349				400				(762	)
Effect of withholding tax on American Depository Shares ("ADS") reimbursement income			150				-				-
Utilization of tax loss previously not recognized			(979	)			(685	)			-
Overprovision in prior year			(81	)			(78	)			(90	)
Others			(21	)			92				214
Income tax expense		$	772			$	403			$	(1,796	)

 

 

17

NET (LOSS) INCOME PER SHARE

 

The calculations of basic and diluted earnings per share are computed as follows:

 

		For the years ended December 31,
		2012				2013				2014
Net (loss) income attributable to Actions Semiconductor Co., Ltd. shareholders		$	(2,202	)		$	124			$	(30,361	)
Shares:
Weighted average shares outstanding used in computing basic net (loss) income per share			412,706,341				412,103,255				395,380,921
Effect of dilutive securities:
Weighted average shares from assumed exercise of share-based awards			-				13,311,756				-
Weighted average shares outstanding used in computing diluted net (loss) income per share			412,706,341				425,415,011				395,380,921
Net (loss) income per share, basic		$	(0.0053	)		$	0.0003			$	(0.0768	)
Net (loss) income per share, diluted		$	(0.0053	)		$	0.0003			$	(0.0768	)

 

The dilutive effect of the options and RSU are calculated using the treasury stock method. Under the treasury stock method, the proceeds from the assumed conversion of options and RSU, which include the benefit of the compensation costs attributable to future services and not yet recognized, are used to repurchase outstanding ordinary shares using average market price.

 

For the years ended December 31, 2012 and 2014, the Company had 5,459,747 and 2,076,484 options and RSU outstanding respectively which could potentilly dilute basic net income per share in the future, but were excluded from the computation of diluted net income per share in 2012 and 2014.

No options and unvested advanced shares are excluded from calculation of diluted income per share in 2013.

 

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,
		2012				2013				2014
Revenue:
MMP SoC for portable media players		$	54,150			$	69,256			$	50,143
Testing solutions			179				135				117
		$	54,329			$	69,391			$	50,260
Gross profit:
MMP SoC for portable media players		$	19,143			$	21,349			$	3,995
Testing solutions			79				77				71
		$	19,222			$	21,426			$	4,066

 

Geographic information

 

The Group operates in PRC/Hong Kong and all of the Group's long-lived assets are located in PRC/Hong Kong and substantially all of our sales are made in PRC/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, 2012, 2013 and 2014 was $342, $527 and $615, respectively.

  

Future minimum lease payments under non-cancelable operating lease agreements as of December 31, 2013 were $285 of which $258 and $27 are payable in the years ending December 31, 2014 and 2015, respectively.

 

Future minimum lease payments under non-cancelable operating lease agreements as of December 31, 2014 were $269 of which $202 and $67 are payable in the years ending December 31, 2015 and 2016, respectively.

 

(b)

Capital commitments

 

Capital commitments for purchase of property, plant and equipment as of December 31, 2013 and 2014 were $99 and $35, respectively.

 

 

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,
		2012				2013				2014
Customer A			11	%			N/A				N/A
Customer B			N/A				N/A				18	%
Customer C			N/A				13	%			N/A
Customer D			N/A				N/A				N/A
Customer E			17	%			15	%			15	%
Customer F			17	%			N/A				N/A
Customer G			11	%			N/A				11	%
Customer J			N/A				N/A				12	%
Customer K			N/A				N/A				10	%
			56	%			28	%			66	%

 

		Accounts receivable
		At December 31,
		2013				2014
Customer B			18	%			33	%
Customer C			15	%			N/A
Customer D			13	%			N/A
Customer E			16	%			14	%
Customer F			N/A				N/A
Customer G			12	%			10	%
Customer H			N/A				13	%
Customer L			N/A				10	%
			74	%			80	%

 

 

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 $2,717, $3,084 and $3,929 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

22

MATERIAL RELATED PARTY DISCLOSURE

 

During the years ended December 31, 2012, 2013 and 2014, the Group recognized net sales of $1,794, $4,639 and $9,211 to GMI Technology Inc. ("GMI") respectively.  As of December 31, 2013 and 2014, amount due from a related party represented an accounts receivable from GMI of $1,301 and $1,650 respectively.  GMI's president is an immediate family member of the Group's Director.

 

During the years ended December 31, 2012, 2013 and 2014, the Group recognized net purchase of nil, nil and $817 from Realtek Semiconductor Corporation ("Realtek") respectively.  As of December 31, 2014, amount due to a related party represented an accounts payable to Realtek of $259.  Realtek's president is one of the Group's Director.

 

As of December 31, 2013 and 2014, the Group had an amount due from an equity method investee, Beijing Actions, of $38 and $41, respectively.

 

23

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, 2013 and 2014, the balance of the Company's PRC subsidiaries reserves amounted to $14,299 and $14,299, respectively.

 

In addition to these reserves, the registered capital of the Company's PRC subsidiaries is also restricted.  As of December 31, 2013 and 2014, the total amount of the restricted capital and reserves amounted to $134,571 and $113,505, respectively.

 

 

SCHEDULE 1

BALANCE SHEETS

 

(In thousands of U.S. dollars, except share and per share data)

 

		At December 31,
		2013				2014
ASSETS
Current assets:
Cash and cash equivalents		$	688			$	14,369
Amounts due from subsidiaries			15,343				7,768
Prepaid expenses and other current assets			54				137
Total current assets			16,085				22,274
Investments in subsidiaries			398,324				334,201
Investments in an equity method investee			14,987				24,020
Acquired intangible assets, net			621				4,661
TOTAL ASSETS			430,017				385,156
LIABILITIES AND EQUITY
Current liabilities:
Short-term bank borrowing		$	-			$	10,000
Accrued expenses and other current liabilities			1,228				903
Amounts due to subsidiaries			146,213				152,150
Total liabilities			147,441				163,053
Equity:
Ordinary shares of par value $0.000001: 2,000,000,000 shares authorized 353,016,455 (2013: 411,474,516) shares issued and outstanding		$	1			$	1
Additional paid-in capital			63,001				63,046
Treasury Stock			(44,119	)			(70,479	)
Accumulated other comprehensive income			40,734				36,937
Retained earnings			222,959				192,598
Total equity			282,576				222,103
TOTAL LIABILITIES AND EQUITY		$	430,017			$	385,156

 

 

STATEMENTS OF OPERATIONS

 

(In thousands of U.S. dollars, except share and per share data)

 

		Year ended December 31,
		2012				2013				2014
Operating expenses:
Research and development		$	(944	)		$	1,017			$	605
General and administrative			(2,190	)			(1,626	)			(2,515	)
Selling and marketing			(48	)			86				43
Total operating expenses			(3,182	)			(523	)			(1,867	)
Loss from operations			(3,182	)			(523	)			(1,867	)
Gain on disposal of subsidiaries			-				-				9,755
Interest income			-				1				1
(Loss) income before income taxes			(3,182	)			(522	)			7,889
Income tax expenses			(150	)			-				-
Share of net income (loss) of subsidiaries, net of taxes			1,080				848				(38,266	)
Share of net income (loss) of an equity method investee			50				(202	)			16
Net (loss) income		$	(2,202	)		$	124			$	(30,361	)

 

 

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars, except share and per share data)

 

		Year ended December 31,
		2012				2013				2014
Net (loss) income			(2,202	)			124				(30,361	)
Other comprehensive income (loss), net of tax:
Change in cumulative foreign currency translation adjustments			3,162				4,983				(3,797	)
Total comprehensive income (loss)		$	960			$	5,107			$	(34,158	)

 

 

 

STATEMENTS OF CHANGES IN EQUITY

 

(In thousands of U.S. dollars, except share and per share data)

 

																		Accumulated
		Ordinary shares								Additional								other				Accumulated
										paid-in				Treasury				comprehensive				retained
		Number				Amount				Capital				Stock				income				earnings				Total
Balance at January 1, 2012			413,985,636			$	1			$	61,044			$	(40,444	)		$	32,589			$	225,037			$	278,227
Repurchase of ordinary shares			(14,812,056	)			-				-				(4,166	)			-				-				(4,166	)
Share-based compensation			-				-				1,465				-				-				-				1,465
Exercise of share-based awards			9,811,512				-				-				2,303				-				-				2,303
Foreign currency translation adjustments			-				-				-				-				3,162				-				3,162
Net loss			-				-				-				-				-				(2,202	)			(2,202	)
Balance at December 31, 2012			408,985,092			$	1			$	62,509			$	(42,307	)		$	35,751			$	222,835			$	278,789
Repurchase of ordinary shares			(11,772,294	)			-				-				(4,853	)			-				-				(4,853	)
Share-based compensation			-				-				492				-				-				-				492
Exercise of share-based awards			14,261,718				-				-				3,041				-				-				3,041
Foreign currency translation adjustments			-				-				-				-				4,983				-				4,983
Net income			-				-				-				-				-				124				124
Balance at December 31, 2013			411,474,516			$	1			$	63,001			$	(44,119	)		$	40,734			$	222,959			$	282,576
Repurchase of ordinary shares			(70,774,015	)			-				-				(28,902	)			-				-				(28,902	)
Share-based compensation			-				-				45				-				-				-				45
Exercise of share-based awards			12,315,954				-				-				2,542				-				-				2,542
Foreign currency translation adjustments			-				-				-				-				(3,797	)			-				(3,797	)
Net loss			-				-				-				-				-				(30,361	)			(30,361	)
Balance at December 31, 2014			353,016,455			$	1			$	63,046			$	(70,479	)		$	36,937			$	192,598			$	222,103

  

 

STATEMENTS OF CASH FLOWS  

 

(In thousands of U.S. dollars)

 

		Year ended December 31,
		2012				2013				2014
Operating activities:
Net (loss) income		$	(2,202	)		$	124			$	(30,361	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of acquired intangible assets			-				33				1,021
Share-based compensation			1,465				492				45
Share of net (income) loss of subsidiaries			(1,080	)			(848	)			38,266
Share of net (income) loss of an equity method investee			(50	)			202				(16	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			30				137				(84	)
Accrued expenses and other current liabilities			1,462				(1,148	)			(325	)
Amounts due to subsidiaries			3,440				7,418				5,937
Cash provided by operating activities			3,065				6,410				14,483
Investing activities:
Dividend received from a subsidiary			-				-				22,060
Investment in an equity method investee			-				(3,712	)			(9,016	)
(Increase) decrease in amounts due from subsidiaries			(1,829	)			(799	)			7,575
Purchase of intangible assets			-				(654	)			(5,061	)
Cash (used in) provided by investing activities			(1,829	)			(5,165	)			15,558
Financing activities:
Repurchase of ordinary shares			(4,152	)			(4,853	)			(28,902	)
Proceeds from exercise of stock options			2,289				3,041				2,542
Raise of short-term bank loan			-				-				10,000
Cash used in financing activities			(1,863	)			(1,812	)			(16,360	)
(Decrease) increase in cash and cash equivalents			(627	)			(567	)			13,681
Cash and cash equivalents at the beginning of the year			1,882				1,255				688
Cash and cash equivalents at the end of the year		$	1,255			$	688			$	14,369

 

 

 

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 requires 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, 2013 and 2014, $134,571 and $113,505 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, 2012, 2013 and 2014.

 

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.

 

  

ACTIONS SEMICONDUCTOR CO., LTD.

 

Third Amended and Restated 2007 Equity Performance and Incentive Plan

 

1.

Purpose. The purpose of the Third Amended and Restated 2007 Equity Performance and Incentive Plan (the “Plan”) is to attract and retain officers, employees, non-employee directors and consultants for Actions Semiconductor Co., Ltd., a Cayman Islands exempted company, and its Subsidiaries and to provide to such persons incentives to stay with the Company and make superior contributions to the Company in the future.

 

2.

Definitions. As used in this Plan,

 

(a)

“Board” means the Board of Directors of the Company and, to the extent of any delegation by the Board to a committee (or subcommittee thereof) pursuant to Section 13 of this Plan, such committee (or subcommittee).

 

(b)

“Company” means Actions Semiconductor Co., Ltd., a Cayman Islands exempted company, or any successor corporation thereto.

 

(c)

“Date of Grant” means the date specified by the Board on which a grant of Option Rights or a grant or sale of Restricted Shares or Restricted Share Units will become effective (which date will not be earlier than the later of (i) the date on which the Board takes action with respect thereto; or (ii) the date on which a Participant commences the provision of services to the Company or any one or more of its Subsidiaries).

 

(d)

“Director” means a member of the Board of Directors of the Company.

 

(e)

“Employee” means any person employed by the Company or any of the Company’s present or future parent or subsidiary corporations as defined in sections 424(e) or (f) of the U.S. Code, and any other entities the employees of which are eligible to receive incentive stock options under the U.S. Code. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.

 

(f)

“Evidence of Award” means an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Board that sets forth the terms and conditions of the awards granted. An Evidence of Award may be in an electronic medium, may be limited to notation on the books and records of the Company and, with the approval of the Board, need not be signed by a representative of the Company or a Participant.

 

(g)

“Market Value per Share” means, as of any particular date, the fair market value of one of the Shares of the Company as determined by the Board.

 

(h)

“Optionee” means the optionee named in an Evidence of Award evidencing an outstanding Option Right.

 

  

(i)

“Option Price” means the purchase price payable on exercise of an Option Right.

 

(j)

“Option Right” means the right to purchase Shares upon exercise of an option granted pursuant to Section 4 of this Plan.

 

(k)

“Participant” means a person who is selected by the Board to receive benefits under this Plan and who is at the time an officer, employee, non-employee director or consultant of the Company or any one or more of its Subsidiaries, or who has agreed to commence serving in any of such capacities within 90 days of the date on which the Board takes action to approve a grant of an award under this Plan. The term “Participant” shall also include any person who provides services to the Company or a Subsidiary that are equivalent to those typically provided by an employee.

 

(l)

“PRC” means the People’s Republic of China.

 

(m)

“Restriction Period” means the period of time during which Restricted Share Units are subject to deferral limitations under Section 6 of this Plan.

 

(n)

“Restricted Shares” means Shares granted or sold pursuant to Section 5 of this Plan as to which neither the risk of forfeiture nor the prohibition on transfers referred to in such Section 5 has expired.

 

(o)

“Restricted Share Units” means an award made pursuant to Section 6 of this Plan of the right to receive Shares at the end of a specified Restriction Period.

 

(p)

“Shares” means the American Depositary Shares representing ordinary shares, par value US $0.000001 per share, of the Company, or any security into which such Shares may be changed by reason of any transaction or event of the type referred to in Section 9 of this Plan.

 

(q)

“Subsidiary” means a corporation, company or other entity (i) more than 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Company.

 

(r)

“U.S. Code” means the United States Internal Revenue Code of 1986, as amended.

 

  

3.

Shares Available Under the Plan. Subject to adjustment as provided in Section 9 of this Plan, the number of Shares that may be issued or transferred (i) upon the exercise of Option Rights, (ii) as Restricted Shares and released from the risk of forfeiture thereof, (iii) upon payment of Restricted Share Units, or (iv) in payment of dividend equivalents paid with respect to awards made under the Plan shall not exceed in the aggregate 11,400,000 Shares, all of which are available to be granted as incentive stock options within the meaning of section 422 of the U.S. Code. In addition to the Shares authorized by the preceding sentence, to the extent any award under this Plan otherwise terminates without the issuance of some or all of the Shares underlying the award to a Participant or if any Option Right under this Plan terminates without having been exercised in full, the Shares underlying such award, to the extent of any such forfeiture or termination, shall be available for future grant under this Plan and credited toward the Plan limit. Such Shares may be Shares of original issuance or Shares that have been previously issued and acquired by the Company or a combination of the foregoing. The Board may, at any time, increase or reduce the number of Shares subject to this Plan, but not below the number of Shares then issuable upon outstanding, unexercised Option Rights and unvested Restricted Shares and Restricted Share Units.

 

4.

Option Rights. The Board may, from time to time and upon such terms and conditions as it may determine, authorize the granting to Participants of options to purchase Shares. Such options may be “incentive stock options” (within the meaning of section 422 of the U.S. Code. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

 

(a)

Each grant will specify the number of Shares to which it pertains subject to the limitations set forth in Section 3 of this Plan.

 

(b)

Each grant will specify an Option Price per Share as determined by the Board, provided that, if the Participant receiving such grant is a United States taxpayer, such Option Price per Share shall not be less than 100% of the Market Value per Share on the Date of Grant. In the case of an incentive stock option (A) granted to an Employee who, at the time the incentive stock option is granted, owns Shares representing more than ten percent (10%) of the voting power of all classes of share capital of the Company or any of the Company’s present or future parent or subsidiary corporations as defined in sections 424(e) or (f) of the U.S. Code, the Option Price per Share will be no less than one hundred ten percent (110%) of the Market Value per Share on the Date of Grant; and (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the Option Price per Share will be no less than one hundred percent (100%) of the Market Value per Share on the Date of Grant.

 

(c)

Each grant will specify whether the Option Price will be payable (i) in cash or by check acceptable to the Company in a currency determined by the Board, (ii) to the extent authorized by the Board, by the actual or constructive transfer to the Company of Shares owned by the Optionee having a value at the time of exercise equal to the total Option Price, (iii) by such other method of payment authorized by the Board, or (iv) by a combination of such methods of payment.

 

  

(d)

To the extent permitted by law, any grant may provide for deferred payment of the Option Price from the proceeds of sale through a broker on a date satisfactory to the Company of some or all of the Shares to which such exercise relates.

 

(e)

Successive grants may be made to the same Participant whether or not any Option Rights previously granted to such Participant remain unexercised.

 

(f)

Each grant will specify the period or periods of continuous service by the Optionee with the Company or any Subsidiary that is necessary before the Option Rights or installments thereof will become exercisable. Notwithstanding the foregoing, any such grant of Option Rights may provide for the immediate exercisability of the Option Right.

 

(g)

Any grant of Option Rights may specify management objectives that must be achieved as a condition to the exercise of such rights.

 

(h)

The Board may, on or after the Date of Grant of any Option Rights, provide for the payment of dividend equivalents to the Optionee on either a current or deferred or contingent basis or may provide that such equivalents will be credited against the Option Price.

 

(i)

No Option Right will be exercisable more than 10 years from the Date of Grant, except that an Option Right intended to be an incentive stock option issued to an individual who owns more than ten percent of the total outstanding voting power of the Company’s outstanding stock (within the meaning of section 422 of the U.S. Code) will not have a term of more than 5 years.

 

(j)

The Board reserves the discretion after the Date of Grant to provide for (i) the payment of a cash bonus at the time of exercise; (ii) the availability of a loan at exercise; (iii) the right to tender in satisfaction of the Option Price non-forfeitable, unrestricted Shares, which are already owned by the Optionee and have a value at the time of exercise that is equal to the Option Price.

 

(k)

Each grant of Option Rights will be evidenced by an Evidence of Award. Each Evidence of Award shall be subject to the Plan and shall contain such terms and provisions as the Board may approve.

 

(l)

A grant of Option Rights that is not intended to be an incentive stock option shall be designated as a “Non-statutory Stock Option” or a “Nonqualified Stock Option.” Each grant that is intended to be an incentive stock option shall be subject to the following additional terms and conditions: (i) it shall only be granted to Employees, and shall be subject to and construed consistently with the requirements of section 422 of the U.S. Code, (ii) it shall be treated as a nonqualified stock option to the extent that, in the calendar year in which the Option is first exercisable, the aggregate fair market value of the Shares subject to the Option Right (when added to other awards granted to the same individual that are intended to be incentive stock options under any plan maintained by the Company and certain related corporations) exceeds US$100,000 or such other limitation as might apply under section 422 of the U.S. Code, (iii) it must be granted within 10 years from the adoption of the Plan or the date that it is approved by shareholders, whichever is earlier, (iv) it is not transferable other than by the laws of descent and distribution, and, during the option holder's lifetime, can be exercised only by the option holder, and (iii) the Company shall have no liability to a Participant, or any other party, if an Option Right (or any part thereof) that is intended to be an incentive stock option is not an incentive stock option, or for any action taken by the Board, including without limitation the conversion of an incentive stock option to a non-statutory stock option.

 

  

5.

Restricted Shares. The Board may also authorize the grant or sale of Restricted Shares to Participants. Each such grant or sale may utilize any or all of the authorizations, and will be subject to all of the requirements, contained in the following provisions:

 

(a)

Each such grant or sale will constitute an immediate transfer of the ownership of Shares to the Participant in consideration of the performance of services, entitling such Participant to voting, dividend and other ownership rights, but subject to the risk of forfeiture and restrictions on transfer hereinafter referred to.

 

(b)

Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant.

 

(c)

Each such grant or sale will provide that the Restricted Shares covered by such grant or sale will be subject to a risk of forfeiture for a period to be determined by the Board at the Date of Grant.

 

(d)

Each such grant or sale will provide that during the period for which such risk of forfeiture is to continue, the transferability of the Restricted Shares will be prohibited or restricted in the manner and to the extent prescribed by the Board at the Date of Grant (which restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Shares to a continuing risk of repurchase in the hands of any transferee).

 

(e)

Any grant of Restricted Shares may specify management objectives that, if achieved, will result in termination or early termination of the restrictions applicable to such Shares.

 

(f)

Any such grant or sale of Restricted Shares may require that any or all dividends or other distributions paid thereon during the period of such restrictions be automatically deferred and reinvested in additional Restricted Shares, which may be subject to the same restrictions as the underlying award.

 

  

(g)

Each grant or sale of Restricted Shares will be evidenced by an Evidence of Award and will contain such terms and provisions, consistent with this Plan, as the Board may approve. Unless otherwise directed by the Board, all certificates representing Restricted Shares will be held in custody by the Company until all restrictions thereon will have lapsed, together with a stock power or powers executed by the Participant in whose name such certificates are registered, endorsed in blank and covering such Shares.

 

6.

Restricted Share Units. The Board may also authorize the granting or sale of Restricted Share Units to Participants. Each such grant or sale may utilize any or all of the authorizations, and shall be subject to all of the requirements, contained in the following provisions:

 

(a)

Each such grant or sale shall constitute the agreement by the Company to deliver Shares to the Participant in the future in consideration of the performance of services, but subject to the fulfillment of such conditions during the Restriction Period as the Board may specify.

 

(b)

Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant.

 

(c)

Each such grant or sale shall be subject to a Restriction Period, as determined by the Board at the Date of Grant.

 

(d)

During the Restriction Period, the Participant shall have no right to transfer any rights under his or her award and shall have no rights of ownership in the Restricted Share Units and shall have no right to vote them, but the Board may, at or after the Date of Grant, authorize the payment of dividend equivalents on the Shares underlying such units on either a current or deferred or contingent basis, either in cash or in additional Shares.

 

(e)

Each grant will specify whether the Restricted Share Units will be payable at the end of the Restriction Period (i) in cash in a currency determined by the Board, (ii) by the actual transfer to the Participant of Shares, or (iii) by a combination of such methods of payment.

 

(f)

Any grant of Restricted Share Units may specify management objectives that, if achieved, will result in termination or early termination of the Restriction Period.

 

(g)

Each grant or sale of Restricted Share Units shall be evidenced by an Evidence of Award and shall contain such terms and provisions, consistent with this Plan, as the Board may approve.

 

7.

Type of Securities Issued. In lieu of delivering Shares in connection with an award of Option Rights, Restricted Shares, or Restricted Shares Units under this Plan, the Board may provide, at or after the Date of Grant, that the securities to be issued or transferred in connection with such awards shall be ordinary shares, par value US $0.000001 per ordinary share, of the Company.

 

  

8.

Transferability.

 

(a)

Except as otherwise determined by the Board, no Option Right or other security granted under this Plan shall be transferable by a Participant other than by will or the laws of descent and distribution. Except as otherwise determined by the Board, Option Rights shall be exercisable during the Optionee’s lifetime only by him or her or by his or her guardian or legal representative.

 

(b)

The Board may specify at the Date of Grant that part or all of the Shares that are (i) to be issued or transferred by the Company upon the exercise of Option Rights or upon the termination of the Restriction Period applicable to Restricted Share Units or (ii) no longer subject to the risk of forfeiture and restrictions on transfer referred to in Sections 5 and 6 of this Plan, will be subject to further restrictions on transfer.

 

9.

Adjustments. The Board shall make or provide for such adjustments in the numbers of Shares covered by outstanding Option Rights granted hereunder, in the Option Price, and in the kind of shares covered thereby and such other amendments to the terms of any outstanding awards granted hereunder, as the Board, in its sole discretion, exercised in good faith, may determine is equitably required or appropriate to prevent dilution or enlargement of the rights of Participants that otherwise would result from (a) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Board, in its discretion, may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced. The Board shall also make or provide for such adjustments in the number of Shares specified in Section 3 of this Plan as the Board in its sole discretion, exercised in good faith, may determine is appropriate to reflect any transaction or event described in this Section 9.

 

10.

Fractional Shares. The Company shall not be required to issue any fractional Shares pursuant to this Plan. The Board may provide for the elimination of fractions or for the settlement of fractions in cash.

 

11.

Withholding Taxes. To the extent that the Company is required to withhold PRC or other taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of such taxes required to be withheld, which arrangements (in the discretion of the Board) may include relinquishment of a portion of such benefit.

 

  

12.

Multiple Jurisdictions. In order to facilitate the making of any grant under this Plan, the Board may provide for such special terms for awards to Participants who are employed by the Company or any of its Subsidiaries in any particular jurisdiction other than the PRC, or who are nationals of any particular jurisdiction other than the PRC, as the Board may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. In addition, the Board may approve such supplements to or restatements or alternative versions of this Plan, including, without limitation, a sub-plan to this Plan, as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for any other purpose, and the Company Secretary or other appropriate officer of the Company may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements or restatements, however, shall include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Company.

 

13.

Administration of the Plan.

 

(a)

This Plan will be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to the Compensation Committee of the Board (or a subcommittee thereof), as constituted from time to time. 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 approved in writing, will be the acts of the committee (or subcommittee). To the extent of any such delegation, references in this Plan to the Board will be deemed to be references to such committee or subcommittee.

 

(b)

The interpretation and construction by the Board of any provision of this 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 pursuant to any provision of this Plan or of any such agreement, notification or document will be final and conclusive. No member of the Board will be liable for any such action or determination made in good faith.

 

14.

Amendments, Etc.

 

(a)

The Board may at any time and from time to time amend the Plan in whole or in part; provided, however, that any amendment which must be approved by the shareholders of the Company in order to comply with applicable law or the rules of the NASDAQ Global Market or, if the Shares are not quoted on the NASDAQ Global Market, the principal national securities exchange upon which the Shares are traded or quoted (“Applicable Law”), will not be effective unless and until such approval has been obtained. Nothing herein shall be construed to limit the Company’s authority to offer similar or dissimilar benefits under other plans or otherwise with or without further shareholder approval.

 

  

(b)

The Board also may permit Participants to elect to defer the issuance of Shares or the settlement of awards in cash under the Plan pursuant to such rules, procedures or programs as it may establish for purposes of this Plan. The Board also may provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferral amounts.

 

(c)

The Board may condition the grant of any award or combination of awards authorized under this 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 the Company or a Subsidiary to the Participant.

 

(d)

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 Section 8(b) of this Plan, the Board 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.

 

(e)

This Plan shall not confer upon any Participant any right with respect to employment or other service with the Company or any Subsidiary (including, without limitation, continuation of employment), nor shall it interfere in any way with any right the Company or any Subsidiary 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 shall not be affected by the execution of this Plan. Awards granted under this Plan shall not form a part of the terms of employment of an employee or entitle such employee to take into account awards granted under this Plan when calculating any compensation or damages upon the termination of such employee’s employment for any reason.

 

(f)

This Plan shall be effective immediately upon its adoption by the Board; provided, however, that this Plan will be subject to approval by the shareholders of the Company within 12 months after the date this Plan is adopted by the Board, which shareholder approval will be obtained in the manner and to the degree required under Applicable Law. Any Option Rights intended to be granted as incentive stock options under this Plan shall be deemed non-statutory stock options or nonqualified stock options if the Plan is not approved by the shareholders within such 12-month period.

 

  

15.

Governing Law. The Plan and all grants and awards and actions taken thereunder shall be governed by and construed in accordance with the internal substantive laws of the Cayman Islands.

 

16.

Compliance with Law. The grant of awards and the issuance of Shares in connection with such awards under this Plan shall be subject to compliance with all applicable requirements of the laws of the PRC, the laws of the Cayman Islands, and United States federal and state law with respect to such securities. Option Rights may not be exercised and Restricted Share Units may not be paid out if the issuance of Shares would constitute a violation of any such applicable or other laws or regulations or the requirements of any stock exchange or market system upon which the Shares may then be listed. In addition, no Option Rights may be exercised and no Restricted Share Units may be paid out unless (a) a registration statement under the United States Securities Act of 1933, as amended (the “Securities Act”), shall at the time of exercise of the Option Rights or the payment of the Restricted Share Units be in effect with respect to the shares issuable upon exercise of the Option Rights or the payment of the Restricted Share Units or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option Rights or payment of the Restricted Share Units may be issued in accordance with the terms of an applicable exemption or exception from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option Rights or payment of Restricted Share Units, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

 

17.

Termination. No grant will be made under this Plan after a term of ten (10) years after the effectiveness of the Plan as provided in Section 14(f), but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of this Plan.

 

 

Exhibit 1.2

 

 

THE COMPANIES LAW (2013 REVISION)

 

OF THE CAYMAN ISLANDS

 

COMPANY LIMITED BY SHARES

 

SECOND AMENDED AND RESTATED ARTICLES OF ASSOCIATION

 

OF

 

ACTIONS SEMICONDUCTOR CO., LTD.

 

炬力集成電路有限公司

 

(Adopted by Special Resolution passed on May 6, 2014)

 

INTERPRETATION

 

1

In these Articles, Table A in the Schedule to the Companies Law (2013 Revision) does not apply and, unless there is something in the subject or context inconsistent therewith,

 

"ADS" shall mean an American depositary share, evidenced by an American depositary receipt, if applicable, issued by JPMorgan Chase Bank, N.A. as depositary and representing an ownership interest in the shares.

 

"Applicable Laws" shall mean the Companies Law and all other applicable laws and regulations, including without limitation, for so long as the ADSs of the Company are quoted on Nasdaq, the rules or regulations issued by Nasdaq, and the relevant laws and regulations of the United States in force from time to time.

 

"Articles" means these Articles as originally framed or as from time to time altered by Special Resolution.

 

"Audit Committee" shall mean the audit committee established pursuant to Article 100(e) – (i).

 

"Auditors" means the persons for the time being performing the duties of auditors of the Company (if any).

 

"Board" means the Board of the Directors as defined in Article 80.

 

"the Chairman" shall mean the Chairman presiding at any meeting of members or of the Board.

 

"Companies Law" means the Companies Law (2013 Revision) of the Cayman Islands and any amendments thereto or re-enactments thereof for the time being in force and includes every other law incorporated therewith or substituted therefor.

 

"Company" means Actions Semiconductor Co., Ltd., the Chinese translation of which is 炬力集成電路有限公司.

 

"Compensation Committee" means the compensation committee established pursuant to Article 100(j).

 

 

"debenture" means debenture stock, mortgages, bonds and any other such securities of the Company whether constituting a charge on the assets of the Company or not.

 

"Directors" means the directors for the time being of the Company.

 

"dividend" includes interim bonuses and distributions permitted by the Companies Law to be catogorised as dividends.

 

"Electronic Record" has the same meaning as in the Electronic Transactions Law (2003 Revision).

 

"Family Member" means a person's spouse, parents, children and siblings, whether by blood, marriage or adoption or anyone residing in such person's home.

 

"Independent Director" shall mean a Director who is an “independent director” as defined in the Nasdaq Stock Market Rules, as amended from time to time.

 

"Member" shall bear the same meaning as in the Companies Law.

 

"Memorandum" means the memorandum of association of the Company as originally framed or as from time to time altered by Special Resolution.

 

"month" means calendar month.

 

"Nasdaq" shall mean the Nasdaq National Market in the United States.

 

"Nominations Committee" shall mean the nominations committee established pursuant to Article 100(k).

 

"Ordinary Resolution" means a resolution passed by a simple majority of votes cast by the Members as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting, and includes a unanimous written resolution.

 

"paid up" means paid up and/or credited as paid up.

 

"principal register" shall mean the Register of Members of the Company maintained at such place within or outside the Cayman Islands as the Board shall determine from time to time. 

 

"Register of Members" means the register maintained in accordance with the Companies Law and includes (except where otherwise stated) any duplicate Register of Members.

 

"Registered Office" means the registered office for the time being of the Company.

 

"Related Party" shall mean:

 

(a)

any Director or executive officer of the Company;

 

(b)

any nominee for election as a Director;

 

(c)

any holder who is known to the Company to own of record or beneficially more than 5% of any class of the Company’s voting securities; and

 

(d)

any member of the immediate family of the foregoing persons.

 

 

For purposes of this definition, a person’s immediate family shall include such person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law.

 

"Related Party Transactions" shall mean a transaction (other than a transaction of a revenue nature in the ordinary course of business) between the Company or any of its subsidiaries and a Related Party.

 

"Seal" means the common seal of the Company and includes every duplicate seal.

 

"SEC" shall mean the US Securities and Exchange Commission.

 

"Secretary" includes an Assistant Secretary and any person appointed to perform the duties of Secretary of the Company.

 

"Share" and "Shares" means a share or shares in the Company and includes a fraction of a share.

 

"Share Premium Account" means the account of the Company which the Company is required by the Companies Law to maintain, to which all premiums over nominal or par value received by the Company in respect of issues of Shares from time to time are credited.

 

"Special Resolution" has the same meaning as in the Companies Law, and includes a unanimous written resolution.

 

"United States" shall mean the United States of America, its territories, its possessions and all areas subject to its jurisdiction.

 

"US$" shall mean United States dollars, the lawful currency of the United States.

 

"written" and "in writing" include all modes of representing or reproducing words in visible form, including in the form of an Electronic Record.

 

Words importing the singular number include the plural number and vice versa.

 

Words importing the masculine gender include the feminine gender.

 

Words importing persons include corporations.

 

References to provisions of any law or regulation shall be construed as references to those provisions as amended, modified, re-enacted or replaced from time to time.

 

Any phrase introduced by the terms "including", "include", "in particular" or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms.

 

Headings are inserted for reference only and shall be ignored in construing these Articles.

 

COMMENCEMENT OF BUSINESS

 

2

The business of the Company may be commenced as soon after incorporation as the Directors shall see fit.

 

3

The Directors may pay, out of the capital or any other monies of the Company, all expenses incurred in or about the formation and establishment of the Company including the expenses of registration.

  

 

SHARE CAPITAL

 

4

The authorised share capital of the Company is US$2,000 divided into 2,000,000,000 ordinary shares of a nominal or par value of US$0.000001 each.

 

ISSUE OF SHARES

 

5

Subject to the relevant provisions, if any, in the Memorandum and these Articles and to any direction that may be given by the Company in general meeting and without prejudice to any special rights previously conferred on the holders of existing Shares, 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.  The Company shall not issue Shares in bearer form.

 

REGISTER OF MEMBERS AND SHARE CERTIFICATES

 

6

The Company shall maintain a Register of Members and every person whose name is entered as a Member in the Register of Members shall be entitled without payment to receive within two months after allotment or lodgement of transfer (or within such other period as the conditions of issue shall provide) one certificate for all his Shares or several certificates each for one or more of his Shares upon payment of fifty cents (US$0.50) for every certificate after the first or such less sum as the Directors shall from time to time determine provided that in respect of a Share or Shares held jointly by several persons the Company shall not be bound to issue more than one certificate and delivery of a certificate for a Share to one of the several joint holders shall be sufficient delivery to all such holders.

 

7

The Board shall cause to be kept at such place within or outside the Cayman Islands as they deem fit a principal register of the Members and there shall be entered therein the particulars of the Members and the Shares issued to each of them and other particulars required under the Companies Law.

 

8

If the Board considers it necessary or appropriate, the Company may establish and maintain a branch register or registers of Members at such location or locations within or outside the Cayman Islands as the Board thinks fit.  The principal register and the branch register(s) shall together be treated as the Register of Members for the purposes of these Articles.

 

9

The Board may, in its absolute discretion, at any time transfer any Share upon the principal register to any branch register or any Share on any branch register to the principal register or any other branch register.

 

10

The Company shall as soon as practicable and on a regular basis record in the principal register all transfers of Shares effected on any branch register and shall at all times maintain the principal register in such manner to show at all times the Members for the time being and the Shares respectively held by them, in all respects in accordance with the Companies Law.

 

11

The Register of Members may be closed at such times and for such periods as the Board may from time to time determine, either generally or in respect of any class of Shares, provided that the Register of Members shall not be closed for more than 30 days in any year (or such longer period as the members may by Ordinary Resolution determine provided that such period shall not be extended beyond 60 days in any year).

 

12

Every certificate for Shares or debentures or representing any other form of security of the Company may be issued under the Seal, which shall only be affixed with the authority of the Board or may be executed under hand by any two directors or as may otherwise be directed by the Board.

 

 

13

Every Share certificate shall specify the number of Shares in respect of which it is issued and the amount paid thereon or the fact that they are fully paid, as the case may be, and may otherwise be in such form as the Board may from time to time prescribe.

 

14

The Company shall not be bound to register more than four persons as joint holders of any Share.  If any Shares shall stand in the names of two or more persons, the person first named in the Register of Members shall be deemed the sole holder thereof as regards service of notices and, subject to the provisions of these Articles, all or any other matters connected with the Company, except the transfer of the Share.

 

15

If a Share certificate is defaced, lost or destroyed, it may be replaced on payment of such reasonable fee, if any, as the Board may from time to time prescribe and on such terms and conditions, if any, as to publication of notices, evidence and indemnity, as the Board thinks fit and where it is defaced or worn out, after delivery up of the old certificate to the Company for cancellation.

 

TRANSFER OF SHARES

 

16

The instrument of transfer of any Share shall be in writing in the usual or common form or any other form approved by the Board, and shall be executed by or on behalf of the transferor and the transferor shall be deemed to remain the holder of a Share until the name of the transferee is entered in the Register of Members in respect thereof.

 

17

The Directors may in their absolute discretion decline to register any transfer of Shares without assigning any reason therefor.  If the Directors refuse to register a transfer they shall notify the transferee within two months of such refusal.

 

18

The registration of transfers may be suspended at such time and for such periods as the Directors may from time to time determine, provided always that such registration shall not be suspended for more than forty five days in any year.

 

REDEEMABLE SHARES

 

19

(a)

Subject to the provisions of the Companies Law and the Memorandum, Shares may be issued or converted into Shares on the terms that they are, or at the option of the Company or the holder are, to be redeemed on such terms and in such manner as the Company, before the issue or conversion of the Shares, may by Special Resolution determine.

 

(b)

Subject to the provisions of the Companies Law and the Memorandum, the Company may purchase its own Shares (including fractions of a Share), including any redeemable Shares, provided that the manner of purchase has first been authorised by the Company in a general meeting and may make payment therefor in any manner authorised by the Companies Law, including out of capital.  Where the Company purchases for redemption a redeemable share, purchases not made through the market or by tender shall be limited to a maximum price as may from time to time be determined by the Directors, either generally or with regard to specific purchases.  If purchases are by tender, tenders shall comply with Applicable Laws.

  

VARIATION OF RIGHTS OF SHARES

 

20

If at any time the Share capital of the Company is divided into different classes of Shares, the rights attached to any class (unless otherwise provided by the terms of issue of the Shares of that class) may, whether or not the Company is being wound up and except where these Articles or the Companies Law impose any stricter quorum, voting or procedural requirements in regard to the variation of rights attached to a specific class, be varied with the consent in writing of the holders of 75% of the issued Shares of that class, or with the sanction of a Special Resolution passed at a general meeting of the holders of the Shares of that class.

  

 

21

The provisions of these Articles relating to general meetings shall apply to every such general meeting of the holders of one class of Shares except that the necessary quorum shall be one person holding or representing by proxy at least one third of the issued Shares of the class.

 

22

For purposes of this provision any particular issue of Shares not carrying the same rights (whether as to rate of dividend, redemption or otherwise) as any other Shares of the time being in issue, shall be deemed to constitute a separate class of Shares.  The rights conferred upon the holders of the Shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the Shares of that class, be deemed to be varied by the creation or issue of further Shares ranking pari passu therewith.

 

COMMISSION ON SALE OF SHARES

 

23

The Company may in so far as the Applicable Laws from time to time permit pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any Shares of the Company. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid up Shares or partly in one way and partly in the other.  The Company may also on any issue of Shares pay such brokerage as may be lawful.

 

NOTICES OF RECORD DATE

 

24

In the event that the Company shall propose at any time:

 

(a)

to declare any dividend or distribution upon its Shares, whether in cash, property, Shares or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

 

(b)

to offer for subscription pro rata to the holders of any class or series of its Shares any additional shares of Shares of any class or series or other rights;

 

(c)

to effect any reclassification or recapitalisation of its Shares outstanding involving a change in the Shares; or

 

(d)

to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up:

 

(i)

at least 20 days' prior written notice shall be given to Members of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Shares shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (c) and (d) above; and

 

(ii)

in the case of the matters referred to in (c) and (d) above, at least 20 days' prior written notice shall be given to Members of the date when the same shall take place (and specifying the date on which the holders of Shares shall be entitled to exchange their Shares for securities or other property deliverable upon the occurrence of such event).

 

 

NON RECOGNITION OF TRUSTS

 

25

The Company shall not be bound by or compelled to recognise in any way (even when notified) any equitable, contingent, future, or partial interest in any Share, or (except only as is otherwise provided by these Articles or the Applicable Laws) any other rights in respect of any Share other than an absolute right to the entirety thereof in the registered holder.

 

LIEN ON SHARES

 

26

The Company shall have a first and paramount lien on all Shares (whether fully paid up or not) registered in the name of a Member (whether solely or jointly with others) for all debts, liabilities or engagements to or with the Company (whether presently payable or not) by such Member or his estate, either alone or jointly with any other person, whether a Member or not, but the Directors may at any time declare any Share to be wholly or in part exempt from the provisions of this Article.  The registration of a transfer of any such Share shall operate as a waiver of the Company's lien thereon.  The Company's lien on a Share shall also extend to any amount payable in respect of that Share.

 

27

The Company may sell, in such manner as the Directors think fit, any Shares on which the Company has a lien, if a sum in respect of which the lien exists is presently payable, and is not paid within fourteen days after notice has been given to the holder of the Shares or to the person entitled to it in consequence of the death or bankruptcy of the holder, demanding payment and stating that if the notice is not complied with the Shares may be sold.

 

28

To give effect to any such sale, the Directors may authorise any person to execute an instrument of transfer of the Shares sold to, or in accordance with the directions of, the purchaser.  The purchaser or his nominee shall be registered as the holder of the Shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the Shares be affected by any irregularity or invalidity in the sale or the exercise of the Company's power of sale under these Articles.

 

29

The net proceeds of such sale after payment of such costs, shall be applied in payment of such part of the amount in respect of which the lien exists as is presently payable and any residue, shall (subject to a like lien for sums not presently payable as existed upon the Shares before the sale) be paid to the person entitled to the Shares at the date of the sale.

 

CALL ON SHARES

 

30

(a)

The Directors may from time to time make calls upon the Members in respect of any monies unpaid on their Shares (whether on account of the nominal value of the Shares or by way of premium or otherwise) and not by the conditions of allotment thereof made payable at fixed terms, provided that no call shall be payable at less than one month from the date fixed for the payment of the last preceding call, and each Member shall (subject to receiving at least fourteen days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on the Shares.  A call may be revoked or postponed as the Directors may determine.  A call may be made payable by instalments.

 

(b)

A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed.

 

(c)

The joint holders of a Share shall be jointly and severally liable to pay all calls in respect thereof.

 

31

If a sum called in respect of a Share is not paid before or on a day appointed for payment thereof, the persons from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate not exceeding 10% per annum as the Directors may determine, but the Directors shall be at liberty to waive payment of such interest either wholly or in part.

 

 

32

Any sum which by the terms of issue of a Share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the Share or by way of premium or otherwise, shall for the purposes of these Articles be deemed to be a call duly made, notified and payable on the date on which by the terms of issue the same becomes payable, and in the case of non payment all the relevant provisions of these Articles as to payment of interest forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.

 

33

The Directors may, on the issue of Shares, differentiate between the holders as to the amount of calls or interest to be paid and the times of payment.

 

34

(a)

The Directors may, if they think fit, receive from any Member willing to advance the same, all or any part of the monies uncalled and unpaid upon any Shares held by him, and upon all or any of the monies so advanced may (until the same would but for such advances, become payable) pay interest at such rate not exceeding (unless the Company in general meeting shall otherwise direct) 7% per annum, as may be agreed upon between the Directors and the Member paying such sum in advance.

 

(b)

No such sum paid in advance of calls shall entitle the Member paying such sum to any portion of a dividend declared in respect of any period prior to the date upon which such sum would, but for such payment, become presently payable.

 

FORFEITURE OF SHARES

 

35

(a)

If a Member fails to pay any call or instalment of a call or to make any payment required by the terms of issue on the day appointed for payment thereof, the Directors may, at any time thereafter during such time as any part of the call, instalment or payment remains unpaid, give notice requiring payment of any part of the call, instalment or payment that is unpaid, together with any interest which may have accrued and all expenses that have been incurred by the Company by reason of such non payment. Such notice shall name a day (not earlier than the expiration of fourteen days from the date of giving of the notice) on or before which the payment required by the notice is to be made, and shall state that, in the event of non payment at or before the time appointed the Shares in respect of which such notice was given will be liable to be forfeited.

 

(b)

If the requirements of any such notice as aforesaid are not complied with, any Share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Directors to that effect.  Such forfeiture shall include all dividends declared in respect of the forfeited Share and not actually paid before the forfeiture.

 

(c)

A forfeited Share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit, and at any time before a sale or disposition, the forfeiture may be cancelled on such terms as the Directors see fit.

 

36

A person whose Shares have been forfeited shall cease to be a Member in respect of the forfeited Shares, but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the Shares together with interest thereon, but his liability shall cease if and when the Company shall have received payment in full of all monies whenever payable in respect of the Shares.

 

37

A certificate in writing under the hand of one Director or the Secretary of the Company that a Share in the Company has been duly forfeited on a date stated in the declaration shall be conclusive evidence of the fact therein stated as against all persons claiming to be entitled to the Share.  The Company may receive the consideration given for the Share on any sale or disposition thereof and may execute a transfer of the Share in favour of the person to whom the Share is sold or disposed of and he shall thereupon be registered as the holder of the Share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the Share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the Share.

 

 

38

The provisions of these Articles as to forfeiture shall apply in the case of non payment of any sum which, by the terms of issue of a Share, becomes payable at a fixed time, whether on account of the nominal value of the Share or by way of premium as if the same had been payable by virtue of a call duly made and notified.

 

REGISTRATION OF EMPOWERING INSTRUMENTS

 

39

The Company shall be entitled to charge a fee not exceeding one dollar (US$1.00) on the registration of every grant of probate, letter of administration, certificate of death or marriage, power of attorney, or other instrument.

 

TRANSMISSION OF SHARES

 

40

In case of the death of a Member, the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognised by the Company as having any title to his interest in the Shares, but nothing herein contained shall release the estate of any such deceased holder from any liability in respect of any Shares which had been held by him solely or jointly with other persons.

 

41

(a)

Any person becoming entitled to a Share in consequence of the death or bankruptcy or liquidation or dissolution of a Member (or in any other way than by transfer) may, upon such evidence being produced as may from time to time be required by the Directors and subject as hereinafter provided, elect either to be registered himself as holder of the Share or to make such transfer of the Share to such other person nominated by him as the deceased or bankrupt person could have made and to have such person registered as the transferee thereof, but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the Share by that Member before his death or bankruptcy as the case may be.

 

(b)

If the person so becoming entitled shall elect to be registered himself as holder he shall deliver or send to the Company a notice in writing signed by him stating that he so elects.

 

42

A person becoming entitled to a Share by reason of the death or bankruptcy or liquidation or dissolution of the holder (or in any other case than by transfer) shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the Share, except that he shall not, before being registered as a Member in respect of the Share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company, provided, however, that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the Share, and if the notice is not complied with within ninety days, the Directors may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the Share until the requirements of the notice have been complied with.

 

 

AMENDMENT OF MEMORANDUM OF ASSOCIATION,

ALTERATION OF CAPITAL & CHANGE OF LOCATION OF REGISTERED OFFICE

 

43

(a)

The Company may by Ordinary Resolution:

 

(i)

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;

 

(ii)

consolidate and divide all or any of its share capital into Shares of larger amount than its existing Shares;

 

(iii)

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 or into Shares without par value;

 

(iv)

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.

 

(b)

All new Shares created in accordance with the provisions of the preceding Article shall be subject to the same provisions of the Articles with reference to the payment of calls, liens, transfer, transmission, forfeiture and otherwise as the Shares in the original share capital.

 

(c)

Subject to the provisions of the Companies Law and the provisions of these Articles as regards the matters to be dealt with by Ordinary Resolution, the Company may by Special Resolution:

 

(i)

change its name;

 

(ii)

alter or add to these Articles;

 

(iii)

alter or add to the Memorandum with respect to any objects, powers or other matters specified therein; and

 

(iv)

reduce its share capital and any capital redemption reserve fund.

 

44

Subject to the provisions of the Companies Law, the Company may by resolution of the Directors change the location of its Registered Office.

 

CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE

 

45

For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any dividend, or in order to make a determination of Members for any other proper purpose, the Directors of the Company may provide that the Register of Members shall be closed for transfers for a stated period but not to exceed in any case forty days.  If the Register of Members shall be so closed for the purpose of determining Members entitled to notice of or to vote at a meeting of Members, such register shall be so closed for at least ten days immediately preceding such meeting and the record date for such determination shall be the date of the closure of the Register of Members.

 

46

In lieu of or apart from closing the Register of Members, the Directors may fix in advance a date as the record date for any such determination of Members entitled to notice of or to vote at a meeting of the Members and for the purpose of determining the Members entitled to receive payment of any dividend the Directors may, at or within 90 days prior to the date of declaration of such dividend fix a subsequent date as the record date for such determination.

 

47

If the Register of Members is not so closed and no record date is fixed for the determination of Members entitled to notice of or to vote at a meeting of Members or Members entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members.  When a determination of Members entitled to vote at any meeting of Members has been made as provided in this section, such determination shall apply to any adjournment thereof.

 

 

GENERAL MEETING

 

48

All general meetings other than annual general meetings shall be called extraordinary general meetings.

 

49

(a)

The Company shall, if required by the Applicable Laws, in each year hold a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it.  The annual general meeting shall be held at such time and place as the Directors shall appoint and if no other time and place is prescribed by them, it shall be held at the Registered Office on the second Wednesday in December of each year at ten o'clock in the morning.

 

(b)

At these meetings the report of the Directors (if any) shall be presented.

 

(c)

The Company may hold an annual general meeting but shall not (unless required by the Applicable Laws) be obliged to hold an annual general meeting.

 

50

Only a majority of the Directors then in office may call general meetings.

 

NOTICE OF GENERAL MEETINGS

 

51

At least twenty (but not more than sixty) days' notice shall be given for any general meeting.  Every notice shall be inclusive of the day on which it is given or deemed to be given and of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company, provided that a general meeting of the Company shall, whether or not the notice specified in this regulation has been given and whether or not the provisions of Articles regarding general meetings have been complied with, be deemed to have been duly convened if it is so agreed:

 

(a)

in the case of an annual general meeting by all the Members (or their proxies) entitled to attend and vote thereat; and

 

(b)

in the case of an extraordinary general meeting by a majority in number of the Members (or their proxies) having a right to attend and vote at the meeting, being a majority together holding not less than 95% in par value of the Shares giving that right.

 

52

The accidental omission to give notice of a general meeting to, or the non receipt of notice of a meeting by any person entitled to receive notice shall not invalidate the proceedings of that meeting.

 

PROCEEDINGS AT GENERAL MEETINGS

 

53

For all purposes the quorum for a general meeting shall be any Member(s) holding in the aggregate not less than one-third of the outstanding voting shares of the Company present in person or by proxy or corporate representative, provided always that if the Company has only one member of record the quorum shall be that one member present in person or by proxy.  No business (except the appointment of a Chairman of the meeting) shall be transacted at any general meeting unless the requisite quorum shall be present at the commencement of the business.

 

54

A person may participate at a general meeting by conference telephone or other communications equipment by means of which all the persons participating in the meeting can communicate with each other.  Participation by a person in a general meeting in this manner is treated as presence in person at that meeting.

 

 

55

A resolution (including a Special Resolution) in writing (in one or more counterparts) signed by all Members for the time being entitled to receive notice of and to attend and vote at general meetings (or, being corporations, signed by their duly authorised representatives) shall be as valid and effective as if the resolution had been passed at a general meeting of the Company duly convened and held.

 

56

If a quorum is not present within half an hour from the time appointed for the meeting or if during such a meeting a quorum ceases to be present, the meeting, if convened upon the requisition of Members, shall be dissolved and in any other case it shall stand adjourned to the same day in the next week at the same time and place or to such other day, time or such other place as the Directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the Members present shall be a quorum.

 

57

The person chairing the meeting, if any, of the Board of Directors shall preside as Chairman at every general meeting of the Company, or if there is no such Chairman, or if he shall not be present within fifteen minutes after the time appointed for the holding of the meeting, or is unwilling to act, the Directors present shall elect one of their number to be Chairman of the meeting.

 

58

If no Director is willing to act as Chairman or if no Director is present within fifteen minutes after the time appointed for holding the meeting, the Members present shall choose one of their number to be Chairman of the meeting.

 

59

The Chairman may, with the consent of a meeting at which a quorum is present, (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place.  When a general meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting; otherwise it shall not be necessary to give any such notice.

 

60

A resolution put to the vote of the meeting shall be decided on a poll.

 

61

[Intentionally deleted]

 

62

[Intentionally deleted]

 

63

A poll shall be taken as the Chairman directs and the result of the poll shall be deemed to be the resolution of the general meeting at which the poll was taken.

 

64

In the case of an equality of votes, the Chairman shall be entitled to a second or casting vote.

 

65

A poll on the election of a Chairman or on a question of adjournment shall be taken forthwith.  A poll on any other question shall be taken at such time as the Chairman of the general meeting directs, and any business other than that upon which a poll is to be taken or is contingent thereon may proceed pending the taking of the poll.

 

VOTES OF MEMBERS

 

66

Subject to any rights or restrictions attached to any Shares, every Member shall have one vote for every Share of which he is the holder.

 

67

In the case of joint holders of record the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members.

 

 

68

A Member of unsound mind, or in respect of whom an order has been made by any court, having jurisdiction in lunacy, may vote, by his committee, receiver, curator bonis, or other person in the nature of a committee, receiver or curator bonis appointed by that court, and any such committee, receiver, curator bonis or other persons may vote by proxy.

 

69

No person shall be entitled to vote at any general meeting unless he is registered as a Member of the Company on the record date for such meeting nor unless all calls or other sums presently payable by him in respect of Shares have been paid.

 

70

No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at such general meeting shall be valid for all purposes.  Any such objection made in due time shall be referred to the Chairman of the general meeting whose decision shall be final and conclusive.

 

71

On a poll, votes may be given either personally or by proxy.

 

PROXIES

 

72

The instrument appointing a proxy shall be in writing and shall be executed under the hand of the appointor or of his attorney duly authorised in writing, or, if the appointor is a corporation under the hand of an officer or attorney duly authorised for that purpose.  A proxy need not be a Member of the Company.

 

73

The instrument appointing a proxy shall be deposited at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company:

 

(a)

not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or

 

(b)

in the case of a poll taken more than 48 hours after it is demanded, be deposited as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; and

 

(c)

where the poll is not taken forthwith but is taken not more than 48 hours after it was demanded be delivered at the meeting at which the poll was demanded to the Chairman or to the secretary or to any director;

 

provided that the Directors may in the notice convening the meeting, or in an instrument of proxy sent out by the Company, direct that the instrument appointing a proxy may be deposited (no later than the time for holding the meeting or adjourned meeting) at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company.  The Chairman may in any event at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited.  An instrument of proxy that is not deposited in the manner permitted shall be invalid.

 

74

The instrument appointing a proxy may be in any usual or common form and may be expressed to be for a particular meeting or any adjournment thereof or generally until revoked.

 

75

Votes given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the Share in respect of which the proxy is given unless notice in writing of such death, insanity, revocation or transfer was received by the Company at the Registered Office before the commencement of the general meeting, or adjourned meeting at which it is sought to use the proxy.

 

 

76

Any corporation or other non-natural person which is a Member may in accordance with its constitutional documents, or in the absence of such provision by resolution of its Directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual Member.  A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way.

 

77

Shares in the Company that are beneficially owned by the Company shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding Shares at any given time.

 

CORPORATE REPRESENTATIVES

 

78

Any corporation which is a Member of the Company may, by resolution of its directors or other governing body or by power of attorney, authorise such person as it thinks fit to act as its representative at any meeting of the Company or of members of any class of Shares of the Company and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which be represents as that corporation could exercise if it were an individual member of the Company and where a corporation is so represented, it shall be treated as being present at any meeting in person.

 

CLEARING HOUSES

 

79

If a clearing house (or its nominee) is a member of the Company it may, by resolution of its directors or other governing body or by power of attorney, authorise such person or persons as it thinks fit to act as its representative or representatives at any general meeting of the Company or at any general meeting of any class of members of the Company provided that, if more than one person is so authorised, the authorisation shall specify the number and class of Shares in respect of which each such person is so authorised.  A person so authorised pursuant to this provision shall be entitled to exercise the same powers on behalf of the clearing house (or its nominee) which he represents as that clearing house (or its nominee) could exercise if it were an individual member of the Company holding the number and class of Shares specified in such authorisation.

 

DIRECTORS

 

80

(a)

There shall be a Board of Directors (the "Board") consisting of not more than five (5) persons.

 

(b)

For as long as the ADSs are listed on Nasdaq, the Independent Directors shall meet at least twice per year and no other Directors shall be present at such meetings.

 

81

Subject to Article 118(a) each Director shall hold office until the expiration of his term and until his successor shall have been elected and qualified.

 

82

[Intentionally deleted].

 

83

Subject to Article 100(j), 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 travelling, 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 the business of the Company, 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.

 

 

84

Subject to Article 100(j), the Directors may by resolution award special remuneration to any Director of the Company undertaking any special work or services for, or undertaking any special mission on behalf of, the Company other than his ordinary routine work as a Director.  Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity shall be in addition to his remuneration as a Director.

 

85

A Director or alternate Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his office of Director for such period and on such terms as to remuneration and otherwise as the Directors may determine.

 

86

A Director or alternate Director may act by himself or his firm in a professional capacity for the Company and he or his firm shall be entitled to remuneration for professional services as if he were not a Director or alternate Director.

 

87

A shareholding qualification for Directors may not be fixed by the Company in general meeting.

 

88

The Company shall keep at its Registered Office a register of Directors and officers containing their names and addresses and occupations and other particulars required by the Companies Law and shall send to the Registrar of Companies of the Cayman Islands a copy of such register and shall from time to time notify the Registrar of Companies of the Cayman Islands of any change that takes place in relation to such Directors and officers as required by the Companies Law.

 

ALTERNATE DIRECTORS

 

89

A Director who expects to be unable to attend Directors' meetings because of absence, illness or otherwise may appoint any person to be an alternate Director to act in his stead and such appointee whilst he holds office as an alternate Director shall, in the event of absence therefrom of his appointor, be entitled to attend meetings of the Directors and to vote thereat and to do, in the place and stead of his appointor, any other act or thing which his appointor is permitted or required to do by virtue of his being a Director as if the alternate Director were the appointor, other than appointment of an alternate to himself, and he shall ipso facto vacate office if and when his appointor ceases to be a Director or removes the appointee from office.  Any appointment or removal under this Article shall be effected by notice in writing under the hand of the Director making the same.

 

90

The appointment of an alternate Director shall determine on the happening of any event which, were he a Director, would cause him to vacate such office or if his appointor ceases to be a Director.

 

91

An alternate Director shall be entitled to receive and waive (in lieu of his appointor) notices of meetings of the Directors and shall be entitled to attend and vote as a Director and be counted in the quorum at any such meeting at which the Director appointing him is not personally present and generally at such meeting to perform all the functions of his appointor as a Director and for the purposes of the proceedings at such meeting the provisions of these Articles shall apply as if he (instead of his appointor) were a Director.  If he shall be himself a Director or shall attend any such meeting as an alternate for more than one Director, his voting rights shall be cumulative and he need not use all his votes or cast all the votes to uses in the same way.  To such extent as the Board may from time to time determine in relation to any committee of the Board, the foregoing provisions of this Article shall also apply mutatis mutandis to any meeting of any such committee of which his appointor is a member.  An alternate Director shall not, save as aforesaid, have power to act as a Director nor shall he be deemed to be a Director for the purposes of these Articles.

 

 

92

An alternate Director shall be entitled to contract and be interested in and benefit from contracts, arrangements or transactions and to be repaid expenses and to be indemnified to the same extent mutatis mutandis as if he were a Director, but he shall not be entitled to receive from the Company in respect of his appointment as alternate Director any remuneration except only such part (if any) of the remuneration otherwise payable to his appointor as such appointor may by notice in writing to the Company from time to time direct.

 

93

In addition to the foregoing provisions of this Article, a Director may be represented at any meeting of the Board (or of any committee of the Board) by a proxy appointed by him, is which event the presence or vote of the proxy shall for all purposes be deemed to be that of the Director.  A proxy need not himself be a Director and the provisions of Articles 72 to 77 shall apply mutatis mutandis to the appointment of proxies by Directors save that an instrument appointing a proxy shall not become invalid after the expiration of twelve months from its date of execution but shall remain valid for such period as the instrument shall provide or, if no such provision is made in the instrument, until revoked in writing and save also that a Director may appoint any number of proxies although only one such proxy may attend in his stead at meetings of the Board).

 

POWERS AND DUTIES OF DIRECTORS

 

94

The business of the Company shall be managed by the Directors (or a sole Director if only one is appointed) who may pay all expenses incurred in promoting, registering and setting up the Company, and may exercise all such powers of the Company but subject to the provisions of the Companies Law, or by these Articles, or such regulations, being not inconsistent with the aforesaid, as may be prescribed by the Company in general meeting from time to time, provided, however, that no regulations made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made.

 

95

The Directors may from time to time and at any time by powers of attorney appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purpose and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorneys as the Directors may think fit and may also authorise any such attorney to delegate all or any of the powers, authorities and discretions vested in him.

 

96

All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Directors shall from time to time by resolution determine.

 

97

The Directors shall cause minutes to be made in books provided for the purpose:

 

(a)

of all appointments of officers made by the Directors;

 

(b)

of the names of the Directors (including those represented thereat by an alternate or by proxy) present at each meeting of the Directors and of any committee of the Directors;

 

(c)

of all resolutions and proceedings at all meetings of the Company and of the Directors and of committees of Directors.

 

98

The Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any Director who has held any other salaried office or place of profit with the Company or to his widow or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.

 

 

99

The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.

 

MANAGEMENT

 

100

(a)

The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the next following paragraphs shall be without prejudice to the general powers conferred by this paragraph.

 

(b)

The Directors from time to time and at any time may establish any committees, local boards or agencies for managing any of the affairs of the Company and may appoint any persons to be members of such committees or local boards or any managers or agents and may fix their remuneration.

 

(c)

The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill up any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any person so appointed and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.

 

(d)

Any such delegates as aforesaid may be authorised by the Directors to subdelegate all or any of the powers, authorities, and discretions for the time being vested in them.

 

(e)

Without prejudice to the freedom of the Directors to establish any other committees, for so long as the ADSs of the Company are listed or quoted on Nasdaq, it shall establish and maintain an Audit Committee as a committee of the board, the composition and responsibilities of which shall comply with the applicable rules of both the Nasdaq Stock Market Rules, as amended from time to time, and the U.S. Sarbanes Oxley Act of 2002.  Unless otherwise permitted under the Nasdaq Stock Market Rules, the Audit Committee shall have at least three members, comprised solely of Independent Directors who do not own or control 20% or more of any class of voting securities of the Company or such other Directors as allowed from time to time and satisfy the following qualifications:

 

(i)

each is able to read and understand fundamental financial statements, including the Company’s balance sheet, income statement, and cash flow statement; and

 

(ii)

at least one of them has past employment experience in finance or accounting, requisite professional experience in accounting, or any other comparable experience or background which results in the individual Director’s financial sophistication, including being or have been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

 

(f)

The Company shall adopt a formal written audit committee charter and review and assess the adequacy of the formal written charter on an annual basis.  The charter shall specify the responsibilities of the Audit Committee which shall include responsibility for, among other things, ensuring its receipt from the outside auditors of the Company of a formal written statement delineating all relationships between the auditor and the Company, and the Audit Committee’s responsibility for actively engaging in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor take appropriate action to oversee the independence of the outside auditor.

 

 

(g)

Unless a Chairperson is elected by the Directors, the members of the Audit Committee may designate a chairperson by majority vote of the full Audit Committee membership.

 

(h)

The Audit Committee shall meet at least four times annually, or more frequently as circumstances dictate.

 

(i)

For so long as the ADSs of the Company are listed or quoted on Nasdaq, the Company shall conduct an appropriate review of all material Related Party Transactions on an ongoing basis and shall utilize the Audit Committee for the review and approval of potential conflicts of interest situations.

 

(j)

Without prejudice to the freedom of the Directors to establish any other committees, the Board may establish a Compensation Committee to assist the board in reviewing and approving the compensation structure for the Company’s directors and officers.  Unless otherwise permitted under the Nasdaq Stock Market Rules, for so long as the ADSs of the Company are listed or quoted on Nasdaq, the Compensation Committee shall have at least three members, comprised solely of Independent Directors.  The Compensation Committee shall evaluate the performance of the Company’s senior executive officers and approve the compensation for such senior executive officers.  The Company shall adopt a formal written nomination charter and assess the adequacy of such formal written charter on an annual basis.

 

(k)

Without prejudice to the freedom of the Directors to establish any other committees, the Board may establish a Nomination Committee to assist the board in identifying qualified individuals to become board members and in determining the composition of the board and its committees.  Unless otherwise permitted under the Nasdaq Stock Market Rules, for so long as the ADSs of the Company are listed or quoted on Nasdaq, the Nomination Committee shall have at least three members, comprised solely of Independent Directors.  The Company shall adopt a formal written nomination charter and assess the adequacy of such formal written charter on an annual basis.

 

INTERESTED DIRECTORS

 

101

No Director or proposed Director shall be disqualified by his office from contracting with the Company either as vendor, purchaser or otherwise nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company with any person, company or partnership of or in which any Director shall be a member or otherwise interested be capable on that account of being avoided, nor shall any Director so contracting or being any member or so interested be liable to account to the Company for any profit so realised by any such contract or arrangement by reason only of such Director holding that office or the fiduciary relationship, thereby established, provided that (a) such Director shall, 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 may subsequently be made by the Company and (b) if such contract or arrangement is a Related Party Transaction, such Related Party Transaction has been approved by the Audit Committee.

 

  

102

Subject to any requirement under Applicable Laws, including disclosure requirements on Related Party Transactions, any Director may continue to be or become a director, managing director, joint managing director, deputy managing director, executive director, manager or other officer or member of any other company in which the Company may be interested and (unless otherwise agreed between the Company and the Director) no such Director shall be liable to account to the Company or the members for any remuneration or other benefits received by him as a director, managing director, joint managing director, deputy managing director, executive director, manager or other officer or member of any such other company.  The Directors may exercise the voting powers conferred by the shares in any other company held or owned by the Company, or exercisable by them as directors of such other company in such manner in all respects as they think fit (including the exercise thereof in favour of any resolution appointing themselves or any of them directors, managing directors, joint managing directors; deputy managing directors, executive directors, managers or other officers of such company) and any Director may vote in favour of the exercise of such voting rights in the manner aforesaid notwithstanding that he may be, or is about to be, appointed a director, managing director, joint managing director, deputy managing director, executive director, manager or other officer of such a company, and that as such he is or may become interested in the exercise of such voting rights in the manner aforesaid.

 

103

A Director may hold any other office or place of profit with the Company (except that of Auditor) in conjunction with his office of Director for such period and upon such terms as the Board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profit or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Article.

 

104

No person shall be disqualified from the office of Director or alternate Director or prevented by such office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or transaction entered into by or on behalf of the Company in which any Director or alternate Director shall be in any way interested be or be liable to be avoided, nor shall any Director or alternate Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or transaction by reason of such Director holding office or of the fiduciary relation thereby established; provided that such Related Party Transaction has been approved by the Audit Committee.

  

MANAGING DIRECTORS

 

105

The Directors may, from time to time, appoint one or more of their body (but not an alternate Director) to the office of Managing Director for such term and at such remuneration (whether by way of salary, or commission, or participation in profits, or partly in one way and partly in another) as they may think fit, subject to Article 100(j), but his appointment shall be subject to determination ipso facto if he ceases for any cause to be a Director and no alternate Director appointed by him can act in his stead as a Director or Managing Director.

 

106

The Directors may entrust to and confer upon a Managing Director any of the powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit and either collaterally with or to the exclusion of their own powers and may from time to time revoke, withdraw, alter or vary all or any of such powers.

 

PROCEEDINGS OF DIRECTORS

 

107

Except as otherwise provided by these Articles, the Directors shall meet together for the despatch of business, convening, adjourning and otherwise regulating their meetings as they think fit.  Questions arising at any meeting shall be decided by a majority of votes of the Directors and alternate Directors present at a meeting at which there is a quorum, the vote of an alternate Director not being counted if his appointor be present at such meeting.  In case of an equality of votes, the Chairman shall have a second or casting vote.

 

 

108

A Director or alternate Director may, and the Secretary on the requisition of a Director or alternate Director shall, at any time summon a meeting of the Directors by at least two days' notice in writing to every Director and alternate Director which notice shall set forth the general nature of the business to be considered unless notice is waived by all the Directors (or their alternates) either at, before or after the meeting is held and, provided, however, if notice is given in person, by cable, telex or telecopy the same shall be deemed to have been given on the day it is delivered to the Directors or transmitting organisation as the case may be.  The provisions of Article 51 shall apply mutatis mutandis with respect to notices of meetings of Directors.

 

109

The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be a majority of the then existing Directors, a Director and his appointed alternate Director being considered only one person for this purpose, provided always that if there shall at any time be only a sole Director the quorum shall be one.  For the purposes of this Article an alternate Director or proxy appointed by a Director shall be counted in a quorum at a meeting at which the Director appointing him is not present.

 

110

The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Director or Directors may act for the purpose of increasing the number of Directors to that number or of summoning a general meeting of the Company, but for no other purpose.

 

111

The Directors may elect a Chairman of their Board and determine the period for which he is to hold office; but if no such Chairman is elected, or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the Directors present may choose one of their number to be Chairman of the meeting.

 

112

The Directors may delegate any of their powers to committees consisting of such member or members of the Board of Directors (including Alternate Directors in the absence of their appointors) as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors.

 

113

A committee may meet and adjourn as it thinks proper.  Questions arising at any meeting shall be determined by a majority of votes of the members present, and in the case of an equality of votes the Chairman shall have a second or casting vote.

 

114

All acts done by any meeting of the Directors or of a committee of Directors (including any person acting as an alternate Director) shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or alternate Director, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and qualified to be a Director or alternate Director as the case may be.

 

115

Members of the Board or of any committee thereof may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting.  A resolution in writing (in one or more counterparts), signed by all the Directors for the time being or all the members of a committee of Directors (an alternate Director being entitled to sign such resolution on behalf of his appointor) shall be as valid and effectual as if it had been passed at a meeting of the Directors or committee as the case may be duly convened and held.

 

VACATION OF OFFICE OF DIRECTOR

 

116

The office of a Director shall be vacated:

 

(a)

if he gives notice in writing to the Company that he resigns the office of Director; or

 

 

(b)

if he absents himself (without being represented by proxy or an alternate Director appointed by him) from three consecutive meetings of the Board without special leave of absence from the Directors, and they pass a resolution that he has by reason of such absence vacated office; or

 

(c)

if he dies, becomes bankrupt or makes any arrangement or composition with his creditors generally; or

 

(d)

if he is found to be or becomes of unsound mind.

 

APPOINTMENT AND REMOVAL OF DIRECTORS

 

117

The Directors shall be 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 shall stand for election. Class I Directors shall be 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 shall hold office for a term that shall coincide 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.  Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred share issued by the Company shall have the right, voting separately by class or series, to elect Directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the applicable terms of these Articles and any certificate of designation creating such class or series of preferred share, and such Directors so elected shall not be divided into classes pursuant to this Article 117 or considered part of such classes unless expressly provided by such terms.

 

118

(a)

The Members 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 these Articles or in any agreement between the Company and such Director, and may by Ordinary Resolution elect another person in his stead. Any person so elected shall 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 Article 117, the Directors shall 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 amount of Directors (exclusive of alternate directors) shall not at any time exceed the number fixed in accordance with these Articles.

  

(b)

Nothing in this Article should be taken as depriving a Director removed under any provisions of this Article of compensation or damages payable to him in respect of the termination of his appointment as Director or of any other appointment or office as a result of the termination of his appointment as Director or as derogatory from any power to remove a Director which may exist apart from the provision of this Article.

 

PRESUMPTION OF ASSENT

 

119

A Director who is present at a meeting of the Board at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent from such action with the person acting as the Chairman or Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered post to such person immediately after the adjournment of the meeting.  Such right to dissent shall not apply to a Director who voted in favour of such action.

 

  

SEAL

 

120

(a)

The Company may, if the Directors so determine, have a Seal.  The Seal shall only be used by the authority of the Directors or of a committee of the Directors authorised by the Directors.  Every instrument to which the Seal has been affixed shall be signed by at least one person who shall be either a Director or some officer or other person appointed by the Directors for the purpose.

 

(b)

The Company may have for use in any place or places outside the Cayman Islands a duplicate Seal or Seals each of which shall be a facsimile of the Seal and, if the Directors so determine, with the addition on its face of the name of every place where it is to be used.

 

(c)

A Director or officer, representative or attorney may without further authority of the Directors affix the Seal over his signature alone to any document of the Company required to be authenticated by him under Seal or to be filed with the Registrar of Companies in the Cayman Islands or elsewhere wheresoever.

 

OFFICERS

 

121

The Company may have a President, a Secretary or Secretary Treasurer appointed by the Directors. The Directors may also from time to time appoint such other officers as they consider necessary, all for such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors from time to time prescribe.

  

DIVIDENDS, DISTRIBUTIONS AND RESERVE

 

122

Subject to the Companies Law, the Directors may from time to time declare dividends (including interim dividends) and distributions on Shares outstanding and authorise payment of the same out of the funds of the Company lawfully available therefor.

 

123

The Directors may, before declaring any dividends or distributions, set aside such sums as they think proper as a reserve or reserves which shall at the discretion of the Directors, be applicable for any purpose of the Company and pending such application may, at the like discretion, be employed in the business of the Company.

 

124

No dividend or distribution shall be payable except out of the profits of the Company, realised or unrealised, or out of the Share Premium Account or as otherwise permitted by the Companies Law.

 

125

Subject to the rights of persons, if any, entitled to Shares with special rights as to dividends or distributions, if dividends or distributions are to be declared on a class of Shares they shall be declared and paid according to the amounts paid or credited as paid on the Shares of such class outstanding on the record date for such dividend or distribution as determined in accordance with these Articles but no amount paid or credited as paid on a Share in advance of calls shall be treated for the purpose of this Article as paid on the Share.

 

126

The Directors may deduct from any dividend or distribution payable to any Member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.

 

 

127

The Board may, with the sanction of the Members 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, or in any one or more of such ways, and where any difficulty arises in regard to the distribution the Board may settle the same as it thinks expedient, and in particular may disregard fractional entitlements, round the same up or down or provide that the same shall accrue to the benefit of the Company, and may fix the value for distribution of such specific assets, or any part thereof, and may determine that cash payments shall be made to any members 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 the Board and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend and such appointment shall be effective.  Where required, a contract shall be filed in accordance with the provisions of the Companies Law and the Board may appoint any person to sign such contract on behalf of the persons entitled to the dividend and such appointment shall be effective.

 

128

Unless otherwise directed by the Board, any dividend, interest or other sum payable in cash to a holder of shares may be paid by cheque or warrant sent through the post to the registered address of the member entitled, or, in case of joint holders, to the registered address of the person whose name stands first in the register in respect of the joint holding or to such person and to such address as the holder or joint holders may in writing direct.  Every cheque 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 the register in respect of such shares and shall be sent at his or their risk, and the payment of any such cheque or warrant by the bank on which it is drawn shall operate as a good discharge to the Company 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 thereon has been forged.

 

129

The Company may cease sending such cheques for dividend entitlements or dividend warrants by post if such cheques or warrants have been left uncashed on two consecutive occasions.  However, the Company may exercise its power to cease sending cheques for dividend entitlements or dividend warrants after the first occasion on which such a cheque or warrant is returned undelivered.

 

130

All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the Board for the exclusive benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof or be required to account for any money earned thereon.  All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the Board and shall revert to the Company and after such forfeiture no member or other person shall have any right to or claim in respect of such dividends or bonuses.

 

131

No dividend or distribution shall bear interest against the Company.

 

UNTRACEABLE MEMBERS

 

132

(a)

The Company shall be entitled to sell any shares of a member or the shares to which a person is entitled by virtue of transmission on death or bankruptcy or operation of law if and provided that:

 

(i)

all cheques 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;

 

(ii)

the Company has not during that time or before the expiry of the three month period referred to in paragraph (iv) below received any indication of the whereabouts or existence of the member or person entitled to such shares by death, bankruptcy or operation of law;

  

(iii)

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 member; and

 

 

(iv)

upon expiry of the 12-year period, the Company has caused an advertisement to be published in the newspapers or by electronic communication in the manner in which notices may be served by the Company by electronic means as herein provided, giving notice of its intention to sell such shares, and a period of three months has elapsed since such advertisement.

 

The net proceeds of any such sale shall belong to the Company and upon receipt by the Company of such net proceeds it shall become indebted to the former member for an amount equal to such net proceeds.

 

(b)

To give effect to any sale contemplated by paragraph (a) the Company may appoint any person to execute as transferor an instrument of transfer of the said shares and such other documents as are necessary to effect the transfer, and such documents shall be as effective as if it had been executed by the registered holder of or person entitled by transmission to such shares and the title of the transferee shall not be affected by any irregularity or invalidity in the proceedings relating thereto.  The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount.  No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments (other than shares or other securities in or of the Company or its holding company if any) or as the Board may from time to time think fit.

 

RECORD DATES

 

133

Notwithstanding any other provisions of these Articles of the Company or the Applicable Laws, the Board may fix any date as the record date for any dividend, distribution, allotment or issue and such record date may be on or at any time before or after any date on which such dividend, distribution, allotment or issue is declared, paid or made.

 

CAPITALISATION

 

134

The Company may capitalise any sum standing to the credit of any of the Company's reserve accounts (including Share Premium Account and capital redemption reserve fund) or any sum standing to the credit of profit and loss account or otherwise available for distribution and to appropriate such sum to Members in the proportions in which such sum would have been divisible amongst them had the same been a distribution of profits by way of dividend and to apply such sum on their behalf in paying up in full unissued Shares for allotment and distribution credited as fully paid up to and amongst them in the proportion aforesaid.  In such event the Directors shall do all acts and things required to give effect to such capitalisation, with full power to the Directors to make such provisions as they think fit for the case of Shares becoming distributable in fractions (including provisions whereby the benefit of fractional entitlements accrue to the Company rather than to the Members concerned).  The Directors may authorise any person to enter on behalf of all of the Members interested into an agreement with the Company providing for such capitalisation and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned.

  

BOOKS OF ACCOUNT

 

135

The Directors shall cause proper books of account to be kept with respect to:

 

(a)

all sums of money received and expended by the Company and the matters in respect of which the receipt or expenditure takes place;

  

 

(b)

all sales and purchases of goods by the Company; and

 

(c)

the assets and liabilities of the Company.

 

Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Company's affairs and to explain its transactions.

 

136

The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Members not being Directors and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by the Companies Law or authorised by the Directors or by the Company in general meeting.

 

137

The Directors may from time to time cause to be prepared and to be laid before the Company in general meeting profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by law.

 

ANNUAL RETURNS AND FILINGS

 

138

The Board shall make the requisite annual returns and any other requisite filings in accordance with the Applicable Laws.

  

AUDIT

 

139

The Directors may appoint an Auditor who shall hold office until removed from office by a resolution of the Directors and may fix his or their remuneration.  Notwithstanding the above, for so long as the ADSs of the Company are listed or quoted on Nasdaq, the Audit Committee is directly responsible for the appointment, remuneration, retention and oversight of the Company's Auditors.

 

140

Every Auditor shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and officers of the Company such information and explanation as may be necessary for the performance of the duties of the auditors.

 

141

Auditors shall, if so required by the Directors, make a report on the accounts of the Company during their tenure of office at the next annual general meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an ordinary company, and at the next extraordinary general meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an exempted company, and at any time during their term of office, upon request of the Directors or any general meeting of the Members.

 

NOTICES

 

142

Notices shall be in writing and may be given by the Company to any Member either personally or by sending it by post, cable, telex, fax or e-mail to him or to his address as shown in the Register of Members (or where the notice is given by e-mail by sending it to the e-mail address provided by such Member).  Any notice, if posted from one country to another, is to be sent airmail.

 

143

(a)

Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, pre paying and posting a letter containing the notice, and shall be deemed to have been received on the fifth day (not including Saturdays or Sundays or public holidays) following the day on which the notice was posted.

 

 

(b)

Where a notice is sent by cable, telex, or fax, service of the notice shall be deemed to be effected by properly addressing, and sending such notice and shall be deemed to have been received on the same day that it was transmitted.

 

(c)

Where a notice is given by e-mail service shall be deemed to be effected by transmitting the e-mail to the e-mail address provided by the intended recipient and shall be deemed to have been received on the same day that it was sent, and it shall not be necessary for the receipt of the e-mail to be acknowledged by the recipient.

 

144

A notice may be given by the Company to the person or persons which the Company has been advised are entitled to a Share or Shares in consequence of the death or bankruptcy of a Member in the same manner as other notices which are required to be given under these Articles and shall be addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description at the address supplied for that purpose by the persons claiming to be so entitled, or at the option of the Company by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred.

 

145

Notice of every general meeting shall be given in any manner hereinbefore authorised to:

 

(a)

every person shown as a Member in the Register of Members on the record date for such meeting except that in the case of joint holders the notice shall be sufficient if given to the joint holder first named in the Register of Members;

 

(b)

every person upon whom the ownership of a Share devolves by reason of his being a legal personal representative or a trustee in bankruptcy of a Member of record where the Member of record but for his death or bankruptcy would be entitled to receive notice of the meeting;

 

(c)

the Auditors;

 

(d)

each Director and alternate Director; and

 

(e)

Nasdaq.

 

No other person shall be entitled to receive notices of general meetings.

 

INFORMATION

 

146

No Member shall be entitled to require discovery of or any information in respect of any detail of the Company's trading or any which is or may be in the nature of a trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Board would not be in the interests of the Members to communicate to the public.

 

147

The Board shall be entitled to release or disclose any information in its possession, custody or control regarding the Company or its affairs to any of its Members including, without limitation, information contained in the Register of Members and transfer books of the Company.

  

WINDING UP

 

148

Subject to Article 127, 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 amongst the Members 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 Members or different classes of Members.  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 Members as the liquidator, with the like sanction, shall think fit, but so that no Member shall be compelled to accept any asset upon which there is a liability.

 

 

148A

If the Company shall be wound up, and the assets available for distribution amongst the Members 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 Members 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 in a winding up the assets available for distribution amongst the Members 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 Members in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively. This Article is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions.

 

INDEMNITY

 

149

Every Director, Auditor or officer of the Company shall be indemnified out of the assets of the Company against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own wilful neglect or default.  No such Director, Auditor or officer shall be liable to the Company for any loss or damage in carrying out his functions unless that liability arises through the wilful neglect or default of such Director, Auditor or officer.

 

FINANCIAL YEAR

 

150

Unless the Directors otherwise prescribe, the financial year of the Company shall end on 31st December in each year and shall begin on 1st January in each year.

 

PENSION AND SHARE OPTION SCHEMES

 

151

(a)

The Board may establish and maintain or procure the establishment and maintenance of any contributory or non-contributory pension or provident or superannuation funds or (with the sanction of an Ordinary Resolution) employee or executive share option schemes for the benefit of, or give or procure the giving of donations, gratuities, pensions, allowances or emoluments to any persons who are or were at any time in the employment or service of the Company, or of any company which is a subsidiary of the Company, or is allied or associated with the Company or with any such subsidiary company, or who are or were at any time directors or officers of the Company or of any such other company as aforesaid, and holding or who have held any salaried employment or office in the Company or such other company, and the wives, widows, families and dependents of any such persons.  The Board may also establish and subsidise or subscribe to any institutions, associations, clubs or funds calculated to be for the benefit of or to advance the interests and well being of the Company or of any such other company as aforesaid, and may make payments for or towards the insurance of any such persons as aforesaid, and subscribe or guarantee money for charitable or benevolent objects or for any exhibition or for any public, general or useful object.  The Board may do any of the matters aforesaid, either alone or in conjunction with any such other company as aforesaid.  Any Director holding any such employment or office shall be entitled to participate in and retain for his own benefit any such donation, gratuity, pension, allowance or emolument.

  

(b)

For so long as the ADSs of the Company are quoted or listed on Nasdaq, a sanction of an Ordinary Resolution by the Members shall be obtained prior to any issuance of any equity or material amendment to any equity compensation plan as required by applicable rules of the Nasdaq Stock Market Rules, as amended from time to time.

 

 

AMENDMENTS OF ARTICLES

 

152

Subject to the Companies Law and to any quorum, voting or procedural requirements expressly imposed by these Articles in regard to the variation of rights attached to a specific class of Shares of the Company, the Company may at any time and from time to time by Special Resolution change the name of the Company or alter or amend these Articles or the Memorandum, in whole or in part.

 

TRANSFER BY WAY OF CONTINUATION

 

153

If the Company is exempted as defined in the Companies Law, it shall, subject to the provisions of the Companies Law and with the approval of a Special Resolution, have the power to register by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands.

 

 

EXHIBIT 8.1

 

LIST OF SUBSIDIARIES

 

All subsidiaries do business under their legal name.

 

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 manufacture of system-on-a-chip products
Actions (Zhuhai) Microelectronics Co., Ltd.		PRC June 5, 2014		100	%		Design and manufacture of system-on-a-chip products
Actions (Zhuhai) Technology Co., Ltd.  ("Actions Technology Zhuhai")		PRC June 5, 2014		100	%		Design and manufacture of system-on-a-chip products
Shanghai Actions Semiconductor Co., Ltd.  ("Actions Semiconductor Shanghai ")		PRC March 27, 2008		100	%		Design and manufacture 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 manufacture of system-on-a-chip products
Actions Capital Investment Inc.		British Virgin Islands 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		93.4	%		Investment holding
Mavrix Technology (H.K.) Co., Limited  (“Mavrix HK”)		Hong Kong August 17, 2007		93.4	%		Manufacturing and trading of system-on-a-chip products
Shanghai Mavrix Electronics, Ltd. (“Mavrix Shanghai”)		PRC October 23, 2006		93.4	%		Design and manufacture of system-on-a-chip products

 

 

EXHIBIT 12.1

 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Zhenyu Zhou, certify that:

 

1.  I have reviewed this annual report on Form 20-F of Actions Semiconductor Co., Ltd.;

 

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4.  The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c)	Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)	Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

5.  The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

 

 

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

Date: April 24, 2015	By:	/s/ Zhenyu Zhou
	Name:	Zhenyu Zhou
	Title:	Chief Executive Officer

 

 

 

 

EXHIBIT 12.2

 

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, I-Hung (Nigel) Liu, certify that:

 

1.  I have reviewed this annual report on Form 20-F of Actions Semiconductor Co., Ltd.;

 

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4.  The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c)	Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)	Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

5.  The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

 

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

Date: April 24, 2015	By:	/s/ I-Hung (Nigel) Liu
	Name:	I-Hung (Nigel) Liu
	Title:	Chief Financial Officer

 

 

EXHIBIT 13.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the annual report of Actions Semiconductor Co., Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

Date: April 24, 2015	By:	/s/ Zhenyu Zhou
	Name:	Zhenyu Zhou
	Title:	Chief Executive Officer
	By:	/s/ I-Hung (Nigel) Liu
	Name:	I-Hung (Nigel) Liu
	Title:	Chief Financial Officer

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document.

 

 

EXHIBIT 15.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 333-191134 and  333-174791) and Registration Statement No. 333-152490 on Form S-8, as amended by the Post-Effective Amendment No. 1 to Form S-8, of our reports dated April 24, 2015, relating to the consolidated financial statements and the financial statement schedules of Actions Semiconductor Co., Ltd. and its subsidiaries (the “Group”) as of December 31, 2013 and 2014, and for the years ended December 31, 2012, 2013 and 2014,  and the effectiveness of the Group’s internal control over financial reporting, appearing in the annual report on Form 20-F of Actions Semiconductor Co., Ltd. for the year ended December 31, 2014.

 

/s/ Deloitte Touche Tohmatsu

Hong Kong

April 24, 2015