Dear Fellow O2 Micro Shareholders:
Lone Star Value Management, LLC (together with its affiliates, "Lone Star
Value", "we", or "us") is a substantial shareholder of O2 Micro
International Limited OIIM ("O2 Micro" or the "Company") with
ownership of over 1.7 million ADS units (the "shares"), which is
approximately 6.3% of its shares outstanding. Lone Star Value is dedicated
to maximizing shareholder value, improving corporate governance, and
upgrading the Board of Directors (the "Board") at O2 Micro for the benefit
of all shareholders.
We are deeply concerned by the significant destruction of shareholder value
over a long period of time by O2 Micro's incumbent Board and management. O2
Micro's stock price performance has been abysmal over any measurable period
of time and has substantially underperformed the market. The Company's
stock price performance has been -26%, -50% and -50% over the past 1, 3, and
5 years versus NASDAQ Composite returns of +14%, +72% and +130% over this
same time period.(1) O2 Micro's earnings per share have been negative over
the past 1, 3, and 5 years.(2) We believe O2 Micro's poor operating and
financial performance has led to a loss of investor confidence in the
incumbent Board and management as evidenced by the fact that the stock
market currently places a negative value on O2 Micro's operating business.
Further, O2 Micro's stock price of $2.36 per share is below the value of the
Company's cash and marketable securities of $2.40 per share and
substantially below the net asset value (excluding the operating business)
of $4.35 per share as shown in the table below:
Net Asset Valuation Table
Value ($MM) Per Share(3)
=========== =============
Cash + Marketable Securities(4) $65.1 $2.40
Net Working Capital + Other(4),(5) 12.8 0.47
Real Estate(6) 25.0 0.92
LT Investments(4) 15.3 0.56
----------- -------------
Value Excluding Operating Business $118.2 $4.35
% Upside to Current Stock Price 84%
==========================
Intellectual Property ??? ???
Value of Operating Business(7) $48 - $80 $1.77 - $2.94
Total Company Value $166 - $198 $5.12 - $7.30
% Upside to Current Stock Price 159% - 209%
==========================
History of Poor Revenue and Cost Management
O2 Micro's revenues have steeply declined over the last 7 years but costs
have remained high, resulting in a consistent stream of operating losses.
We believe O2 Micro's recently announced cost-cutting measures fall far
short of the needed change and were merely reactive to the public
announcement of our stake in the Company.(8) In our view, O2 Micro's
significant discount to its net asset value is the result of considerable
mismanagement as evidenced by declining revenues and an inability or
unwillingness to right-size the Company's cost base.
Here are the facts:
-- Revenue has fallen by 63% from $166mm in 2007 to $62mm (Q3 annualized).
-- R&D as a percentage of revenue increased from 21% in 2007 to 37% in
2013.
-- SG&A as a percentage of revenue increased from 28% in 2007 to 42% in
2013.
-- Cash balance has eroded by 48% from $126m in 2011 to its current $65mm.
Recent actions to manage costs fall far short of the needed level of
optimization of O2Micro's excessive cost structure. We see further room for
cost-cutting, rationalization, and more focused R&D spending that is yet to
be realized and a long time coming. In addition, O2 Micro's intellectual
property portfolio of patents may have significant hidden value that the
incumbent Board and management have failed to realize. Even worse,
unsuccessful patent litigation in prior years cost the shareholders dearly
as evidenced by the cumulative provision for litigation of $41.8mm between
2002 and 2007.(9)
There Are Meaningful Opportunities within the Control of the Board and
Management to
Unlock Significant Value for ALL O2 Micro Shareholders
We call on O2 Micro's Board and management to immediately end the cash burn
and to take meaningful steps to create shareholder value. O2 Micro's strong
asset base and discounted valuation imply the potential for significant
value creation if the right steps are taken. The Company's core operations
have gross margins of 52% (Q3 2014) revealing a business with great
potential for profitability with a rationalized cost structure, whether as
an independent entity or combined with a strategic buyer. We believe that
with an improved Board, new ideas, and a commitment to shareholder value, O2
Micro shareholders can realize upside of at least 100% versus the current
stock price, and likely much more.
Given O2 Micro's long history of poor operating and financial performance,
we believe meaningful change on the Board, including shareholder
representation, is imperative for any meaningful turnaround to begin to
occur. The incumbent Board has proven incapable or unwilling to stop the
excessive cash burn and explore opportunities to create value for
shareholders. In our view, it is simply too much to ask shareholders to
believe that the same team doing the same things at O2 Micro will yield
different results in the future. We strongly believe shareholder
representation and fresh perspective on this currently stale Board would
sharpen its focus on creating shareholder value. Shareholder representation
in the boardroom will both strengthen the Board's commitment to tighten
oversight of operations and to open-mindedly explore opportunities to
capitalize on O2 Micro's strong asset base. We are adamant that O2 Micro
shareholders, not the incumbent Board, should be the ones to make any
changes to O2 Micro's Board.
Lone Star Value has expressed its views to the Board and management of O2
Micro at an in-person meeting at the Company's headquarters and in follow-up
conference calls. We have made every effort to engage in constructive
discussions with the Company with the goal of meaningfully improving the
Company's Board, corporate governance practices, and focus on shareholder
value. Lone Star Value believes its suggestions would meaningfully improve
shareholder rights and value at O2 Micro. We remain open to productive
discussions with the Company and urge the Company to show its appreciation
of the gravity of the issues facing O2 Micro by urgently engaging in a
meaningful dialogue with us over our concerns and suggestions.
Sincerely, Jeffrey E. Eberwein Lone Star Value Management, LLC
About Lone Star Value Management:
Lone Star Value Management is an investment firm that invests in undervalued
securities and engages with its portfolio companies in a constructive way to
help maximize value for all shareholders.
Proxy voting inquiries please contact:
John Grau
InvestorCom
203-972-9300 x11
jgrau@investor-com.com
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