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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2001.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-29939
OMNIVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0401990
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
930 Thompson Place, Sunnyvale, California 94085
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (408) 733-3030
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on July
17, 2001 as reported on the Nasdaq National Market, was approximately
$97,780,890. Shares of Common Stock held by each executive officer and director
and by each person who owns five percent or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of July 17, 2001, registrant had outstanding 22,093,787 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2001 Annual Meeting
of Stockholders.
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OMNIVISION TECHNOLOGIES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED APRIL 30, 2001
Page
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PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 17
Item 3. Legal Proceedings................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 19
Item 6. Selected Financial Data.......................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 40
Item 8. Financial Statements and Supplementary Data...................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management... 42
Item 13. Certain Relationships and Related Transactions................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 43
Signatures................................................................ 45
2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, including the information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All of the statements contained in this Annual Report on Form
10-K, other than statements of historical fact, should be considered forward
looking statements, including, but not limited to, the statements regarding the
timing of the marketability of emerging applications; the growth of the PC
camera market; the growth of the number of pictures generated as different uses
of imaging and video emerge; the ease of transferring images across PC systems
and communication networks; opportunities for small, low power, low cost
digital still cameras to be integrated directly into portable devices; the
growth of the market for digital still cameras; the growth of the CMOS image
sensor market and the time at which the CMOS image sensor market will surpass
the CCD image sensor market; the role which new CMOS image sensors will play in
moving video applications into many new mass markets; the suitability of
multiple chip image sensors for many new mass market applications; the
advantages derived by us and our customers from directly working together; our
continued investment of significant funds in research and development; our
future success being dependent upon our ability to protect our intellectual
property; our plan to vigorously defend ourselves in lawsuits regarding
intellectual property; our continued evaluation of the benefits of migrating to
a smaller circuit technology, using other color filter vendors and other
packaging technologies and making our testing facilities available to third
parties; the retention of future earnings and the payment of cash dividends;
our plan for the use of the net proceeds of our initial public offering; our
current foreign currency exchange rate risk; the effect of a 10% change on
interest rates on our fair market value and our portfolio and our expectation
of the effect of a sudden change in market interest rates on our operating
results and cash flows. There can be no assurance that these expectations will
prove to have been correct. Certain important factors that could cause actual
results to differ materially from our expectations are disclosed in this Annual
Report on Form 10-K, including, without limitation, in the section entitled
"Factors Affecting Future Results" in Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operation and this section. All
subsequent written and oral forward-looking statements by or attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
such factors.
Overview
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We were organized in 1995 as a California corporation and completed a
reincorporation in Delaware in March 2000 prior to our initial public offering.
We design, develop and market high performance, high quality and cost efficient
semiconductor imaging devices for computing, communications and consumer
electronics applications. Our main product, an image sensor, is used to capture
an image in cameras and camera related products such as personal computer
cameras, digital still cameras, personal digital assistant cameras and mobile
phone cameras. We have developed our image sensors using the standard
semiconductor manufacturing process used for approximately ninety percent of
modern integrated circuits. This enables us to take advantage of the many
benefits of high volume, mainstream semiconductor manufacturing such as low
cost, high reliability, volume capacity and competitive lead times. In
addition, unlike competitive image sensors which require multiple chips to
achieve the same functions, we are able to integrate nearly all camera
functions into a single chip. This leads us to believe that we supply the most
highly integrated, single chip image sensor. Our single chip design offers
competitive advantages that can allow our customers to design cameras that are
lower in cost, smaller, lighter in weight, consume less power, are more
reliable and more easily integrated with other circuits than cameras using
multiple chip image sensors. Our image sensors are currently used for the
following applications:
o digital still cameras, personal computer video cameras, personal digital
assistant cameras and mobile phone cameras which are used for capturing
images that can be stored, downloaded, viewed, edited and manipulated,
and for Internet applications such as creating still and live video for
websites and e-mail;
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o security and surveillance systems and closed circuit television systems
including onsite and remote security cameras for both home and business
and surveillance systems such as baby monitors and door phones; and
o toys and games such as highly interactive participatory video games
where the users' motions and images can be incorporated into the game
and his or her motions, rather than a joystick or mouse, control actions
in the game.
We assist our customers in developing new image sensor specifications that
are required for emerging applications. We believe that these applications will
be marketable within the next three years. Examples of such applications
include:
o personal identification systems such as fingerprint scanners, retina
scanners and face recognition systems;
o medical imaging devices used for routine doctors' office examinations;
o machine control systems such as bar code readers, production control
systems and quality inspection systems;
o automotive applications such as cameras that may replace rear and side
view mirrors to security systems, air bag inflation sensors, accident
recorders, driver monitors and maintenance inspection systems; and
o videophones integrated in tabletop phones.
We have shipped approximately 6.5 million image sensors in the year ended
April 30, 2001, or Fiscal Year 2001, as compared to approximately 4.0 million
image sensors in the year ended April 30, 2000 or Fiscal Year 2000. Our
customers include industry leading original equipment manufacturers, or OEM,
such as Alaris, Inc., or Alaris, Creative Technologies Ltd., or Creative,
Teksel Co., Ltd., or Teksel, who distributes our products to Kyocera
Corporation, or Kyocera, X10 Wireless Technology, Inc., or X10, and Viewquest
Technologies, Inc., or Viewquest.
Our objective is to be a leading supplier of image sensors for camera
manufacturers by:
o focusing on capturing mass market applications;
o targeting camera manufacturers by assisting them in the design and
development of their products;
o maintaining our technology leadership by continuing to develop our core
technology;
o continuing to develop new products aimed at new and existing markets;
and
o continuing to establish both formal and informal strategic relationships
with key suppliers and customers.
Industry Background
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Growth of Digital Video Imaging
Multimedia technology and its uses have grown in the past decade. A
significant driver of this growth in multimedia has been the growth of video
technologies. Many large industries including the movie, television, publishing
and computer industries depend directly on video technologies to create and
deliver their products. Traditionally all video, still image and sound products
were based on analog technologies. More recently, computer based video
technology has been replacing traditional analog image and sound capture
technologies, such as conventional cameras, film and tape recorders. This has
begun to occur because digital technology offers enhanced quality, manipulation
and storage capabilities that analog technologies lack. For example, a movie
recorded and stored digitally can be easily searched and will not suffer
degradation over time.
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The Internet and Miniaturization of Electronics Fuel Demand for Video
Imaging
Video and image capture on PCs was first used in videoconferencing
applications. However, early videoconferencing applications were expensive, and
suffered from poor image quality and inadequate network infrastructure. Video
conferencing grew rapidly as image quality improved and cameras became more
affordable. Cahners In-Stat Group predicts that the market for PC cameras will
grow from approximately 9 million units in 2000 to approximately 35 million
units by 2004. As cameras became readily available on PCs, applications other
than videoconferencing quickly followed. The introduction of the World Wide Web
browser, with its hypertext and Uniform Resource Locator, or URL, address
system, changed the Internet from a text based system to a multimedia driven
network that features sound, pictures and live video clips. Fueled by the
growth of the Internet as a method to publish, transport and store images, the
number of pictures generated is expected to grow significantly as different
uses of imaging and video continue to emerge. Today PC video cameras are used
for capturing still pictures and live video clips used for web sites, video
email, video greeting cards, web based photo exchanges, desktop publishing and
interactive games. As network bandwidth continues to improve, transferring
images across PC systems and communication networks will become even easier,
further driving the demand for video and multimedia applications.
Miniaturization has moved computing from the desktop to a wide assortment
of portable and hand held devices including laptops, personal digital
assistants, electronic games and mobile phones. These battery operated devices
are creating an opportunity for small, low power, low cost digital still
cameras to be integrated directly into the portable device so that images can
be captured for transfer to computer systems using wired or wireless methods.
Examples of commercial uses for these captured images include property damage
pictures for insurance claims, images of competitive products for analysis, or
enhancement of computer contact databases.
The more recent digital still cameras use a live video image sensor to
display a real time image on a miniature, built in display which serves as a
viewfinder. Still images captured by the same sensor and stored in the camera
are transferred to a computer system for viewing, editing, transmitting and
printing. When connected to the computer, digital still cameras can also
function like PC video cameras. These devices have made a significant impact on
the camera market by taking market share from film based cameras and are one of
the fastest growing consumer electronic products.
Advances in Image Sensor Technology
Image sensors are at the center of all electronic cameras. Image sensors
capture an image through a lens and convert that image into electronic signals.
Charged couple device, or CCD, technology has dominated the image sensor market
for over 25 years. However, production is concentrated with relatively few,
large, primarily vertically integrated camcorder manufacturers. According to a
study published by the Cahners In-Stat Group in October 2000, the top six CCD
image sensor manufacturers, Fuji Corporation, or Fuji, Matsushita Electric
Industrial, or Matsushita, Nippon Electric Corporation or NEC, Sharp
Corporation, or Sharp, Sony Corporation, or Sony, and Toshiba Corporation, or
Toshiba, account for approximately 97.3% of total CCD image sensor production.
A newer, easier to use semiconductor technology, complementary metal oxide
semiconductor, or CMOS, has been adopted for most common integrated circuits.
Although CMOS technology has been available for image sensor designs for over
20 years, until recently it has not been used in commercial products because of
poor image quality. Recent improvements in CMOS, including smaller size
circuits, better current control, and a more stable fabrication process, have
made it possible to design CMOS image sensors that provide high image quality
and that have many advantages over CCD sensors.
Advantages of CMOS Over CCD Technology
CMOS technology has many advantages over CCD technology including:
o Cameras using CMOS image sensors consume as little as one tenth as much
power as those using CCD technology, making them more suitable for
battery operated applications.
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o CMOS image sensors require only one voltage, the three or five volts
typically used for modern integrated CMOS circuits, while CCD image
sensors require three separate and different voltages, which means that
CMOS image sensors are easier and less costly to integrate into
companion circuit boards.
o CMOS technology permits integration of more functions into fewer chips,
providing space, cost, product design and reliability advantages.
Cameras using CMOS technology do not require as many semiconductors as cameras
using CCD technology.
o The CMOS fabrication process requires fewer masking steps than the CCD
fabrication process. The CCD fabrication process generally requires 20
to 40 masking steps, which is two to three times more complex than the
typical CMOS fabrication process.
o CMOS image sensors do not cause an image to lose definition when
directed towards bright light while CCD image sensors create a blurry or
smeared image.
In addition, since CCD technology is used only for image sensors, future
improvements in the core technology and the fabrication process are
concentrated among a few large, vertically integrated equipment manufactures.
Such concentration tends to limit innovation and investments, and according to
Frost & Sullivan, economies of scale for the manufacture of CCD image sensors
have already been reached. By contrast, CMOS technology is used for
approximately 90% of modern integrated circuits.
Because of the advantages of CMOS technology, the market for CMOS image
sensors is expected to surpass the market for CCD image sensors in 2003. The
Cahners In-Stat Group forecasts in its study published in October 2000, that
CMOS's share of the image sensor market will grow from approximately 30% in
2000 to 75% in 2004. In particular, Cahners In-Stat Group predicts that in
2004, approximately 88.6% of the 35 million PC cameras will use CMOS image
sensors. Cahners In-Stat Group also predicts that in 2004 CMOS technology will
account for approximately 45.8% of the 34.9 million digital still cameras.
Applications for CMOS Image Sensors
Based on discussions with current and potential customers, we anticipate
that the newer CMOS image sensors will help move video applications into many
new mass markets, particularly where low cost, low power consumption and small
size are important. Some of these applications include:
o a wide array of personal identification systems, including fingerprint
scanners, retina scanners and face recognition systems that can be used
for credit card and debit card authorization, opening a hotel door,
entering a car or home, accessing a computer or online network, and any
number of applications where a system needs to identify a person as a
valid user;
o a wide array of medical instruments used for routine doctors' office
examinations;
o videophones integrated into tabletop phones;
o automotive applications that range from cameras that may replace rear
and side view mirrors to security systems, air bag inflation sensors,
accident recorders, driver monitors and maintenance inspection systems;
and
o machine control applications, including bar code readers, production
control systems and quality control monitors.
However, we believe that multiple chip CMOS image sensors do not fully
take advantage of the benefits enabled by CMOS technology. Image sensors that
require more than one chip are more expensive, larger, heavier, consume more
power, are less reliable and are more difficult to integrate with other
electronic circuits. As a result, multiple chip image sensors may not be ideal
for many new mass market applications.
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Our Solution
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We design, develop and market our high performance, high quality and cost
efficient image sensors for computing, communications and consumer electronics
applications. We have developed our image sensors using the standard CMOS
manufacturing process used for approximately 90% of modern integrated circuits.
As a result, unlike competitive image sensors which require multiple chips to
achieve the same functions, we are able to integrate nearly all the camera
functions into a single chip. This leads us to believe that we supply the most
highly integrated single chip image sensor. Customers can use our highly
integrated image sensor to design camera products that are lower in cost,
smaller in size, lighter in weight, consume less power and are more reliable
and easier to integrate with other electronic circuits than cameras using the
traditional CCD technology or multiple chip CMOS image sensors.
Our proprietary circuit design integrates the image capture, the image
processing function, the color processing and the conversion and output into a
single chip. Our image sensors are used in conjunction with our interface chips
or other manufacturers' adaptor chips to connect directly with a personal
computer.
Our image sensors provide a number of benefits to our customers, including
the following:
o Lower Cost. The highly integrated design of our image sensors allows
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our customers to build a camera that can be generally less expensive
than one using CCD technology. Our single chip image sensor also allows
our customers to build cameras that generally are less expensive than
cameras using multiple chip CMOS image sensors.
o Lower Power Consumption. A camera using our image sensor can require as
------------------------
little as one tenth of the power required for a CCD camera and half the
power required for a multiple chip CMOS camera, making our solution more
suitable for battery powered operation. In addition, CMOS image sensors
use a single voltage while CCD image sensors require three voltages. As
a result of this simplicity, our customers can more easily and quickly
design camera products.
o Smaller Size. Our highly integrated, single chip design allows our
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customers to develop cameras that are smaller in size and lighter in
weight than cameras that use CCD or multiple chip CMOS image sensors.
For portable applications, size and weight are critical factors in a
consumer's buying decision. Additionally, devices using our image
sensors are more reliable because there are fewer parts to fail.
o Streamlined Manufacturing and Production. Our image sensors provide
-----------------------------------------
consistent quality that makes them easier to use for large-scale
production than CCD image sensors because CCD image sensors must each be
hand calibrated to match companion components. Our image sensors can be
mounted with automatic insertion equipment and run through standard
automatic re-flow soldering lines, whereas CCD must each be individually
placed and soldered by hand.
o Ease of Use for End Users. As opposed to other CCD and CMOS image sensor
--------------------------
manufacturers, we offer a complete solution for our customers' end
users. Use of our image sensors along with our interface chips and our
Windows(r) and Apple Computer iMac(r) software drivers enables a plug
and play connection of the camera to a personal computer.
o Accelerated Time to Market. The highly integrated nature of our image
---------------------------
sensors and their programming ease simplify the design of cameras and
allow our customers to shorten their product design time. We can also
help our customers accelerate their time to market by providing camera
reference designs, engineering design review services and customer
product evaluation testing and debugging services.
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Our Strategy
- ------------
Our objective for Fiscal Year 2001 was to maintain and grow our leadership
position as a supplier of CMOS image sensors for the camera manufacturer
marketplace. Key elements of our strategy included:
o Target Mass Market Applications. We focused our efforts on mass market
--------------------------------
opportunities for image sensors. These markets included cameras for
closed circuit television systems, digital still cameras, personal
computer video cameras, personal digital assistant cameras, mobile phone
cameras, cameras for security and surveillance systems, cameras for toys
and games, videophones, personal identification systems, medical imaging
devices, machine control systems and automotive applications.
o Focus on Camera Manufacturers. We used our expertise in the design of
------------------------------
consumer cameras to assist our camera manufacturer customers to design
and develop their products using our image sensors.
o Maintain Technology Leadership. We maintained our technology leadership
-------------------------------
by developing our core technology. Our product and technology strategy
is focused on developing image sensors that are smaller in size, consume
less power and have higher pixel resolutions. During Fiscal Year 2001,
we achieved progress along all of these parameters and made
announcements of new products in all of these categories, including our
new higher resolution sensors, smaller, lower power consuming versions
of the CIF and VGA sensors, and new software drivers for the Apple iMac
market.
o Developed New Products. In Fiscal Year 2001, we developed new products
-----------------------
aimed at new and existing markets. We introduced three new product
families, which included the OV8110 and related OV8610 medium resolution
chips and the OV9110 and related OV9610 high resolution megapixel chips.
o Continued to Develop Strategic Relationships. We continued to establish
---------------------------------------------
both formal and informal strategic relationships with key manufacturers
and customers. Relationships with manufacturers enable us to gain access
to wafer capacity and develop joint engineering projects aimed at
enhancing the application of our image sensors and improving the
production yield and the sensor image quality of our image sensors.
Relationships with customers have allowed us to collaborate in the
design and development of cameras using our image sensors.
Products
- --------
We design, develop and market our high performance, high quality and cost
efficient CMOS image sensors for computing, communications, automotive and
consumer electronics applications.
We have developed proprietary designs for a single chip image sensor that
includes the image capture, image processing circuitry, color processing and
conversion and output. Our products are programmable and allow our customers to
provide custom, proprietary features in their application software or hardware
design so that they can offer unique products to end users. Our technology
provides a platform for different products that allow our customers to choose
the most appropriate features for their applications. These features include:
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Product Features
Complementary Metal Oxide
Semiconductor Image Sensors Black and white or color
Resolutions Low resolution
Medium resolution
High resolution
Output Signal For television
For computers
Operating Voltage 5 volt or 3 volt
Optical Lens Size 1/6, 1/5, 1/4, 1/3 or 1/2 inch format
Interface Chips For connecting to computers
Software Drivers Windows and Apple computer
software drivers
The following table summarizes our current image sensor product offerings:
CMOS Image Sensors
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Product
Black and Color Introduction
White Sensors Sensors Resolution Output Target Markets Date
- -------------- ------- ---------- ------ -------------- ----
OV5116 Low NTSC or PAL Security and 2/01
for TV surveillance
Toys and games
OV5017 Low For computers Machine control 5/97
OV7410 OV7910 Medium NTSC or PAL 2/99
for TV Security and
surveillance
Close circuit
television
Toys and games
OV6120 OV6620 Low For computers PC video cameras 4/99
Toys and games
Machine control
OV7120 OV7620 Medium For computers PC video cameras 10/99
Digital still cameras
Machine control
Security and
surveillance
OV6130 OV6630 Low For computers PC video cameras 2/00
Toys and games
Machine control
OV8110 OV8610 Medium For computers PC video cameras 2/01
High Digital still cameras
Machine control
Security and
surveillance
OV9110 OV9610 High For computers PC video cameras 4/01
Digital still cameras
Machine control
Security and
surveillance
We also provide a companion chip used to interface our image sensors to
the universal serial bus, a connection which allows add on devices to be
connected to personal computers. These low cost, proprietary designed chips
accept the live video output from our image sensors, perform data compression
and handle the bus protocol for transferring the image data to the personal
computer. They also act as a master for passing programming information to and
from our image sensor.
We also design, develop and license plug and play software drivers for
Microsoft Windows and Apple Computer's iMac system. These software drivers
accept the image data being received from the universal serial bus,
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provide the data decompression if required and manage interface protocols with
the camera. These drivers have been designed for speed and flexibility and
allow easy customization of the user interface to give the appearance of the
customer's branded product or application software.
Customers
- ---------
Our customers include industry leading camera manufacturers, contract
manufacturers and distributors. During Fiscal Year 2001, we shipped
approximately 6.5 million image sensors as compared to approximately 4.0
million image sensors during Fiscal Year 2000. The following table describes
representative camera manufacturer customers who purchase our products for
their own branded products and contract manufacturers who build products for a
camera manufacturer. Also shown are representative distributors who purchase
our products for resale.
Customer Product Family Markets
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Camera Manufacturer and Contract Manufacturer Customers
- -------------------------------------------------------------------------------
Alaris Color digital sensors PC video cameras
Color analog sensors Toys and games
COMedia Black and white analog Security and surveillance
sensors
Color analog sensors
Creative Technology Color digital sensors PC video cameras
USB interface Digital still cameras
CRS Electronic Color analog sensors Toys and games
Philips Color digital sensors PC video cameras
USB interface
Olympus Optical Co. Color digital sensors Security and surveillance
Color analog sensors PC video cameras
Prochips Technology Color digital sensors PC video cameras
USB interface
Teksel/Kyocera Color digital sensors Cell phone accessory
Samsung Color digital sensors PC video cameras
USB interface
Mtek Vision Color digital sensors PC video cameras
USB interface
Viewquest Technologies Color digital sensors Toys and games
USB interface PC video cameras
Personal digital assistant
cameras
Welch Allyn Black and white analog Bar code readers
sensors
Color analog sensors
X10 Wireless
Technology, Inc. Color analog sensors Security and surveillance
Distributors
- -------------------------------------------------------------------------------
World Peace Color digital sensors PC video cameras
Industrial (Taiwan) Black and white digital Digital still cameras
Sensors Security and surveillance
Color analog sensors General purpose cameras
USB interface
In many cases, our camera manufacturer customers outsource manufacturing
functions to third parties. In these cases we typically help these third party
manufacturers bring the design to production. Once the production is ready, we
sell our products to these third party manufacturers either directly or through
distributors. For example, Viewquest, a major manufacturer in Taiwan,
manufactures a personal digital assistant camera for Kodak. In many cases these
third party manufacturers may also introduce us to additional camera
manufacturers with whom they have relationships.
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In Fiscal Year 2001, approximately 71% of our revenues were derived from
camera manufacturers and their contract manufacturers. Our largest customer,
Creative, accounted for 14% of our total revenues. No other single camera
manufacturer customer represented more than 10% of total revenues.
We have signed an agreement with Creative under which Creative has agreed
to purchase various products of ours which are used in personal computer video
cameras and digital still cameras. This agreement expires in February of 2002.
We have also entered into a software license agreement with Creative. Pursuant
to this agreement, we have granted to Creative a non-exclusive, royalty free
license to use our software in connection with Creative's manufacture of
products which incorporate our image sensors.
In Fiscal Year 2001, approximately 29% of our revenues were from
distributors. The largest distributor was World Peace Industrial Co. Ltd., or
World Peace, who represented approximately 17% of total revenues. No other
single distributor represented more than 10% of total revenues. We have signed
agreements with most of our distributors, including World Peace.
Strategic Relationships
- -----------------------
We have established an informal strategic relationship with Taiwan
Semiconductor Manufacturing Corp., or TSMC, both in Taiwan and in the United
States. TSMC is one of our primary sources of wafer fabrication. This
relationship includes joint engineering projects aimed at improving production
yields, improving image quality and correlating final packaged chip testing and
wafer level testing. We provide extensive, in depth technical expertise on
image sensor design issues, which has allowed TSMC to develop an image sensor
production business. TSMC provides us with extensive, in depth technical
expertise on variations of the CMOS semiconductor fabrication process which
assists us in improving the design and production of our image sensors. We are
one of TSMC's largest customer for CMOS image sensors and in the past we have
received preferential capacity scheduling.
We have signed an agreement with Powerchip Semiconductor Corp., or PSC, as
a second source for wafer fabrication. By working closely with PSC's engineers,
we have been able to design new image sensor products that take advantage of
PSC's memory chip fabrication processes. PSC's fabrication process gives us a
number of important improvements, including better current control for better
image quality, three-volt power for portable applications and more image sensor
chips per wafer. In return, we have assisted PSC in the image sensor
fabrication and the color filter application process business.
We have several informal strategic relationships with key customers in the
development of new camera products incorporating our image sensors. By working
directly with key customers, we can help them take advantage of our image
sensors and can inform them of new developments so they can market their
products more quickly. By learning more about our customers' desires and
requirements we are able to plan and prioritize our product development
projects. These key customers include Creative, for PC video cameras and
digital still cameras, Alaris for PC video cameras, Viewquest for cameras for
toys, PC video cameras and personal digital assistant cameras, Teksel/Kyocera
for cameras for mobile telephones, Welch Allyn for cameras for bar code
readers, and X10 for cameras for home entertainment and surveillance cameras.
Sales and Marketing
- -------------------
We sell our products through a direct sales force and indirectly through
distributors and manufacturer's representatives. As of April 30, 2001, our
sales and marketing organizations had a total of 30 employees. We also have 24
independent distributors and manufacturers' representatives, four of whom are
domestic and 20 of whom are located outside the United States.
Our sales and marketing strategy in Fiscal Year 2001 was to achieve design
wins with key industry leaders who target mass market applications. We sold our
image sensors to camera manufacturers who market camera products under their
own brand. We also sold image sensors to large manufacturing companies that
produce camera products for others to market under different brand names.
Through our relationships, we have developed considerable expertise in the
design of consumer cameras. We have used that expertise to assist our customers
in developing their
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products which incorporate our image sensors. We also have provided reference
designs and engineering design review and engineering product evaluation
testing and debugging services for our customers.
Technology
- ----------
We have key technical competencies in analog signal processing design,
mixed signal circuit design, advanced CMOS image sensor design, automatic
testing and single chip semiconductor design.
Analog Circuit Design
We have in-house expertise to design sophisticated analog semiconductor
circuits. This expertise is unique because most semiconductor design engineers
today work in the area of digital circuit design. Our in house expertise has
allowed us to process the video data captured in the analog domain, which has
many significant advantages over digital processing. Analog processing works
directly on the original image signals without the loss of data typical with
conversion to digital processing. Analog circuits require considerably less
space which means we can design smaller chips with far less noise caused by
heat or cross talk than digital circuits. The image processing circuits take
approximately 20% to 30% of the space in our typical image sensor design,
leaving 70% to 80% for the image sensing array. Most CCD image sensors and
other competitive CMOS image sensor products convert the image signal to
digital as the very first step. In our product designs, conversion to a digital
signal is the last step taken before the output step rather than the first.
Analog processing is the key for integrating all the functions on a single chip
thereby taking full advantage of the benefits of CMOS technology.
Mixed Analog/Digital Circuit Design
We have developed extensive in house expertise in the technology of mixing
analog and digital signals in the same semiconductor design without suffering
the common problems of interference from noise caused by heat or crosstalk. We
use digital circuits in our image sensors to interface to the outside digital
world. We have developed a method of programming the analog processing circuits
which gives our customers extensive and flexible programming capability from
digitally based microprocessors and micro controllers.
Advanced CMOS Image Sensor Design
Our in house semiconductor design engineers are skilled in the design of
high speed, low power and mixed analog/digital CMOS image sensors. We use
advanced design techniques to develop high speed, highly integrated
semiconductors which can be fabricated using standard CMOS processes and which
can be manufactured using conventional low cost packages.
Automatic Testing
Automatic testing methods and equipment designed for conventional CMOS
devices are not sufficient for testing an image sensor. In addition to testing
all the normal logic and electrical functions, an optical test must be
performed on the image sensor. The sensor is turned on and captures a live
image, which is subsequently analyzed for quality and color. Our in house
expertise has allowed us to design automatic testing equipment, specifically
for CMOS image sensors. Using commercially available off the shelf modules and
components, we have designed and developed a complete microcomputer based
testing system that has automatic handling capability, an image source, a
lighting and lens system and automatic output sorting. This low cost system is
programmable so that testing criteria and testing methodology can be easily
changed and can be replicated to meet increased production requirements. The
system produces detailed reports on test results that are used for feedback to
our quality control and operations department. We currently use these systems
to deliver a high quality product at high production volumes.
Single Chip Semiconductor Design
Our expertise has allowed us to create a single chip CMOS image sensor.
Our single chip integrates the image capture, the image processing, the color
processing and conversion and output for either television or computers.
12
Research and Development
- ------------------------
The internal design of our CMOS image sensors has been done in a modular
fashion. The major functions, such as the image capture, image sensor control
logic, color processing, analog output, digital output and programming control,
are stand alone circuits that can rapidly be modified or used as is in new
product developments. As a result, circuit improvements automatically migrate
to each new product, and the total development time and cost for new products
is greatly reduced.
We use a team approach to design new products, which includes a senior
design engineer and additional engineers with specific design expertise. As of
April 30, 2001, we had a total of 45 employees in R&D, including 14 employees
in our core logic group responsible for image sensor design and development and
31 employees in our engineering systems group responsible for the design and
development of interface chips, software drivers, reference camera designs,
automated test equipment and customer engineering support services.
We have invested, and expect that we will continue to invest, significant
funds on research and development. Our research and development expenses were
approximately $5.5 million in Fiscal Year 2001, $3.7 million in Fiscal Year
2000, and $3.3 million in the fiscal year ended April 30, 1999 or Fiscal Year
1999.
Intellectual Property
- ---------------------
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely on a combination of patent,
copyright, trademark and trade secrets, as well as nondisclosure agreements and
other methods to protect various aspects of our image sensors such as the image
capture and the image processing circuit. As of April 30, 2001, we have been
issued 14 United States patents. We have also received nine foreign patents. We
have filed 24 additional United States patent applications, of which two have
been allowed. We have also filed 33 additional foreign patent applications, of
which one has been allowed. These patents and patent applications protect the
single chip image sensor design, noise reduction and cancellation circuits,
image enhancement, color processing, and applications technologies of our
semiconductor image sensors.
In March 2000, we received a letter from Koninklijke Philips N.V., or
Philips, in which Philips claimed to have patent rights in a serial bus system
for data transmission, known as the I2C bus system. Although we do not believe
any of our products infringe any Philips patent, we are currently discussing
possible royalty or licensing arrangements as a means of business resolution.
In the meantime, we have completed implementation of a new serial bus system
for our products.
In March 1999, we received a letter from Photobit Corporation, requesting
that we review our products in light U.S. Patent No. 5,841,126. Photobit did
not respond to our inquiry regarding this letter. In June 2000, we received
additional correspondence from counsel for Photobit and California Institute of
Technology ("CalTech"), asserting infringement of U.S. Patent No. 5,841,126,
U.S. Patent No. 5,886,659, U.S. Patent No. 5,990,506, U.S. Patent No. 6,005,619
and U.S. Patent No. 6,021,172, which relate to various aspects of image
sensors. Photobit did not indicate which of our products were implicated nor
the manner in which it believed any of our products might infringe on any of
its patents. Following unsuccessful licensing negotiations, we filed, on
October 13, 2000, an action in the U.S. District Court, Northern District of
California, civil action number CV-00-3791, against Photobit and CalTech,
seeking declaratory judgment that the five specifically identified patents (the
'126, '659, '506, '619 and '172 patents) are invalid and/or not infringed by
any of our products. An answer to our complaint was filed by Photobit and
CalTech on November 22, 2000, including counterclaims alleging infringement as
to the '126, '506 and '619 patents only. Our answer to those counterclaims was
filed on December 12, 2000. Upon being granted leave to amend by the district
court on June 6, 2001, OmniVision filed its amended complaint against Photobit
and CalTech on June 21, 2001, which includes claims of inequitable conduct,
patent misuse, unfair competition, and violation of the Racketeer Influenced
and Corrupt Organizations Act. Photobit and CalTech's response to the amended
complaint is due by late July. Discovery is currently in process, and trial is
scheduled for July of 2002. We plan to vigorously protect our rights in this
matter.
13
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission ("ITC"), based on the same three patents that
are the subject of the counterclaims in the Northern District of California
action (the '126, '506 and '619 patents) against us and against Creative Labs,
Inc. and X10 Wireless Technology, Inc, requesting that the ITC institute an
investigation pursuant to Section 337 of the Tariff Act of 1930 (19 U.S.C. Sec.
1337). A supplement to the complaint was filed on February 27, 2001. The ITC
voted to institute an investigation ("In the Matter of Certain CMOS Active
Pixel Image Sensors And Products Containing Same," Investigation No. 337-TA-
451), and a Notice of Investigation was published on March 12, 2001. By
instituting this investigation, the ITC has not yet made any decision on the
merits of the case. In the event that the ITC ultimately determines that a
violation of Section 337 has occurred, the involved products may be precluded
from importation into and/or sale in the United States. At present, the target
date for completion of the investigation is May 13, 2002. As with the action
pending in the Northern District of California, we believe the claims of
Photobit and CalTech are meritless, and plan to vigorously defend ourselves in
the ITC investigation.
Manufacturing
- -------------
Wafer Fabrication
Our semiconductor products are fabricated using standard CMOS processes,
which permit us to engage independent wafer foundries to fabricate our
semiconductors. By outsourcing our manufacturing to semiconductor foundries, we
are able to avoid the high cost of owning and operating a semiconductor wafer
fabrication facility. This allows us to focus our resources on the design,
development and marketing of our image sensors.
We outsource our wafer manufacturing to TSMC and PSC. Our image sensors
are currently fabricated using a standard process at 0.25, 0.40, 0.50 and 0.60
microns. We continue to evaluate the benefits and feasibility of migrating to a
smaller circuit technology in order to reduce costs or to increase quality and
performance.
We have signed agreements with Samsung Electronics Co. Ltd., or Samsung,
and CoAsia Microelectronics Corp., Samsung's sales agent, under which Samsung
fabricates one of our interface chips on its standard fabrication line. Samsung
not only fabricates the wafers, but also packages the chips and performs a
final test, delivering a final product that can be shipped by CoAsia
Microelectronics Corp. directly to our customers when required. We also have a
signed agreement with Winbond Electronics Corp., or Winbond, to supply
interface chips to our customers.
Color Filter Application
A majority of our unit sales of image sensors for Fiscal Year 2001 are
color image sensors. These require a color filter to be applied to the wafer
before packaging. This color filter application uses a series of masks to place
red, green and blue dyes on the individual picture elements in an industry
standard Bayer pattern. As a final step, a micro lens is applied to each
picture element. We outsource the application of our color filters to Toppan
Printing Co., Ltd. in Japan and to TSMC in Taiwan.
Assembly
After wafer fabrication, and color filter application if required, the
wafers are diced into chips, which are then assembled into packages. Our
products are designed to use low cost standard packages that are widely in use
for optical sensor chips. These packages have a glass lid to allow light to
pass through to the image sensor array. We outsource the majority of our
packaging requirements to Alphatec in Thailand and Kyocera in Japan. We
continue to evaluate the benefits of using other vendors and other packaging
technologies in order to further reduce costs or increase quality or
performance.
Testing
High volume product testing is an important part of the production of
image sensors and is a substantial barrier to entry for many companies.
Production testing equipment designed for conventional CMOSs is not sufficient
for testing image sensors because an optical image must be captured and checked
in addition to checking the normal
14
logic and electrical functions. The few commercially available image sensor
testers are expensive and do not meet our high standards.
We have designed our own automatic test equipment, using readily available
modules and components. These testers are computer based and have automatic
handling capability, a lighting and lens system, a changeable image source and
automatic output sorting by grade. The system is programmable so that testing
criteria and methodology can be changed easily to accommodate new products or
special testing requests. Our cost to build a system is substantially less than
that of commercially available testers. We can expand our production capability
by building additional systems at a low cost. Current testing capacity is in
excess of one million units per month.
Our policy is to do a complete optical test of all our image sensors.
Currently, substantially all of our testing is done on our testing machines
installed at our headquarters facility in Sunnyvale, California, although a
very small amount of testing for a few older products is done by hand by a
third party. We continue to evaluate the benefits of making our testing
machines available to outside vendors who could perform our testing in order to
reduce costs.
We use the reports from our testing machines to monitor the cause of any
failure in order to place responsibility with the appropriate vendor, i.e.
wafer fabrication, color filter application and packaging. Since image sensors
are optical products, the introduction of impurities is a major concern during
the color filter application and packaging process. We use test data to
establish yield goals at each step of the manufacturing process and take
remedial action as appropriate.
Quality Assurance
We focus on product quality through all stages of the design and
manufacturing process. Our designs are subjected to in depth circuit simulation
before being committed to silicon. Test wafers are fabricated and test chips
are packaged and live tested before a new product is committed to production.
Initial production runs are kept at a minimum until sufficient products have
completed the entire manufacturing and testing process and are delivered to and
approved by customers. Full production runs are committed only at that time.
We qualify each of our vendors through a series of industry standard
environmental product stress tests, as well as an audit and an analysis of the
subcontractor's quality system and manufacturing capability. We also
participate in quality and reliability monitoring through each stage of the
production cycle by reviewing electrical parametric data from our foundries and
other subcontractors. We closely monitor wafer foundry production to obtain
consistent overall quality, reliability and yield levels.
Competition
- -----------
We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. We believe that the principal factors
affecting competition in our markets are time to market, quality, total system
design cost, availability of foundry capacity, customer support and reputation.
Our primary competition comes from CCD image sensor manufacturers and CMOS
image sensor manufacturers:
o CCD Image Sensor Manufacturers. Image sensor manufacturers using CCD
technology include a number of well established companies, particularly
vertically integrated camcorder manufacturers. Our main competition
comes from Cahners In-Stat Group believes the top six companies that
collectively account for approximately 97.3% of the total CCD image
sensor market. These six include Fuji, Matsushita, NEC, Sharp, Sony, and
Toshiba; and
o CMOS Image Sensor Manufacturers. Image sensor manufacturers using CMOS
technology include a number of well established companies such as
Agilent Technologies, Inc., ST Microelectronics, Conexant Systems, Inc.,
Hyundai Electronics Industries Co. Ltd., Mitsubishi Electronic,
Motorola, Inc., and Toshiba Corporation. In addition, we compete with a
large number of smaller companies including Zoran and Photobit
Corporation.
15
Our competitors include many large domestic and international companies
that have greater access to advanced wafer foundry capacity, substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines, access to large customer bases and longer standing
relationships with suppliers and customers than we do.
Backlog
- -------
Sales are generally made pursuant to standard purchase orders. Our backlog
includes only those customer orders for which we have accepted purchase orders
and assigned shipment dates within the upcoming twelve months. As of April 30,
2001 and 2000, our backlog was approximately $8.3 million and $23.7 million,
respectively. Although our backlog is typically filled within two to four
quarters, our current backlog is subject to changes in delivery schedules and
backlog may not necessarily be an indication of future revenue.
Employees
- ---------
As of April 30, 2001 we had a total of 104 full time employees, 81 located
at our headquarters in Sunnyvale, California and 23 in foreign sales support
offices. Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical and management
personnel. None of our employees are represented by a collective bargaining
agreement, and we have never experienced any work stoppage. We believe that our
employee relations are good.
Executive Officers of the Registrant
The following table sets forth, as of April 30, 2001, certain information
concerning our executive officers and directors:
Name Age Position
---- --- --------
Shaw Hong.................. 63 Chief Executive Officer and Director
H. Gene McCown............. 65 Vice President of Finance and Chief
Financial Officer
Robert J. Stroh............ 61 Vice President of Strategic Marketing and
Business Development
Raymond Wu................. 46 Executive Vice President and Director
Hank O'Hara (1)............ 66 Vice President of Worldwide Sales
- ---------------------
(1) Mr. O'Hara resigned his position with us effective May 25, 2001.
Shaw Hong, one of our cofounders, has served as one of our directors and
---------
as our Chief Executive Officer and President since May 1995. From January 1990
to April 1995, Mr. Hong was the President of HK Technology, Inc., an integrated
circuit design company. Mr. Hong holds a B.S. in Electrical Engineering from
Jiao Tong University in China and a M.S. in Electrical Engineering from Oregon
State University.
H. Gene McCown has served as our Vice President of Finance and Chief
--------------
Financial Officer since July 1999. From July 1998 to January 1999, Mr. McCown
served as Vice President of Finance and Chief Financial Officer of Innovative
Robotic Solutions, Inc, a manufacturer of semiconductor equipment. From July
1991 to July 1998, Mr. McCown served as Vice President of Finance and Chief
Financial Officer of Chrontel, Inc., a semiconductor manufacturer. Mr. McCown
holds a B.S. in Accounting from San Jose State University.
Robert J. Stroh has served as our Vice President of Strategic Marketing
---------------
and Business Development since November 2000. From June 1998 to November 2000,
Mr. Stroh served as our Vice President of Sales and Marketing. From January
1997 to June 1998, Mr. Stroh served as our Director of Marketing and Sales.
From June 1993 to December 1996, Mr. Stroh founded and was president of Stroh
Golf Ventures, a company that conducted golf camps, Stroh Holdings LLC, an
Internet sales company, and Direct Product Network, Inc., an Internet sales
16
company. Mr. Stroh holds a M.B.A. from Indiana University and a B.S. in
Business from Pennsylvania State University.
Raymond Wu, one of our cofounders, has served as one of our directors
----------
since May 1995 and as our Executive Vice President since October of 1999. From
July 1998 to October 1999, Mr. Wu served as our Vice President of Business
Development. From May 1995 to July 1998, Mr. Wu was the head of our Sales
department and our Engineering department. From January 1990 to April 1995, Mr.
Wu held various positions within the design and mechanical engineering
departments of HK Technology, Inc. Mr. Wu received a B.S. degree in Electrical
Engineering from Chung-Yuan University in Taiwan and a M.S. in Electrical
Engineering from Wayne State University.
Hank O'Hara resigned as our Vice President of Worldwide Sales in May 2001.
-----------
From April 2000 to May 2001, Mr. O'Hara served as our Vice President of
Worldwide Sales. From February 1997 to April 2000, Mr. O'Hara co-founded and
served as Vice President Sales and Marketing of Alacritech, a designer and
manufacturer of high performance networking boards. From January 1994 to
February 1997, he served as Vice President of Sales of Pericom Semiconductor, a
manufacturer of high performance digital and mixed-signal integrated circuits.
In addition, over the past 30 years, Mr. O'Hara has held sales and marketing
positions at various public companies. Mr. O'Hara received a B.S. in Mechanical
Engineering from California Polytechnical Institute at San Luis Obispo.
ITEM 2. PROPERTIES
Our headquarters, including our principal engineering, administrative,
marketing and testing facilities, are located in approximately 21,280 square
feet of space we have leased in Sunnyvale, California under a lease expiring
April 30, 2003.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents, product liabilities and other actions
arising out of the normal course of business. In March 2000, we received a
letter from Koninklijke Philips N.V. in which Philips claimed to have patent
rights in a serial bus system for data transmission, known as the I2C bus
system. Although we do not believe any of our products infringe any Philips
patent, we are currently discussing possible royalty or licensing arrangements
as a means of business resolution. In the meantime, we have completed
implementation of a new serial bus system for our products.
In March 1999, we received a letter from Photobit Corporation, requesting
that we review our products in light U.S. Patent No. 5,841,126. Photobit did
not respond to our inquiry regarding this letter. In June 2000, we received
additional correspondence from counsel for Photobit and California Institute of
Technology, asserting infringement of U.S. Patent No. 5,841,126, U.S. Patent
No. 5,886,659, U.S. Patent No. 5,990,506, U.S. Patent No. 6,005,619 and U.S.
Patent No. 6,021,172, which relate to various aspects of image sensors.
Photobit did not indicate which of our products were implicated nor the manner
in which it believed any of our products might infringe on any of its patents.
Following unsuccessful licensing negotiations, we filed, on October 13, 2000,
an action in the U.S. District Court, Northern District of California, civil
action number CV-00-3791, against Photobit and CalTech, seeking declaratory
judgment that the five specifically identified patents (the '126, '659, '506,
'619 and '172 patents) are invalid and/or not infringed by any of our products.
An answer to our complaint was filed by Photobit and CalTech on November 22,
2000, including counterclaims alleging infringement as to the '126, '506 and
'619 patents only. Our answer to those counterclaims was filed on December 12,
2000. Upon being granted leave to amend by the district court on June 6, 2001,
OmniVision filed its amended complaint against Photobit and CalTech on June 21,
2001, which includes claims of inequitable conduct, patent misuse, unfair
competition, and violation of the Racketeer Influenced and Corrupt
Organizations Act. Photobit and CalTech's response to the amended complaint is
due by late July. Discovery is currently in process, and trial is scheduled
for July of 2002. We plan to vigorously protect our rights in this matter.
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission, based on the same three patents that are the
subject of the counterclaims in the Northern District of California action
17
(the '126, '506 and '619 patents) against us and against Creative Labs, Inc.
and X10 Wireless Technology, Inc, requesting that the ITC institute an
investigation pursuant to Section 337 of the Tariff Act of 1930 (19 U.S.C. Sec.
1337). A supplement to the complaint was filed on February 27, 2001. The ITC
voted to institute an investigation ("In the Matter of Certain CMOS Active
Pixel Image Sensors And Products Containing Same," Investigation No. 337-TA-
451), and a Notice of Investigation was published on March 12, 2001. By
instituting this investigation, the ITC has not yet made any decision on the
merits of the case. In the event that the ITC ultimately determines that a
violation of Section 337 has occurred, the involved products may be precluded
from importation into and/or sale in the United States. At present, the target
date for completion of the investigation is May 13, 2002. As with the action
pending in the Northern District of California, we believe the claims of
Photobit and CalTech are meritless, and plan to vigorously defend ourselves in
the ITC investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
------------------
Our Common Stock has been traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the trading symbol "OVTI" since July 14, 2000. The
following table sets forth for the period indicated the high and low closing
prices for our Common Stock, as reported by the Nasdaq National Market.
Period Ended July 17, 2001 High Low
---- ---
First Quarter (through July 17, 2001) $ 6.200 $ 3.480
Fiscal Year Ended April 30, 2001 High Low
---- ---
Fourth Quarter $ 5.781 $ 2.370
Third Quarter $35.000 $ 2.938
Second Quarter $47.250 $23.141
First Quarter (from July 14, 2000) $40.438 $22.750
The reported last sale price of our Common Stock on the Nasdaq National
Market on July 17, 2001 was $5.00. The approximate number of holders of record
of the shares of our Common Stock was 224 as of July 17, 2001. This number
does not include stockholders whose shares are held in trust by other entities.
The actual number of stockholders is greater than this number of holders of
record. We estimate that the number of beneficial stockholders of the shares of
our Common Stock as of July 17, 2001 was approximately 2,700.
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the next 12 months.
(b) Report of offering securities and use of proceeds therefrom
-----------------------------------------------------------
We completed our initial public offering, or IPO, on July 14, 2000,
pursuant to a Registration Statement on Form S-1 (File No. 333-31926), which
was declared effective by the Securities and Exchange Commission on July 13,
2000. In the IPO, we sold an aggregate of 5,000,000 shares of common stock. In
August 2000, the underwriters of the Company's initial public offering
exercised their over-allotment option to purchase an additional 750,000 shares
of common stock at $13.00 per share. Net proceeds from exercise of the over-
allotment option aggregated approximately $8.5 million after paying the
underwriters' fee and related expenses. The sale of the shares of common stock
generated aggregate gross proceeds of approximately $74,750,000, including
proceeds from the exercise of the over-allotment option. The aggregate net
proceeds were approximately $67,661,000, including the proceeds from the
exercise of the over-allotment option, after deducting underwriting discounts
and commissions of approximately $5,233,000 and directly paying expenses of the
offering of approximately $1,857,000. Fleet Boston Robertson Stephens Inc.,
Prudential Volpe Technology and Needham & Company, Inc. were the lead
underwriters for the IPO.
From July 14, 2000 to April 30, 2001, we used such net offering proceeds,
in direct or indirect payments to others, as follows:
Purchase and installment of machinery and equipment....... $ 588,000
Working capital........................................... 19,112,000
Investment in short-term, interest-bearing obligations.... 44,161,000
Investment in China subsidiary............................ 3,800,000
-----------
Total..................................................... $67,661,000
===========
19
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds.
Other than anticipated capital expenditures in the amount of approximately
$2.5 million and anticipated investment expenditures of approximately $7.0
million in the next twelve months, we have no specific plan for the proceeds
from our initial public offering. The primary purpose of the offering has been
to use the proceeds for general corporate purposes, including working capital.
We may also use some of the proceeds to meet capacity commitments or to acquire
other companies, technology or products that complement our business, although
we are not currently planning any of these transactions. Pending these uses,
the net proceeds of the offering have been invested in interest bearing,
investment grade securities.
20
ITEM 6: SELECTED FINANCIAL DATA
Fiscal Year Ended April 30,
----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues..................................... $ 53,707 $40,253 $ 5,243 $ 1,476 $ 59
Cost of revenues............................. 54,696(1) 28,191 4,085 2,652 557
-------- ------- ------- ------- -------
Gross profit (loss).......................... (989) 12,062 1,158 (1,176) (498)
-------- ------- ------- ------- -------
Operating expenses:
Research and development................... 5,539 3,702 3,290 3,440 1,698
Selling, general and administrative........ 6,703 3,243 1,853 1,323 706
Stock compensation charge.................. 1,018 1,552 459 206 44
-------- ------- ------- ------- -------
Total operating expenses................. 13,260 8,497 5,602 4,969 2,448
-------- ------- ------- ------- -------
Income (loss) from operations................ (14,249) 3,565 (4,444) (6,145) (2,946)
Interest income (expense), net............... 2,692 174 396 106 108
-------- ------- ------- ------- -------
Income (loss) before income taxes............ (11,557) 3,739 (4,048) (6,039) (2,838)
Provision for income taxes................... -- 300 -- -- --
-------- ------- ------- ------- -------
Net income (loss)............................ $(11,557) $ 3,439 $(4,048) $(6,039) $(2,838)
======== ======= ======= ======= =======
Net income (loss) per share:
Basic...................................... $ (0.67) $ 1.15 $ (5.59) $(12.71) $(16.89)
======== ======= ======= ======= =======
Diluted.................................... $ (0.67) $ 0.21 $ (5.59) $(12.71) $(16.89)
======== ======= ======= ======= =======
Shares used in computing per share amounts:
Basic...................................... 17,134 2,985 724 475 168
======== ======= ======= ======= =======
Diluted.................................... 17,134 16,399 724 475 168
======== ======= ======= ======= =======
April 30,
-----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.................... $ 51,053 $ 5,888 $ 5,374 $ 2,686 $ 3,747
Working capital.............................. 66,903 11,667 6,819 2,343 3,669
Total assets................................. 78,647 26,298 10,536 3,721 4,516
Total current liabilities.................... 7,371 12,529 2,632 633 268
Total redeemable convertible preferred stock. -- 21,082 21,082 12,745 8,118
Accumulated deficit.......................... (22,219) (10,662) (14,101) (10,053) (4,014)
Total stockholders' equity................... $ 71,276 $ (7,313) $(13,178) $ (9,658) $(3,870)
(1) Includes inventory write-off of $18,652 in the fiscal year ended April 30,
2001.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Discussion and
Results of Operations contains forward looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors
that include, but are not limited to, the risks discussed in "Factors Affecting
Future Results". These forward looking statements include, but are not limited
to: the statements relating to the development of new products in new and
existing markets, the expansion of the range of picture resolutions offered,
the development of new products which require only three volts for portable
applications, the improvement of image quality, the integration of additional
functions and the improvement to the interface chip in the third paragraph
under "Overview;" the statements relating to the generation of revenues from
five volt products in 2001 in the fourth paragraph under "Overview;" the
statements relating to technology leadership and increase in research and
development expenses in the eighth paragraph under "Overview;" the statements
regarding the potential fluctuations and expected increases of research and
development costs under "Research and Development;" the statements regarding
increases in selling, general and administrative expenses under "Selling,
General and Administrative;" the statements regarding amortization of
compensation charges under "Stock Compensation Charge;" the statements
regarding cash resources available to meet capital requirements, the factors
affecting capital requirements and the raising and availability of additional
funds in the sixth paragraph under "Liquidity and Capital Resources;" and the
statements regarding evaluation of acquisitions in the seventh paragraph under
"Liquidity and Capital Resources."
Overview
- --------
We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our highly
integrated image sensors are used in a variety of electronic cameras and camera
related products for both still picture and live video applications. Our image
sensors are used in cameras and camera related products such as personal
computer cameras, digital still cameras, closed circuit TV's, mobile phone
cameras and personal digital assistant cameras, security and surveillance
cameras and cameras for toys. Our image sensors are designed to use the CMOS
fabrication process, a new, easier to use semiconductor technology for image
sensors. Our single chip image sensors can allow our customers to build cameras
that are smaller, require fewer chips, consume less power and cost less to
build than cameras using traditional CCD technology, or multiple chip CMOS
image sensors. Unlike competitive image sensors, which require multiple chips
to achieve the same functions, we are able to integrate nearly all camera
functions into a single chip. This leads us to believe that we supply one of
the most highly integrated single chip CMOS image sensor solutions.
We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers' representatives. Our image sensors are
sold to camera manufacturers who market camera products under their own brand.
We also sell to large manufacturing companies that produce camera products for
others to market under different brand names.
Image sensors are characterized by several important attributes such as
picture resolution, color, lens size, voltage requirements and type of video
output. We intend to continue developing new products aimed at new and existing
markets. We plan to expand the range of picture resolutions we offer, provide
additional products that require only three volts for portable applications and
further improve image quality and integrate additional functions into our image
sensor. In addition, we developed and market an interface chip that connects a
camera to the universal serial bus on personal computers, and we plan to
continue to make improvements to that product as well.
Our first image sensor was a low resolution, black and white sensor
introduced in 1996. We introduced an improved version of this sensor in early
1997. In addition, we introduced color and digital image sensors in 1997 and
higher resolution and higher quality image sensors in 1998 and 1999. For Fiscal
Years 2001 and 2000, the majority of our revenues were generated from sales of
our five-volt color image sensors. Given the growth of the Internet and
multimedia applications which allow for digital images to be captured, stored
and transported, we expect that a significant portion of our revenues in fiscal
year ended April 30, 2002, will be generated from our five-volt color image
sensors, which are used primarily in affordable and easy to use personal
computer cameras, and increasingly, from 3.2 volt color image sensors which are
used in both personal computer cameras and cellular phone accessories.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We sell our products through a direct sales force and indirectly through
distributors and manufacturers' representatives. Our image sensors are sold to
camera manufacturers who market camera products under their own brand. We also
sell to large manufacturing companies that produce camera products for others
to market under different brand names.
We outsource all of our semiconductor manufacturing and assembly. This
approach allows us to focus our resources on the design, development and
marketing of our products and significantly reduces our capital requirements.
We outsource our wafer manufacturing to TSMC and PSC. We have a signed
agreement with Samsung, who is one of our suppliers for our universal serial
bus interface chip that we sometimes sell along with our image sensor. A
majority of our unit sales of image sensors for the Fiscal Year 2001 are color
image sensors. These require a color filter to be applied to the wafer before
packaging. We outsource the application of this color filter to Toppan Printing
Co., or Toppan, and TSMC. We outsource the packaging of our image sensors to
Kyocera, Taiwan Electronic Packaging Company, or TEPC, and Alphatec
Semiconductor Packaging Co., or Alphatec. Outside testing services do not offer
suitable tests for the key parameter of product performance and image quality.
Therefore, we design and produce our own automatic testing equipment
specifically for image sensor testing, and we do substantially all of our
testing in house. Our control over the testing process helps us maintain
consistent product quality and identify areas to improve product quality and
reduce costs.
We recognize revenue upon the shipment of our products to the customer
provided that we have received a signed purchase order, the price is fixed,
title has transferred, collection of resulting receivables is probable, product
returns are reasonably estimable, there are no customer acceptance requirements
and there are no remaining significant obligations. For certain shipments to
distributors under agreements allowing for return or credits, revenue is
deferred until the distributor resells the product. We provide for future
returns based on historical experiences at the time revenue is recognized.
Sales of our image sensors are subject to seasonality. Some of the
products using our image sensors such as personal computer video cameras and
digital still cameras are consumer electronics goods. Typically, these goods
are subject to seasonality with generally increased sales in November and
December due to the holidays. As a result, product sales are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of the year.
We intend to maintain our technology leadership by continuing to develop
our core technology through our in house research and development efforts. As a
result, we expect our research and development expenses to increase on a dollar
basis and may increase on a percentage of revenue basis during Fiscal Year
2002.
In December 2000, we formed a new subsidiary to conduct testing and
packaging operations in Shanghai, the Peoples' Republic of China, or China. The
registered capital of this new company is $12.0 million of which we funded $3.8
million in the year ended April 30, 2001, as required. We are further obligated
to fund the remaining $8.2 million of registered capital by December 2003. As
of April 30, 2001, $1.9 million of the $3.8 million was paid for land use
rights and to building contractors, $1.8 million was deposited in a bank
account in China and $0.1 million was expended for general purposes. The
formation and operation of the new company in China requires a large initial
capital investment, and there may be significant administrative, legal and
governmental barriers in China, which may prevent our ability to begin
operation of the new company as well as using the funds outside of China. We
expect that we will enter into additional commitments in connection with
constructing the facility in Shanghai.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Results of Operations
- ---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data reflected as a percentage of revenues. Our results
of operations are reported as a single business segment.
Year Ended April 30,
-----------------------
2001 2000 1999
---- ---- ----
Statement of Operations Data as a Percentage of Revenues:
Revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues (including inventory write-off of
$18,652 in Fiscal Year 2001)...................... 101.8 70.0 77.9
----- ----- -----
Gross profit (loss)............................... (1.8) 30.0 22.1
----- ----- -----
Operating expenses:
Research and development............................ 10.3 9.2 62.8
Selling, general and administrative................. 12.5 8.1 35.3
Stock compensation charge........................... 1.9 3.9 8.8
----- ----- -----
Total operating expenses.......................... 24.7 21.2 106.9
----- ----- -----
Income (loss) from operations......................... (26.5) 8.8 (84.8)
Interest income, net.................................. 5.0 0.4 7.6
----- ----- -----
Income (loss) before income taxes..................... (21.5) 9.2 (77.2)
Provision for income taxes............................ -- 0.7 --
----- ----- -----
Net income (loss)..................................... (21.5)% 8.5% (77.2)%
===== ===== =====
Results of Operations for the Fiscal Years Ended April 30, 2001, 2000 and 1999
Revenues. We derive revenues from the sale of our standard image sensor
---------
array products and other companion circuits for use in a variety of
applications. Revenues for Fiscal Years 2001, 2000 and 1999 were approximately
$53.7 million, $40.3 million and $5.2 million, respectively. Revenues increased
$13.5 million, or 33%, from Fiscal Year 2000 to fiscal 2001 primarily as a
result of greater demand for PC cameras and security and surveillance cameras
relative to the prior year. Revenues increased $35.1 million or 668% from
Fiscal Year 1999 to Fiscal Year 2000 primarily as a result of an increase in
sales of our color image sensor products to camera manufacturer customers and
increased demand for our image sensor products through our distribution
channels. In the first quarter of Fiscal Year 1999, we decreased the prices of
our image sensor products in order to stimulate demand. Subsequently, the
average selling price has continued to decline, but at a slower rate.
Nonetheless, revenues have increased because of higher volumes shipped. For
Fiscal Year 2001, one of our distributors, World Peace, represented
approximately 17% of revenues and one of our camera manufacturer customers,
Creative, accounted for approximately 14% of revenues. For Fiscal Year 2000,
one of our distributors, World Peace, represented approximately 30% of total
revenues and two of our camera manufacturer customers, Creative and Alaris,
accounted for approximately 18% and 11% of total revenues, respectively. For
the Fiscal Year 1999, two of our distributors, World Peace and Holy Stone
represented approximately 43% and 24% of total revenues, respectively. No other
customers accounted for 10% or more of total revenues in Fiscal Years 2001,
2000 and 1999. Domestic and international revenues for Fiscal Year 2001 were
$8.4 million and $45.3 million, respectively, as compared to $8.7 million and
$31.6 million for Fiscal Year 2000 and $0.7 million and $4.5 million for Fiscal
Year 1999, respectively.
Gross profit (loss). Gross margins for Fiscal Years 2001, 2000 and 1999
--------------------
were (1.8%), 30.0% and 22.1%, respectively. The decrease in gross margins for
Fiscal Year 2001 was primarily due to an $18.7 million charge for excess
inventory that we recognized in Fiscal Year 2001. During the quarters ended
April 30 and July 31, 2000, we placed non-cancelable orders with our contract
manufacturers for a large quantity of color image sensors designed for use in
PC cameras based on increased sales levels from the preceding year and on our
expectations of increased demand for the sensors following the four- to six-
month production lead time. However, due primarily to continued weakness in the
PC camera manufacturing business segment, the demand for these color image
sensors did not meet our expectations. The current inventory of the color image
sensors designed for PC cameras significantly exceeds
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
the forecasted demand. We, therefore, recorded an $18.7 million charge for
excess inventories in Fiscal Year 2001. On a pro-forma basis, before
recognition of the inventory reserves, gross margins were 32.9% for fiscal 2001
as compared to 30.0% and 22.1% in Fiscal Years 2000 and 1999. The increase in
gross margins on a pro-forma basis from Fiscal Year 2000 to Fiscal Year 2001
was due to modest yield improvements resulting from higher capacity utilization
and favorable changes in product mix. The increase in gross margins from Fiscal
Year 1999 to Fiscal Year 2000 was primarily due to the increase in sales of
higher margin color image sensors, improved final test yields and the benefit
of fixed period costs being spread over a larger sales volume. These
improvements to gross margins in Fiscal Year 2000 were partly offset by the
effect of a cumulative royalty reserve of $944,000. Gross margins for Fiscal
Year 2000 would have been 32.3%, excluding the effect of the charge for
cumulative royalties.
Research and development. Research and development expenses consist
-------------------------
primarily of compensation and personnel related expenses and costs for
purchased materials, designs and tooling, depreciation of computers and
workstations, and amortization of computer aided design software. Research and
development expenses for Fiscal Years 2001, 2000 and 1999 were approximately
$5.5 million, $3.7 million and $3.3 million, respectively. As a percentage of
revenues, research and development expenses represented 10.3%, 9.2% and 62.8%
of revenues, respectively. Our research and development expenses for Fiscal
Year 2001 increased at a rate proportionately greater than revenues. Research
and development expenses increased by approximately $1.8 million from Fiscal
Year 2000 to Fiscal Year 2001 due to an increase in salaries and payroll
related expenses associated with additional personnel, contracted costs
associated with new product development, software installation and expenses
related to the application for new patents. As revenues increased from Fiscal
Year 1999 to Fiscal Year 2000, research and development expenses declined as a
percentage of revenues. Our research and development expenses increased by
approximately $412,000 from Fiscal Year 1999 to Fiscal Year 2000 due to an
increase in salaries and payroll related expenses associated with additional
personnel. This increase on a dollar basis was partially offset by reductions
in the cost of engineering supplies and materials and a reduction in
engineering consulting fees. Research and development expenses decreased as a
percent of revenues from Fiscal Year 1999 to Fiscal Year 2000 because revenues
increased at a rate greater than the rate of increase in expenses. Research and
development expenses may fluctuate significantly from period to period as a
result of our product development cycles. We expect that our future research
and development expenses will increase in absolute dollars and may increase as
a percentage of revenues as we design and develop our next generation of image
sensor products.
Selling, general and administrative. Selling, general and administrative
------------------------------------
expenses consist primarily of compensation and personnel related expenses and
commissions paid to distributors and manufacturers' representatives. Selling,
general and administrative expenses were $6.7 million, $3.2 million and $1.9
million for Fiscal Years 2001, 2000 and 1999, respectively. As a percentage of
revenues, selling general and administrative expenses represented 12.5%, 8.1%
and 35.3% during Fiscal Years 2001, 2000 and 1999, respectively. Our selling,
general and administrative expenses increased on an absolute dollar basis in
Fiscal Year 2001 by approximately $3.5 million due to an increase in salaries
and payroll related expenses associated with additional personnel, an increase
in commissions paid to distributors and manufacturers' representatives, and
increased legal expenses associated with legal actions resulting from
infringement claims by Photobit and Cal Tech and accounting costs associated
with business development and operations. Our selling, general and
administrative expenses increased on an absolute dollar basis in Fiscal Years
2000 and 1999 by approximately $1.4 million and $0.5 million, respectively, due
to increases in salaries and commissions to distributors and manufacturers'
representatives. The increase in selling, general and administrative expenses
as a percentage of revenues for Fiscal Year 2001 resulted from expenses that
increased at a rate greater than the rate of increase in revenues. The decrease
in our selling, general and administrative expenses as a percentage of revenues
for Fiscal Years 2000 and 1999 was primarily due to the increased revenues,
only partially offset by increased compensation and personnel expenses and an
increase in commissions paid to distributors. We expect that our future
selling, general and administrative expenses will increase in absolute dollars
and may increase as a percentage of revenues.
Stock compensation charge. We incurred stock compensation charges of
--------------------------
approximately $1.1 million, $1.9 million and $519,000 for Fiscal Years 2001,
2000 and 1999, respectively. Deferred compensation totaled approximately $5.2
million and represents the difference between the deemed fair market value of
our common stock on the date of grant and the exercise price of stock options
to purchase our common stock on the date of grant, is amortized on an
accelerated basis as the options vest. We expect deferred compensation charges
of $1.1 million as of April 30, 2001 to be amortized on an accelerated basis
over the vesting period of generally five years.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Interest income, net. Interest income, net for Fiscal Year 2001 was
---------------------
approximately $2.3 million. Interest income, net, increased primarily due to
the investment of the net proceeds from our initial public offering in
interest-bearing accounts consisting primarily of high-grade corporate
securities and government bonds maturing approximately 12 months or less from
the date of purchase. Interest income, net for Fiscal Years 2000 and 1999
were minor because we have financed our business operations primarily through a
series of relatively small private equity transactions prior to our initial
public offering of common stock in July 2000.
Provision for income taxes. We generated a loss before income taxes of
---------------------------
approximately $11.6 million in Fiscal Year 2001 and therefore had no provision
for income taxes in the period. We generated approximately $3.7 million in
operating profits for the Fiscal Year ended April 30, 2000 and had a provision
for income taxes amounting to $300,000 after taking into consideration the
utilization of the prior years' net operating loss carryforwards and credits.
We incurred an operating loss for Fiscal Year 1999 and therefore had no
provision for income taxes in the period.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or SFAS No. 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138 "Accounting for Certain Hedging Activities, an
amendment of FASB Statement No. 133," effective for all interim and annual
periods beginning after June 15, 2000. SFAS No 138 amends accounting and
reporting standards for certain derivative instruments and certain hedging
activities. We will adopt the standard no later than the first quarter of
fiscal year 2002 and our management does not expect the adoption of these
standards to have a material effect on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," as amended by SAB 101A and 101B. SAB 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in
financial statements under certain circumstances. We adopted the provisions of
SAB 101 in our consolidated financial statements for all periods presented.
On June 29, 2001, the FASB approved its proposed SFAS No. 141, or FAS 141,
"Business Combinations," and SFAS No. 142, or FAS 142, "Goodwill and Other
Intangible Assets."
Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests (pooling) method
is prohibited. The provisions of the statement will apply to all business
combinations initiated after June 30, 2001.
FAS 142 will apply to all acquired intangible assets whether acquired
singly, as part of a group, or in a business combination. The statement will
supersede Accounting Principals Board, or APB, Opinion No. 17, "Intangible
Assets," and will carry forward provisions in APB Opinion No.17 related to
internally developed intangible assets. Adoption of FAS 142 will result in
ceasing amortization of goodwill. All of the provisions of the statement should
be applied in fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
We do not expect the adoption of these standards to have a material effect
on our consolidated financial statements.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Liquidity and Capital Resources
Since inception, we have financed our growth principally through sales of
common stock and private sales of equity securities, totaling approximately
$89.8 million. Principal sources of liquidity at April 30, 2001 consisted of
cash, cash equivalents and short-term investments of $54.1 million.
Our working capital increased by $55.3 million to $66.9 million as of
April 30, 2001 from $11.6 million as of April 30, 2000. The increase was
primarily attributable to a $48.2 million increase in cash, cash equivalents
and short-term investments resulting principally from $67.7 million in proceeds
from our initial public offering in July 2000. Our increased working capital
was also attributable to a $2.8 million increase in refundable and deferred
income taxes, combined with a $5.7 million reduction in accounts payable, which
were partially offset by a $1.0 million reduction in accounts receivable, net.
For Fiscal Year 2001, our use of cash for operating activities increased
to approximately $17.2 million from cash provided of $1.5 million in Fiscal
Year 2000, primarily due to a net loss of $11.6 million in Fiscal Year 2001 as
compared to net income of $3.4 million for Fiscal Year 2000, a $5.7 million
decrease in accounts payable and a $2.8 million increase in refundable and
deferred income taxes partially offset by a $1.0 million decrease in accounts
receivable combined with a $0.4 million increase in accrued expenses and other
liabilities and a net $66,000 decrease in inventory including the recognition
of an $18.7 million charge for excess inventory. For Fiscal Year 2000, we
generated $1.5 million in cash from operating activities. During Fiscal Year
1999, we used $5.0 million for operating activities, primarily due to operating
losses and increased working capital as sales increased.
For Fiscal Year 2001, our use of cash for investing activities increased
to approximately $5.6 million from a use of $1.6 million in Fiscal Year 2000
and $0.6 million in Fiscal Year 1999, due to $3.0 million in net purchases of
short-term investments combined with $2.6 million in purchases of property,
plant and equipment. Net cash used for investing activities for Fiscal Years
2000 and 1999 resulted from purchases of property, plant and equipment.
For Fiscal Year 2001, net cash provided from financing activities
increased to approximately $68.0 million from $0.6 million for Fiscal Year 2000
and $8.3 million for Fiscal Year 1999. The increase was primarily due to
proceeds from the issuance and sale of 5,000,000 shares of common stock in our
initial public offering and the issuance and sale of an additional 750,000
shares of common stock following the exercise by the underwriters' of their
over-allotment option. Approximately $44.2 million of these proceeds were
invested in short-term interest-bearing investments. Net cash provided from
financing activities for Fiscal Year 2000 resulted from the issuance and sale
of common stock upon the exercise of employee stock options during the year.
Net cash provided from financing activities for Fiscal Year 1999 resulted from
the issuance and sale of preferred stock.
Based on our current working capital position and the cash flows that we
expect to generate through mid-fiscal 2002, we believe these cash resources
will be sufficient to meet our capital and investment requirements, including
anticipated capital expenditures in the amount of approximately $2.5 million
and anticipated investment expenditures of approximately $7.0 million
associated with the new company that we have formed in China, for at least the
next 12 months. After this period, capital requirements will depend on many
factors, including the levels at which we maintain inventory and accounts
receivable, costs of securing access to adequate manufacturing capacity and
increases in our operating expenses. To the extent that existing cash resources
are insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. Additional funds may
not be available, or if available, we may not be able to obtain them on terms
favorable to us or to our shareholders. In the event that we do raise
additional cash through financings, current investors could be further diluted.
From time to time, we may evaluate acquisitions of business, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of securities that may result in
further dilution to existing stockholders.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
FACTORS AFFECTING FUTURE RESULTS
You should carefully consider these risk factors, together with all of the
other information included in this Annual Report on Form 10-K. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business.
Our limited operating history makes it difficult to evaluate our future
- -----------------------------------------------------------------------
prospects and your investment.
- ------------------------------
We were incorporated in May 1995 and only began selling our products in
1996. We introduced our first black and white image sensor for the security and
surveillance and toy and game markets in 1996 and our first color image sensor
for the PC video camera and toy and game markets in October 1997. We are
continuing to develop and produce new products for the digital still camera and
PC video camera markets. Thus, we have a limited operating history, which makes
an evaluation of our future prospects and your investment difficult.
Accordingly, we face risks and difficulties frequently encountered by early
stage companies in new and rapidly evolving markets.
We have a history of losses, we were only profitable in Fiscal Year 2000 and we
- -------------------------------------------------------------------------------
may not ever return to profitability.
- --------------------------------------
We incurred net losses of approximately $11.6 million in Fiscal Year 2001
and approximately $4.0 million in Fiscal Year 1999. For the year ended April
30, 2000, the only year in which we have been profitable, our net income was
approximately $3.4 million. In the future, as we develop new products, we
expect research and development expenses to increase. Also, as we hire
additional personnel and possibly engage in larger business transactions, we
expect selling, general and administrative expenses to increase. We will also
incur substantial noncash charges relating to the amortization of unearned
compensation. If these expenses increase and our revenues do not increase, we
may not subsequently sustain profitability.
We may not adequately forecast the number of wafers we need, and therefore we
- -----------------------------------------------------------------------------
may not be able to react to fluctuations in demand for our products, which
- --------------------------------------------------------------------------
could result in higher operating expenses and lower revenues.
- -------------------------------------------------------------
We must forecast the number of wafers we need from each of our foundries.
However, if customer demand falls below our forecast and we are unable to
reschedule or cancel our wafer orders, we may retain excess wafer inventories,
which could result in higher operating expenses and reduced gross margins.
Conversely, if customer demand exceeds our forecasts, we may be unable to
obtain an adequate supply of wafers to fill customer orders, which could result
in lower revenues and could harm our relationship with key customers. As a
consequence of a forecast which proved to be greater than market demand for our
products, we recognized an $18.7 million inventory adjustment in Fiscal Year
2001.
The recent economic slowdown, particularly the rapid deterioration in PC video
- ------------------------------------------------------------------------------
camera demand, has reduced and may continue to reduce our revenues and to harm
- ------------------------------------------------------------------------------
our business.
- -------------
In the third and fourth quarters of Fiscal Year 2001, our customers and
distributors, primarily our PC video camera customers and distributors, were
impacted by significantly lower demand for camera related products, which
forced them to unexpectedly reschedule or cancel orders for our products in the
third and fourth quarters of Fiscal Year 2001. As a result, our revenues and
earnings were adversely affected. In June 2001, we announced projected
revenues and earnings for the first quarter of Fiscal Year 2002. If demand for
camera related products, in particular PC video cameras, does not recover in
Fiscal Year 2002, or if we are unable to manage our operating expenses, we will
not be able to meet these projections.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Fluctuations in our quarterly operating results make it difficult to predict
- ----------------------------------------------------------------------------
our future performance and may result in volatility in the market price of our
- ------------------------------------------------------------------------------
common stock.
- -------------
Our quarterly operating results have varied significantly from quarter to
quarter in the past and are likely to vary significantly in the future based on
a number of factors related to how we manage our business. These factors, many
of which are more fully discussed in other risk factors, include:
o our ability to manage our product transitions;
o the mix of the products we sell and the distribution channels through
which they are sold; and
o the availability of production capacities at the semiconductor foundries
that manufacture our products or components of our products.
In the past, our introduction of new products and our product mix have
affected our quarterly operating results. We also anticipate that the rate of
orders from our customers may vary significantly from quarter to quarter. Our
expenses and inventory levels are based on our expectations of future revenues
and our expenses are relatively fixed in the short term. Consequently, if
revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high and our operating results for that
quarter and, potentially future quarters, may be harmed.
Certain other factors have in the past caused and are likely in the future
to cause fluctuations in our quarterly operating results. These factors are
industry risks over which we have little or no control. These factors include:
o the growth of the market for products and applications using CMOS image
sensors;
o the timing and amount of orders from our camera manufacturers and
distributor customers;
o the deferral of customer orders in anticipation of new products, designs
or enhancements by us or our competitors; and
o the announcement and introduction of products and technologies by our
competitors.
Any one or more of these factors is difficult to forecast and could result
in fluctuations in our quarterly operating results. Fluctuations in our
quarterly operating results could adversely affect the price of our common
stock in a manner unrelated to our long term operating performance. Due to the
potential volatility of our stock price, you should not rely on the results of
any one quarter as an indication of our future performance. It is likely that
at some point our quarterly operating results will fall below the expectations
of security analysts and investors. In this event, the price of our common
stock would likely decrease.
We depend on the acceptance of CMOS technology for mass market image sensor
- ---------------------------------------------------------------------------
applications, and any delay in the widespread acceptance of this technology
- ---------------------------------------------------------------------------
could adversely affect our ability to increase our revenues and improve our
- ---------------------------------------------------------------------------
earnings.
- ---------
Our business strategy depends on the rapid and widespread adoption of the
CMOS fabrication process for image sensors and the acceptance of our single
chip technology. The image sensor market has been dominated by CCD technology
for over 25 years. Although CMOS technology has been available for over 20
years, CMOS technology has only recently been used in image sensors. Along with
the other risk factors described in this section, the following factors may
delay the widespread adoption of the CMOS fabrication process and our single
chip technology, the occurrence of any of which could adversely affect our
ability to increase our revenues and earnings:
o the failure of the emergence of a universal platform for imaging
solutions for computers and the Internet;
o the limited availability of bandwidth to run CMOS image sensor
applications;
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
o the uncertainty of emerging markets for products incorporating CMOS
technology;
o the failure of development of user friendly and affordable products; and
o improvements or cost reductions to CCD image sensors, which could slow
the adoption of CMOS image sensors in markets already dominated by CCD
image sensors, such as the security and surveillance market.
We depend on a limited number of third party wafer foundries to manufacture a
- -----------------------------------------------------------------------------
substantial majority of our products, which reduces our ability to control the
- ------------------------------------------------------------------------------
manufacturing process.
- ----------------------
We do not own or operate a semiconductor fabrication facility. We rely on
TSMC, PSC and Samsung to produce a substantial majority of our wafers and final
products. Our reliance on these third party foundries involves a number of
significant risks, including:
o reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
o lack of guaranteed production capacity or product supply; and
o unavailability of, or delayed access to, next generation or key process
technologies.
We do not have long term supply agreements with any of our foundries and
instead secure manufacturing availability on a purchase order basis. These
foundries have no obligation to supply products to us for any specific period,
in any specific quantity or at any specific price, except as set forth in a
particular purchase order. Our requirements represent a small portion of the
total production capacities of these foundries and TSMC, PSC, or Samsung may
reallocate capacity to other customers, even during periods of high demand for
our products. If any of our foundries were to become unable or unwilling to
continue manufacturing our wafers in the required volumes, at acceptable
quality, yields and costs and in a timely manner, our business would be
seriously harmed. As a result, we would have to identify and qualify substitute
foundries, which would be time consuming and difficult and could result in
unforeseen manufacturing and operations problems. In addition, if competition
for foundry capacity increases, our product costs may increase, and we may be
required to pay or invest significant amounts to secure access to manufacturing
services. We are also exposed to additional risks if we decide to transfer our
production of semiconductors from one foundry to another. We may qualify
additional foundries in the future. If we do not qualify additional foundries,
we may be exposed to increased risk of capacity shortages due to our complete
dependence on our foundries.
If we do not achieve acceptable wafer manufacturing yields, our costs could
- ---------------------------------------------------------------------------
increase, and our products may not be deliverable which could lead to higher
- ----------------------------------------------------------------------------
operating expenses and lower revenues and damage to our customer relationships.
- -------------------------------------------------------------------------------
The fabrication of our products requires wafers to be produced in a highly
controlled and clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the particular foundry's manufacturing process
technology. Low yields may result from design errors or manufacturing failures
in new or existing products. Yield problems may not be determined or improved
until an actual image sensor is made and can be tested. As a result, yield
problems may not be identified until the wafers are well into the production
process. We only test our products after they are assembled, as their optical
nature makes earlier testing difficult and expensive. The risks associated with
yields are even greater because we rely on third party offshore foundries for
our wafers which increases the effort and time required to identify,
communicate and resolve manufacturing yield problems. If the foundries cannot
achieve the planned yields, this will result in higher costs and reduced
product availability.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We depend on third party vendors for color filter processing and assembly,
- --------------------------------------------------------------------------
which reduces our control over delivery schedules, product quality and cost.
- ----------------------------------------------------------------------------
After our wafers are produced, they are color filter processed and
assembled by six independent vendors: TSMC, PSC and Toppan for the color
filtering process and Kyocera, TEPC, and Alphatec for additional processing and
assembly. We do not have long-term agreements with any of these vendors and
typically obtain services from them on a purchase order basis. Our reliance on
these vendors involves risks such as reduced control over delivery schedules,
quality assurance and costs. These risks could result in product shortages or
could increase our costs of manufacturing, assembling or testing our products.
If these vendors are unable or unwilling to continue to provide color filter
processing and assembly services and deliver products of acceptable quality, at
acceptable costs and in a timely manner, our business would be seriously
harmed. We would also have to identify and qualify substitute vendors, which
could be time consuming and difficult and result in unforeseen operations
problems.
Our lengthy manufacturing, packaging and assembly cycle, in addition to our
- ---------------------------------------------------------------------------
customers' design cycle, may result in uncertainty and delays in generating
- ---------------------------------------------------------------------------
revenues.
- ---------
A lengthy manufacturing, packaging and assembly process, typically lasting
four months or more, is required to manufacture our image sensors. It can take
additional time before a customer commences volume shipments of products that
incorporate our image sensors. Even when a manufacturer decides to design our
image sensors into its products, the manufacturer may never ship final products
incorporating our image sensors. Given this lengthy cycle, we experience a
delay between the time we incur expenditures for research and development,
sales and marketing efforts and inventory and the time we generate revenues, if
any, from these expenditures. As a result, our revenues and profits could be
seriously harmed if a significant customer reduces or delays orders or chooses
not to release products incorporating our products.
If the demand for our products in current markets and emerging markets fails to
- -------------------------------------------------------------------------------
increase as we anticipate, our growth prospects would be diminished.
- --------------------------------------------------------------------
Our success depends in large part on the continued growth of various
markets that use our products and the emergence of new markets for our
products. The current markets that use our products include digital still
cameras, personal computer video cameras, personal digital assistant cameras,
mobile phone cameras, security and surveillance systems, closed circuit
television systems, toys and games and automotive applications. Emerging
markets for our products include personal identification systems, medical
imaging devices, machine control systems, videophones and automotive
applications. If these markets do not continue to grow and develop, the need
for cameras which are lower in cost, smaller, lighter in weight, consume less
power and are more reliable might not fully develop. In such case, it would be
unlikely that our products would achieve commercial success.
Failure to obtain design wins could cause our revenues to level off or decline.
- -------------------------------------------------------------------------------
Our future success will depend on camera manufacturers designing our image
sensors into their systems. To achieve design wins, which are decisions by
those manufacturers to design our products into their systems, we must define
and deliver cost effective, innovative and integrated semiconductor solutions.
Once a manufacturer has designed a supplier's products into its systems, the
manufacturer may be reluctant to change its source of components due to the
significant costs associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key camera manufacturers could decrease our
market share or revenues.
Continuing declines in our average sales prices since the first quarter of
- --------------------------------------------------------------------------
Fiscal Year 1999 may result in declines in our gross margins.
- -------------------------------------------------------------
Because the image sensor market is characterized by intense competition,
and price reductions for our products are necessary to meet consumer price-
points, we expect to experience market driven pricing pressures. This will
likely result in a decline in average sales prices for our products. We believe
that we can offset declining average
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
sales prices by achieving manufacturing cost efficiencies, developing new
products that incorporate more advanced technology and including more advanced
features that can be sold at stable average gross margins. However, if we are
unable to achieve such cost reductions and technological advances, or are
unable to timely introduce new products, we will lose revenues and gross
margins will decline.
Seasonality in our business will cause our results of operations to fluctuate
- -----------------------------------------------------------------------------
from period to period and could cause our stock price to fluctuate or decline.
- ------------------------------------------------------------------------------
Sales of our image sensors are subject to seasonality. Some of the
products using our image sensors such as PC video cameras and digital still
cameras are consumer electronics goods. Typically, these goods are subject to
seasonality with generally increased sales in November and December due to the
holidays. In addition, we typically experience a decrease in orders in the
quarter ended April 30 from our Chinese and Taiwanese customers primarily due
to the Chinese New Year. As a result, we believe product sales are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of each year.
We depend on a few key customers, and the loss of any of them could
- -------------------------------------------------------------------
significantly reduce our revenues.
- ----------------------------------
Historically, a relatively small number of customers and distributors has
accounted for a significant portion of our product revenues For Fiscal Year
2001, one of our distributors, World Peace represented approximately 17% of
revenues and one of our camera manufacturer customers, Creative accounted for
approximately 14% of revenues.
As a result of customer concentration, a significant reduction, delay or
cancellation of orders from one or more of our key camera manufacturers or
distributors, or a decision by our significant customers to select products
manufactured by a competitor for inclusion in future product generations could
seriously harm our business. For example, in 1999, we had to replace one of our
largest distributors with Wintek Electronics because that distributor decided
to distribute a competitor's products. We expect our operating results to
continue to depend on sales to or design decisions of a relatively small number
of distributors and camera manufacturers.
We do not have long-term commitments from our customers, and we allocate
- ------------------------------------------------------------------------
resources based on our estimates of customer demand, which could lead to excess
- -------------------------------------------------------------------------------
inventory and lost revenue opportunities.
- -----------------------------------------
Our sales are generally made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may cancel or defer
purchase orders. We manufacture our products according to our estimates of
customer demand. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand, we may allocate resources to manufacturing
products which we may not be able to sell or we may have to sell our products
to other customers for lower prices. As a result, we would have excess
inventory, which would have an adverse impact on our results of operations. For
example, one customer, Creative unexpectedly cancelled its purchase orders for
one of our products in the second quarter of Fiscal Year 2001 which resulted in
our shipping substantially fewer quantities to them in the third and fourth
quarters of Fiscal Year 2001 and contributed to a higher than expected
inventory position. Conversely, if we underestimate customer demand or if
sufficient manufacturing capacity is unavailable, we may forego revenue
opportunities, lose market share and damage our customer relationships.
We face foreign business, political and economic risks because a majority of
- ----------------------------------------------------------------------------
our products, and our customers' products are manufactured and sold outside of
- ------------------------------------------------------------------------------
the United States.
- ------------------
A substantial portion of our business, in particular, the manufacturing,
processing and assembly of our products, is conducted outside of the United
States, and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are camera manufacturers or are the manufacturers
or suppliers for camera manufacturers and are located in Japan, Korea,
Singapore and Taiwan. In addition, sales outside of the United States accounted
for approximately 84% of our revenues for Fiscal Year 2001, 78% of our revenues
for Fiscal Year 2000 and 86% of our revenues for Fiscal Year
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
1999. We anticipate that sales outside of the United States will continue to
account for a substantial portion of our revenue in future periods.
Accordingly, we are subject to foreign risks, including:
o difficulties in managing distributors;
o difficulties in staffing and managing foreign operations;
o difficulties in managing foundries and third party manufacturers;
o political and economic instability which may have an adverse impact on
foreign exchange rates in Asia;
o inadequacy of local infrastructure, in particular with respect to our
future expansion in China; and
o difficulties in accounts receivable collections.
In addition, camera manufacturers who design our solutions into their
products sell them outside of the United States. This exposes us indirectly to
foreign risks. Because sales of our products have been denominated to date
exclusively in United States dollars, increases in the value of the United
States dollar will increase the price of our products so that they become
relatively more expensive to customers in the local currency of a particular
country, leading to a reduction in revenues and profitability in that country.
A portion of our international revenues may be denominated in foreign
currencies in the future, which will subject us to risks associated with
fluctuations in those foreign currencies.
Our dependence on selling through distributors increases the complexity of our
- ------------------------------------------------------------------------------
business which may increase our operating costs and may reduce our ability to
- -----------------------------------------------------------------------------
forecast revenues.
- ------------------
Our revenues depend on design wins with new camera manufacturers which, in
turn, rely on third party manufacturers or distributors to provide inventory
management and purchasing functions. Selling through distributors reduces our
ability to forecast sales and increases the complexity of our business,
requiring us to:
o manage a more complex supply chain;
o manage the level of inventory at each distributor;
o provide for credits, return rights and price protection;
o estimate the impact of credits, return rights, price protection and
unsold inventory at distributors; and
o monitor the financial condition and credit worthiness of our
distributors. Any failure to manage these challenges could reduce our
revenues and damage our relationships with our distributors.
We face intense competition in our markets from more established CCD image
- --------------------------------------------------------------------------
sensor manufacturers and CMOS image sensor manufacturers and if we are unable
- -----------------------------------------------------------------------------
to compete successfully, we will not achieve our financial objectives.
- ----------------------------------------------------------------------
The image sensor market is intensely competitive. These markets are
characterized by rapid technological change, evolving standards, short product
life cycles and decreasing prices. Our current products face competition from a
number of sources including companies which sell charged couple device image
sensors as well as other companies which sell multiple chip CMOS image sensors.
We expect competition in our markets to increase.
Many of our competitors have longer operating histories and greater
presence in key markets, greater name recognition, access to large customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. As a result, they may
be able to adapt more quickly to new or
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
emerging technologies and customer requirements or devote greater resources to
the promotion and sale of their product than we may. Our competition includes
CCD image sensor manufacturers, including Fuji, Matsushita, NEC, Sharp, Sony,
and Toshiba, as well as CMOS image sensor manufacturers such as Agilent
Technologies, Inc., Conexant Systems, Inc., Hyundai Electronics Industries Co.
Ltd., Mitsubishi Electronic, Motorola, Inc., ST Microelectronics and Toshiba
Corporation. In addition, there are a large number of smaller startup companies
including ElecVision, Inc. and Photobit, which may or do compete with us. In
particular, Hyundai and Agilent Technologies have introduced multiple chip CMOS
image sensors. We cannot assure you that we can compete successfully against
current or potential competitors, or that competition will not seriously harm
our business by reducing sales of our products, reducing our profits and
reducing our market share.
Our success depends on the development and introduction of new products, which
- ------------------------------------------------------------------------------
we may not be able to do in a timely manner because the process of developing
- -----------------------------------------------------------------------------
products using CMOS image sensors is complex and costly.
- --------------------------------------------------------
The development of new products is highly complex, and we have experienced
delays in completing the development and introduction of new products on
several occasions in the past, some of which exceeded six months. As our
products integrate new and more advanced functions, they become more complex
and increasingly difficult to design and debug. Successful product development
and introduction depend on a number of factors, including:
o accurate prediction of market requirements and evolving standards,
including pixel resolution, output interface standards, power
requirements, optical lens size, input standards and operating systems
for personal computers and other platforms;
o development of advanced technologies and capabilities;
o definition of new products which satisfy customer requirements;
o timely completion and introduction of new product designs;
o use of leading edge foundry processes and achievement of high
manufacturing yields; and
o market acceptance of the new products.
Accomplishing all of this is extremely challenging, time consuming and
expensive. We cannot assure you that any new products or product enhancements
will be developed in time to capture market opportunities or achieve a
significant or sustainable level of acceptance in new and existing markets.
The high level of complexity and integration of functions of our products
- -------------------------------------------------------------------------
increases the risk of latent defects which could damage customer relationships
- ------------------------------------------------------------------------------
and increase our costs.
- -----------------------
Because we integrate many functions on a single chip, our products are
complex. The greater integration of functions and complexity of operations of
our products, the greater the risk that latent defects or subtle faults could
be discovered by customers or end users after volumes of product have been
shipped. Although we test our products, they may contain defects and errors. In
the past we have encountered defects and errors in our products. Delivery of
products with defects or reliability, quality or compatibility problems may
damage our reputation and our ability to retain existing customers and attract
new customers. In addition, product defects and errors could result in
additional development costs, diversion of technical resources, delayed product
shipments, increased product returns, product warranty costs for recall and
replacement and product liability claims against us which may not be fully
covered by insurance.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We maintain a backlog of customer orders which is subject to cancellation or
- ----------------------------------------------------------------------------
delay in delivery schedules, and any cancellation or delay may result in lower
- ------------------------------------------------------------------------------
than anticipated revenues.
- --------------------------
We manufacture and market primarily standard products. Our sales are
generally made pursuant to standard purchase orders. We include in our backlog
only those customer orders for which we have accepted purchase orders and
assigned shipment dates within the upcoming 12 months. Although our backlog is
typically filled within two to four quarters, orders constituting our current
backlog are subject to cancellation or changes in delivery schedules, and
backlog may not necessarily be an indication of future revenue. In addition,
the current backlog will not necessarily lead to revenues in any future period.
Any cancellation or delay in orders which constitute our current or future
backlog may result in lower than expected revenues. Our bookings visibility
continues to be limited with a substantial majority of our quarterly product
revenues coming from orders that are received and fulfilled in the same
quarter.
We must attract and retain qualified personnel to be successful, and
- --------------------------------------------------------------------
competition for qualified personnel is intense in our market.
- -------------------------------------------------------------
Our success depends to a significant extent upon the continued
contributions of our key management, technical and sales personnel, many of
whom would be difficult to replace. The loss of one or more of these employees
could seriously harm our business. We do not have key person life insurance on
any of our key personnel. We have no agreements which obligate our employees to
continue working for us. Our success also depends on our ability to identify,
attract and retain qualified technical (particularly analog or mixed signal
design engineers), sales, marketing, finance and management personnel.
Competition for qualified personnel is particularly intense in our industry and
in Silicon Valley, California. This is due to a number of factors, including
the high concentration of established and emerging growth technology companies.
This competition makes it difficult to retain our key personnel and to recruit
new qualified personnel. We have experienced, and may continue to experience,
difficulty in hiring and retaining candidates with appropriate qualifications.
If we do not succeed in hiring and retaining candidates with appropriate
qualifications, our revenues and product development efforts could be harmed.
We may be unable to adequately protect our intellectual property and therefore
- ------------------------------------------------------------------------------
we may lose some of our competitive advantage.
- ----------------------------------------------
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies. We have been issued patents and have a number of
pending United States and foreign patent applications. However, we cannot
assure you that any patent will issue as a result of any applications or, if
issued, that any claims allowed will be sufficiently broad to protect our
technology. In addition, it is possible that existing or future patents may be
challenged, invalidated or circumvented. It may be possible for a third party
to copy or otherwise obtain and use our products, or technology without
authorization, develop corresponding technology independently or design around
our patents. Effective copyright, trademark and trade secret protection may be
unavailable or limited in foreign countries. These disputes may result in
costly and time consuming litigation or the license of additional elements of
our intellectual property for free.
We could become subject to litigation regarding intellectual property, which
- ----------------------------------------------------------------------------
could divert management attention, be costly to defend and prevent us from
- --------------------------------------------------------------------------
using or selling the challenged technology.
- -------------------------------------------
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. This
litigation is widespread in the technology industry and is particularly
prevalent in the semiconductor industry, where a number of companies
aggressively use their patent portfolios by bringing numerous infringement
claims. In addition, in recent years, there has been an increase in the filing
of nuisance suits alleging infringement of intellectual property rights, which
pressure defendants into entering settlement arrangements to quickly dispose of
such suits, regardless of their merits.
In March 2000, we received a letter from Koninklijke Philips N.V. in which
Philips claimed to have patent rights in a serial bus system for data
transmission, known as the I2C bus system. Although we do not believe any of
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
our products infringe any Philips patent, we are currently discussing possible
royalty or licensing arrangements as a means of business resolution. In the
meantime, we have completed implementation of a new serial bus system for our
products.
In March 1999, we received a letter from Photobit Corporation, requesting
that we review our products in light U.S. Patent No. 5,841,126. Photobit did
not respond to our inquiry regarding this letter. In June 2000, we received
additional correspondence from counsel for Photobit and California Institute of
Technology, asserting infringement of U.S. Patent No. 5,841,126, U.S. Patent
No. 5,886,659, U.S. Patent No. 5,990,506, U.S. Patent No. 6,005,619 and U.S.
Patent No. 6,021,172, which relate to various aspects of image sensors.
Photobit did not indicate which of our products were implicated nor the manner
in which it believed any of our products might infringe on any of its patents.
Following unsuccessful licensing negotiations, we filed, on October 13, 2000,
an action in the U.S. District Court, Northern District of California, civil
action number CV-00-3791, against Photobit and CalTech, seeking declaratory
judgment that the five specifically identified patents (the '126, '659, '506,
'619 and '172 patents) are invalid and/or not infringed by any of our products.
An answer to our complaint was filed by Photobit and CalTech on November 22,
2000, including counterclaims alleging infringement as to the '126, '506 and
'619 patents only. Our answer to those counterclaims was filed on December 12,
2000. Upon being granted leave to amend by the district court on June 6, 2001,
OmniVision filed its amended complaint against Photobit and CalTech on June 21,
2001, which includes claims of inequitable conduct, patent misuse, unfair
competition, and violation of the Racketeer Influenced and Corrupt
Organizations Act. Photobit and CalTech's response to the amended complaint is
due by late July. Discovery is currently in process, and trial is scheduled
for July of 2002. We plan to vigorously protect our rights in this matter.
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission, based on the same three patents that are the
subject of the counterclaims in the Northern District of California action (the
'126, '506 and '619 patents) against us and against Creative Labs, Inc. and X10
Wireless Technology, Inc, requesting that the ITC institute an investigation
pursuant to Section 337 of the Tariff Act of 1930 (19 U.S.C. Sec. 1337). A
supplement to the complaint was filed on February 27, 2001. The ITC voted to
institute an investigation ("In the Matter of Certain CMOS Active Pixel Image
Sensors And Products Containing Same," Investigation No. 337-TA-451), and a
Notice of Investigation was published on March 12, 2001. By instituting this
investigation, the ITC has not yet made any decision on the merits of the case.
In the event that the ITC ultimately determines that a violation of Section 337
has occurred, the involved products may be precluded from importation into
and/or sale in the United States. At present, the target date for completion
of the investigation is May 13, 2002. As with the action pending in the
Northern District of California, we believe the claims of Photobit and CalTech
are meritless, and plan to vigorously defend ourselves in the ITC
investigation.
Other companies may pursue litigation with respect to these or other
claims. The results of any litigation are inherently uncertain. In the event of
an adverse result in any litigation with respect to intellectual property
rights relevant to our products that could arise in the future, we could be
required to obtain licenses to the infringing technology, pay substantial
damages under applicable law, including treble damages if we are held to have
willfully infringed, cease the manufacture, use and sale of infringing products
or to expend significant resources to develop noninfringing technology.
Litigation frequently involves substantial expenditures and can require
significant management attention, even if we ultimately prevail.
Failure to effectively manage our growth could adversely affect our ability to
- ------------------------------------------------------------------------------
increase our revenues and improve our earnings.
- -----------------------------------------------
Our growth has placed, and will continue to place, a significant strain on
our management and other resources. To manage our growth effectively, we must,
among other things:
o implement and improve operational and financial systems;
o train and manage our employee base; and
o attract and retain qualified personnel with relevant experience.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We must also manage multiple relationships with customers, business
partners and other third parties, such as our foundries and process and
assembly vendors. Moreover, our growth may significantly overburden our
management and financial systems and other resources. We also cannot assure you
that we have made adequate allowances for the costs and risks associated with
our expansion. In addition, our systems, procedures or controls may not be
adequate to support our operations, and we may not be able to expand quickly
enough to capitalize on potential market opportunities. Our future operating
results will also depend on expanding sales and marketing, research and
development and administrative support.
Our investment in a Chinese entity to conduct testing and packaging operations
- ------------------------------------------------------------------------------
may not reduce our design and testing costs nor improve our gross margins and
- -----------------------------------------------------------------------------
as a result our earnings would be adversely affected.
- -----------------------------------------------------
In December 2000, we formed a new subsidiary, or the Chinese Subsidiary,
to conduct testing and packaging operations in Shanghai, the Peoples' Republic
of China, or China. The registered capital of this new company is $12.0 million
of which we funded $3.8 million in the year ended April 30, 2001, as required.
We are further obligated to fund the remaining $8.2 million of registered
capital by December 2003. As of April 30, 2001, $1.9 million of the $3.8
million was paid for land use rights and to building contractors, $1.8 million
was deposited in a bank account in China and $0.1 million was expended for
general purposes. The formation and operation of the new company in China
requires a large initial capital investment, and there may be significant
administrative, legal and governmental barriers in China, which may prevent our
ability to begin operation of the new company as well as using the funds
outside of China. We expect that we will enter into additional commitments in
connection with constructing the facility in Shanghai.
We cannot be sure that our investment in our Chinese Subsidiary will
eventually result in the reduction of our design and testing costs. The
formation and operation of our Chinese Subsidiary requires a large initial
capital investment and will also require significant future capital investment
as we continue to maintain and upgrade our facility. There may be significant
administrative, legal and governmental barriers in China which may prevent or
delay our ability to begin the operation of or continue the operation of our
Chinese Subsidiary. In addition, the design and testing of our products is a
highly complex, sensitive and precise process which is subject to a wide
variety of factors, any number of which could result in an increase of our
costs. If our design and testing costs fail to decrease as a result of our
investment in our China Subsidiary our earnings may be adversely affected.
The incorporation, formation and development of our Chinese subsidiary has
resulted and will continue to result in the diversion of capital away from
other business issues, as the operation of our design and testing facility will
require that we constantly upgrade our technology to remain competitive. The
incorporation, formation and development of our Chinese subsidiary has also
resulted in the diversion of management's attention away from other business
issues. If our ongoing investment in the Chinese Subsidiary does not result in
offsetting gains in the form of design and testing improvements accompanied by
reduced design and testing costs, whether because of the risks and difficulties
entailed by foreign operations or for other reasons, our business and financial
condition will be adversely affected.
Provisions in our charter documents and Delaware law could prevent or delay a
- -----------------------------------------------------------------------------
change in control of us and may reduce the market price of our common stock.
- ----------------------------------------------------------------------------
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
o adjusting the price, rights, preferences, privileges and restrictions of
preferred stock without stockholder approval;
o providing for a classified board of directors with staggered, three year
terms;
o requiring supermajority voting to amend some provisions in our
certificate of incorporation and bylaws;
o limiting the persons who may call special meetings of stockholders; and
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
o prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent another
company from acquiring or merging with us.
Our stock has been and will likely continue to be subject to substantial price
- ------------------------------------------------------------------------------
and volume fluctuations due to a number of factors, many of which will be
- -------------------------------------------------------------------------
beyond our control, that may prevent our stockholders from reselling our common
- -------------------------------------------------------------------------------
stock at a profit.
- ------------------
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of
semiconductor companies have been especially volatile. This market volatility,
as well as general economic, market or political conditions, could reduce the
market price of our common stock in spite of our operating performance. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:
o actual or anticipated fluctuations in our operating results;
o changes in expectations as to our future financial performance;
o changes in financial estimates of securities analysts;
o release of lock-up or the transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock;
o changes in market valuations of other technology companies; and
o announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions.
Due to these factors, the price of our stock may decline and investors may
be unable to resell their shares of our stock for a profit. In addition, the
stock market experiences extreme volatility that often is unrelated to the
performance of particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance.
We rely on a continuous power supply to conduct our operations and California's
- -------------------------------------------------------------------------------
current energy crisis could disrupt our operations and increase our expenses.
- -----------------------------------------------------------------------------
The State of California is in the midst of an energy crisis that could
disrupt our operations and increase our expenses. In the event of an acute
power shortage, that is, when power reserves for the State of California fall
below one and one-half percent, the State of California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout the state. We currently do not have backup generators or alternate
sources of power in the event of a blackout, and our current insurance does not
provide coverage for any damages we or our customers or distributors may suffer
as a result of any interruption in our power supply. If blackouts interrupt
our ability to continue operations at our facilities, then our reputation could
be damaged, our ability to retain existing customers could be harmed and we
could fail to obtain new customers. These interruptions could also result in
lost revenue, any of which could substantially harm our business and results of
operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California state government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
the past year. If wholesale energy prices continue to increase, our operating
expenses will likely increase, as our U.S. facilities are located in
California.
Class action litigation due to stock price volatility could lead to substantial
- -------------------------------------------------------------------------------
costs and divert our management's attention and resources.
- ----------------------------------------------------------
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the semiconductor industry and other technology
industries are particularly vulnerable to this kind of litigation due to the
high volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
------------------------------
We are an international company, selling our products globally and, in
particular in Japan, Korea, Singapore and Taiwan. Although we transact our
business in U.S. dollars, future fluctuations in the value of the U.S. dollar
may affect the competitiveness of our products, gross profits realized, and
results of operations. Further, we incur expenses in Japan, Korea, Taiwan,
Thailand, China and other countries that are denominated in currencies other
than the U.S. dollar. We cannot estimate the effect that an immediate 10%
change in foreign currency exchange rates would have on our future operating
results or cash flows as a direct result of changes in exchange rates. However,
we do not believe that we currently have any significant direct foreign
currency exchange rate risk, and we have not hedged exposures denominated in
foreign currencies or any other derivative financial instruments.
Quantitative and Qualitative Discussion of Market Interest Rate Risk
--------------------------------------------------------------------
Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
our exposure to financial market risk by performing ongoing evaluations of our
investment portfolio. We presently invest in short term bank market rate
accounts, certificates of deposit issued by banks, high-grade corporate
securities and government bonds maturing approximately 12 months or less from
the date of purchase. Due to the short maturities of our investments, the
carrying value should approximate the fair market value. In addition, we do not
use our investments for trading or other speculative purposes. Due to the short
duration of our investment portfolio, we do not expect that an immediate 10%
change in interest rates would have a material effect on the fair market value
or our portfolio. Therefore, we would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden change
in market interest rates.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS - UNAUDITED
Three Months Ended
--------------------------------------
July 31, Oct. 31, Jan. 31, April 30,
(in thousands, except per share data) 2000 2000 2001 2001
---- ---- ---- ----
Revenues.............................. $17,819 $18,385 $ 8,110 $ 9,393
Cost of revenues...................... 12,295 12,949 23,774 5,678(1)
Gross profit (loss)................... 5,524 5,436 (15,664) 3,715
Net income (loss)..................... $ 1,888 $ 2,148 $(15,620) $ 27
Net income (loss) per share:
Basic............................... $ 0.42 $ 0.10 $ (0.73) $ 0.0
======= ======= ======== ========
Diluted............................. $ 0.11 $ 0.09 $ (0.73) $ 0.0
======= ======= ======== ========
Shares used in computing per
share amounts:
Basic............................... 4,486 21,113 21,414 21,536
======= ======= ======== ========
Diluted............................. 17,534 23,367 21,414 24,325
======= ======= ======== ========
(1) Includes inventory write-off of $18,652 in the Fiscal Year ended April 30,
2001.
Three Months Ended
--------------------------------------
July 31, Oct. 31, Jan. 31, April 30,
1999 1999 2000 2000
---- ---- ---- ----
Revenues.............................. $ 4,803 $ 8,063 $ 12,245 $ 15,142
Cost of revenues...................... 3,178 5,912 8,608 10,493
Gross profit.......................... 1,625 2,151 3,637 4,649
Net income............................ $ 177 $ 111 $ 1,525 $ 1,626
Net income per share:
Basic............................... $ 0.07 $ 0.05 $ 0.56 $ 0.57
======= ======= ======== ========
Diluted............................. $ 0.01 $ 0.01 $ 0.09 $ 0.10
======= ======= ======== ========
Shares used in computing per
share amounts:
Basic............................... 2,713 2,396 2,733 2,877
======= ======= ======= =======
Diluted............................. 16,224 16,696 16,963 16,717
======= ======= ======= =======
Our consolidated financial statements and the independent accountants'
reports appear on pages F-1 through F-21 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning our directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in our
Proxy Statement related to our 2001 Annual Meeting of Stockholders, to be filed
with the Securities and Exchange Commission within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). Certain information required by this item concerning executive
officers is set forth in Part I of this Report in "Business - Executive
Officers of the Registrant" and certain other information required by this item
is incorporated by reference from the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" contained in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections captioned "Employment Contracts" contained in the Proxy Statement.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following consolidated financial statements
---------------------
are incorporated by reference in Item 8 of this Report:
Page
----
Report of Independent Accountants................................ F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity.................. F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-7
2. Financial Statement Schedules. The following financial schedule is
------------------------------
filed as part of this Report under "Schedule II": Schedule II -
Valuation and Qualifying Accounts for the Years Ended April 30,
2001, 2000 and 1999. All other schedules called for by Form 10-K
have been omitted because they are not applicable or are not
required or the information required to be set forth therein is
included in the consolidated financial statements or notes
thereto.
3. Exhibits.
---------
Exhibit
Number Description
------ ------------------------------------------------------------
2.1(1) Merger Agreement between OmniVision Technologies, Inc., a
Delaware corporation and OmniVision Technologies, Inc., a
California corporation
2.1(1) Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2(1) Amended and Restated Registration Rights Agreement, dated as
of May 20, 1998, by and among the Registrant and certain
stockholders of the Registrant
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(1) 2000 Stock Plan and form of option agreement
10.3(1) 2000 Employee Stock Purchase Plan and form of subscription
agreement
10.4(1) 2000 Director Stock Option Plan and form of option agreement
10.5(1) Lease Agreement dated April 4, 1997 between the Registrant
and Lewis Duckor for the premises at 930 Thompson Avenue,
Sunnyvale, California 94086
10.6(1) First Amendment to Lease Agreement dated July 15, 1999
between the Registrant and Lewis Duckor for the premises at
930 Thompson Avenue, Sunnyvale, California 94086
*10.7(1) Non-exclusive Distributor Agreement between the Registrant
and World Peace Industrial Co., Ltd. dated January 1, 1998
*10.8(1) Confidential Foundry Agreement between Registrant and
Powerchip Semiconductor Corp. dated March 13, 1998
*10.10(1) Software License Agreement between the Registrant and
Creative Technology Ltd. dated February 1, 1999
*10.11(1) Non-exclusive Distributor Agreement between the Registrant
and Wintek Electronics Co., Ltd. dated October 22, 1999
*10.12(1) Confidential Foundry Agreement between Registrant and
Shanghai HuaHong-NEC Electronics Co., Ltd. dated December
13, 1999
43
*10.13(1) Sales Agreement between the Registrant and CoAsia
MicroElectronics Corp. dated May 7, 1999
*10.14(1) Agreement between the Registrant, CoAsia MicroElectronics
and Samsung Electronics Taiwan Co., Ltd. dated July 17, 1998
*10.15(1) Letter Agreement between the Registrant and Creative
Technology Ltd. dated February 1, 1999
10.16(2) Agreement on Construction of Complete Municipal Facilities,
Shanghai Songjiang Export Processing Zone between OmniView
Technology International Ltd. and Shanghai Songjiang Export
Processing Zone Administrative Committee dated December 28,
2000
10.17(2) Shanghai Songjiang Export Processing Zone Administrative
Committee Official Reply to the Feasibility Study Report and
Articles of Association of Foreign Solely-funded Hao wei
Electronics (Shanghai) Co., Ltd. dated December 19, 2000
10.18(2) Contract on the Transfer of Shanghai State-owned Land Use
Right between OmniView Technology International Ltd. and
Shanghai Songjiang District Building and Land Administrative
Bureau dated December 28, 2000
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Power of Attorney (included on page 45)
------------------------
* Portions of this agreement has been omitted pursuant to a request
for confidential treatment and the omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (File No. 333-31926) as declared
effective by the Securities and Exchange Commission on July 13,
2000.
(2) Incorporated by reference to exhibits filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
2001.
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the three months ended April 30, 2001.
(c) Exhibits Pursuant to Item 601 of Regulation S-K. See Item 14(a)(3)
above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
OMNIVISION TECHNOLOGIES, INC.
By: /s/ SHAW HONG
-----------------------------
Shaw Hong
President and Chief Executive Officer
Date: July 20, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Shaw Hong and H. Gene McCown, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that each of said attorneys-in-
facts and agents, or his substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- -------------------------- --------------------------------- -------------
/s/ SHAW HONG Chief Executive Officer, President July 20, 2001
------------------------ and Director (Principal Executive
Shaw Hong Officer)
/s/ H. GENE MCCOWN Vice President of Finance and Chief July 20, 2001
------------------------ Financial Officer (Principal
H. Gene McCown Financial and Accounting Officer)
/s/ RAYMOND WU Executive Vice President and July 20, 2001
------------------------ Director
Raymond Wu
/s/ EDWARD C.V. WINN Director July 20, 2001
------------------------
Edward C.V. Winn
/s/ LEON MALMED Director July 20, 2001
------------------------
Leon Malmed
45
OMNIVISION TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of OmniVision Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
OmniVision Technologies, Inc. and its subsidiaries at April 30, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
June 5, 2001
F-2
OMNIVISION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 30,
----------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................. $ 51,053 $ 5,888
Short-term investments................................ 3,000 --
Accounts receivable, net.............................. 5,269 6,156
Inventories........................................... 11,445 11,511
Refundable and deferred income taxes.................. 3,288 446
Prepaid expenses and other assets..................... 219 195
-------- --------
Total current assets................................ 74,274 24,196
Property, plant and equipment, net...................... 4,080 2,102
Other non-current assets................................ 293 --
-------- --------
Total assets........................................ $ 78,647 $ 26,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 4,284 $ 9,972
Accrued expenses and other liabilities................ 2,255 1,841
Deferred revenue...................................... 832 716
-------- --------
Total current liabilities........................... 7,371 12,529
-------- --------
Commitments and contingencies (Note 11)
Redeemable convertible preferred stock.................. -- 21,082
Stockholders' equity (deficit):
Common stock, $0.001 par value; 100,000,000 shares
authorized; 21,999,580 and 3,885,550 shares issued
and outstanding..................................... 22 4
Additional paid-in capital............................ 94,531 5,840
Deferred compensation related to stock options........ (1,058) (2,495)
Accumulated deficit................................... (22,219) (10,662)
-------- --------
Total stockholders' equity (deficit)................ 71,276 (7,313)
-------- --------
Total liabilities and stockholders' equity........ $ 78,647 $ 26,298
======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-3
OMNIVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended April 30,
-----------------------------
2001 2000 1999
---- ---- ----
Revenues....................................... $ 53,707 $ 40,253 $ 5,243
Cost of revenues (including inventory write-off
of $18,652 in the fiscal year ended April 30,
2001)*....................................... 54,696 28,191 4,085
-------- -------- --------
Gross profit (loss)............................ (989) 12,062 1,158
Operating expenses:
Research and development*.................... 5,539 3,702 3,290
Selling, general and administrative*......... 6,703 3,243 1,853
Stock compensation charge*................... 1,018 1,552 459
-------- -------- --------
Total operating expenses................... 13,260 8,497 5,602
-------- -------- --------
Income (loss) from operations.................. (14,249) 3,565 (4,444)
Interest income, net........................... 2,692 174 396
-------- -------- --------
Income (loss) before income taxes.............. (11,557) 3,739 (4,048)
Provision for income taxes..................... -- 300 --
-------- -------- --------
Net income (loss).............................. $(11,557) $ 3,439 $ (4,048)
======== ======== ========
Net income (loss) per share:
Basic........................................ $ (0.67) $ 1.15 $ (5.59)
======== ======== ========
Diluted...................................... $ (0.67) $ 0.21 $ (5.59)
======== ======== ========
Shares used in computing net income (loss)
per share:
Basic........................................ 17,134 2,985 724
======== ======== ========
Diluted...................................... 17,134 16,399 724
======== ======== ========
(*) Stock-based compensation charges included in:
Cost of revenues......................... $ 59 $ 310 $ 60
======== ======== ========
Operating expenses:
Research and development............... $ 618 $ 997 $ 302
Selling, general and administrative.... 400 555 157
-------- -------- --------
$ 1,018 $ 1,552 $ 459
======== ======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
OMNIVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Additional
Common Stock Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------ ------- ------------ ------- -----
Balance at May 1, 1999...... 1,200,000 $ 1 $ 823 $ (429) $(10,053) $ (9,658)
Exercise of stock options 56,000 -- 9 -- -- 9
Deferred compensation
related to stock options
granted................... -- -- 824 (824) -- --
Amortization of deferred
Compensation.............. -- -- -- 519 -- 519
Net loss.................... -- -- -- -- (4,048) (4,048)
---------- ----- ------- ------- -------- -------
Balance at April 30, 1999 1,256,000 1 1,656 (734) (14,101) (13,178)
Exercise of stock options 2,718,050 3 567 -- -- 570
Deferred compensation
related to stock options
granted................... -- -- 3,687 (3,687) -- --
Purchase of common stock.... (88,500) -- (9) -- -- (9)
Forfeiture of stock option
Granted................... -- -- (61) 35 -- (26)
Amortization of deferred
Compensation.............. -- -- -- 1,891 -- 1,891
Net income.................. -- -- -- -- 3,439 3,439
---------- ----- ------- ------- -------- -------
Balance at April 30, 2000... 3,885,550 4 5,840 (2,495) (10,662) (7,313)
Exercise of stock options... 84,300 -- 99 -- -- 99
Employee stock purchase plan 48,479 -- 247 -- -- 247
Shares issued in connection
with Initial Public
Offering.................. 5,750,000 6 67,655 -- -- 67,661
Conversion of preferred stock
at Initial Public Offering 12,305,001 12 21,070 -- -- 21,082
Grant of fully-vested options
to non-employees........... -- -- 31 -- -- 31
Re-purchase of common stock.. (73,750) -- (20) -- -- (20)
Forfeiture of stock option
Granted.................... -- -- (391) 198 -- (193)
Amortization of deferred
Compensation............... -- -- -- 1,239 -- 1,239
Net loss..................... -- -- -- -- (11,557) (11,557)
---------- ----- ------- ------- -------- -------
Balance at April 30, 2001 21,999,580 $ 22 $94,531 $(1,058) $(22,219) $71,276
========== ===== ======= ======= ======== =======
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-5
OMNIVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended April 30,
-----------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss)............................. $(11,557) $ 3,439 $ (4,048)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............... 615 547 309
Allowance for doubtful accounts and sales
Returns................................... (84) 286 137
Amortization of deferred compensation....... 1,077 1,862 519
Changes in assets and liabilities:
Accounts receivable....................... 971 (4,709) (1,829)
Inventories............................... 66 (9,270) (2,083)
Refundable and deferred income taxes...... (2,842) -- --
Prepaid expenses and other assets......... (317) (538) (12)
Accounts payable.......................... (5,688) 8,237 1,442
Accrued expenses and other liabilities.... 414 1,226 275
Deferred revenue.......................... 116 434 282
------- ------- -------
Net cash provided by (used in)
operating activities.................. (17,229) 1,514 (5,008)
------- ------- -------
Cash flows from investing activities:
Purchases of short-term investments........... (3,000) -- --
Purchases of property, plant and equipment.... (2,593) (1,564) (650)
------- ------- -------
Net cash used in investing activities... (5,593) (1,564) (650)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock..... -- -- 8,337
Issuance of common stock, net................. 67,987 564 9
------- ------- -------
Net cash provided by financing activities 67,987 564 8,346
------- ------- -------
Net increase in cash and cash equivalents 45,165 514 2,688
Cash and cash equivalents at beginning of period 5,888 5,374 2,686
------- ------- -------
Cash and cash equivalents at end of period...... $51,053 $ 5,888 $ 5,374
======= ======= =======
Supplemental cash flow information:
Interest paid................................. $ 36 $ -- $ --
======= ======= =======
Taxes paid.................................... $ 3,483 $ 129 $ --
======= ======= =======
Supplemental non-cash investing and financial
information:
Conversion of redeemable convertible preferred
stock to common stock....................... $21,082 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended April 30, 2001, 2000 and 1999
NOTE 1 - OMNIVISION AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
OmniVision Technologies, Inc. and subsidiaries (the "Company") designs,
develops and markets complementary metal oxide semiconductor ("CMOS") image
sensors. The Company was incorporated in California in May 1995 and
reincorporated in the State of Delaware in March 2000.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Foreign currency translation
The functional currencies of the Company's subsidiaries are the local
currencies. Transaction gains and losses resulting from transactions
denominated in currencies other than the U.S. dollar for the Company or in the
local currencies for the subsidiaries are included in other income for the
periods presented.
The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Revenue and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included in other comprehensive income in the
stockholders' equity.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity at the date of purchase of three months or less to be cash
equivalents. Cash equivalents consist principally of money market deposit
accounts that are stated at cost, which approximates fair value.
Short-term investments
The Company's short-term investments, which are classified as available-
for-sale, are invested in high-grade corporate securities and government bonds
maturing approximately twelve months or less from the date of purchase. These
investments are reported at fair value. Unrealized gains or losses are recorded
in stockholders' equity and included in other comprehensive income (losses).
Unrealized gains or losses were not significant during any period covered.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and other current liabilities
approximate fair value due to their short maturities.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is generally computed using the
straight-line method over the estimated useful lives of the assets.
Building improvements............................. 5 years
Machinery and equipment........................... 3 - 5 years
Furniture and fixtures............................ 3 - 7 years
Long-lived assets
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", which requires the
Company to review for impairment of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset might
not be recoverable. When such an event occurs, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the undiscounted expected future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized. To date, no
impairment loss has been recognized.
Revenue recognition
The Company recognizes revenue upon the shipment of its products to the
customer provided that the Company has received a signed purchase order, the
price is fixed, title has transferred, collection of resulting receivables is
probable, product returns are reasonably estimable, there are no customer
acceptance requirements and there are no remaining significant obligations. For
certain shipments to distributors under agreements allowing for return or
credits, revenue is deferred until the distributor resells the product. The
Company provides for future returns based on historical experiences at the time
revenue is recognized.
Inventories
Inventories are stated at the lower of cost, determined on first-in,
first-out ("FIFO") basis, or market.
Research and development
Research and development costs are expensed as incurred.
Income taxes
The Company accounts for deferred income taxes using the liability method,
under which the expected future tax consequences of timing differences between
the book and tax basis of assets and liabilities are recognized as deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets when management estimates, based on available
objective evidence, that it is more likely than not that the benefit will not
be realized for the deferred tax assets.
Comprehensive income (losses)
Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners.
Comprehensive income was not significant during any period covered.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
Certain risks and uncertainties
The Company's products are concentrated in a single segment in the
semiconductor imaging devices industry which is characterized by rapid
technological advances, changes in customer requirements and evolving industry
standards. These products depend in part on a limited number of suppliers of
wafers. Also, the Company has depended on a limited number of products and
customers for substantially all revenue to date. Failure by the Company to
anticipate or to respond adequately to technological developments in its
industry, changes in customer or supplier requirements or changes in industry
standards, or any significant delays in the development or introduction of
products or services, could have a material adverse effect on the Company's
business and operating results.
Segment information
The Company identifies its operating segments based on business
activities, management responsibility and geographical location. For all
periods presented, the Company operated in a single business segment. Revenue
by geographic location is presented in Note 10.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and FASB Interpretation
44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN
44") and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 25, compensation cost is recognized based on the difference,
if any, on the date of grant between the fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Deferred compensation is
amortized over the vesting period on an accelerated basis using the model
presented in paragraph 24 of FIN 28. SFAS 123 requires a "fair value" based
method of accounting for an employee stock option or similar equity investment.
The pro forma disclosures of the difference between the compensation expense
included in net loss and the related cost measured by the fair value method are
presented in Note 8.
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments that are offered to other than employees for
acquiring or in conjunction with selling goods or services" ("EITF 96-18").
Under SFAS 123 and EITF 96-18, stock option awards issued to non-employees are
accounted for at their fair value, determined using the Black-Scholes option
pricing model.
Basic and diluted net income (loss) per share
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share", under the provisions of which basic income
(loss) per share is computed by dividing the income (loss) available to holders
of common stock for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted income
(loss) per share excludes potential common stock if the effect of such stock is
antidilutive. Potential common stock consists of unvested restricted common
stock, incremental common or preferred shares issuable upon the exercise of
stock options and shares issuable upon conversion of the redeemable convertible
preferred stock.
Reclassifications
Certain reclassifications have been made in the 2000 balance sheet to
conform to the 2001 presentations.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards, ("SFAS"), No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138 "Accounting for Certain Hedging Activities, an
amendment of FASB Statement No. 133," effective for all interim and annual
periods beginning after June 15, 2000. SFAS No 138 amends accounting and
reporting standards for certain derivative instruments and certain hedging
activities. The Company will adopt the standard no later than the first quarter
of fiscal year 2002 and management does not expect the adoption of these
standards to have a material effect on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," as amended by SAB 101A and 101B. SAB 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in
financial statements under certain circumstances. The Company adopted the
provisions of SAB 101 in its consolidated financial statements for all periods
presented.
On June 29, 2001, the FASB approved its proposed SFAS No. 141, ("FAS 141")
"Business Combinations," and SFAS No. 142 ("FAS 142"), "Goodwill and Other
Intangible Assets."
Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests method is
prohibited. The provisions of the statement will apply to all business
combinations initiated after June 30, 2001.
FAS 142 will apply to all acquired intangible assets whether acquired
singly, as part of a group, or in a business combination. The statement will
supersede Accounting Principals Board, ("APB"), Opinion No. 17, "Intangible
Assets," and will carry forward provisions in APB Opinion No.17 related to
internally developed intangible assets. Adoption of FAS 142 will result in
ceasing amortization of goodwill. All of the provisions of the statement should
be applied in fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
The Company does not expect the adoption of these standards to have a
material effect on its consolidated financial statements.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
NOTE 2 - BALANCE SHEET ACCOUNTS (IN THOUSANDS)
April 30,
-----------------------
2001 2000
---- ----
Cash and cash equivalents:
Cash.............................................. $ 1,918 $ 5,888
Money market funds................................ 3,563 --
Commercial paper.................................. 45,572 --
------- -------
$51,053 $ 5,888
======= =======
Short-term investments:
Corporate notes................................... $ 3,000 $ --
------- -------
$ 3,000 $ --
======= =======
Accounts receivable:
Accounts receivable............................... $ 6,016 $ 6,987
Less: Allowance for doubtful accounts............. (114) (156)
Sales return reserve........................ (633) (675)
------- -------
$ 5,269 $ 6,156
======= =======
Inventories:
Work in progress.................................. $ 3,752 $10,342
Finished goods.................................... 7,693 1,169
------- -------
$11,445 $11,511
======= =======
Property and equipment:
Machinery and equipment........................... $ 2,917 $ 2,292
Furniture and fixtures............................ 222 248
Software.......................................... 798 639
Construction in progress.......................... 1,933 98
------- -------
5,870 3,277
Less: Accumulated depreciation and amortization. (1,790) (1,175)
------- -------
$ 4,080 $ 2,102
======= =======
Accrued expenses and other liabilities:
Employee compensation............................. $ 695 $ 351
Other............................................. 1,560 1,490
------- -------
$ 2,255 $ 1,841
======= =======
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
NOTE 3 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year Ended April 30,
----------------------
2001 2000
---- ----
Current:
Federal........................................... $ 2,516 $ 626
State............................................. 63 120
------- -------
Total current................................... 2,579 746
------- -------
Deferred:
Federal........................................... (2,579) (347)
State............................................. -- (99)
------- -------
Total deferred.................................. (2,579) (446)
------- -------
Total provision............................... $ -- $ 300
======= =======
There was no income tax provision for the year ended April 30, 1999
because operations resulted in pre-tax losses.
The provision for income taxes differs from the amount computed by
applying the federal income tax rate of 34% to pretax income (loss) from
operations as a result of the following (in thousands):
Year Ended April 30,
----------------------
2001 2000
---- ----
Statutory federal income tax........................ $(3,929) $ 1,271
State income taxes, net of federal tax benefits..... (315) 150
Amortization of stock compensation.................. 489 639
Release of valuation allowance...................... 3,653 (2,281)
Alternative minimum tax............................. -- 337
Other............................................... 102 184
------- -------
Tax provision....................................... $ -- $ 300
======= =======
Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that the Company will not realize a
significant portion of its deferred tax assets and, accordingly, valuation
allowances of $6,307,000 and $2,654,000 have been established for such amounts
at April 30, 2001 and 2000, respectively.
The following is an analysis of the Company's deferred tax assets (in
thousands):
Year Ended April 30,
----------------------
2001 2000
---- ----
Net operating loss carryforward and credit
carryforwards...................................... $ 470 $ 1,500
Reserves............................................. 8,369 698
Accruals and other................................... 493 902
------- -------
9,332 3,100
Valuation allowance.................................. (6,307) (2,654)
------- -------
Net deferred tax assets.............................. $ 3,025 $ 446
======= =======
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
As of April 30, 2001, the Company had net operating loss carryforwards of
approximately $500,000 for federal and state income tax purposes. These losses
are available to reduce taxable income and expire through 2019. Because of
certain changes in the ownership in December 1996, there is an annual
limitation of approximately $200,000 on the use of these net operating loss
carryforwards.
NOTE 4 - RELATED PARTIES TRANSACTIONS
The chairman of Powerchip Semiconductor Corp. ("PSC") was a board member
of the Company until May 2001. PSC has been a vendor for the Company since the
year ended April 30, 1999. Total purchases were $22,011,000, $6,857,000 and
$5,000 for the years ended April 30, 2001, 2000 and 1999, respectively.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share attributable to common stockholders for the periods indicated
(in thousands, except per share data):
Year Ended April 30,
---------------------------
2001 2000 1999
---- ---- ----
Numerator:
Net income (loss).............................. $(11,557) $ 3,439 $(4,048)
======== ======= =======
Denominator:
Weighted average shares........................ 17,757 3,558 1,216
Weighted average unvested common stock subject
to repurchase................................ (623) (573) (492)
-------- ------- -------
Denominator for basic net income (loss) per share 17,134 2,985 724
======== ======= =======
Weighted average effect of dilutive securities:
Common stock options........................... -- 536 --
Unvested common stock subject to repurchase.... -- 573 --
Convertible preferred stock.................... -- 12,305 --
-------- ------- -------
Denominator for dilutive net income (loss)
per share...................................... 17,134 16,399 724
======== ======= =======
Basic net income (loss) per share................ $ (0.67) $ 1.15 $ (5.59)
======== ======= =======
Diluted net income (loss) per share.............. $ (0.67) $ 0.21 $ (5.59)
======== ======= =======
The following table sets forth weighted average potential shares of common
stock that are not included in the diluted net income (loss) per share
calculation above because to do so would be antidilutive for the periods
indicated (in thousands):
Year Ended April 30,
--------------------------
2001 2000 1999
---- ---- ----
Weighted average effect of common stock
equivalents:
Unvested common stock subject to repurchase.... 623 -- 492
Options outstanding............................ 1,237 -- 2,350
Shares resulting from the conversion of the:
Series A convertible preferred stock......... 985 -- 4,300
Series B convertible preferred stock......... 842 -- 3,672
Series C convertible preferred stock......... 993 -- 4,256
------ ------ ------
Total common stock equivalents excluded from
the computation of earnings (loss) per share
as their effect was antidilutive............... 4,680 -- 15,070
====== ====== ======
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
NOTE 6 - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 12,783,336 shares of Convertible
preferred stock ("preferred stock"). As of April 30, 2001, no shares of
preferred stock were issued and outstanding as all shares of preferred stock
were converted into 12,305,001 shares of common stock at the time of the
Company's initial public offering.
Series A Series B Series C Additional
Preferred Stock Preferred Stock Preferred Stock Paid-in
--------------- --------------- ---------------
(in thousands) Shares Amount Shares Amount Shares Amount Capital Total
------ ------ ------ ------ ------ ------ ------- -----
Balance at May 1, 1999...... 4,300 $ 4 3,672 $ 4 1,553 $ 1 $ 12,736 $ 12,745
Issuance of Series C
preferred stock at
$3.00 per share for cash -- -- -- -- 2,781 3 8,334 8,337
Balance at April 30, 1999
and at April 30, 2000..... 4,300 4 3,672 4 4,334 4 21,070 21,082
------ ---- ----- ----- ----- ---- -------- --------
Conversion of preferred
Stock at Initial Public
Offering................ (4,300) (4) (3,672) (4) (4,334) (4) (21,070) (21,082)
------ ---- ------ ----- ------ ---- -------- --------
Balance at April 30, 2001 -- $ -- -- $ -- -- $ -- $ -- $ --
====== ==== ====== ===== ====== ==== ======== ========
The rights, preferences and restrictions of the preferred stock are as
follows:
Conversion. Each share of Series A, Series B and Series C preferred stock
was convertible into such number of shares of common stock as is determined by
dividing the original issuance price by $0.60, $1.50 and $3.00, respectively
("Initial Conversion Price").
Dividends. Holders of Series A, Series B and Series C preferred stock were
entitled to receive, when and as declared by the Board of Directors,
noncumulative dividends at the annual rate of $0.06, $0.15 and $0.30 per share,
respectively. Such dividends were payable in preference to any dividend for
common stock declared by the Board of Directors. No dividends were declared
since inception.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
Voting. The holders of the preferred stock had the right to vote with the
-------
common stock, on an as-if-converted basis, on all other matters as provided
under California law. The holder of each share of preferred stock was entitled
to the number of votes equal to the number of shares of common stock into which
such share of preferred stock could be converted on the record date for the
vote or the consent of shareholders and shall have voting rights and powers
equal to the voting rights and powers of the common stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
------------
the corporation, the holders of each share of preferred stock then outstanding
are entitled to be paid, before any payment made to the holders of the common
stock, an amount equal to the original issue price per share ("Preference
Amount") of preferred stock. If the assets of the corporation are insufficient
to pay the full liquidation preference to the preferred stock, the assets shall
be distributed ratably among the holders of the preferred stock in proportion
to the full preference amount each such holder is otherwise entitled to
receive. After payment has been made to the holders of the preferred stock of
their full preference amount, any remaining assets or surplus funds of the
corporation are to be shared by and distributed ratably among the holders of
common stock in proportion to the number of shares then held by each of them.
A consolidation or merger of the Company with or into any other
corporation or corporations, acquisition by any other corporation or
corporations, or a sale of all or substantially all of the assets or voting
control of the Company, in which the prior stockholders of the Company do not
own a majority of the outstanding shares of the surviving corporation (a
"change in control") is deemed to be a liquidation.
Redemption
Series A, B and C preferred stock were redeemable upon a change in control
of the Company at an amount equal to the liquidation preference described
above.
Series A, B and C preferred stock were recorded at fair value at the date
of issuance outside of stockholder's equity, which equals the redemption value.
NOTE 7 - COMMON STOCK
The Company completed its initial public offering ("IPO") on July 14,
2000, pursuant to a Registration Statement on Form S-1 (File No. 333-31926),
which was declared effective by the Securities and Exchange Commission on July
13, 2000. In the IPO, the Company sold an aggregate of 5,000,000 shares of
common stock. In August 2000, the underwriters of the Company's initial public
offering exercised their over-allotment option to purchase an additional
750,000 shares of common stock at $13.00 per share. Net proceeds from exercise
of the over-allotment option aggregated approximately $8.5 million after paying
the underwriters' fee and related expenses. The sale of the shares of common
stock generated aggregate gross proceeds of approximately $74,750,000,
including proceeds from the exercise of the over-allotment option. The
aggregate net proceeds were approximately $67,661,000, including the proceeds
from the exercise of the over-allotment option, after deducting underwriting
discounts and commissions of approximately $5,233,000 and directly paying
expenses of the offering of approximately $1,857,000.
The Company is authorized to issue up to 100,000,000 shares of common
stock. As of April 30, 2001, 21,999,580 shares were issued and outstanding. In
addition, 8,333,500 shares of common stock have been reserved for issuance
under the Company's employee stock option plans, Directors' stock option plan
and employee stock purchase plan.
Certain common stock option holders have the right to exercise unvested
options, subject to a repurchase right held by the Company, in the event of
voluntary or involuntary termination of employment of the stockholder. Of the
shares issued to date, 2,770,050 shares of the Company's common stock have been
issued under restricted stock purchase agreements, under which the Company has
the option to repurchase issued shares of common stock. Under
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
these agreements, 20% of the Company's repurchase rights lapse after one year.
The remaining rights lapse quarterly over the following four years. As of April
30, 2001 and 2000, 449,500 and 921,600 shares of common stock were subject to
repurchase by the Company at the original exercise price, respectively.
NOTE 8 - STOCK PLANS
1995 Stock Option Plan
In May 1995, the Company adopted the 1995 Stock Plan under which 3,600,000
shares of common stock were reserved for issuance to eligible employees,
directors and consultants upon exercise of the stock options and stock purchase
rights. Incentive stock options are granted at a price not less than 100% of
the fair market value of the Company's common stock and at a price of not less
than 110% of the fair market value for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of grant.
Nonstatutory stock options are granted at a price not less than 85% of the fair
market value of the common stock and at a price not less than 110% of the fair
market value for grants to a person who owned more than 10% of the voting power
of all classes of stock on the date of the grant. Options granted under the
1995 Stock Plan generally vest over five years and are exercisable immediately
or for up to ten years (five years for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of the grant).
Those options exercised but unvested are subject to repurchase by the Company
at the exercise price.
In February 2000, the Company terminated the 1995 Stock Option Plan as to
future grants. However, options outstanding under the 1995 Stock Option Plan
continue to be governed by the terms of the 1995 Stock Option Plan.
2000 Stock Plan
In February 2000, the Company adopted the 2000 Stock Plan under which
3,000,000 shares of common stock were reserved for issuance together with an
annual increase in the number of shares reserved thereunder beginning on the
first day of the Company's fiscal year, commencing May 1, 2002, in an amount
equal to the lesser of: 1,500,000 shares, or 6% of outstanding shares of common
stock on the last day of the prior fiscal year; or an amount determined by the
Company's board of directors. The 2000 Stock Plan provides for grants of
incentive stock options to its employees including officers and employees,
directors and nonstatutory stock options to its consultants including
nonemployee directors. Incentive stock options are granted at a price not less
than 110% of the fair market value for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of grant.
Nonstatutory stock options are granted at a price not less than 85% of the fair
market value of the common stock and at a price not less than 110% of the fair
market value for grants to a person who owned more than 10% of the voting power
of all classes of stock on the date of the grant. Options granted under the
2000 Stock Plan generally vest over five years and are exercisable immediately
or for up to ten years (five years for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of the grant).
Those options exercised but unvested are subject to repurchase by the Company
at the exercise price.
2000 Director Option Plan
The 2000 Director Option Plan was adopted by the board of directors in
February 2000 and the shareholders in March 2000. Under this plan 250,000
shares of common stock were reserved for issuance together with an annual
increase in the number of shares reserved thereunder beginning on the first day
of the Company's fiscal year commencing May 1, 2002 equal to the lesser of
75,000 shares, 0.25% of the outstanding shares of the common stock on the last
day of the prior fiscal year or an amount determined by the board of directors.
The 2000 Director Option Plan provides for an initial grant to the nonemployee
director to purchase 20,000 shares of common stock. Subsequent to the initial
grants, each nonemployee director will be granted an option to purchase 10,000
shares of common stock at the next meeting of the board of directors following
the annual meeting of stockholders, if on the date of the annual meeting, the
director has served on the board of directors for six months. The terms of the
options granted under the 2000 Director Option Plan is ten years, but the
options expire three months following the
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
termination of the optionee's status as a director or twelve months if the
termination is due to death or disability. The initial 20,000 share grants will
become exercisable at a rate of one-fourth of the shares on the first
anniversary of the grant date and at a rate of 1/16th of the shares per quarter
thereafter. The subsequent 10,000 share grants will become exercisable at the
rate of 1/16th of the shares per quarter.
2000 Employee Stock Purchase Plan
The 2000 Employee Stock Purchase Plan was adopted by the board of
directors in February 2000 and was adopted by the shareholders in March 2000.
The 2000 Employee Stock Purchase Plan became effective upon the
closing of the Company's initial public offering. Under the 2000 Employee Stock
Purchase Plan, 1,500,000 shares of common stock were reserved for issuance
together with an annual increase in the number of shares reserved thereunder
beginning on the first day of the fiscal year commencing May 1, 2002 in an
amount equal to the lesser of: 1,000,000 shares, or 4% of the Company's common
stock on the last day of the prior fiscal year, or an amount determined by the
Company's board of directors. The offering period under this plan begins on the
first trading day on or after June 1 and December 1 of each year. The purchase
price of the common stock under this plan will be 85% of the lesser of the fair
market value per share on the start date of the offering period or on the end
date of the purchase period. Employees may end their participation in an
offering period at any time, and their participation ends automatically on
termination of employment with the Company. This plan will terminate in
February 2010, unless the board of directors determines to terminate it sooner.
As of April 30, 2001, 48,479 shares had been exercised under the 2000 Employee
Stock Purchase Plan.
The following table summarizes stock option activities:
Options Outstanding
----------------------------------------------
Weighted
Options Average
Available Price
For Number of Price per per
Grant Shares Share Share
----- ------ ----- -----
Balance at May 1, 1998......... 1,476,000 2,124,000 -- 0.12
Granted...................... ( 741,000) 741,000 0.30 0.30
Exercised.................... -- (56,000) 0.15-0.25 0.16
Canceled..................... 48,000 (48,000) 0.25-0.30 0.28
--------- ---------
Balance at April 30, 1999. 783,000 2,761,000 -- 0.17
Adoption of 2000 Stock Plan 3,000,000 -- -- --
Adoption of 2000 Director
Option Plan................ 250,000 -- -- --
Granted...................... (919,000) 919,000 0.75-7.00 1.41
2000 Stock Plan Granted...... (5,000) 5,000 9.00 9.00
2000 Stock Plan Granted...... (1,157,000) 1,157,000 10.00 10.00
2000 Director Option Plan
Granted...................... (60,000) 60,000 10.00 10.00
Exercised.................... -- (2,718,050) 0.06-0.75 0.21
Canceled..................... 152,500 (152,500) 0.06-0.75 0.34
Termination of 1995 stock
option plan................ (16,500) -- -- --
---------- ----------
Balance at April 30, 2000...... 2,028,000 2,031,450 -- 6.57
Granted...................... (1,015,358) 1,015,358 2.75-29.06 6.10
Exercised.................... -- (84,300) 0.25-13.00 1.17
Repurchased.................. 117,250 -- 0.06- 0.75 0.23
Canceled..................... 196,512 (196,512) 0.75-13.00 5.76
---------- ----------
Balance at April 30, 2001...... 1,326,404 2,765,996 -- $ 6.62
========== ==========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
The following table summarizes information about stock options outstanding
at April 30, 2001:
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
April 30, Contractual Exercise April 30, Exercise
Exercise Prices 2001 Life Price 2001 Price
- --------------- ---- ---- ----- ---- -----
$0.06 20,000 5.19 $0.06 20,000 $0.06
$0.25 - $0.30 112,000 7.09 0.29 112,000 0.29
$0.75 405,800 8.40 0.75 405,800 0.75
$2.75 49,875 9.91 2.75 -- --
$4.50 - $5.44 895,608 9.66 4.75 72,500 4.50
$7.00 - $8.06 77,563 9.12 7.44 45,688 7.00
$10.00 - $13.00 1,158,150 8.95 10.06 309,150 10.22
$29.06 47,000 9.48 29.06 -- --
--------- -------
$0.06 - $29.06 2,765,996 9.03 $6.62 965,138 $4.29
========= =======
Stock-based compensation under APB No. 25
In connection with certain stock option grants the Company recorded
deferred stock compensation costs totaling $5,208,000 being the difference
between the exercise price and the deemed fair value at the date of grant,
which is being recognized over the vesting period of the related options of
generally five years. Future amortization of deferred compensation expense is
estimated to be approximately $604,000, $321,000, $125,000 and $8,000 in the
years ended April 30, 2002, 2003 and 2004 and after, respectively.
Stock based compensation charge is comprised of the following (in
thousands):
Year Ended April 30,
--------------------------
2001 2000 1999
---- ---- ----
Cost of revenues................................ $ 59 $ 310 $ 60
====== ====== ======
Operating expenses:
Research and development...................... $ 618 $ 997 $ 302
Selling, general and administrative........... 400 555 157
------ ------ ------
Total operating expenses................... 1,018 1,552 459
------ ------ ------
Total compensation charge.................. $1,077 $1,862 $ 519
====== ====== ======
Fair value disclosures
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted under the fair value method. The fair value for these options was
estimated using the Black-Scholes option pricing model.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
Employee Stock Option Plan Employee Stock
Year Ended April 30, Purchase Plan
------------------------- Year Ended
2001 2000 1999 April 30, 2001
---- ---- ---- --------------
Risk-free interest rate............ 5.56% 6.04% 5.47% 5.36%
Expected term of options (in years) 3.6 4.1 4.1 0.5
Expected volatility................ 185% 110% 0% 185%
Expected dividend yield............ 0% 0% 0% 0%
The Company used 0% as expected volatility for all periods before March 8,
2000. For the period from March 8, 2000, the date of first filing of the
Registration Statement through April 30, 2000, 110% volatility was used.
The weighted average grant date fair value of options granted during the
years ended April 30, 2001, 2000 and 1999 was $5.67, $5.29 and $1.63,
respectively.
Had compensation cost been determined based upon the fair value at the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been (in thousands, except per share data):
Year Ended April 30,
-----------------------------
2001 2000 1999
---- ---- ----
Net income (loss) - as reported............... $(11,557) $3,439 $(4,048)
Net income (loss) - as adjusted............... $(17,001) $2,412 $(4,773)
Net income (loss) per share:
Basic as reported........................... $ (0.67) $ 1.15 $ (5.59)
======== ====== =======
Diluted as reported......................... $ (0.67) $ 0.21 $ (5.59)
======== ====== =======
Net income (loss) per share:
Basic as adjusted........................... $ (0.99) $ 0.81 $ (6.59)
======== ====== =======
Diluted as adjusted......................... $ (0.99) $ 0.15 $ (6.59)
======== ====== =======
NOTE 9 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
investments in a money market account. The Company's products are primarily
sold to OEM customers and to distributors. The Company performs ongoing credit
evaluations of its customers and maintains reserves for credit losses. The
Company's sales to significant customers as a percentage of revenues were as
follows for the indicated periods:
Year Ended April 30,
--------------------------
2001 2000 1999
---- ---- ----
Percentage of revenues:
Customer A.................................. 17% 30% 43%
Customer B.................................. 14% 18% 24%
Customer C.................................. 1% 11% -%
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
Significant customer account receivables as a percentage of net accounts
receivable were as follows for the fiscal years indicated:
April 30,
----------------
2001 2000
---- ----
Percentage of accounts receivable:
Customer A...................................... 3% 33%
Customer B...................................... 4% 26%
Customer C...................................... 1% -%
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company identifies its operating segments based on business
activities, management responsibility and geographic location. For all periods
presented, the Company operated in a single business segment.
The Company sells its products in the United States and to the Asia
Pacific region. Revenues by geographic locations based on the country or region
of the customer were as follows (in thousands):
Year Ended April 30,
----------------------------
2001 2000 1999
---- ---- ----
Taiwan...................................... $14,604 $16,848 $3,084
United States............................... 8,355 8,709 735
Singapore................................... 7,611 6,670 536
Japan....................................... 6,865 897 62
Hong Kong................................... 5,061 2,780 435
South Korea................................. 5,051 3,296 260
Europe...................................... 2,936 468 64
All other................................... 3,224 585 67
------- ------- ------
$53,707 $40,253 $5,243
======= ======= ======
In December 2000, the Company formed a new subsidiary to conduct testing
and packaging operations in Shanghai, the People's Republic of China. The
registered capital of this new company is $12.0 million, of which $3.8 million
was funded by the Company in the year ended April 30, 2001, as required. The
Company is further obligated to fund the remaining $8.2 million of registered
capital by December 2003. As of April 30, 2001, $1.9 million of the $3.8
million was paid for land use rights and to building contractors, $1.8 million
was deposited in a bank account in China and $0.1 million was expended for
general purposes. The formation and operation of the new company in China
requires a large initial capital investment, and there may be significant
administrative, legal and governmental barriers in China, which may prevent the
Company's ability to begin operation of the new company as well as using the
funds outside of China.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2001, 2000 and 1999
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities in the U.S. under non-cancelable lease
agreements. The facility leases expire April 30, 2003. Future minimum lease
payments under all non-cancelable operating leases as of April 30, 2001 are as
follows (in thousands):
Years Ended April 30,
- ---------------------
2002......................................................... $628
2003......................................................... $284
Rental expenses under all operating leases amounted to $323,000, $268,000
and $203,000 for the years ended April 30, 2001, 2000 and 1999, respectively.
From time to time, the Company has been subject to legal proceedings and
claims with respect to such matters as patents, product liabilities and other
actions arising out of the normal course of business.
In March 2000, the Company received written notice from Koninklijke
Philips N.V. ("Philips") in which Philips claimed to have patent rights in a
serial bus system for data transmission, known as the I2C bus system. Although
the Company does not believe that any of its products infringe any Philips
patent, the Company is currently discussing possible royalty or licensing
arrangements as a means of business resolution. In the meantime, the Company
has completed implementation of a new serial bus system for its products.
During the year ended April 30, 2001, the Company received written notice
from Photobit Corporation ("Photobit") and California Institute of Technology
("CalTech") asserting infringement of patents which relate to various aspects
of image sensors. The Company filed an action with the U.S. District Court,
Northern District of California, seeking declaratory judgment that the patents
identified are invalid and/or not infringed by any of the Company's products.
Discovery is in process, and trial is scheduled for July 2002. In addition,
Photobit and CalTech filed a complaint with the U.S. International Trade
Commission for the same patents. The investigation is in process and the target
date for completion of the investigation is May 13, 2002. As with the action
pending in the Northern District of California, the Company believes that the
claims of Photobit and CalTech are meritless, and plan to vigorously defend
itself in the ITC investigation.
While the effect on future financial results cannot be predicted with
certainty, the Company believes that the final outcome of such matters will not
have a material adverse effect on its financial position and results of
operations or cash flows.
In conjunction with the formation of the new company in China, and in
addition to the capital requirement (see Note 10), the Company has entered into
certain commitments related to leasing land and constructing a facility in
Shanghai, China for approximately $12.0 million, of which $3.8 million has been
paid to date.
F-21
SCHEDULE II
OMNIVISION TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2001, 2000, and 1999
(Amounts in thousands)
Additions
Balance at and Write-offs Balance at
Beginning of Charges to and End of
Description Year Expenses Deductions Year
- --------------------------------- ---- -------- ---------- ----
Allowance for doubtful
accounts receivable:
Fiscal year ended April 30, 2001 $ 156 $ (41) $ 1 $ 114
====== ====== ====== ======
Fiscal year ended April 30, 2000 $ 56 $ 103 $ 3 $ 156
====== ====== ====== ======
Fiscal year ended April 30, 1999 $ 10 $ 49 $ 3 $ 56
====== ====== ====== ======
Deferred tax valuation allowance:
Fiscal year ended April 30, 2001 $2,654 $3,653 $ -- $6,307
====== ====== ====== ======
Fiscal year ended April 30, 2000 $4,973 $ -- $2,319 $2,654
====== ====== ====== ======
Fiscal year ended April 30, 1999 $3,532 $1,441 $ -- $4,973
====== ====== ====== ======
Sales return reserve:
Fiscal year ended April 30, 2001 $ 675 $ 556 $ 598 $ 633
====== ====== ====== ======
Fiscal year ended April 30, 2000 $ 489 $ 256 $ 70 $ 675
====== ====== ====== ======
Fiscal year ended April 30, 1999 $ 398 $ 91 $ -- $ 489
====== ====== ====== ======
S-1