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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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, CA 94085
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 733-3030
______________
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 and Exchange Act
of 1934 during the preceding 12 months (or for 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 [ ]
At December 12, 2002, 22,999,382 shares of common stock of the Registrant
were outstanding.
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OMNIVISION TECHNOLOGIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - October 31, 2002
and April 30, 2002........................................... 3
Condensed Consolidated Income Statements - Three and Six Months
Ended October 31, 2002 and 2001.............................. 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended October 31, 2002 and 2001.............................. 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 31
Item 4. Controls and Procedures.......................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders.............. 32
Item 6. Exhibits and Reports on Form 8-K................................. 33
Signatures............................................................... 34
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
October 31, April 30,
2002 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................ $ 51,398 $ 55,803
Short-term investments................................... 2,000 2,002
Accounts receivable, net................................. 15,111 10,787
Inventories.............................................. 11,905 3,244
Refundable and deferred income taxes..................... 2,984 3,066
Prepaid expenses and other assets........................ 2,422 987
-------- --------
Total current assets................................... 85,820 75,889
Property, plant and equipment, net......................... 8,529 6,164
Other non-current assets................................... 345 288
-------- --------
Total assets........................................... $ 94,694 $ 82,341
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 11,761 $ 5,865
Accrued expenses and other liabilities................... 4,302 4,306
Deferred revenue......................................... 926 651
-------- --------
Total current liabilities.............................. 16,989 10,822
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value; 100,000 shares authorized;
22,582 and 22,287 shares issued and outstanding........ 23 22
Additional paid-in capital............................... 96,835 95,469
Deferred compensation related to stock options........... (297) (479)
Accumulated deficit...................................... (18,856) (23,493)
-------- --------
Total stockholders' equity............................. 77,705 71,519
-------- --------
Total liabilities and stockholders' equity............. $ 94,694 $ 82,341
======== ========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues....................... $ 21,743 $ 12,265 $ 38,533 $ 23,426
Cost of revenues*.............. 13,063 7,591 23,337 13,724
-------- -------- -------- --------
Gross profit................... 8,680 4,674 15,196 9,702
-------- -------- -------- --------
Operating expenses:
Research and development*.... 2,489 1,798 5,119 3,486
Selling, general and
administrative*............ 2,710 3,384 4,790 6,623
Stock compensation charge*... 150 167 264 325
Litigation settlement........ -- 3,500 -- 3,500
-------- -------- -------- --------
Total operating expenses... 5,349 8,849 10,173 13,934
-------- -------- -------- --------
Income (loss) from operations.. 3,331 (4,175) 5,023 (4,232)
Interest income, net........... 216 454 432 1,021
-------- -------- -------- --------
Income (loss) before income
Taxes........................ 3,547 (3,721) 5,455 (3,211)
Provision for income taxes..... 532 -- 818 --
-------- -------- -------- --------
Net income (loss).............. $ 3,015 $ (3,721) $ 4,637 $ (3,211)
======== ======== ======== ========
Net income (loss) per share:
Basic........................ $ 0.13 $ (0.17) $ 0.21 $ (0.15)
======== ======== ======== ========
Diluted...................... $ 0.12 $ (0.17) $ 0.19 $ (0.15)
======== ======== ======== ========
Shares used in computing net
income (loss) per share:
Basic........................ 22,438 21,795 22,348 21,738
======== ======== ======== ========
Diluted...................... 24,441 21,795 24,955 21,738
======== ======== ======== ========
(*)Stock-based compensation
charges included in:
Cost of revenues........... $ 4 $ 8 $ 7 $ 17
======== ======== ======== ========
Operating expenses:
Research and development. $ 36 $ 40 $ 82 $ 127
Selling, general and
administrative......... 114 127 182 198
-------- -------- -------- --------
$ 150 $ 167 $ 264 $ 325
======== ======== ======== ========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
---------------------------
October 31, October 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss).................................... $ 4,637 $ (3,211)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 432 381
Allowance for doubtful accounts and sales returns.. 193 (159)
Amortization of deferred compensation.............. 271 342
Changes in assets and liabilities:
Accounts receivable.............................. (4,517) (2,362)
Inventories...................................... (8,661) 5,163
Refundable and deferred income taxes............. 82 (36)
Prepaid expenses and other assets................ (1,492) (441)
Accounts payable................................. 5,896 12
Accrued expenses and other liabilities........... 596 3,504
Deferred revenue................................. 275 (94)
-------- --------
Net cash provided by (used in) operating
activities................................... (2,288) 3,099
-------- --------
Cash flows from investing activities:
Purchase of short-term investments................... (2,000) (173)
Proceeds from sale of short-term investments......... 2,002 --
Purchases of property, plant and equipment........... (2,797) (1,059)
-------- --------
Net cash used in investing activities.......... (2,795) (1,232)
-------- --------
Cash flows from financing activities:
Deposit received (refunded).......................... (600) 500
Proceeds from issuance of common stock, net.......... 1,279 306
Payment for repurchase of common stock, net.......... (1) (4)
-------- --------
Net cash provided by financing activities...... 678 802
-------- --------
Net increase (decrease) in cash and cash equivalents... (4,405) 2,669
Cash and cash equivalents at beginning of period....... 55,803 51,053
-------- --------
Cash and cash equivalents at end of period............. $ 51,398 $ 53,722
======== ========
Supplemental cash flow information:
Taxes paid........................................... $ 2,088 $ 36
======== ========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
5
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended October 31, 2002 and 2001
(unaudited)
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements as
of October 31, 2002 and April 30, 2002 and for the three and six months ended
October 31, 2002 and 2001 have been prepared by OmniVision Technologies, Inc.
and subsidiaries (the "Company" or "OmniVision") in accordance with the rules
and regulations of the Securities and Exchange Commission. The amounts as of
April 30, 2002 have been derived from the Company's annual audited financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
and its results of operations and cash flows. These financial statements should
be read in conjunction with the annual audited financial statements and notes
as of and for the fiscal year ended April 30, 2002, included in the Company's
Annual Report on Form 10-K.
The results of operations for the three and six months ended October 31,
2002 are not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 2003 or any other future interim period, and the
Company makes no representations related thereto.
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - 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
considered probable, product returns are reasonably estimable, there are no
customer acceptance requirements and there are no remaining significant
obligations. The Company provides for future returns based on historical
experiences at the time revenue is recognized. For certain shipments to
distributors under agreements allowing for return or credits, revenue is
deferred until the distributor resells the product.
Note 3 - 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.
6
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Six Months Ended October 31, 2002 and 2001
(unaudited)
Note 4 - Balance Sheet Accounts (In Thousands)
------------------------------------
October 31, April 30,
2002 2002
---- ----
Cash and cash equivalents:
Cash.................................................... $ 662 $ 3,625
Money market funds...................................... 17,798 10,303
Commercial paper........................................ 32,938 41,875
-------- --------
$ 51,398 $ 55,803
======== ========
Short-term investments:
Corporate notes......................................... $ 2,000 $ 2,002
======== ========
Inventories:
Work in progress........................................ $ 7,439 $ 2,361
Finished goods.......................................... 4,466 883
-------- --------
$ 11,905 $ 3,244
======== ========
Prepaid expenses and other assets:
Prepaid expenses........................................ $ 2,337 $ 510
Other receivables....................................... 85 477
-------- --------
$ 2,422 $ 987
======== ========
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 period indicated
(in thousands, except per share data):
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income (loss).............. $ 3,015 $ (3,721) $ 4,637 $ (3,211)
======== ======== ======== ========
Denominator:
Weighted average shares........ 22,552 22,100 22,487 22,083
Weighted average unvested
common stock subject to
repurchase................... (114) (305) (139) (345)
-------- -------- -------- --------
Denominator for basic net
income (loss) per share...... 22,438 21,795 22,348 21,738
Effect of dilutive securities:
Common stock options......... 1,889 -- 2,468 --
Unvested common stock subject
to repurchase.............. 114 -- 139 --
-------- -------- -------- --------
Denominator for dilutive net
income (loss) per share........ 24,441 21,795 24,955 21,738
======== ======== ======== ========
Basic net income (loss) per share $ 0.13 $ (0.17) $ 0.21 $ (0.15)
======== ======== ======== ========
Diluted net income (loss) per
share.......................... $ 0.12 $ (0.17) $ 0.19 $ (0.15)
======== ======== ======== ========
7
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Six Months Ended October 31, 2002 and 2001
(unaudited)
Note 6 - 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 primarily to the Asia Pacific region and in
the United States. Revenues by geographic locations based on the country or
region in which the customer is located are not necessarily representative of
the geographic distribution of sales into end-user markets as the Company's
customers sell their products globally and were as follows (in thousands):
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---- ---- ---- ----
Hong Kong................ $ 13,232 $ 2,956 $ 20,878 $ 4,324
Taiwan................... 5,642 2,936 9,785 4,407
United States............ 388 3,775 3,166 10,264
Japan.................... 243 1,317 1,139 1,987
All other................ 2,238 1,281 3,565 2,444
-------- -------- -------- --------
$ 21,743 $ 12,265 $ 38,533 $ 23,426
======== ======== ======== ========
The Company's long-lived assets are located in the following countries (in
thousands):
October 31, April 30,
2002 2002
---- ----
United States....................................... $ 1,676 $ 1,716
China............................................... 6,818 4,426
All other........................................... 35 22
------- -------
$ 8,529 $ 6,164
======= =======
Note 7 - Commitments and Contingencies
-----------------------------
In December 2000, the Company established a wholly owned Chinese
subsidiary, HuaWei Semiconductor (Shanghai) Co., Ltd., ("HuaWei
Semiconductor"). HuaWei Semiconductor is a wholly owned subsidiary of HuaWei
Technology International, Ltd., ("HuaWei"), a Cayman Islands company that is
itself wholly owned by OmniVision. The Company established HuaWei
Semiconductor as part of its efforts to reduce the costs associated with the
testing of its CMOS image sensors. The Company currently anticipates that in
addition to using HuaWei Semiconductor as a testing facility, the Company may
expand the scope of its operations at HuaWei Semiconductor to include other
processes associated with the manufacturing of its products, such as color
filter applications. In August 2002, the Company increased the registered
capital of HuaWei Semiconductor to $30.0 million, from an initial $12.0 million
commitment. Of HuaWei Semiconductor's $30.0 million in registered capital, $9.5
million had been funded as of October 31, 2002. HuaWei made this investment in
HuaWei Semiconductor through capital provided by the Company from the Company's
available working capital. Of the remaining $20.5 million of registered capital
for HuaWei Semiconductor, which is an obligation of HuaWei, $2.5 million must
be funded by January 2004 and $18.0 million must be funded by January 2005. Of
the $9.5 million invested in HuaWei Semiconductor through October 31, 2002,
$6.7 million was used to pay for land use rights and to building contractors in
partial payment for the construction of the facility, $0.8 million was expended
for general operating expenses and $2.0 million remained available for future
use.
8
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Six Months Ended October 31, 2002 and 2001
(unaudited)
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.
On November 29, 2001, a complaint captioned McKee v. OmniVision
Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the
United States District Court for the Southern District of New York against the
Company, some of its directors and officers, and various underwriters for its
initial public offering. Plaintiffs generally allege that the named defendants
violated federal securities laws because the prospectus related to the
Company's offering failed to disclose, and contained false and misleading
statements regarding, certain commissions purported to have been received by
the underwriters, and other purported underwriter practices in connection with
their allocation of shares in the Company's offering. The complaint seeks
unspecified damages on behalf of a purported class of purchasers of its common
stock between July 14, 2000 and December 6, 2000. Substantially similar actions
have been filed concerning the initial public offerings for more than 300
different issuers, and the cases have been coordinated as In re Initial Public
Offering Securities Litigation, 21 MC 92. The issuers in the coordinated action
have filed a consolidated motion to dismiss.
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. The Company has completed
implementation of a new serial bus system for its products that the Company
believes do not infringe any patent.
Note 8 - Recent Accounting Pronouncements
--------------------------------
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses the recognition,
measurement and reporting of costs associated with exit or disposal activities,
and supersedes previous authoritative guidance, Emerging Issues Task Force
("EITF") No. 94-3. The principal difference between SFAS No. 146 and EITF No.
94-3 relates to the requirements that a liability for a disposal activity
(including those related to employee termination benefits and obligations under
operating leases and other contracts) be recognized when the liability is
incurred, and not necessarily the date of an entity's commitment to an exit
plan, as under EITF No. 94-3. SFAS No. 146 also establishes that the initial
measurement of a liability recognized under SFAS No. 146 be based on fair
value. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which 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 in our products, 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 continued improvement to the interface chips in the second
paragraph under "Overview;" the statements relating to the product mix of
revenues in Fiscal Year 2003 in the third paragraph under "Overview"; the
statements relating to the generation of revenues from five-volt and three-volt
products in the remainder of fiscal year 2003 in the third paragraph under
"Overview;" the statements relating to technology leadership and increase in
research and development expenses in the seventh paragraph under "Overview;"
the statements regarding the expansion of the scope of our operations at HuaWei
Semiconductor, the additional capital expenditures required by HuaWei
Semiconductor, the future funding sources for HuaWei and the potential nature
of future third party funding of HuaWei Semiconductor in the last paragraph
under "Overview;" the statements regarding the ongoing investment in HuaWei
Semiconductor and its future impact on our gross profit margin under "Gross
Profit;" the statements regarding the 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 the size of and
amortization of compensation charges under "Stock Compensation Charge;" the
statements regarding the effect of our obligations and commitments on liquidity
and capital resources; the expansion of the scope of our operations at HuaWei
Semiconductor; the additional capital expenditures required for the development
of HuaWei Semiconductor; the future funding sources for HuaWei and the
potential nature and availability of future third party funding of HuaWei
Semiconductor in the first paragraph under "Contractual Obligations and
Commercial Commitments;" the statements regarding cash resources available to
meet capital requirements in the second paragraph under "Contractual
Obligations and Commercial Commitments;" the statements regarding the effect of
and exposure to foreign currency exchange rate risk under "Foreign Currency
Exchange Risk;" and the statements regarding the effect of and exposure to
market interest rate risk under "Quantitative and Qualitative Discussion of
Market Interest Rate Risk;" among others. These forward-looking statements are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Future Results." 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
- --------
We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our main
product, an image sensing device called a CameraChip(tm), is used to capture an
image in cameras and camera related products in high-volume imaging
applications such as personal computer cameras, digital still cameras, security
and surveillance cameras, personal digital assistant cameras, mobile phone
cameras and cameras for automobiles and toys for both still picture and live
video applications. Our CameraChips are designed to use the complementary
metal oxide semiconductor, or CMOS, fabrication process. Our highly integrated
CameraChips 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 charge coupled device, or CCD, technology, or multiple chip CMOS
image sensors. Unlike some 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. We believe that we supply one of the most highly
integrated single chip CMOS image sensor solutions available today.
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 CameraChips aimed at new and
existing markets. We plan to expand the range of picture resolutions we offer,
provide additional CameraChips that require only three volts for portable
applications, further improve image quality and integrate additional functions
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
into our CameraChips. In addition, we have developed and market a family of
interface chips that include compression capabilities and which connect 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 each subsequent year. For
Fiscal Years 2002, 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 an equally significant portion
of our revenues in the fiscal year ending April 30, 2003, or Fiscal Year 2003,
will be generated from three-volt color image sensors, which are used primarily
in digital still cameras, personal computer cameras and cellular phone
accessories, and also from our five-volt color image sensors, which are used
primarily in affordable and easy to use personal computer cameras as well as
security and surveillance cameras.
We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers' representatives. Our CameraChips 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 Taiwan Semiconductor Manufacturing
Company, or TSMC, and Powerchip Semiconductor Company, or PSC. Some of our
CameraChips require further assembly prior to shipment, and we have also
outsourced this assembly process. A majority of our unit sales of CameraChips
for the three and six months ended October 31, 2002 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
Corporation, or Kyocera, Pan Pacific Semiconductor Co., Ltd., or PPSC, and
Alphatec Semiconductor Packaging Co., or Alphatec. Outside testing services do
not offer suitable tests for the key parameters 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 both domestically and at our new facility in China. Our
control over the testing process helps us maintain consistent product quality
and identify areas to improve product quality and reduce costs.
Sales of our CameraChips are subject to seasonality. Some of the products
using our CameraChips such as personal computer video cameras and digital still
cameras are consumer electronics goods. Typically, these goods are subject to
seasonality with generally increased consumer 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 calendar year. In addition, we typically experience a decrease in orders in
the quarter ended January 31 from our Chinese and Taiwanese customers primarily
due to the Chinese New 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 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 during Fiscal
Year 2003.
In December 2000, we established an indirect wholly owned Chinese
subsidiary, HuaWei Semiconductor (Shanghai) Co., Ltd., or HuaWei Semiconductor,
as part of our efforts to reduce the costs associated with the testing of our
CMOS image sensors. HuaWei Semiconductor is a wholly owned subsidiary of HuaWei
Technology International, Ltd., or HuaWei, a Cayman Islands company that is
itself wholly owned by us. We currently anticipate that in addition to using
HuaWei Semiconductor as a testing facility, we may expand the scope of our
operations at HuaWei Semiconductor to include other processes associated with
the manufacturing of our products, such as color filter applications. In August
2002, we increased the registered capital of HuaWei Semiconductor to $30.0
million, from an initial $12.0 million commitment. Of HuaWei Semiconductor's
$30.0 million in registered capital, $9.5 million had been funded as of October
31, 2002. HuaWei made this investment in HuaWei Semiconductor
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
through capital provided by us from our available working capital. Of the
remaining $20.5 million of registered capital for HuaWei Semiconductor, which
is an obligation of HuaWei, $2.5 million must be funded by January 2004 and
$18.0 million must be funded by January 2005. We currently anticipate that
development efforts for HuaWei Semiconductor will require additional capital
expenditures of approximately $28.0 million through April 30, 2003. We expect
to fund HuaWei Semiconductor through a combination of funds invested directly
through HuaWei from our available working capital and by investments from third
parties. Third party financing for HuaWei Semiconductor could include debt
financing from banking institutions or an equity financing transaction.
Critical Accounting Policies
- ----------------------------
For a discussion of the critical accounting policies, please see the
discussion in our Annual Report on Form 10-K for the fiscal year ended April
30, 2002.
Results of Operations
- ---------------------
The following table sets forth the results of our operations as a
percentage of revenues. Our historical operating results are not necessarily
indicative of the results for any future period.
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 60.1 61.9 60.6 58.6
------ ------ ------ ------
Gross profit................... 39.9 38.1 39.4 41.4
------ ------ ------ ------
Operating expenses:
Research and development....... 11.4 14.7 13.3 14.9
Selling, general and
administrative............... 12.5 27.6 12.4 28.3
Stock compensation charge...... 0.7 1.3 0.7 1.4
Litigation settlement.......... -- 28.5 -- 14.9
------ ------ ------ ------
Total operating expenses..... 24.6 72.1 26.4 59.5
------ ------ ------ ------
Income (loss) from operations.... 15.3 (34.0) 13.0 (18.1)
Interest income, net............. 1.0 3.7 1.1 4.4
------ ------ ------ ------
Income (loss) before income taxes 16.3 (30.3) 14.1 (13.7)
Provision for income taxes....... 2.4 -- 2.1 --
------ ------ ------ ------
Net income (loss).............. 13.9% (30.3)% 12.0% (13.7)%
====== ====== ====== ======
Three and Six Months Ended October 31, 2002 as Compared to Three and Six Months
Ended October 31, 2001
Revenues
- --------
We derive revenues from the sale of our CameraChip products and other
companion circuits for use in a variety of high-volume applications. Revenues
for the three months ended October 31, 2002 increased 77% to approximately
$21.7 million from $12.3 million for the three months ended October 31, 2001.
The increase in revenues during the three months ended October 31, 2002 was
primarily due to sharply increased demand from our contract manufacturing
customers who are primarily engaged in the manufacturing of digital still
cameras and from increased cell phone camera revenues. Driven by the growth
primarily in high-resolution products, revenues from the sale of digital image
sensor products increased by approximately 208% and represented approximately
74% and 43% of revenues for the three months ended October 31, 2002 and 2001,
respectively. Digital image sensor products are used primarily in devices such
as digital still camera, cell phone camera and personal computer camera
applications. These increases were partially offset by decreases in revenues
from analog image sensor products, which declined by approximately 20% for the
three months ended October 31, 2002 from the same period in Fiscal Year 2001
and represented approximately 26% and 57% of revenues for the three months
ended October 31, 2002 and 2001,
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
respectively. Analog image sensor products are used primarily in security and
surveillance camera and toy camera applications. Revenues for the six months
ended October 31, 2002 increased 64% to approximately $38.5 million from $23.4
million for the six months ended October 31, 2001. The increase in revenues
during the six months ended October 31, 2002 was primarily due to sharply
increased demand by our contract manufacturing customers who are primarily
engaged in the manufacturing of digital still cameras and from increased cell
phone camera revenues. Driven by the growth primarily in high-resolution
products, revenues from the sale of digital image sensor products increased by
approximately 253% and represented approximately 64% and 30% of revenues for
the six months ended October 31, 2002 and 2001, respectively. These increases
were partially offset by decreases in revenues from analog image sensor
products, which declined by approximately 15% for the six months ended October
31, 2002 from the same period in Fiscal Year 2001 and represented approximately
36% and 70% of revenues for the six months ended October 31, 2002 and 2001,
respectively. We expect that revenues from the sale of digital image sensor
products are likely to increase in absolute dollars and as a percentage of
revenues while revenues from the sale of analog image sensor products are
likely to decrease as a percentage of revenues.
Revenues by product categories were as follows (in thousands):
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
---- ---- ---- ----
Digital image sensors...... $ 16,121 $ 5,241 $ 24,615 $ 6,969
Analog image sensors....... 5,622 7,024 13,918 16,457
-------- -------- -------- --------
Total.................... $ 21,743 $ 12,265 $ 38,533 $ 23,426
======== ======== ======== ========
Domestic and international revenues for the three months ended October 31,
2002 were $0.4 million and $21.3 million, respectively, as compared to $3.8
million and $8.5 million, respectively, for the three months ended October 31,
2001. Domestic and international revenues for the six months ended October 31,
2002 were $3.2 million and $35.3 million, respectively, as compared to $10.3
million and $13.1 million, respectively, for the six months ended October 31,
2001. This represents a continuing shift from the year ago periods in our
revenue by geographic region from domestic to Asia-Pacific manufacturers as a
result primarily of the decline in analog image sensor product revenues for the
three and six months ended October 31, 2002 as compared to the same periods in
Fiscal Year 2002. Because of the preponderance of Asia Pacific manufacturers
and the fact that virtually all purchasers of the Company's image sensors sell
their products globally, we believe that such figures do not accurately reflect
geographic distribution of sales into end-user markets. Our two largest
original equipment manufacturing, or OEM, customers during the three months
ended October 31, 2002 were Concord Camera HK Limited, or Concord, based in
Hong Kong, and Aiptek International, Inc., or Aiptek, headquartered in Taiwan,
and they accounted for 19.5% and 12.7% of revenues, respectively. No other
single OEM customer accounted for 10% or more of revenues in the three months
ended October 31, 2002. For the three months ended October 31, 2001, one of our
security camera manufacturer customers, X10 Wireless Technology, Inc., or X10,
represented approximately 26.1% of revenues. No other single OEM customer
accounted for 10% or more of revenues in the three months ended October 31,
2001. Our largest distributor during the three months ended October 31, 2002
was Gain Tune, Ltd, or Gain Tune, based in Hong Kong, which accounted for 16.8%
of revenues. Gain Tune is an affiliated entity of World Peace Industrial Co.
Ltd., or World Peace, headquartered in Taiwan. Our two largest distributors
during the three months ended October 31, 2001 were World Peace, which
accounted for 16.7% of revenues, and SEC Development Co. Ltd., or SEC,
headquartered in Hong Kong, which accounted for 10.0% of revenues. For the six
months ended October 31, 2002, Gain Tune represented 15.4% of revenues and
Concord represented 12.2% or revenues. No other single OEM customer or
distributor accounted for 10% or more of revenues in the six months ended
October 31, 2002. For the six months ended October 31, 2001, X10 represented
39.5% of revenues, World Peace accounted for approximately 12.6% of revenues.
Gross Profit
- ------------
Gross margins for the three months ended October 31, 2002 and 2001 were
39.9% and 38.1% of revenues, respectively. The increase in gross margin for the
three months ended October 31, 2002 was primarily due to
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
component cost reductions and a shift in product mix toward sales of products
with proportionately greater margins than in the year ago period. Gross profit
for the three months ended October 31, 2002 also included a gross profit of
approximately $1.0 million from the sale of inventory that we had written off
in the quarter ended January 31, 2001. For the three months ended October 31,
2001, approximately $0.5 million of the margin was attributable to gross profit
from the sale of inventory that we had written-off in the quarter ended January
31, 2001. Excluding the gross profit from the sale of the written off
inventory, the gross margin would have been 37.2% of revenues for the quarter
ended October 31, 2002 as compared to 34.3% of revenues in the corresponding
quarter of the previous fiscal year. Gross margins for the six months ended
October 31, 2002 and 2001 were 39.4% and 41.4% of revenues, respectively. The
decrease in gross margin for the six months ended October 31, 2002 was
primarily due to a one-time $0.6 million payment to secure additional
production capacity and the proportionately greater beneficial impact in the
year ago period from the sale of previously written-off inventory. Gross profit
for the six months ended October 31, 2002 included a gross profit of
approximately $1.8 million from the sale of inventory that we had written-off
in prior years. For the six months ended October 31, 2001, $1.6 million of the
margin was attributable to gross profit from the sale of inventory that we had
written off in prior years. Excluding the gross profit from the sale of the
written off inventory, the gross margin would have been 36.6% of revenues for
the six months ended October 31, 2002 as compared to 34.6% of revenues in the
corresponding quarter of the previous fiscal year. The increase in gross margin
on an adjusted basis for the six months ended October 31, 2002 was due to
component cost reductions and changes in product mix.
Research and Development
- ------------------------
Research and development expenses for the three months ended October 31,
2002 and 2001 were approximately $2.5 million and $1.8 million, respectively.
As a percentage of revenues, research and development expenses for the three
months ended October 31, 2002 and 2001 represented 11.4% and 14.7%,
respectively. The decline in research and development as a percentage of
revenues was due to the proportionately greater increase in revenues for the
three months ended October 31, 2002 from prior year levels. Our research and
development expenses for the three months ended October 31, 2002 increased by
approximately $0.7 million from the same period in the prior year due to a $0.5
million increase in salaries and payroll-related expenses associated with
additional personnel and a $0.1 million increase in expenses related to new
product development required to improve our current product line and support
new product introductions. Research and development expenses for the six months
ended October 31, 2002 and 2001 were approximately $5.1 million and $3.5
million, respectively. As a percentage of revenues, research and development
expenses for the six months ended October 31, 2002 and 2001 represented 13.3%
and 14.9%, respectively. The decline in research and development as a
percentage of revenues was due to the proportionately greater increase in
revenues for the six months ended October 31, 2002 from prior year levels. Our
research and development expenses for the six months ended October 31, 2002
increased by approximately $1.6 million from the same period in the prior year
due to a $0.8 million increase in salaries and payroll-related expenses
associated with additional personnel and a $0.7 million increase in expenses
related to new product development required to improve our current product line
and support new product introductions. 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, all of which
may fluctuate significantly from period to period as a result of our product
development cycles. We expect that our future research and development expenses
may increase in absolute dollars and may decrease as a percentage of revenues
as we design and develop our next generation of CameraChip products.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses for the three months ended
October 31, 2002 and 2001 were approximately $2.7 million and $3.4 million,
respectively. The decrease in selling, general and administrative expenses of
approximately $0.7 million for the three months ended October 31, 2002 from the
same period in the prior year was a result primarily of the approximately $1.3
million decrease in legal expenses associated with patent litigation in fiscal
year 2002 which was settled in September 2001. The decrease in legal expenses
was partially offset by $0.3 million in increased salaries and payroll related
expenses associated with additional personnel and a $0.1 million
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
increase in commissions related to increased revenues. As a percentage of
revenues, selling, general and administrative expenses for the three months
ended October 31, 2002 and 2001 represented 12.5% and 27.6%, respectively.
Selling, general and administrative expenses decreased as a percentage of
revenues for the three months ended October 31, 2002 from the similar period in
the prior year as a result primarily of the decrease in legal expenses
associated with patent litigation combined with the proportionately greater
increase in revenues. Selling, general and administrative expenses for the six
months ended October 31, 2002 and 2001 were approximately $4.8 million and $6.6
million, respectively. The decrease in selling, general and administrative
expenses of approximately $1.8 million for the six months ended October 31,
2002 from the same period in the prior year was a result primarily of the
approximately $3.0 million decrease in legal expenses associated with patent
litigation in Fiscal Year 2002. The decrease in legal expenses was partially
offset by a $0.5 million increase in salaries and payroll related expenses
associated with additional personnel and a $0.3 million increase in commissions
related to increased revenues. As a percentage of revenues, selling, general
and administrative expenses for the six months ended October 31, 2002 and 2001
represented 12.4% and 28.3%, respectively. Selling, general and administrative
expenses decreased as a percentage of revenues for the six months ended October
31, 2002 from the similar period in the prior year as a result primarily of the
decrease in legal expenses associated with patent litigation combined with the
increase in revenues. Selling, general and administrative expenses consist
primarily of compensation and personnel related expenses, commissions paid to
distributors, manufacturers' representatives, and insurance and legal expenses.
Selling, general and administrative expenses include the expenses associated
with the startup of our wholly owned Chinese subsidiary, HuaWei Semiconductor.
We expect that our future selling, general and administrative expenses will
increase in absolute dollars.
Interest Income, Net
- --------------------
Interest income, net for the three months ended October 31, 2002 and 2001
was approximately $0.2 million and $0.5 million, respectively. Interest income,
net for the six months ended October 31, 2002 and 2001 was approximately $0.4
million and $1.0 million, respectively. Interest income, net, decreased for the
three and six months ended October 31, 2002 primarily due to a decline in
interest rates. Our cash and cash equivalents are invested in interest-bearing
accounts consisting primarily of high-grade corporate securities and money
market accounts maturing approximately twelve months or less from the date of
purchase.
Provision for Income Taxes
- --------------------------
We generated approximately $3.5 million and $5.5 million in income before
income taxes for the three and six months ended October 31, 2002, respectively.
We recorded a provision for income taxes for the three and six months ended
October 31, 2002 of approximately $0.5 million and $0.8 million, respectively.
We had no provision for income taxes in the comparable prior year periods after
taking into consideration the utilization of the prior years' net operating
loss carryforwards and credits.
Liquidity and Capital Resources
- -------------------------------
Principal sources of liquidity at October 31, 2002 consisted of cash, cash
equivalents and short-term investments of $53.4 million.
Our working capital increased by approximately $3.8 million to $68.8
million as of October 31, 2002 from $65.1 million as of April 30, 2002. The
increase was primarily attributable to an $8.7 million increase in inventories
and a $4.3 million increase in accounts receivable consistent with the increase
in revenues from prior year levels during the six months ended October 31,
2002, and a $1.4 million increase in prepaid expenses and other assets,
partially offset by a $5.9 million increase in accounts payable and a $4.4
million decrease in cash and cash equivalents.
For the six months ended October 31, 2002, our use of cash in operating
activities totaled approximately $2.3 million as compared to cash provided by
operating activities of $3.1 million for the similar period in the prior year,
primarily due to a $8.7 million increase in inventories to support future sales
and a $4.5 million increase in accounts receivable consistent with the increase
in current quarter revenues, and a $1.5 million increase in prepaid
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
expenses and other assets, which were partially offset by $5.9 million increase
in accounts payable and net income of approximately $4.6 million for the six
months ended October 31, 2002.
For the six months ended October 31, 2002, our cash used in investing
activities increased to approximately $2.8 million from a use of $1.2 million
for the similar period in the prior year, due to $2.8 million in purchases of
property, plant and equipment. Net cash used for investing activities of $1.2
million for the six months ended October 31, 2001, primarily resulted from
purchases of property, plant and equipment.
For the six months ended October 31, 2002, net cash provided by financing
activities decreased to approximately $0.7 million from $0.8 million for the
similar period in the prior year. The decrease was primarily due to an increase
in proceeds from the issuance and sale of common stock pursuant to the exercise
of stock options and from employee purchases through the employee stock
purchase plan which totaled $1.3 million during the six months ended October
31, 2002 as compared to $0.3 million for the similar period in the prior year.
Proceeds from the issuance and sale of common stock for the six months ended
October 31, 2002 were partially offset by $0.6 million in refunded deposits
related to investments from third parties in HuaWei Semiconductor. For the six
months ended October 31, 2001, such deposits contributed $0.5 million to cash
flows from financing activities.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The following summarizes our contractual obligations and commercial
commitments as of October 31, 2002 and the effect such obligations and
commitments are expected to have on our liquidity and cash flows in future
periods (in thousands):
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Contractual Obligations
- -----------------------
Operating leases............... $ 1,421 $ 753 $ 662 $ 6 $ --
Noncancelable orders........... 1,959 1,959 -- -- --
------- ------- ------ ------ ------
Total contractual obligations 3,380 2,712 662 6 --
Other Commercial Commitments
- ----------------------------
Investment in China............ 20,600 100 20,500 -- --
------- ------- ------ ------ ------
Total contractual obligations
and commercial commitments. $23,980 $ 2,812 $21,162 $ 6 $ --
======= ======= ======= ====== ======
The $20.6 million commercial commitment referenced in the table above
regarding our investment in China relates primarily to the remaining $20.5
million of registered capital for HuaWei Semiconductor, which is an obligation
of HuaWei. We established HuaWei Semiconductor as part of our efforts to
reduce the costs associated with the testing of our CMOS image sensors. We
currently anticipate that in addition to using HuaWei Semiconductor as a
testing facility, we may expand the scope of our operations at HuaWei
Semiconductor to include other processes associated with the manufacturing of
our products, such as color filter applications. We currently anticipate that
development efforts for HuaWei Semiconductor will require additional capital
expenditures of approximately $28.0 million through April 30, 2003. We expect
to fund HuaWei Semiconductor through a combination of funds invested directly
through HuaWei from our available working capital and by investments from third
parties. Third party financing for HuaWei Semiconductor could include debt
financing from banking institutions or an equity financing transaction. Third
party financing may not be available to us when and as required or on terms
that are favorable to our stockholders and us. In the event we are unable to
obtain financing from third parties, the issuance of our equity securities,
including securities convertible into our equity securities, would dilute the
ownership interests of our existing stockholders and the issuance of debt
securities could increase the risk or perceived risk of our business. Issuance
of debt securities could also impair our financial condition and interest
payments could have an adverse effect on our results of operation.
We currently expect our available cash, cash equivalents, and short-term
investments, together with cash that we anticipate to be generated from
business operations, to be sufficient to satisfy our foreseeable working
capital
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
requirements. Our ability to generate cash from operations is subject to
substantial risks described below under the caption "Factors Affecting Future
Results." We encourage you to review these risks carefully. If we are unable to
generate sufficient cash from our operations, it would have a material adverse
effect on our business and financial condition.
Other Matters
- -------------
The Audit Committee of the Board of Directors has approved the non-audit
services and associated fees to be performed by PricewaterhouseCoopers LLP.
FACTORS AFFECTING FUTURE RESULTS
You should carefully consider these risk factors, together with all of the
other information included in this Quarterly Report on Form 10-Q. 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.
We have a history of losses, and in future periods we may not be able to
- ------------------------------------------------------------------------
achieve or sustain profitability.
- --------------------------------
We incurred net losses of approximately $1.3 million in Fiscal Year 2002
and $11.6 million in Fiscal Year 2001. In Fiscal Year 2000, the only year in
which we were profitable on a fiscal year basis, our net income was
approximately $3.4 million. In the three and six months ended October 31, 2002,
our net income was $3.0 million and $4.6 million, respectively. We may not be
able to sustain profitability in future periods, including subsequent quarters
or on an annual basis in Fiscal Year 2003 and beyond. In the future, we expect
to incur significant expenses, including expenses related to our research and
development efforts, including the development of new products and expenses
related to the funding of HuaWei Semiconductor, which could impair our ability
to achieve and sustain profitability. In addition, as we hire additional
personnel and possibly engage in larger business transactions, we expect
selling, general and administrative expenses to increase. Other risks, such as
product yields and competition, associated with our business described
elsewhere in this section, many of which are beyond our control, could also
affect our ability to achieve and sustain profitability. If our revenues do not
increase, we may not subsequently achieve or sustain profitability.
Problems with wafer manufacturing yields could result in higher operating
- -------------------------------------------------------------------------
costs, and could impair our ability to meet customer demands for our products.
- -----------------------------------------------------------------------------
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. Problems with wafer manufacturing yields may also impair
our ability to timely deliver products to our customers, which could adversely
affect our customer relations and make it more difficult to sustain and grow
our business.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
The continued economic slowdown has adversely affected our revenues and may
- ---------------------------------------------------------------------------
continue to do so in the future.
- -------------------------------
Since the third quarter of Fiscal Year 2001, our customers and
distributors, primarily our PC video camera customers and distributors, have
been impacted by significantly lower demand for camera related products, which
has forced them to unexpectedly reschedule or cancel orders for our products.
As a result, our revenues and earnings have been adversely affected. If the
macroeconomic climate, especially with respect to investments in technology
such as ours, does not improve, our revenues and operating results may continue
to be adversely affected. In addition, if the demand for our products, in
particular our camera-related products such as PC video cameras, does not
increase as we expect, or if it were to lessen for any reason, we may not be
able to meet analysts' projections for future operating results, which would
likely cause our stock price to decline, potentially significantly.
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 CCD image sensors, as well as
other companies, which sell 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. We expect
competition in our markets to increase.
Many of our competitors have longer operating histories, greater presence
in key markets, greater name recognition, larger 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 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 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, as well as CMOS
image sensor manufacturers such as Agilent Technologies, Inc., Pictos
Technologies, Inc. (formerly Conexant Systems, Inc.), Hyundai Electronics
Industries Co. Ltd., IC Media Corporation, or IC Media, Micron Technology,
Inc., Mitsubishi Electronic Company, Motorola, Inc., National Semiconductor
Corporation, STMicroelectronics, Inc., Toshiba Corporation and Zoran
Corporation.
In addition, for competitive reasons, or otherwise, some of our
competitors may acquire or enter into strategic or commercial agreements or
arrangements with our foundries or third party providers of color filter
processing, assembly services or packaging services. As a result of such
agreements or arrangements, our ability to secure sufficient capacity from
these manufacturers and service providers to meet our customer demands may be
impaired. In addition, competitors may enter into exclusive relationships with
product distributors, which could impair our ability to sell our products and
grow our business. We have experienced these types of competitive pressures in
the past.
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 that we may not be able to sell or we may have to sell our products to
other customers for lower prices. For example, one customer unexpectedly
cancelled its purchase orders for one of our products in the
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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.
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 adversely affect our operating results, including a reduction in
our gross margins. Conversely, if customer demand exceeds our forecasts, we may
be unable to obtain an adequate supply of wafers to fill customer orders that
could result in lost sales, which could harm our relationship with existing
customers and potential customers and impair our ability to grow our business.
We have experienced problems with accurately estimating wafer requirements in
the past. For example, as a consequence of a product order forecast which
proved to be greater than market demand for our products, we recognized an
$18.7 million inventory adjustment in Fiscal Year 2001.
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 and PSC 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 or PSC 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, which is a time consuming and difficult
process that could result in unforeseen product or operation problems. 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.
Our reliance on third party vendors for color filter processing services could
- ------------------------------------------------------------------------------
adversely affect our ability to deliver our products to our customers and
- -------------------------------------------------------------------------
reduces our control over delivery schedules, product quality and cost.
- ---------------------------------------------------------------------
After our wafers are produced, they are color filter processed by two
independent vendors, TSMC and Toppan. We do not have long-term agreements with
either of these vendors and typically obtain services from them on a purchase
order basis. If for any reason one or more of our current vendors was unable or
unwilling to continue to provide color filter processing services and deliver
products of acceptable quality, at acceptable costs and in a timely manner,
this could severely impair our ability to deliver our products to our
customers, which would harm our operating results and prospects. We would also
have to identify and qualify substitute vendors, which could be time consuming
and difficult and result in unforeseen operations problems. If competition for
color filter processing capacity increases, our product costs may increase, and
we may be required to pay or invest significant amounts to
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
secure access to these services. There are a limited number of companies that
provide these services, and in the event our current providers of color filter
processing services refuse or are unable to continue to provide these services
to us, we may not be able to procure these services from alternate service
providers. Furthermore, if customer demand for our products increases, we may
not be able to secure sufficient additional capacity from our current service
providers on commercially reasonable terms, if at all. Moreover, our reliance
on third party vendors to provide color filter processing services 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.
We rely on a limited number of third party vendors to provide packaging
- -----------------------------------------------------------------------
services for our CMOS image sensors.
- -----------------------------------
We have historically outsourced our entire packaging requirement for our
image sensors to Kyocera, PPSC and Alphatec. Kyocera is currently our sole
provider of ceramic chip packages which are generally used in our higher-priced
products. In addition, PPSC is currently the sole provider of plastic chip
packages, which are generally used in our lower-priced product lines. Plastic
packaging services are important to our ability to reduce costs because plastic
packaging is less expensive than ceramic packaging and, consequently, our
industry is evolving to rely more heavily on plastic packaging. We do not
currently have long-term agreements with any of these vendors and typically
obtain services from them on a purchase order basis. If one or more of these
current vendors was unable or unwilling to continue to provide these packaging
services for any reason, our ability to deliver our CMOS image sensors could be
materially adversely affected which would harm our operating results and
prospects. If competition for packaging capacity increases, our product costs
may increase, and we may be required to pay or invest significant amounts to
secure access to these services. We would also have to identify and qualify
substitute vendors, which could be time consuming and difficult and result in
unforeseen operations problems. There are a limited number of companies that
provide these services, and in the event our current packaging service
providers refuse or are unable to continue to provide these services to us, we
may not be able to procure these services from alternate third party service
providers. Furthermore, if customer demand for our products increases, we may
not be able to secure sufficient additional capacity from our current packaging
service providers on commercially reasonable terms, if at all. Moreover, we
rely on these packaging vendors for quality assurance purposes, which affects
our yields. If we experience quality control problems with the packaging of our
products, this could result in product shortages or could increase the costs of
manufacturing, assembling and testing our products, which would adversely
affect our gross margins.
Our ability to deliver products that meet our customers' requirements is
- ------------------------------------------------------------------------
dependent upon our ability to meet new and changing requirements for color
- --------------------------------------------------------------------------
filter processing and assembly and product packaging.
- ----------------------------------------------------
We expect that as our products develop to meet new and changing industry
and customer requirements, our requirements for color filter processing and
ceramic and plastic packaging services will also evolve. For instance, we have
recently used contract manufacturing services to assemble new camera modules
for one of our OEM customers. We expect that our industry will continue to
evolve and adopt new technologies and materials that improve the quality of
image sensor products and that also reduce manufacturing costs. Our ability to
deliver products that meet customer demands and our ability to attain and
sustain profitability is dependant upon our ability to procure services that
meet these new requirements on a cost-effective basis. We have historically
relied exclusively on third parties to provide these services, and there can be
no assurances that these third parties will be able to provide services that
meet new requirements. Furthermore, even if these third party vendors are able
to provide services that meet the new and evolving requirements, these services
may not be available on a cost basis that enables us to achieve or sustain
profitability.
20
ITEM 2. 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, many of which are beyond our control. These factors, many
of which are more fully discussed in other risk factors, include:
o our ability to accurately forecast the number of wafers we need;
o our ability to achieve acceptable wafer manufacturing yields;
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. Changes in our product mix could
adversely affect our operating results because some products provide higher
margins than others. We typically experience lower yields in the manufacturing
of newer products, and consequently our gross margins with new products have
historically been lower than our gross margins from our older, more established
products. We also anticipate that the rate of orders from our customers may
vary significantly from quarter to quarter. Our expenses, including our future
capital commitments such as those with HuaWei Semiconductor, and our inventory
levels are based on our expectations of future revenues and are relatively
fixed. 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 customers, including camera
manufacturers and distributors;
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. Our revenue or operating
results in a given quarter could be substantially less than anticipated by
market analysts, which could result in a substantial decline in our stock
price. In addition, quarter-to-quarter variations, such as those recently
experienced, could create uncertainty about the direction or progress of our
business, which could also result in a decline in the price of our common
stock. Our revenues and operating results will vary from quarter to quarter for
many reasons beyond our control, including those described in this section. As
a result, our quarterly revenues and operating results are not predictable with
any significant degree of accuracy. In addition, historical revenue growth
rates will not necessarily be sustainable in the future or indicative of future
growth rates. If our revenue growth rates slow or our revenues decline, our
operating results could be seriously impaired because many of our expenses are
fixed and cannot be easily or quickly changed, which could lead to a dramatic
decline in our stock price. 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.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Declines in our average sales prices 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. We expect that
there will be a continued decline in average sales prices for many of our
products. We believe that we can offset declining average sales prices.
However, if we are unable to achieve cost reductions by achieving manufacturing
cost efficiencies and technological advances, or are unable to timely introduce
new products that incorporate more advanced technology and include more
advanced features that can be sold at stable average gross margins, we will
lose revenues and gross margins will decline.
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 are examples of
factors that 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 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.
o the failure of development of user friendly and affordable products; and
o the limited availability of bandwidth to run CMOS image sensor
applications; and
o the uncertainty of emerging markets for products incorporating CMOS
technology.
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, in particular the markets for digital still cameras, personal computer
cameras, video phones, including video cell phones, and security and
surveillance products 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 cameras, personal digital assistant cameras,
mobile phone cameras, cameras for security and surveillance systems, closed
circuit television systems, cameras for toys and games and automotive
applications. Emerging markets for our products include cameras for personal
identification systems, medical imaging devices, machine control systems, and
videophones. If these markets do not continue to grow and develop, the need for
cameras which are lower in cost, smaller, lighter in weight, more reliable and
which consume less power 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.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Historically, our revenues have been dependent upon a few key customers and
- ---------------------------------------------------------------------------
distributors, and the loss of any of them could significantly reduce our
- ------------------------------------------------------------------------
revenues.
- --------
Historically a relatively small number of customers and distributors have
accounted for a significant portion of our product revenues. Our two largest
OEM customers during the three months ended October 31, 2002 were Concord and
Aiptek, who accounted for 19.5% and 12.7% of revenues, respectively. No other
single customer accounted for 10% or more of revenues in the three months ended
October 31, 2002. Our largest distributor during the three months ended October
31, 2002 was Gain Tune, which accounted for 16.8% of revenues. For the six
months ended October 31, 2002, Gain Tune represented 15.4% of revenues and
Concord represented 12.2% or revenues. No other single customer or distributor
accounted for 10% or more of revenues in the six months ended October 31, 2002.
A significant reduction, delay or cancellation of orders from our key customers
or distributors, or a decision by them to select or distribute products
manufactured by a competitor could seriously harm our business. For example, in
1999, we had to replace one of our largest distributors with Wintek Electronics
Co., Ltd., 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.
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 personal computer video cameras and
digital still cameras, are consumer electronics goods. Typically, these goods
are subject to seasonality with generally increased consumer 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 calendar year. In addition, we typically experience a
decrease in orders in the quarter ended January 31 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 the calendar year.
Our lengthy manufacturing, packaging and assembly cycle, in addition to our
- ---------------------------------------------------------------------------
customers' design cycle, may result in uncertainty and delays in generating
- ---------------------------------------------------------------------------
revenues.
- --------
Manufacturing our image sensors requires a lengthy manufacturing,
packaging and assembly process, typically lasting four months or more. 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 and sales and marketing efforts 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.
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. These
camera manufacturers 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, among other matters:
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;
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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 or impair our ability
to achieve market acceptance for our products, thereby adversely affecting our
revenues and operating results.
We may never achieve the anticipated benefits from our planned operations in
- ----------------------------------------------------------------------------
Shanghai. In addition, our Shanghai operations involve substantial capital
- ---------------------------------------------------------------------------
expenditures.
- ------------
In December 2000, we established HuaWei Semiconductor as part of our
efforts to reduce the costs associated with the testing of our CMOS image
sensors. We currently anticipate that in addition to using HuaWei Semiconductor
as a testing facility, we may expand the scope of our operations at HuaWei
Semiconductor to include other processes associated with the manufacturing of
our products, such as color filter applications. We may never achieve the
anticipated benefits from our planned operations in Shanghai. Because of
potential problems with establishing a testing facility or with expanding the
operations of HuaWei Semiconductor to include other processes associated with
manufacturing our products, including technology and infrastructure risks, we
may not be able to lower the costs of manufacturing our products. In addition,
there may be significant administrative, legal and governmental barriers in
China, which may harm us or prevent us from beginning operation of this Chinese
subsidiary. If our ongoing investment in the Chinese subsidiary does not result
in offsetting gains in the form of operating cost reductions, whether because
of the risks and difficulties entailed by foreign operations or for other
reasons, our business and financial condition will be adversely affected.
Our operating through HuaWei Semiconductor will involve substantial risks
that could increase our operating expenses and adversely affect our operating
results, financial condition, ability to deliver our products and grow our
business, including:
o difficulties in staffing and managing foreign operations, in particular
attracting and retaining qualified, personnel in designing, selling and
supporting CMOS image sensors;
o difficulties in integrating our operations in Shanghai with those in
Sunnyvale, California;
o disruption of our current business operations, including diversion away
from other business issues;
o difficulty in maintaining uniform standards, controls, procedures and
policies;
o political and economic instability which may have an adverse impact on
foreign exchange rates in Asia, and could impair our ability to conduct
our business in the affected foreign locations; and
o inadequacy of local infrastructure.
We also face potential risks associated with capital requirements for
HuaWei Semiconductor. Of HuaWei Semiconductor's $30.0 million in registered
capital, $9.5 million had been funded as of October 31, 2002. HuaWei made this
investment in HuaWei Semiconductor through capital provided by us from our
available working capital. Of the remaining $20.5 million of registered capital
for HuaWei Semiconductor, which is an obligation of HuaWei, $2.5 million must
be funded by January 2004 and $18.0 million must be funded by January 2005. We
currently anticipate that development efforts for HuaWei Semiconductor will
require additional capital expenditures of approximately $28.0 million through
April 30, 2003. We expect to fund HuaWei Semiconductor through a combination of
funds invested directly through HuaWei from our available working capital and
by investments from third parties. Third party financing for HuaWei
Semiconductor could include debt financing from banking institutions or an
equity financing transaction. Third party financing may not be available to us
when and as required or on terms that are favorable to us and our stockholders.
In the event we are unable to obtain financing from third parties, the issuance
of our equity securities, including securities convertible into our equity
securities, would dilute the
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
ownership interests of our existing stockholders and the issuance of debt
securities could increase the risk or perceived risk of our business. Issuance
of debt securities could also impair our financial condition and interest
payments could have an adverse effect on our results of operation. In addition,
Chinese law may prevent the use of capital committed to HuaWei Semiconductor
outside of China.
In addition to risks we face in connection with our planned operations in
- -------------------------------------------------------------------------
Shanghai, 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.
- ----------------------------
Historically, the manufacturing, processing and assembly of our products
has principally been conducted by foreign third-party manufacturers and service
providers. Because our headquarters are located in Sunnyvale, California we
face difficulties in managing our third party foundries, color filter
application service providers and ceramic and plastic service providers, which
are all located in Asia, and our foreign distributors. In addition, potential
political and economic instability, may have an adverse impact on foreign
exchange rates in Asia, and could impair the ability of important manufacturing
and other service providers from providing the services that we need.
Potential adverse effects of tariffs, duties, price controls or other
restrictions that impair trade, which could result in regulations which impair
our ability to conduct business or could result in increased and unforeseen
costs.
In addition, many of our customers are camera manufacturers or are the
manufacturers or suppliers for camera manufacturers and are located in Hong
Kong, Japan, Korea and Taiwan. In addition, sales outside of the United States
accounted for approximately 98% and 92% of our revenues for the three and six
months ended October 31, 2002, respectively, and 74% of our revenues for fiscal
2002. We anticipate that sales outside of the United States will continue to
account for a substantial portion of our revenue in future periods. Dependence
on sales to foreign customers involves certain risks, including:
o longer payment cycles;
o the adverse effects of tariffs, duties, price controls or other
restrictions that impair trade; 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 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;
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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
failure to successfully develop new products that achieve market acceptance
would adversely affect our operating results and impact our ability to grow our
business.
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.
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.
Our business could be harmed if we lost the services of one or more members of
- ------------------------------------------------------------------------------
our senior management team.
- --------------------------
The loss of the services of one or more of our executive officers or key
employees, or the decision of one or more of these individuals to join a
competitor, could adversely affect our business and harm our operating results
and financial condition. Our success depends to a significant extent on the
continued service of our senior management and other key technical personnel.
None of our senior management is bound by an employment or non-competition
agreement. We do not maintain key man life insurance on any of our employees.
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 term employment agreements with our
employees. Our success also depends on our ability to identify, attract and
retain
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
qualified technical (particularly analog or mixed signal design engineers),
sales, marketing, finance and management personnel. Competition for qualified
personnel is 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
provide assurance 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. For example, we have filed two
complaints, one in California and one in Taiwan, against IC Media alleging that
IC Media has infringed one of our patents. Both of these complaints seek
injunctive relief and damages from IC Media. In response to our patent
infringement complaints, IC Media has initiated a cancellation proceeding with
respect to our patent. If we are not successful in suits in which we claim
that third parties infringe our patents or other intellectual property, such as
our complaints against IC Media, then our competitive position may be adversely
affected.
Furthermore, 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 intellectual property rights, including rights of companies in
the semiconductor industry. 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. We
expect these claims to increase as OmniVision and its intellectual property
portfolio become larger. Intellectual property claims against us, and any
resulting lawsuit, may result in our incurring significant expenses and could
subject us to significant liability for damages and invalidate what we
currently believe are our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and
could divert management's time and attention. Any potential intellectual
property litigation against us could also force us to do one or more of the
following:
o cease selling, incorporating or using products or services that
incorporate the infringed intellectual property;
o obtain from the holder of the infringed intellectual property a license
to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all; or
o redesign those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated
development expenses.
If we are subject to a successful claim of infringement and we fail to
develop non-infringing intellectual property or license the infringed
intellectual property on acceptable terms and on a timely basis, our revenues
could decline or our expenses could increase. We may in the future initiate
claims or litigation against third parties for infringement of our intellectual
property rights or to determine the scope and validity of our proprietary
rights or the proprietary
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
rights of competitors. These claims could also result in significant expense
and the diversion of technical and management personnel's attention.
If we do not effectively manage our growth, this 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. We expect that we will continue to face
challenges regarding managing our growth in connection with the expansion of
our operations through HuaWei Semiconductor. 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.
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.
We may experience integration or other problems with potential acquisitions,
- ----------------------------------------------------------------------------
which could have an adverse effect on our business or results of operations.
- ----------------------------------------------------------------------------
New acquisitions could dilute the interests of existing stockholders, and the
- -----------------------------------------------------------------------------
announcement of new acquisitions could result in a decline in the price of our
- ------------------------------------------------------------------------------
common stock.
- ------------
We may in the future make acquisitions of, or large investments in,
businesses that offer products, services, and technologies that we believe
would complement our products. We may also make acquisitions of, or
investments in, businesses that we believe could expand our distribution
channels. Even though we announce an acquisition, we may not be able to
complete it. Any future acquisition or substantial investment would present
numerous risks. The following are examples of these risks:
o difficulty in combining the technology, operations or work force of the
acquired business,
o disruption of our on-going business,
o difficulty in realizing the potential financial or strategic benefits of
the transaction,
o difficulty in maintaining uniform standards, controls, procedures and
policies,
o possible impairment of relationships with employees and customers as a
result of integration of new businesses and management personnel, and
o impairment of assets related to resulting goodwill, and reductions in
our future operating results from amortization of intangible assets.
We expect that future acquisitions could provide for consideration to be
paid in cash, shares of our common stock, or a combination of cash and our
common stock. If the consideration for the transaction were paid in common
stock, this would further dilute our existing stockholders.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Provisions in our charter documents and Delaware law, as well as our
stockholders rights plan, 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
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 board of directors adopted a
Preferred Stock Rights Agreement in August 2001, the Rights Agreement. Pursuant
to the Rights Agreement, our board of directors declared a dividend of one
right, or right, to purchase one one-thousandth share of our Series A
Participating Preferred Stock for each outstanding share of our common stock.
The dividend was paid on September 28, 2001 to stockholders of record as of the
close of business on that date. Each right entitles the registered holder to
purchase from us one one-thousandth of a share of Series A Preferred at an
exercise price of $40.00, subject to adjustment. The exercise of the rights
could have the effect of delaying, deferring or preventing a change of control
of us, including, without limitation, discouraging a proxy contest or making
more difficult the acquisition of a substantial block of our common stock. The
Rights Agreement could also limit the price that investors might be willing to
pay in the future for our common stock.
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 market price of our common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. From the
completion of our initial public offering in July 2000 through October 31,
2002, the closing sales price of our common stock has ranged from a high of
$47.25 per share to a low of $2.37 per share. 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.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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.
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.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
------------------------------
We are an international company, selling our products globally, in
particular, in China, Hong Kong, Japan, Korea 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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that the information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures in reaching that
level of reasonable assurance. We do not expect that our disclosure controls
and procedures will prevent all error and all fraud. Because of inherent
limitations in any system of disclosure controls and procedures, no evaluation
of controls can provide absolute assurance that all instances of error or
fraud, if any, within our company may be detected.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date that we completed our evaluation.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 29, 2001, a complaint captioned McKee v. OmniVision
Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the
United States District Court for the Southern District of New York against the
Company, some of its directors and officers, and various underwriters for its
initial public offering. Plaintiffs generally allege that the named defendants
violated federal securities laws because the prospectus related to the
Company's offering failed to disclose, and contained false and misleading
statements regarding, certain commissions purported to have been received by
the underwriters, and other purported underwriter practices in connection with
their allocation of shares in the Company's offering. The complaint seeks
unspecified damages on behalf of a purported class of purchasers of its common
stock between July 14, 2000 and December 6, 2000. Substantially similar actions
have been filed concerning the initial public offerings for more than 300
different issuers, and the cases have been coordinated as In re Initial Public
Offering Securities Litigation, 21 MC 92. The issuers in the coordinated action
have filed a consolidated motion to dismiss.
On October 11, 2002, the Company filed a complaint against IC Media
Corporation in Superior Court of California, Santa Clara County (Case No. CV
811866.) In its complaint, the Company alleges misappropriation of trade
secrets, unfair competition and other business torts, and seeks damages and
injunctive relief. IC Media Corporation has answered the complaint by denying
the allegations and raising various defenses; no counterclaims have been
asserted. The Company has confidence in the merits of its case and plans to
pursue its legal remedies.
Further, the Company on August 21, 2002 initiated a patent infringement
action in Taiwan, R.O.C. against IC Media Corporation of San Jose, CA for
infringement of Taiwan patent NI-139439 owned by the Company. The action was
brought in the Civil Tribunal of the Shih Lin District Court and assigned Civil
Action Number 91 Su-Zi 1074. The patent infringement action seeks damages and
injunctive relief against IC Media Corporation. In response to the Company's
patent infringement action, on October 2, 2002, IC Media Corporation initiated
a cancellation proceeding (Cancellation No. 089123560N01) in the Taiwan
Intellectual Property Office with respect to the Company's Taiwan patent NI-
139439. Should IC Media Corporation prevail in the cancellation proceeding, the
Taiwan Intellectual Property Office may cancel the Company's Taiwan patent NI-
139439. Both actions are currently pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held at our corporate headquarters
at 930 Thompson Place, Sunnyvale, California on September 4, 2002 at 10:00 a.m.
local time. The results of the matters voted upon were as follows:
1. To elect two Class II directors to serve until the expiration of their
three-year terms or until their successors are duly elected or
appointed and qualified.
Vote
------------------------------
For Withheld
--- --------
John T. Rossi...................... 19,738,110 260,534
Raymond Wu......................... 16,690,502 3,308,142
The term of office of directors Shaw Hong, Edward C. V. Winn and
Tsuey-Jiuan Chen continued after the Annual Meeting.
32
2. To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the fiscal year ending April
30, 2003.
For Against Abstained
--- ------- ---------
19,888,202 109,564 878
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit
Number Description
------ -----------
99.1 Certification Of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the three months
ended October 31, 2002.
33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNIVISION TECHNOLOGIES, INC.
-----------------------------
(Registrant)
Dated: December 13, 2002
By: /s/ SHAW HONG
------------------------------------
Shaw Hong
Chief Executive Officer, President and Director
(Principal Executive Officer)
Dated: December 13, 2002
By: /s/ H. GENE MCCOWN
------------------------------------
H. Gene McCown
Vice President of Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
34
I, Shaw Hong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OmniVision
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the filing date of this quarterly report;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 13, 2002
By: /s/ SHAW HONG
-----------------------------------
Shaw Hong
Chief Executive Officer and President
35
I, H. Gene McCown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OmniVision
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the filing date of this quarterly report;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 13, 2002
By: /s/ H. GENE MCCOWN
-----------------------------------
H. Gene McCown
Vice President of Finance and Chief
Financial Officer (Principal
Financial Officer)
36