<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[ ] 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
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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 11, 2000, 21,962,083 shares of common stock of the Registrant
were outstanding.
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<TABLE>
<CAPTION>
OMNIVISION TECHNOLOGIES, INC.
INDEX
Page
No
--
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets - October 31, 2000 and April 30, 2000... 3
Condensed Statements of Operations - Three and Six Months Ended
October 31, 2000 and 1999...................................... 4
Condensed Statements of Cash Flows - Six Months Ended October 31,
2000 and 1999.................................................. 5
Notes to Condensed 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....... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 27
Item 2. Changes in Securities and Use of Proceeds........................ 27
Item 6. Exhibits and Reports on Form 8-K................................. 28
Signatures................................................................. 29
</TABLE>
2
<PAGE> 3
PART I-FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OMNIVISION TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
October 31, April 30,
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 49,399 $ 5,888
Short-term investments............................. 5,409 --
Accounts receivable, net........................... 9,264 6,156
Inventories........................................ 27,052 11,511
Prepaid expenses and other assets.................. 1,301 641
-------- --------
Total current assets............................. 92,425 24,196
Property, plant and equipment, net................... 2,285 2,102
-------- --------
Total assets....................................... $ 94,710 $ 26,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 5,694 $ 9,972
Accrued expenses and other liabilities............. 2,019 1,841
Deferred revenue................................... 955 716
-------- --------
Total current liabilities........................ 8,668 12,529
-------- --------
Contingencies (Note 8)
Redeemable convertible preferred stock............... -- 21,082
-------- --------
Stockholders equity (deficit):
Common stock, $0.001 par value; 100,000 shares
authorized; 21,885 and 3,886 shares issued
and outstanding.................................. 22 4
Additional paid-in capital......................... 94,419 5,840
Deferred compensation related to stock options..... (1,773) (2,495)
Accumulated deficit................................ (6,626) (10,662)
-------- --------
Total stockholders' equity (deficit)........... 86,042 (7,313)
-------- --------
Total liabilities and stockholders' equity..... $ 94,710 $ 26,298
======== ========
</TABLE>
See notes to Condensed Financial Statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
OMNIVISION TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------- -----------------------
October 31, October 31, October 31, October 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... $ 18,385 $ 8,063 $ 36,204 $ 12,866
Cost of revenues*.............. 12,949 5,912 25,244 9,090
-------- -------- -------- --------
Gross profit................... 5,436 2,151 10,960 3,776
-------- -------- -------- --------
Operating expenses:
Research and development*.... 1,363 762 2,644 1,549
Selling, general and
administrative*............ 1,350 648 2,424 1,280
Stock compensation charge*... 225 666 509 745
-------- -------- -------- --------
Total operating expenses... 2,938 2,076 5,577 3,574
-------- -------- -------- --------
Income from operations......... 2,498 75 5,383 202
Interest income (expense), net. 967 36 1,127 87
-------- -------- -------- --------
Income before income taxes..... 3,465 111 6,510 289
Provision for income taxes..... 1,317 -- 2,474 1
-------- -------- -------- --------
Net income..................... $ 2,148 $ 111 $ 4,036 $ 288
======== ======== ======== ========
Net income per share:
Basic........................ $ 0.10 $ 0.05 $ 0.32 $ 0.10
======== ======== ======== ========
Diluted...................... $ 0.09 $ 0.01 $ 0.20 $ 0.02
======== ======== ======== ========
Shares used in computing net
income per share:
Basic...................... 21,113 2,396 12,766 2,843
======== ======== ======== ========
Diluted.................... 23,367 16,696 20,687 16,397
======== ======== ======== ========
(*)Stock-based compensation
charges included in:
Cost of revenues........ $ 38 $ 180 $ 76 $ 190
======== ======== ======== ========
Operating expenses:
Research and
Development.......... $ 138 $ 412 $ 321 $ 437
Selling, general and
Administrative....... 87 254 188 308
-------- -------- -------- --------
$ 225 $ 666 $ 509 $ 745
======== ======== ======== ========
</TABLE>
See notes to Condensed Financial Statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
OMNIVISION TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
----------------
October 31, October 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 4,036 $ 288
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................. 280 224
Allowance for doubtful accounts and sales
Returns..................................... 25 40
Amortization of deferred compensation......... 585 935
Changes in assets and liabilities:
Accounts receivable......................... (3,133) (2,214)
Inventories................................. (15,541) (1,395)
Prepaid expenses and other assets........... (660) (112)
Accounts payable............................ (4,278) 1,103
Accrued expenses and other liabilities...... 178 (96)
Deferred revenue............................ 239 80
-------- --------
Net cash used in operating activities..... (18,269) (1,147)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments............... (5,409) --
Purchases of property, plant and equipment........ (463) (898)
-------- --------
Net cash used in investing activities........... (5,872) (898)
-------- --------
Cash flows from financing activities:
Issuance of common stock, net..................... 67,652 328
Payment for repurchase of common stock............ -- (5)
-------- --------
Net cash provided by financing activities....... 67,652 323
-------- --------
Net increase (decrease) in cash and cash equivalents 43,511 (1,722)
Cash and cash equivalents at beginning of period.... 5,888 5,374
-------- --------
Cash and cash equivalents at end of period.......... $ 49,399 $ 3,652
======== ========
Supplemental cash flow information:
Interest paid..................................... $ 36 $ 1
======== ========
Taxes paid........................................ $ 3,411 $ 1
======== ========
Supplemental non-cash investing and financial
information:
Conversion of redeemable convertible preferred
stock to common stock........................... $ 21,082 $ --
======== ========
</TABLE>
See notes to Condensed Financial Statements.
5
<PAGE> 6
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements as of October
31, 2000 and April 30, 2000 and for the three and six months ended October 31,
2000 and 1999 have been prepared by OmniVision Technologies, Inc. (the
"Company" or "OmniVision") in accordance with the rules and regulations of the
Securities and Exchange Commission. The amounts as of April 30, 2000 have been
derived from our 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 year ended April 30, 2000, included in the Registration Statement on
Form S-1 (No. 333-31926).
The results of operations for the three and six months ended October 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending April 30, 2001 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
Revenue from product sales is recognized at the time of shipment, except
for certain shipments to distributors under agreements allowing for return or
credits, in which case revenue is deferred until the distributor resells the
product. A provision is made for expected sales returns and allowances when
revenue is recognized.
Note 3 - Short-term Investments
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's short-term investments are invested in high-grade corporate
securities and government bonds maturing approximately twelve months or less
from the date of purchase. These investments are carried at cost, which
approximates fair value. Material unrealized gains or losses, if any, are
recorded in stockholders' equity and included in other comprehensive income.
Unrealized gains or losses were not significant during any period covered.
6
<PAGE> 7
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 4 - Inventory
Inventories as of October 31, 2000 and April 30, 2000, consist of:
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
---- ----
<S> <C> <C>
Work in progress............................ $22,068 $10,342
Finished goods.............................. 4,984 1,169
------- -------
Total inventory........................... $27,052 $11,511
======= =======
</TABLE>
Note 5 - Net Income Per Share
The following table sets forth the computation of basic and diluted income
per share attributable to common stockholders of the period indicated (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 31, October 31, October 31, October 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income......................$ 2,148 $ 111 $ 4,036 $ 288
======= ======= ======= =======
Denominator:
Weighted average shares......... 21,755 3,557 13,541 3,496
Weighted average unvested common
stock subject to repurchase... (642) (1,161) (775) (653)
------- ------- ------- -------
Denominator for basic net income
per share..................... 21,113 2,396 12,766 2,843
Weighted average effect of
dilutive securities:
Common stock options........ 1,612 834 1,506 596
Unvested common stock subject
to repurchase............. 642 1,161 775 653
Convertible preferred stock. -- 12,305 5,640 12,305
------- ------- ------- ------
Denominator for dilutive net
income per share................ 23,367 16,696 20,687 16,397
======= ======= ======= =======
Basic net income per share........$ 0.10 $ 0.05 $ 0.32 $ 0.10
======= ======= ======= =======
Diluted net income per share......$ 0.09 $ 0.01 $ 0.20 $ 0.02
======= ======= ======= =======
</TABLE>
Note 6 - Equity
In July 2000, the Company completed its initial public offering of
5,000,000 shares of common stock at $13.00 per share. Net proceeds aggregated
approximately $59.2 million after paying the underwriters' fee and related
expenses. At the closing of the offering, all issued and outstanding shares of
the Company's preferred stock were converted into an aggregate of 12,305,001
shares of common stock. In August 2000, the underwriters' of the Company's
initial public offering exercised their over-allotment option to purchase an
additional 750,000 shares of common stock at $13.00 per share. Net proceeds
aggregated approximately $8.5 million after paying the underwriters' fee and
related expenses.
7
<PAGE> 8
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 7 - 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 of the customer were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 31, October 31, October 31, October 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Taiwan.......................... $ 3,839 $2,285 $12,186 $ 4,594
Singapore....................... 5,854 1,798 7,400 2,256
United States................... 2,251 3,110 3,938 4,441
Korea........................... 1,223 307 3,926 613
Hong Kong....................... 1,168 355 3,072 609
Japan........................... 1,700 191 2,645 278
Europe.......................... 1,308 14 1,699 23
All Other....................... 1,042 3 1,338 52
------- ------ ------- -------
$18,385 $8,063 $36,204 $12,866
======= ====== ======= =======
</TABLE>
Note 8 - Contingencies
From time to time, the Company has been subject to legal proceedings and
claims with respect to such matters as patents, product liabilities and other
actions arising out of the normal course of business. In March 2000, the
Company received written notice from Koninklijke Philips N.V. ("Philips") in
which Philips claimed to have patent rights in a serial bus system for data
transmission, known as I2C bus system. The Company, as of October 31, 2000, had
a reserve which the Company believes will adequately cover any potential future
royalty payment. While the effect on future financial results cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on its financial position and
results of operations or cash flows.
Note 9 - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the balance
sheet and measurement of those instruments at fair value. In June 2000, SFAS
No. 133 was amended by SFAS No. 138. As amended by SFAS No. 137 in July 1999,
this statement is effective for fiscal years beginning after June 15, 2000. The
Company will adopt the standard no later than the first quarter of fiscal year
2002 and management does not expect a material impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," as amended by SAB 101A and 101B. SAB 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in
financial statements under certain circumstances. The Company adopted the
provisions of SAB 101 in these condensed financial statements for all periods
presented.
8
<PAGE> 9
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The adoption of FIN
44 did not and is not expected to have a material impact on the Company's
financial position, results of operation or cash flows.
9
<PAGE> 10
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. These statements include the
statements relating to the development of new products in new and existing
markets, the expansion of the range of picture resolutions offered, the
development of new products which require only three volts for portable
applications, the improvement of image quality, the integration of additional
functions and the improvement to the interface chip in the third paragraph
under "Overview;" the statements relating to the generation of revenues from
five volt products in 2001 in the fourth paragraph under "Overview;" the
statements relating to technology leadership and increase in research and
development expenses in the eighth paragraph under "Overview;" the statements
regarding the potential fluctuations and expected increases of research and
development costs under "Research and Development;" the statements regarding
increases in selling, general and administrative expenses under "Selling,
General and Administrative;" the statements regarding amortization of
compensation charges under "Stock Compensation Charge;" the statements
regarding available cash resources available to meet capital requirements, the
factors affecting capital requirements and the raising and availability of
additional funds in the sixth paragraph under "Liquidity and Capital
Resources;" the statements regarding evaluation of acquisitions in the seventh
paragraph under "Liquidity and Capital Resources;" the statements under
"Factors Affecting Future Results;" the statements under "Part II Other
Information - Item 1. Legal Proceedings," and the statements under "Part II
Other Information - Item 2. Changes in Securities and Use of Proceeds", 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."
Overview
--------
We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our single
chip image sensors are used in a variety of electronic cameras and camera
related products for both still picture and live video applications. Our image
sensors are used in cameras and camera related products such as personal
computer cameras, digital still cameras, closed circuit TV's, mobile phone
cameras, personal digital assistant cameras, security and surveillance cameras
and toy cameras. Our image sensors are designed to use the complementary metal
oxide semiconductor fabrication process, a new, easier to use semiconductor
technology for image sensors. Our single chip image sensors can allow our
customers to build cameras that are smaller, require fewer chips, consume less
power and cost less to build than cameras using traditional charged couple
device technology, or multiple chip complementary metal oxide semiconductor
image sensors. Unlike competitive image sensors, which require multiple chips
to achieve the same functions we are able to integrate nearly all camera
functions into a single chip. This leads us to believe that we supply the most
highly integrated single chip complementary metal oxide semiconductor image
sensor solution.
We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers' representatives. Our image sensors are
sold to camera manufacturers who market camera products under their own brand.
We also sell to large manufacturing companies that produce camera products for
others to market under different brand names.
Image sensors are characterized by several important attributes such as
picture resolution, color, lens size, voltage requirements and type of video
output. We intend to continue developing new products aimed at new and existing
markets. We plan to expand the range of picture resolutions we offer, provide
additional products that require only three volts for portable applications and
further improve image quality and integrate additional functions into our image
sensor. In addition, we developed and market an interface chip that connects a
camera to the universal serial bus on personal computers, and we plan to make
improvements to that product as well.
Our first image sensor was a low resolution, black and white sensor
introduced in 1996. We introduced an improved version of this sensor in early
1997. In addition, we introduced color and digital image sensors in 1997 and
higher resolution and higher quality image sensors in 1998 and 1999. For the
year ended April 30, 2000, the majority of our revenues were generated from
sales of our five volt color image sensors. Given the growth of the
10
<PAGE> 11
Internet and multimedia applications which allow for digital images to be
captured, stored and transported, we expect that a significant portion of our
revenues in fiscal year 2001 will be generated from our five volt color image
sensors, which are used primarily in affordable and easy to use personal
computer cameras.
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. We have a signed
agreement with Samsung Electronics Co., Ltd., or Samsung, who is our sole
source supplier for our universal serial bus interface chip that we sometimes
sell along with our image sensor. A majority of our unit sales of image sensors
for the three and six months ended October 31, 2000 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, TSMC, and PSC. We outsource the packaging of our image sensors to
Kyocera Corporation, or Kyocera, Taiwan Electronic Packaging Company, or TEPC,
and Alphatec Semiconductor Packaging Co., or Alphatec. Outside testing services
do not offer suitable tests for the key parameter of product performance, image
quality. Therefore, we design and produce our own automatic testing equipment
specifically for image sensor testing, and we do substantially all of our
testing in house. Our control over the testing process helps us maintain
consistent product quality and identify areas to improve product quality and
reduce costs.
We recognized revenues when our products are shipped to our customers or,
in the case of sales to distributors made under agreements permitting the
return of unsold products, when our distributors ship the products to their
customers. Our sales are generally made on a purchase order basis rather than
by long term purchase commitments. Our customers may cancel or defer purchase
orders without penalty. Our backlog includes only those customers' orders for
which we have accepted purchase orders and assigned shipment dates within the
upcoming twelve months. While our backlog may be substantial at times, it is
subject to cancellation or changes in delivery schedules and may not
necessarily be an indication of future revenues.
Sales of our image sensors are subject to seasonality. Some of the
products using our image sensors such as personal computer video cameras and
digital still cameras are consumer electronics goods. Typically, these goods
are subject to seasonality with generally increased sales in November and
December due to the holidays. As a result, product sales are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of the year.
We intend to maintain our technology leadership by continuing to develop
our core technology through our in house research and development efforts. As a
result, we expect our research and development expenses to increase in fiscal
year 2001.
11
<PAGE> 12
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 31, October 31, October 31, October 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 70.4 73.3 69.7 70.7
----- ----- ----- -----
Gross profit.................. 29.6 26.7 30.3 29.3
----- ----- ----- -----
Operating expenses:
Research and development...... 7.4 9.5 7.3 12.0
Selling, general and
Administrative.............. 7.4 8.0 6.7 10.0
Stock compensation charge..... 1.2 8.3 1.4 5.8
----- ----- ----- -----
Total operating expenses.. 16.0 25.8 15.4 27.8
----- ----- ----- -----
Income from operations.......... 13.6 0.9 14.9 1.5
Interest income (expense), net.. 5.3 0.5 3.1 0.7
----- ----- ----- -----
Income before income taxes...... 18.9 1.4 18.0 2.2
Provision for income taxes...... 7.2 -- 6.8 --
----- ----- ----- -----
Net income...................... 11.7% 1.4% 11.2% 2.2%
===== ===== ===== =====
</TABLE>
Three and Six Months Ended October 31, 2000 as Compared to Three and Six Months
Ended October 31, 1999
Revenues
--------
We derive revenues from the sale of our standard image sensor array
products and other companion circuits for use in a variety of applications.
Revenues for the three months ended October 31, 2000 increased 128% to
approximately $18.4 million from $8.1 million for the three months ended
October 31, 1999. Revenues for the six months ended October 31, 2000 increased
181% to approximately $36.2 million from $12.9 million for the six months ended
October 31, 1999. The increase in revenues during the three and six months
ended October 31, 2000 was primarily as a result of selling a greater number of
units of sensor array products to meet increased demand for PC cameras, PDA
cameras and security and surveillance cameras. Domestic and international
revenues for the three months ended October 31, 2000 were $2.3 million and
$16.1 million, respectively, as compared to $3.1 million and $5.0 million,
respectively, for the three months ended October 31, 1999. Domestic and
international revenues for the six months ended October 31, 2000 were $3.9
million and $32.3 million, respectively, as compared to $4.4 million and $8.5
million, respectively, for the six months ended October 31, 1999. For the three
months ended October 31, 2000, one of our distributors, World Peace Industrial
Company, Ltd., or World Peace, represented approximately 11.7% of revenues and
one of our camera manufacturer customers, Creative Technologies Ltd., or
Creative, accounted for approximately 31.8% of revenues. For the six months
ended October 31, 2000, World Peace represented approximately 19.8% of revenues
and Creative accounted for approximately 20.4% of revenues. For the three
months ended October 31, 1999, World Peace accounted for approximately 20.0% of
revenues, and two of our camera manufacturer customers, Alaris, Inc., or
Alaris, and Creative, accounted for approximately 23.1% and 22.1% of revenues,
respectively. For the six months ended October 31, 1999, two of our
distributors, World Peace and Holy Stone Enterprise Co. Ltd., or Holy Stone,
accounted for approximately 20.7% and 10% of revenues, respectively, and Alaris
and Creative, accounted for approximately 19.2% and 17.1% of revenues,
respectively.
12
<PAGE> 13
Gross Profit
------------
Gross margins for the three months ended October 31, 2000 and 1999 were 29.6%
and 26.7%, respectively. Gross margins for the six months ended October 31,
2000 and 1999 were 30.3% and 29.3%, respectively. The increase in gross margin
for the three and six months ended October 31, 2000 was primarily due to modest
yield improvements resulting from higher capacity utilization.
Research and Development
------------------------
Research and development expenses for the three months ended October 31,
2000 and 1999 were approximately $1.4 million and $762,000, respectively.
Research and development expenses for the six months ended October 31, 2000 and
1999 were approximately $2.6 million and $1.5 million, respectively. As a
percentage of revenues, research and development expenses for the three months
ended October 31, 2000 and 1999 represented 7.4% and 9.5%, respectively. As a
percentage of revenues, research and development expenses for the six months
ended October 31, 2000 and 1999 represented 7.3% and 12.0%, respectively. As
revenues increased from the three and six months ended October 31, 1999, to the
three and six months ended October 31, 2000, research and development expenses
declined as a percentage of revenues. Our research and development expenses
increased from the three and six months ended October 31, 1999 to the three and
six months ended October 31, 2000 by approximately $601,000 and $1.1 million,
respectively, due to an increase in salaries, payroll related expenses
associated with additional personnel, and a higher cost of engineering
supplies, materials, and contracted costs associated with new product
development. Research and development expenses consist primarily of
compensation and personnel related expenses and costs for purchased materials,
designs and tooling, depreciation of computers and workstations, and
amortization of computer aided design software, 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 will
increase in absolute dollars and may increase as a percentage of revenues as we
design and develop our next generation of image sensor products.
Selling, General and Administrative
-----------------------------------
Selling, general and administrative expenses for the three months ended
October 31, 2000 and 1999 were approximately $1.4 million and $648,000,
respectively. Selling, general and administrative expenses for the six months
ended October 31, 2000 and October 31, 1999 were approximately $2.4 million and
$1.3 million, respectively. As a percentage of revenues, selling, general and
administrative expenses for the three months ended October 31, 2000 and 1999
represented 7.4% and 8.0%, respectively. As a percentage of revenues, selling,
general and administrative expenses for the six months ended October 31, 2000
and October 31, 1999 represented 6.7% and 10.0%, respectively. As revenues
increased from the three and six months ended October 31, 1999, to the three
and six months ended October 31, 2000, selling, general and administrative
expenses declined as a percentage of revenues. Our selling, general and
administrative expenses increased from the three and six months ended October
31, 1999 to the three and six months ended October 31, 2000 by approximately
$702,000 and $1.1 million, respectively, due to an increase in salaries,
payroll related expenses associated with additional personnel, and an increase
in commissions paid to distributors and manufacturers' representatives. We
expect that our future selling, general and administrative expenses will
increase in absolute dollars and may increase as a percentage of revenues.
Stock Compensation Charge
-------------------------
We incurred stock compensation charges of approximately $225,000 and
$666,000 for the three months ended October 31, 2000 and 1999, respectively. We
incurred stock compensation charges of approximately $509,000 and $745,000 for
the six months ended October 31, 2000 and 1999, respectively. Deferred
compensation, representing the difference between the deemed fair market value
of our common stock on the date of grant and the exercise price of stock
options on the date of grant, is amortized on an accelerated basis as the
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<PAGE> 14
options vest. We expect deferred compensation charges of approximately $1.8
million as of October 31, 2000 to be amortized on an accelerated basis over the
vesting period of generally five years.
Interest Income (Expense), Net
------------------------------
Interest income and interest expense, net for the three months ended
October 31, 2000 and 1999 were income of approximately $967,000 and $36,000,
respectively. Interest income and interest expense, net for the six months
ended October 31, 2000 and 1999 were income of approximately $1.1 million and
$87,000 respectively. Interest income and interest expense, net, increased
primarily due to the investment of the net proceeds from our initial public
offering in interest-bearing accounts consisting primarily of high-grade
corporate securities and government bonds maturing approximately twelve months
or less from the date of purchase.
Provision for Income Taxes
--------------------------
We generated approximately $3.5 million and $111,000 in operating profits
for the three months ended October 31, 2000 and October 31, 1999, respectively.
We generated approximately $6.5 million and $289,000 in operating profits for
the six months ended October 31, 2000 and October 31, 1999, respectively. We
had a provision for income taxes amounting to approximately $1.3 million and
$2.5 million for the three and six months ended October 31, 2000, respectively,
after taking into consideration the utilization of prior years' net operating
loss carryforwards and credits. As a result of the utilization of prior years'
net operating loss carryforwards during the three and six months ended October
31, 1999, there was a minor provision for income taxes for the six months ended
October 31, 1999.
Liquidity and Capital Resources
-------------------------------
Since inception, we have financed the Company's growth through sales of
common stock and private sales of equity securities. Principal sources of
liquidity at October 31, 2000 consisted of cash, cash equivalents and short-
term investments of $54.8 million.
Our working capital increased by $72.1 million to $83.7 million as of
October 31, 2000 from $11.6 million as of April 30, 2000. The increase was
primarily attributable to a $48.9 million increase in cash, cash equivalents
and short-term investments resulting principally from $47.7 million in proceeds
from our initial public offering. Our increased working capital was also
attributable to a $15.5 million increase in inventories to support our growth
and a $3.1 million increase in accounts receivable, combined with a $4.3
million reduction in accounts payable.
For the six-month period ended October 31, 2000, our use of cash for
operating activities increased to approximately $18.3 million from a use of
$1.1 million for the similar period in the prior year, primarily due to a $15.5
million increase in inventory in anticipation of future sales and a $3.1
million increase in accounts receivable, combined with a $4.3 million decrease
in accounts payable, partially offset by increased net income of $4.0 million
for the six-month period.
For the six-month period ended October 31, 2000, our use of cash for
investing activities increased to approximately $5.9 million from a use of
$898,000 for the similar period in the prior year, primarily due to $5.4
million in net purchases of short-term investments. Net cash used for investing
activities for the six-month period ended October 31, 1999, resulted from
purchases of property, plant and equipment.
For the six-month period ended October 31, 2000, net cash provided from
financing activities increased to approximately $67.7 million from $323,000 for
the similar period in the prior year. The increase was primarily due to
proceeds from the issuance and sale of 5,000,000 shares of common stock in our
initial public offering and the issuance and sale of an additional 750,000
shares of common stock following the exercise by the underwriters' of the
Company's initial public offering of their over-allotment option. Approximately
$50.6 million of these
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<PAGE> 15
proceeds was invested in cash equivalents and short-term investments. Net cash
provided from financing activities for the six-month period ended October 31,
1999, amounted to approximately $323,000 from the issuance and sale of common
stock upon the exercise of employee stock options during the period.
Based on our current working capital position and the cash flows we expect
to generate in the remainder of fiscal 2001, we believe these cash resources
will be sufficient to meet our capital requirements for at least the next
twelve months. After this period, capital requirements will depend on many
factors, including the levels at which we maintain inventory and accounts
receivable, costs of securing access to adequate manufacturing capacity and
increases in our operating expenses. To the extent that existing cash resources
are insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. Additional funds may
not be available, or if available, we may not be able to obtain them on terms
favorable to us or to our shareholders. In the event that we do raise
additional cash through financings, current investors could be further diluted.
From time to time, we may evaluate acquisitions of companies, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of securities that may result in
further dilution to existing stockholders.
FACTORS AFFECTING FUTURE RESULTS
Our limited operating history makes it difficult to evaluate our future
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prospects and your investment.
-----------------------------
We were incorporated in May 1995 and only began selling our products
recently. We introduced our first black and white image sensor for the security
and surveillance and toy and game markets in 1996 and our first color image
sensor for the PC video camera and toy and game markets in October 1997. We are
still in the process of developing and producing new products for the digital
still camera and PC video camera markets which we intend to introduce this
year. Thus, we have a limited operating history, which makes an evaluation of
our future prospects and your investment difficult. Accordingly, we face risks
and difficulties frequently encountered by early stage companies in new and
rapidly evolving markets.
We have a history of losses, we only recently became profitable and we may not
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subsequently sustain profitability.
----------------------------------
We incurred net losses of approximately $6.0 million in fiscal year 1998
and approximately $4.0 million in fiscal year 1999. For the year ended April
30, 2000, the first year in which we became profitable, our net income was
approximately $3.4 million. In the six months ended October 31, 2000, our net
income was approximately $4.0 million. In the future, as we develop new
products, we expect research and development expenses to increase. Also, as we
hire additional personnel and possibly engage in larger business transactions,
we expect selling, general and administrative expenses to increase. We will
also incur substantial noncash charges relating to the amortization of unearned
compensation. If these expenses increase and our revenues do not increase, we
may not subsequently sustain profitability.
Fluctuations in our quarterly operating results make it difficult to predict
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our future performance and may result in volatility in the market price of our
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common stock.
------------
Our quarterly operating results have varied significantly from quarter to
quarter in the past and are likely to vary significantly in the future based on
a number of factors related to how we manage our business. These factors, many
of which are more fully discussed in other risk factors, include:
o our ability to manage our product transitions;
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<PAGE> 16
o the mix of the products we sell and the distribution channels through
which they are sold; and
o the availability of production capacities at the semiconductor foundries
that manufacture our products or components of our products.
In the past, our introduction of new products and our product mix have
affected our quarterly operating results. We also anticipate that the rate of
orders from our customers may vary significantly from quarter to quarter. Our
expenses and inventory levels are based on our expectations of future revenues
and our expenses are relatively fixed in the short term. Consequently, if
revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high and our operating results for that
quarter and, potentially future quarters, may be harmed.
Certain other factors have in the past caused and are likely in the future
to cause fluctuations in our quarterly operating results. These factors are
industry risks over which we have little or no control. These factors include:
o the growth of the market for products and applications using
complementary metal oxide semiconductor image sensors;
o the timing and amount of orders from our camera manufacturers and
distributor customers;
o the deferral of customer orders in anticipation of new products, designs
or enhancements by us or our competitors; and
o the announcement and introduction of products and technologies by our
competitors.
Any one or more of these factors is difficult to forecast and could result
in fluctuations in our quarterly operating results. Fluctuations in our
quarterly operating results could adversely affect the price of our common
stock in a manner unrelated to our long term operating performance. Due to the
potential volatility of our stock price, you should not rely on the results of
any one quarter as an indication of our future performance. It is likely that
at some point our quarterly operating results will fall below the expectations
of security analysts and investors. In this event, the price of our common
stock would likely decrease.
We depend on the acceptance of complementary metal oxide semiconductor
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technology for mass market image sensor applications, and any delay in the
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widespread acceptance of this technology could adversely affect our ability to
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increase our revenues and improve our earnings.
----------------------------------------------
Our business strategy depends on the rapid and widespread adoption of the
complementary metal oxide semiconductor fabrication process for image sensors
and the acceptance of our single chip technology. The image sensor market has
been dominated by charged couple device, or CCD, technology for over 25 years.
Although complementary metal oxide semiconductor technology has been available
for over 20 years, complementary metal oxide semiconductor technology has only
recently been used in image sensors. Along with the other risk factors
described in this section, the following factors may delay the widespread
adoption of the complementary metal oxide semiconductor fabrication process and
our single chip technology, the occurrence of any of which could adversely
affect our ability to increase our revenues and earnings:
o the failure of the emergence of a universal platform for imaging
solutions for computers and the Internet;
o the limited availability of bandwidth to run complementary metal oxide
semiconductor image sensor applications;
o the uncertainty of emerging markets for products incorporating
complementary metal oxide semiconductor technology;
16
<PAGE> 17
o the failure of development of user friendly and affordable products; and
o improvements or cost reductions to charged couple device image sensors,
which could slow the adoption of CMOS image sensors in markets already
dominated by charged couple device image sensors, such as the security
and surveillance market.
We depend on a limited number of third party wafer foundries to manufacture a
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substantial majority of our products, which reduces our ability to control the
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manufacturing process.
---------------------
We do not own or operate a semiconductor fabrication facility. We rely on
Taiwan Semiconductor Manufacturing Company, or TSMC, Powerchip Semiconductor
Company, or PSC and Samsung Electronics Co. Ltd., or Samsung, to produce a
substantial majority of our wafers and final products. Our reliance on these
third party foundries involves a number of significant risks, including:
o reduced control over delivery schedules, quality assurance,
manufacturing yields and production costs;
o lack of guaranteed production capacity or product supply; and
o unavailability of, or delayed access to, next generation or key process
technologies.
We do not have long term supply agreements with any of our foundries and
instead secure manufacturing availability on a purchase order basis. These
foundries have no obligation to supply products to us for any specific period,
in any specific quantity or at any specific price, except as set forth in a
particular purchase order. Our requirements represent a small portion of the
total production capacities of these foundries and TSMC, PSC, or Samsung may
reallocate capacity to other customers, even during periods of high demand for
our products. If any of our foundries were to become unable or unwilling to
continue manufacturing our wafers in the required volumes, at acceptable
quality, yields and costs and in a timely manner, our business would be
seriously harmed. As a result, we would have to identify and qualify substitute
foundries, which would be time consuming and difficult and could result in
unforeseen manufacturing and operations problems. In addition, if competition
for foundry capacity increases, our product costs may increase, and we may be
required to pay or invest significant amounts to secure access to manufacturing
services. We are also exposed to additional risks if we decide to transfer our
production of semiconductors from one foundry to another. We may qualify
additional foundries in the future. If we do not qualify additional foundries,
we may be exposed to increased risk of capacity shortages due to our complete
dependence on our foundries.
We may not adequately forecast the number of wafers we need, and therefore we
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may not be able to react to fluctuations in demand for our products, which
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could result in higher operating expenses and lower revenues.
------------------------------------------------------------
We must forecast the number of wafers we need from each of our foundries.
However, if customer demand falls below our forecast and we are unable to
reschedule or cancel our wafer orders, we may retain excess wafer inventories,
which could result in higher operating expenses and reduced gross margins.
Conversely, if customer demand exceeds our forecasts, we may be unable to
obtain an adequate supply of wafers to fill customer orders, which could result
in lower revenues and could harm our relationship with key customers.
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<PAGE> 18
If we do not achieve acceptable wafer manufacturing yields, our costs could
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increase, and our products may not be deliverable which could lead to higher
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operating expenses and lower revenues and damage to our customer relationships.
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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.
We depend on third party vendors for color filter processing and assembly,
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which reduces our control over delivery schedules, product quality and cost.
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After our wafers are produced, they are color filter processed and
assembled by six independent vendors: TSMC, PSC and Toppan Printing Co., Ltd.,
or Toppan for the color filtering process and Kyocera Corporation, or Kyocera,
Taiwan Electronic Packaging Company, or TEPC, and Alphatec Semiconductor
Packaging Company Limited, or Alphatec, for additional processing and assembly.
We do not have long term agreements with any of these vendors and typically
obtain services from them on a purchase order basis. Our reliance on these
vendors involves risks such as reduced control over delivery schedules, quality
assurance and costs. These risks could result in product shortages or could
increase our costs of manufacturing, assembling or testing our products. If
these vendors are unable or unwilling to continue to provide color filter
processing and assembly services and deliver products of acceptable quality, at
acceptable costs and in a timely manner, our business would be seriously
harmed. We would also have to identify and qualify substitute vendors, which
could be time consuming and difficult and result in unforeseen operations
problems.
Our lengthy manufacturing, packaging and assembly cycle, in addition to our
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customers' design cycle, may result in uncertainty and delays in generating
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revenues.
--------
A lengthy manufacturing, packaging and assembly process, typically lasting
four months or more, is required to manufacture our image sensors. It can take
additional time before a customer commences volume shipments of products that
incorporate our image sensors. Even when a manufacturer decides to design our
image sensors into its products, the manufacturer may never ship final products
incorporating our image sensors. Given this lengthy cycle, we experience a
delay between the time we incur expenditures for research and development,
sales and marketing efforts and inventory and the time we generate revenues, if
any, from these expenditures. As a result, our revenues and profits could be
seriously harmed if a significant customer reduces or delays orders or chooses
not to release products incorporating our products.
If the demand for our products in current markets and emerging markets fails to
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increase as we anticipate, our growth prospects would be diminished.
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Our success depends in large part on the continued growth of various
markets that use our products and the emergence of new markets for our
products. The current markets that use our products include digital still
cameras, personal computer video cameras, personal digital assistant cameras,
mobile phone cameras, security and surveillance systems, closed circuit
television systems, toys and games and automotive applications. Emerging
markets for our products include personal identification systems, medical
imaging devices, machine control
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<PAGE> 19
systems, videophones and automotive applications. If these markets do not
continue to grow and develop, the need for cameras which are lower in cost,
smaller, lighter in weight, consume less power and are more reliable might not
fully develop. In such case, it would be unlikely that our products would
achieve commercial success.
Failure to obtain design wins could cause our revenues to level off or decline.
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Our future success will depend on camera manufacturers designing our image
sensors into their systems. To achieve design wins, which are decisions by
those manufacturers to design our products into their systems, we must define
and deliver cost effective, innovative and integrated semiconductor solutions.
Once a manufacturer has designed a supplier's products into its systems, the
manufacturer may be reluctant to change its source of components due to the
significant costs associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key camera manufacturers could decrease our
market share or revenues.
Continuing declines in our average sales prices since the first quarter of
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fiscal 1999 may result in declines in our gross margins.
-------------------------------------------------------
Because the image sensor market is characterized by intense competition,
and price reductions for our products are necessary to meet consumer
pricepoints, we expect to experience market driven pricing pressures. This will
likely result in a decline in average sales prices for our products. We believe
that we can offset declining average sales prices by achieving manufacturing
cost efficiencies, developing new products that incorporate more advanced
technology and including more advanced features that can be sold at stable
average gross margins. However, if we are unable to achieve such cost
reductions and technological advances, or are unable to timely introduce new
products, we will lose revenues and gross margins will decline.
Seasonality in our business will cause our results of operations to fluctuate
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from period to period and could cause our stock price to fluctuate or decline.
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Sales of our image sensors are subject to seasonality. Some of the
products using our image sensors such as PC video cameras and digital still
cameras are consumer electronics goods. Typically, these goods are subject to
seasonality with generally increased sales in November and December due to the
holidays. In addition, we have experienced a decrease in orders in the quarter
ended April 30, 2000 from our Chinese and Taiwanese customers primarily due to
the Chinese New Year. As a result, we believe product sales are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of each year.
We depend on a few key customers, and the loss of any of them could
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significantly reduce our revenues.
---------------------------------
Historically, a relatively small number of customers and distributors has
accounted for a significant portion of our product revenues. For the three
months ended October 31, 2000, one of our distributors, World Peace,
represented approximately 11.7% of total revenues and one of our camera
manufacturer customers, Creative, accounted for approximately 31.8% of
revenues. For the six months ended October 31, 2000, World Peace represented
approximately 19.8% of revenues and Creative accounted for approximately 20.4%
of revenues. For the three months ended October 31, 1999, World Peace accounted
for approximately 20.0% of revenues, and two of our camera manufacturer
customers, Alaris and Creative, accounted for approximately 23.1% and 22.1% of
revenues, respectively. For the six months ended October 31, 1999, two of our
distributors, World Peace and Holy Stone, accounted for approximately 20.7% and
10% of revenues, respectively, and Alaris and Creative accounted for
approximately 19.2% and 17.1% of revenues, respectively.
As a result of customer concentration, a significant reduction, delay or
cancellation of orders from one or more of our key camera manufacturers or
distributors, or a decision by our significant customers to select products
manufactured by a competitor for inclusion in future product generations could
seriously harm our business. For example, in 1999, we had to replace one of our
largest distributors with Wintek Electronics because
19
<PAGE> 20
that distributor decided to distribute a competitor's products. We expect our
operating results to continue to depend on sales to or design decisions of a
relatively small number of distributors and camera manufacturers.
We do not have long term commitments from our customers, and we allocate
------------------------------------------------------------------------
resources based on our estimates of customer demand, which could lead to excess
-------------------------------------------------------------------------------
inventory and lost revenue opportunities.
----------------------------------------
Our sales are generally made on the basis of purchase orders rather than
long term purchase commitments. In addition, our customers may cancel or defer
purchase orders. We manufacture our products according to our estimates of
customer demand. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand, we may allocate resources to manufacturing
products which we may not be able to sell or we may have to sell our products
to other customers for lower prices. As a result, we would have excess
inventory, which would have an adverse impact on our results of operations. For
example, customers such as Creative Technology and Alaris unexpectedly deferred
their purchase orders for two of our products in 1999 which resulted in our
shipping fewer quantities to them in the first quarter of fiscal year 2000 and
a higher than expected inventory position. Conversely, if we underestimate
customer demand or if sufficient manufacturing capacity is unavailable, we
would forego revenue opportunities, lose market share and damage our customer
relationships.
We face foreign business, political and economic risks because a majority of
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our products, and our customers' products are manufactured and sold outside of
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the United States.
-----------------
A substantial portion of our business, in particular, the manufacturing,
processing and assembly of our products, is conducted outside of the United
States, and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are camera manufacturers or are the manufacturers
or suppliers for camera manufacturers and are located in China, Japan, Korea,
Singapore and Taiwan. In addition, sales outside of the United States accounted
for approximately 88% and 91% of our revenues for the three and six months
ended October 31, 2000 and 61% and 66% of our revenues for the three and six
months ended October 31, 1999. We anticipate that sales outside of the United
States will continue to account for a substantial portion of our revenue in
future periods. Accordingly, we are subject to foreign risks, including:
o difficulties in managing distributors;
o difficulties in staffing and managing foreign operations;
o difficulties in managing foundries and third party manufacturers;
o political and economic instability which may have an adverse impact on
foreign exchange rates in Asia;
o inadequacy of local infrastructure, in particular with respect to our
future expansion in China; and
o difficulties in accounts receivable collections.
In addition, camera manufacturers who design our solutions into their
products sell them outside of the United States. This exposes us indirectly to
foreign risks. Because sales of our products have been denominated to date
exclusively in United States dollars, increases in the value of the United
States dollar will increase the price of our products so that they become
relatively more expensive to customers in the local currency of a particular
country, leading to a reduction in revenues and profitability in that country.
A portion of our international revenues may be denominated in foreign
currencies in the future, which will subject us to risks associated with
fluctuations in those foreign currencies.
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<PAGE> 21
Our dependence on selling through distributors increases the complexity of our
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business which may increase our operating costs and may reduce our ability to
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forecast revenues.
-----------------
Our revenues depend on design wins with new camera manufacturers which, in
turn, rely on third party manufacturers or distributors to provide inventory
management and purchasing functions. Selling through distributors reduces our
ability to forecast sales and increases the complexity of our business,
requiring us to:
o manage a more complex supply chain;
o manage the level of inventory at each distributor;
o provide for credits, return rights and price protection;
o estimate the impact of credits, return rights, price protection and
unsold inventory at distributors; and
o monitor the financial condition and credit worthiness of our
distributors. Any failure to manage these challenges could reduce our
revenues and damage our relationships with our distributors.
We face intense competition in our markets from more established charged couple
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device image sensor manufacturers and complementary metal oxide semiconductor
-----------------------------------------------------------------------------
image sensor manufacturers and if we are unable to compete successfully, we
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will not achieve our financial objectives.
-----------------------------------------
The image sensor market is intensely competitive. These markets are
characterized by rapid technological change, evolving standards, short product
life cycles and decreasing prices. Our current products face competition from a
number of sources including companies which sell charged couple device image
sensors as well as other companies which sell multiple chip complementary metal
oxide semiconductor image sensors. We expect competition in our markets to
increase.
Many of our competitors have longer operating histories and greater
presence in key markets, greater name recognition, access to large customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. As a result, they may
be able to adapt more quickly to new or emerging technologies and customer
requirements or devote greater resources to the promotion and sale of their
product than we may. Our competition includes charged couple device image
sensor manufacturers, including Matsushita Electric Industrial, Sanyo Electric
Co. Ltd., Sharp Corporation, Sony Corporation, Toshiba Corporation and Victor
Company of Japan, as well as complementary metal oxide semiconductor image
sensor manufacturers such as Agilent Technologies, Inc., Conexant Systems,
Inc., Hyundai Electronics Industries Co. Ltd., Mitsubishi Electronic, Motorola,
Inc., ST Microelectronics and Toshiba Corporation. In addition, there are a
large number of smaller startup companies including ElecVision, Inc. and
Photobit Corporation, which may compete with us. In particular, Hyundai and
Agilent Technologies have introduced multiple chip complementary metal oxide
semiconductor image sensors. We cannot assure you that we can compete
successfully against current or potential competitors, or that competition will
not seriously harm our business by reducing sales of our products, reducing our
profits and reducing our market share.
Our success depends on the development and introduction of new products, which
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we may not be able to do in a timely manner because the process of developing
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products using complementary metal oxide semiconductor 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:
21
<PAGE> 22
o accurate prediction of market requirements and evolving standards,
including pixel resolution, output interface standards, power
requirements, optical lens size, input standards and operating systems
for personal computers and other platforms;
o development of advanced technologies and capabilities;
o definition of new products which satisfy customer requirements;
o timely completion and introduction of new product designs;
o use of leading edge foundry processes and achievement of high
manufacturing yields; and
o market acceptance of the new products.
Accomplishing all of this is extremely challenging, time consuming and
expensive. We cannot assure you that any new products or product enhancements
will be developed in time to capture market opportunities or achieve a
significant or sustainable level of acceptance in new and existing markets.
The high level of complexity and integration of functions of our products
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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
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delay in delivery schedules, and any cancellation or delay may result in lower
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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 twelve months. Although our backlog
is typically filled within two to four quarters, orders constituting our
current backlog are subject to cancellation or changes in delivery schedules,
and backlog may not necessarily be an indication of future revenue. In
addition, the current backlog will not necessarily lead to revenues in any
future period. Any cancellation or delay in orders which constitute our current
or future backlog may result in lower than expected revenues. Our bookings
visibility continues to be limited with a substantial majority of our quarterly
product revenues coming from orders that are received and fulfilled in the same
quarter.
We must attract and retain qualified personnel to be successful, and
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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
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<PAGE> 23
personnel. We have no agreements which obligate our employees to continue
working for us. Our success also depends on our ability to identify, attract
and retain qualified technical (particularly analog or mixed signal design
engineers), sales, marketing, finance and management personnel. Competition for
qualified personnel is particularly intense in our industry and in Silicon
Valley, California. This is due to a number of factors, including the high
concentration of established and emerging growth technology companies. This
competition makes it difficult to retain our key personnel and to recruit new
qualified personnel. We have experienced, and may continue to experience,
difficulty in hiring and retaining candidates with appropriate qualifications.
If we do not succeed in hiring and retaining candidates with appropriate
qualifications, our revenues and product development efforts could be harmed.
We may be unable to adequately protect our intellectual property and therefore
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we may lose some of our competitive advantage.
---------------------------------------------
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies. We have been issued patents and have a number of
pending United States and foreign patent applications. However, we cannot
assure you that any patent will issue as a result of any applications or, if
issued, that any claims allowed will be sufficiently broad to protect our
technology. In addition, it is possible that existing or future patents may be
challenged, invalidated or circumvented. It may be possible for a third party
to copy or otherwise obtain and use our products, or technology without
authorization, develop similar 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
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could divert management attention, be costly to defend and prevent us from
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using or selling the challenged technology.
------------------------------------------
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. This
litigation is widespread in the technology industry and is particularly
prevalent in the semiconductor industry, where a number of companies
aggressively use their patent portfolios by bringing numerous infringement
claims. In addition, in recent years, there has been an increase in the filing
of nuisance suits alleging infringement of intellectual property rights, which
pressure defendants into entering settlement arrangements to quickly dispose of
such suits, regardless of their merits.
In March 2000, we received 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. We are currently in
negotiations with Philips for royalty or licensing arrangements. Specifically,
Philips has initially requested a royalty rate of 2% of the net selling price
of products that use the I2C bus system. However, we may not be able to enter
into any royalty or licensing agreements on commercially acceptable terms or at
all. During the negotiation period, we completed implementing a redesigned
serial bus system for our products in an effort to avoid infringement of
Philips' patents. Although the opinion of our patent counsel is that our
redesigned serial bus system does not infringe upon Philips' patents, Philips
may still assert a claim of infringement on the redesigned serial bus system.
Should Philips assert a claim of infringement on the redesigned serial bus
system, we plan to vigorously defend ourselves. Additionally we cannot be sure
that the redesign will result in competitive products.
In March 1999, we received a written notice from Photobit Corporation in
which Photobit claimed to have patent rights in certain image sensor
technology. Photobit requested that we review our products in light of one of
their issued patents, U.S. Patent No. 5,841,126. In June 2000, we received a
second written notice from Photobit, in which Photobit reiterated their claim
on U.S. Patent No. 5,841,126 and further alleged that we infringed upon U.S.
Patent No. 5,886,659, U.S. Patent No. 5,990,506, U.S. Patent No. 6,005,619 and
U.S. Patent No. 6,021,172 related to various aspects of color image sensors.
Photobit did not indicate which of our products were implicated nor the manner
in which any of our products might infringe on its patents. Following
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<PAGE> 24
further correspondence and dialog between us and Photobit, we filed, on October
13, 2000, an action in the U.S. District Court, civil action number CV-00-3791
EDL for the Northern District of California against Photobit and the California
Institute of Technology ("CalTech"), seeking a declaration that the five above-
identified patents (the '126, '659, '506, '619 and '172 patents) are not valid,
enforceable and/or infringed by our products. An answer to our complaint was
filed by Photobit and CalTech on November 22, 2000, raising various defenses to
our declaratory judgment complaint and Photobit asserted counterclaims that
allege infringement of the '126, '506 and '619 patents. An answer to those
counterclaims is due on December 12, 2000. Discovery has commenced and a Case
Management Conference is scheduled for February 13, 2001, to address various
scheduling and procedural issues. We plan to vigorously pursue our claims and
defend ourselves against the counterclaims arising from this matter.
Photobit or other companies may pursue litigation with respect to these or
other claims. The results of any litigation are inherently uncertain. In the
event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, pay
substantial damages under applicable law, including treble damages if we are
held to have willfully infringed, cease the manufacture, use and sale of
infringing products or to expend significant resources to develop noninfringing
technology. Litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
Failure to effectively manage our growth could adversely affect our ability to
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increase our revenues and improve our earnings.
----------------------------------------------
We are experiencing a period of significant growth that will continue to
place a great strain on our management and other resources. We have grown from
65 employees on October 31, 1999 to 76 employees on October 31, 2000. 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
this 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.
Provisions in our charter documents and Delaware law could prevent or delay a
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change in control of OmniVision and may reduce the market price of our common
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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;
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<PAGE> 25
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 stock has been and will likely continue to be subject to substantial price
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and volume fluctuations due to a number of factors, many of which will be
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beyond our control, that may prevent our stockholders from reselling our common
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stock at a profit.
-----------------
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of
semiconductor companies have been especially volatile. This market volatility,
as well as general economic, market or political conditions, could reduce the
market price of our common stock in spite of our operating performance. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:
o actual or anticipated fluctuations in our operating results;
o changes in expectations as to our future financial performance;
o changes in financial estimates of securities analysts;
o release of lock-up or the transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock;
o changes in market valuations of other technology companies; and
o announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions.
Due to these factors, the price of our stock may decline and investors may
be unable to resell their shares of our stock for a profit. In addition, the
stock market experiences extreme volatility that often is unrelated to the
performance of particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance.
Class action litigation due to stock price volatility could lead to substantial
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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.
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<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are an international company, selling our products globally and, in
particular in China, Japan, Korea, Singapore and Taiwan. Although we transact
our business in U.S. dollars, future fluctuations in the value of the U.S.
dollar may affect the competitiveness of our products, gross profits realized,
and results of operations. Further, we incur expenses in Japan, Korea, Taiwan,
Thailand 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.
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 twelve 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.
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<PAGE> 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
From time to time, the Company has been subject to legal proceedings and
claims with respect to such matters as patents, product liabilities and other
actions arising out of the normal course of business. In March 2000, the
Company received written notice from Koninklijke Philips N.V. ("Philips") in
which Philips claimed to have patent rights in a serial bus system for data
transmission, known as I2C bus system. The Company, as of October 31, 2000, had
a reserve which the Company believes will adequately cover any potential future
royalty payment. While the effect on future financial results cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on its financial position and
results of operations or cash flows.
In March 1999, we received a written notice from Photobit Corporation in
which Photobit claimed to have patent rights in certain image sensor
technology. Photobit requested that we review our products in light of one of
their issued patents, U.S. Patent No. 5,841,126. In June 2000, we received a
second written notice from Photobit, in which Photobit reiterated their claim
on U.S. Patent No. 5,841,126 and further alleged that we infringed upon U.S.
Patent No. 5,886,659, U.S. Patent No. 5,990,506, U.S. Patent No. 6,005,619 and
U.S. Patent No. 6,021,172 related to various aspects of color image sensors.
Photobit did not indicate which of our products were implicated nor the manner
in which any of our products might infringe on its patents. Following further
correspondence and dialog between us and Photobit, we filed, on October 13,
2000, an action in the U.S. District Court, civil action number CV-00-3791 EDL
for the Northern District of California against Photobit and the California
Institute of Technology ("CalTech"), seeking a declaration that the five above-
identified patents (the '126, '659, '506, '619 and '172 patents) are not valid,
enforceable and/or infringed by our products. An answer to our complaint was
filed by Photobit and CalTech on November 22, 2000, raising various defenses to
our declaratory judgment complaint and Photobit asserted counterclaims that
allege infringement of the '126, '506 and '619 patents. An answer to those
counterclaims is due on December 12, 2000. Discovery has commenced and a Case
Management Conference is scheduled for February 13, 2001, to address various
scheduling and procedural issues. We plan to vigorously pursue our claims and
defend ourselves against the counterclaims arising from this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-------------------------------------------------
We completed our initial public offering ("IPO") on July 14, 2000,
pursuant to a Registration Statement on Form S-1 (File No. 333-31926), which
was declared effective by the Securities and Exchange Commission on July 13,
2000. In the IPO, we sold an aggregate of 5,000,000 shares of common stock. In
August 2000, the underwriters' of the Company's initial public offering
exercised their over-allotment option to purchase an additional 750,000 shares
of common stock at $13.00 per share. Net proceeds aggregated approximately $9.1
million after paying the underwriters' fee and related expenses. The sale of
the shares of common stock generated aggregate gross proceeds of approximately
$74,750,000, including proceeds from the exercise of the over-allotment option.
The aggregate net proceeds were approximately $67,661,000, including the
proceeds from the exercise of the over-allotment option, after deducting
underwriting discounts and commissions of approximately $5,233,000 and directly
paying expenses of the offering of approximately $1,857,000. Fleet Boston
Robertson Stephens Inc., Prudential Volpe Technology and Needham & Company,
Inc. were the lead underwriters for the IPO. As of October 31, 2000,
approximately $20,000,000 of the net proceeds were used for working capital
purposes and the remaining $47,661,000 were invested in cash equivalents and
short-term investments.
Other than anticipated capital expenditures in the amount of approximately
$4.0 million in the next twelve months, we have no specific plan for the
proceeds from our initial public offering. The primary purpose of the offering
is to use the proceeds for general corporate purposes, including working
capital. We may also use some of the proceeds to meet capacity commitments or
to acquire other companies, technology or products that
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<PAGE> 28
complement our business, although we are not currently planning any of these
transactions. Pending these uses, the net proceeds of the offering will be
invested in interest bearing, investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE
(b) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the three months
ended October 31, 2000.
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<PAGE> 29
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 14, 2000
By: /s/ SHAW HONG
------------------------------
Shaw Hong
Chief Executive Officer, President and Director
(Principal Executive Officer)
Dated: December 14, 2000
By: /s/ H. GENE MCCOWN
------------------------------
H. Gene McCown
Vice President of Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
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<PAGE> 30
</TABLE>
