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SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q/A
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2003 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number: 0-29939
OMNIVISION TECHNOLOGIES, INC.
Delaware | 77-0401990 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification Number) |
1341 Orleans Drive, Sunnyvale, California 94089-1136
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 542-3000
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. Yesx Noo
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo
At December 8, 2003, 54,276,724 shares of common stock of the Registrant were outstanding.
EXPLANATORY NOTE
This amended Quarterly Report on Form 10-Q is being filed for the purpose of amending and restating Items 1, 2 and 4 of Part I and Item 6 of Part II of the Form 10-Q originally filed solely to the extent necessary (i) to reflect the restatement of our condensed consolidated financial statements as of and for the period ended January 31, 2004 as described in Note 1 to the condensed consolidated financial statements and to report in the equity section of the balance sheet the benefit from exercises of stock options, (ii) to make revisions to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as warranted by the restatement (which do not include “Factors Affecting Future Results”), (iii) to make revisions to Item 4 of Part I to reflect our evaluation of controls and procedures as of this date of filing this amended Quarterly Report on Form 10-Q, (iv) to include the certifications required by the Sarbanes-Oxley Act of 2002 and (v) to update the exhibits in accordance with this amended Quarterly Report on Form 10-Q. We have made no further changes to the originally filed Form 10-Q. All information in this amended Quarterly Report on Form 10-Q is as of the date the Quarterly Report on Form 10-Q was originally filed and does not reflect any subsequent information or events other than those reflected in the restatement.
OMNIVISION TECHNOLOGIES, INC.
INDEX
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |||||||
26 | ||||||||
27 | ||||||||
30 | ||||||||
31 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32 |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
October 31, | April 30, | |||||||
2003 | 2003 | |||||||
(restated) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 173,796 | $ | 50,438 | ||||
Restricted cash | 1,068 | — | ||||||
Short-term investments | 11,548 | 10,224 | ||||||
Accounts receivable, net | 45,731 | 19,133 | ||||||
Inventories | 25,505 | 13,642 | ||||||
Refundable and deferred income taxes | 6,438 | 7,642 | ||||||
Prepaid expenses and other assets | 1,696 | 1,195 | ||||||
Total current assets | 265,782 | 102,274 | ||||||
Property, plant and equipment, net | 18,370 | 12,456 | ||||||
Long-term investments | 4,828 | 2,845 | ||||||
Other non-current assets | 407 | 378 | ||||||
Total assets | $ | 289,387 | $ | 117,953 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 38,031 | $ | 10,528 | ||||
Accrued expenses and other liabilities | 11,133 | 8,037 | ||||||
Deferred income | 2,843 | 2,845 | ||||||
Total current liabilities | 52,007 | 21,410 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 54,157,904 and 46,805,816 shares issued and outstanding | 54 | 47 | ||||||
Additional paid-in capital | 225,516 | 104,824 | ||||||
Deferred compensation related to stock options | (71 | ) | (159 | ) | ||||
Retained earnings (accumulated deficit) | 11,881 | (8,169 | ) | |||||
Total stockholders’ equity | 237,380 | 96,543 | ||||||
Total liabilities and stockholders’ equity | $ | 289,387 | $ | 117,953 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Revenues | $ | 77,998 | $ | 21,743 | $ | 124,837 | $ | 38,533 | ||||||||
Cost of revenues(1) | 48,425 | 13,063 | 77,885 | 23,337 | ||||||||||||
Gross profit | 29,573 | 8,680 | 46,952 | 15,196 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 3,173 | 2,489 | 6,753 | 5,119 | ||||||||||||
Selling, general and administrative | 5,904 | 2,710 | 10,394 | 4,790 | ||||||||||||
Stock-based compensation charge(2) | 95 | 150 | 196 | 264 | ||||||||||||
Total operating expenses | 9,172 | 5,349 | 17,343 | 10,173 | ||||||||||||
Income from operations | 20,401 | 3,331 | 29,609 | 5,023 | ||||||||||||
Interest income, net | 548 | 216 | 770 | 432 | ||||||||||||
Income before income taxes | 20,949 | 3,547 | 30,379 | 5,455 | ||||||||||||
Provision for income taxes | 7,123 | 532 | 10,329 | 818 | ||||||||||||
Net income | $ | 13,826 | $ | 3,015 | $ | 20,050 | $ | 4,637 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.26 | $ | 0.07 | $ | 0.39 | $ | 0.10 | ||||||||
Diluted | $ | 0.23 | $ | 0.06 | $ | 0.35 | $ | 0.09 | ||||||||
Shares used in computing net income per share: | ||||||||||||||||
Basic | 53,946 | 44,876 | 50,812 | 44,696 | ||||||||||||
Diluted | 60,295 | 48,882 | 57,654 | 49,910 | ||||||||||||
(1) Stock-based compensation charges included in Cost of revenues | $ | — | $ | 4 | $ | 2 | $ | 7 | ||||||||
(2) Stock-based compensation charges by functional area: | ||||||||||||||||
Research and development | $ | 14 | $ | 36 | $ | 42 | $ | 82 | ||||||||
Selling, general and administrative | 81 | 114 | 154 | 182 | ||||||||||||
$ | 95 | $ | 150 | $ | 196 | $ | 264 | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended | ||||||||
October 31, | ||||||||
2003 | 2002 | |||||||
(restated) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 20,050 | $ | 4,637 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 716 | 432 | ||||||
Amortization of deferred stock-based compensation | 198 | 271 | ||||||
Tax benefits from stock option exercises | 3,410 | — | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (26,598 | ) | (4,324 | ) | ||||
Inventories | (11,863 | ) | (8,661 | ) | ||||
Refundable and deferred income taxes | 1,204 | 82 | ||||||
Prepaid expenses and other assets | (530 | ) | (1,492 | ) | ||||
Accounts payable | 27,503 | 5,896 | ||||||
Accrued expenses and other liabilities | 3,096 | 596 | ||||||
Deferred income | (2 | ) | 275 | |||||
Net cash provided by (used in) operating activities | 17,184 | (2,288 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of short-term marketable investments | (1,324 | ) | (2,000 | ) | ||||
Restricted cash | (1,068 | ) | — | |||||
Proceeds from sale of short-term investments | — | 2,002 | ||||||
Purchase of long-term non-marketable investment | (1,983 | ) | — | |||||
Purchases of property, plant and equipment | (6,630 | ) | (2,797 | ) | ||||
Net cash used in investing activities | (11,005 | ) | (2,795 | ) | ||||
Cash flows from financing activities: | ||||||||
Deposit refunded | — | (600 | ) | |||||
Proceeds from issuance of common stock, net | 117,179 | 1,279 | ||||||
Payment for repurchase of common stock, net | — | (1 | ) | |||||
Net cash provided by financing activities | 117,179 | 678 | ||||||
Net increase (decrease) in cash and cash equivalents | 123,358 | (4,405 | ) | |||||
Cash and cash equivalents at beginning of period | 50,438 | 55,803 | ||||||
Cash and cash equivalents at end of period | $ | 173,796 | $ | 51,398 | ||||
Supplemental cash flow information: | ||||||||
Taxes paid | $ | 7,210 | $ | 2,088 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
Note 1 — Basis of Presentation and Restatement
Overview
The accompanying unaudited condensed consolidated financial statements as of October 31, 2003 and April 30, 2003 and for the three and six months ended October 31, 2003 and 2002 have been prepared by OmniVision Technologies, Inc. and subsidiaries (the “Company” or “OmniVision”) in accordance with the rules and regulations of the Securities and Exchange Commission. The amounts as of April 30, 2003 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended April 30, 2003, included in the Company’s Annual Report on Form 10-K.
On January 20, 2004, the Company announced that its Board of Directors had approved a 2-for-1 split of the Company’s common stock to be effected in the form of a stock dividend payable to stockholders of record on January 30, 2004. Stockholders of record received one additional share of common stock for every share held on January 30, 2004. The stock split was effected after the close of market on February 17, 2004 and the additional shares were distributed on February 18, 2004. All share and per share data in this Quarterly Report on Form 10-Q/A are presented on a post-stock split basis.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.
Restatement of Previous Quarterly Financial Statements
On June 23, 2004, the Company issued a press release and filed a Current Report on Form 8-K announcing that the Company was restating its financial results for its quarters ended July 31, 2003, October 31, 2003 and January 31, 2004.
The restatements arose out of an internal review which was initiated in response to issues raised by an employee. The management of the Company notified the Audit Committee of the Board of Directors of the issues raised, and the Audit Committee, with assistance from special legal counsel, conducted its own independent investigation. As a result of the internal review and the independent investigation, management and the Audit Committee determined that certain errors had occurred which principally affected the timing of revenue recognition for certain sales. The independent investigation concluded that there was no evidence of wrongdoing in connection with these errors.
The restatement of the Company’s financial results for the first three quarters of fiscal 2004 related primarily to two issues identified as part of the internal review and independent investigation. First, beginning in the second half of fiscal 2003 and continuing through the first nine months of fiscal 2004, certain distribution sales, for which the Company recognizes revenue on a “sell-through” basis, were not reported to the Company by one of its distributors in a timely manner. Additionally, in the second and third quarters of fiscal 2004, during the transition of testing operations and certain international sales functions to overseas locations, some shipments made to customers late in
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
the quarter were incorrectly classified as transferring title upon delivery as opposed to upon shipment, and therefore revenue was not recognized when product was shipped. Both of these issues resulted in delayed revenue recognition. Both management and the Audit Committee determined that the errors did not have material effects on quarterly or annual financial statements for fiscal 2003 and consequently decided not to restate the quarterly or annual financial results for such periods.
The following tables present amounts from operations and the balance sheet as previously reported and as restated:
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, 2003 | October 31, 2003 | |||||||||||||||
(Reported) | (Restated) | (Reported) | (Restated) | |||||||||||||
Revenues | $ | 68,540 | $ | 77,998 | $ | 115,032 | $ | 124,837 | ||||||||
Cost of revenues(1) | 42,476 | 48,425 | 71,604 | 77,885 | ||||||||||||
Gross profit | 26,064 | 29,573 | 43,428 | 46,952 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 3,173 | 3,173 | 6,753 | 6,753 | ||||||||||||
Selling, general and administrative | 5,705 | 5,904 | 10,195 | 10,394 | ||||||||||||
Stock-based compensation charge(2) | 95 | 95 | 196 | 196 | ||||||||||||
Total operating expenses | 8,973 | 9,172 | 17,144 | 17,343 | ||||||||||||
Income from operations | 17,091 | 20,401 | 26,284 | 29,609 | ||||||||||||
Interest income, net | 548 | 548 | 770 | 770 | ||||||||||||
Income before income taxes | 17,639 | 20,949 | 27,054 | 30,379 | ||||||||||||
Provision for income taxes | 5,997 | 7,123 | 9,198 | 10,329 | ||||||||||||
Net income | $ | 11,642 | $ | 13,826 | $ | 17,856 | $ | 20,050 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.22 | $ | 0.26 | $ | 0.35 | $ | 0.39 | ||||||||
Diluted | $ | 0.19 | $ | 0.23 | $ | 0.31 | $ | 0.35 | ||||||||
Shares used in computing net income per share: | ||||||||||||||||
Basic | 53,946 | 53,946 | 50,812 | 50,812 | ||||||||||||
Diluted | 60,295 | 60,295 | 57,654 | 57,654 | ||||||||||||
(1) Stock-based compensation charges included in Cost of revenues | $ | — | $ | — | $ | 2 | $ | 2 | ||||||||
(2) Stock-based compensation charges by functional area: | ||||||||||||||||
Research and development | $ | 14 | $ | 14 | $ | 42 | $ | 42 | ||||||||
Selling, general and administrative | 81 | 81 | 154 | 154 | ||||||||||||
$ | 95 | $ | 95 | $ | 196 | $ | 196 | |||||||||
Balance Sheet Items: | ||||||||||||||||
Accounts Receivable | 39,649 | 45,731 | ||||||||||||||
Inventories | 29,302 | 25,505 | ||||||||||||||
Total Assets | 287,102 | 289,387 | ||||||||||||||
Accrued Expenses and Other Current Liabilities | 12,954 | 11,133 | ||||||||||||||
Total Liabilities | 55,326 | 52,007 | ||||||||||||||
Shareholders’ Equity | 231,776 | 237,380 |
Note 2 — Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue from the sale of products to original equipment manufacturers and value added resellers upon the shipment of its products to the customer provided that the Company has received a signed purchase order, the price is fixed or determinable, title and risk of loss has transferred to the customer, collection of resulting receivables is considered reasonably assured, product returns are reasonably estimable, there are no customer acceptance requirements and there are no remaining significant obligations. The Company provides for future returns based on historical experiences at the time revenue is recognized. For certain shipments to distributors under agreements allowing for return or credits, revenue is deferred until the distributor resells the product to the
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
end-user customer. Deferred income on shipment to distributors represents the amount billed less the cost of inventory shipped to but not yet sold by distributors.
Short-Term Investments
The Company’s short-term investments, which are classified as available-for-sale, are invested in marketable high-grade corporate securities and government bonds maturing twelve months or less from the date of purchase. These investments are reported at fair value which approximates cost. Unrealized gains or losses are recorded in stockholders’ equity and included in other comprehensive income (losses). Unrealized gains or losses were not significant during any period presented in these financial statements.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and the Financial Accounting Standards Board (“FASB”) FASB Interpretation 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”), and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123”(“SFAS 148”). Under APB 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. Deferred stock-based compensation is then amortized over the vesting period of the option on an accelerated basis using the multiple option approach as defined in paragraph 24 of FIN 28. SFAS 123 describes a “fair value” based method of accounting for an employee stock option or similar equity instrument. The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS 123 and SFAS 148 to stock-based employee grants compensation and is referenced to in this Note as “as adjusted” (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Net income, as reported | $ | 13,826 | $ | 3,015 | $ | 20,050 | $ | 4,637 | ||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 20 | 59 | 58 | 138 | ||||||||||||
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects | 4,591 | 1,983 | 7,696 | 3,377 | ||||||||||||
As adjusted net income | $ | 9,255 | $ | 1,091 | $ | 12,412 | $ | 1,398 | ||||||||
Net income per share – Basic: | ||||||||||||||||
As reported | $ | 0.26 | $ | 0.07 | $ | 0.39 | $ | 0.10 | ||||||||
As adjusted | $ | 0.17 | $ | 0.02 | $ | 0.24 | $ | 0.03 | ||||||||
Net income per share – Diluted: | ||||||||||||||||
As reported | $ | 0.23 | $ | 0.06 | $ | 0.35 | $ | 0.09 | ||||||||
As adjusted | $ | 0.16 | $ | 0.02 | $ | 0.24 | $ | 0.03 | ||||||||
Shares used in computing net income per share – Basic: | ||||||||||||||||
As reported | 53,946 | 44,876 | 50,812 | 44,696 | ||||||||||||
As adjusted | 53,946 | 44,876 | 50,812 | 44,696 | ||||||||||||
Shares used in computing net income per share – Diluted: | ||||||||||||||||
As reported | 60,295 | 48,882 | 57,654 | 49,910 | ||||||||||||
As adjusted | 57,439 | 45,104 | 51,175 | 44,974 | ||||||||||||
The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments that are Offered to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”). Under SFAS 123
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
and EITF 96-18, stock option awards issued to non-employees are accounted for at their fair value, determined using the Black-Scholes option pricing model.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”(“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The original effective date of FIN 46 was delayed to the first reporting period after December 15, 2003 for any variable interest entities or potential variable interest entities created before February 1, 2003. The Company does not expect the adoption of FIN 46 to have a material impact on its consolidated financial position, results of operations and cash flows.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
Note 3 — Balance Sheet Accounts (In Thousands)
October 31, | April 30, | |||||||
2003 | 2003 | |||||||
Cash and cash equivalents: | ||||||||
Cash | $ | 4,142 | $ | 941 | ||||
Money market funds | 91,748 | 25,363 | ||||||
Commercial paper | 77,906 | 24,134 | ||||||
$ | 173,796 | $ | 50,438 | |||||
Accounts receivable: | (restated) | |||||||
Accounts receivable | $ | 52,204 | $ | 21,188 | ||||
Less: Allowance for doubtful accounts | (2,315 | ) | (915 | ) | ||||
Sales return reserve | (4,158 | ) | (1,140 | ) | ||||
$ | 45,731 | $ | 19,133 | |||||
Inventories: | (restated) | |||||||
Work in progress | $ | 17,985 | $ | 8,942 | ||||
Finished goods | 7,520 | 4,700 | ||||||
$ | 25,505 | $ | 13,642 | |||||
Prepaid expenses and other assets: | ||||||||
Prepaid expenses | $ | 1,444 | $ | 1,187 | ||||
Other receivables | 252 | 8 | ||||||
$ | 1,696 | $ | 1,195 | |||||
Property, plant and equipment, net: | ||||||||
Building | $ | 8,244 | $ | — | ||||
Building improvements | 3,310 | — | ||||||
Machinery and equipment | 6,728 | 3,607 | ||||||
Furniture and fixtures | 216 | 283 | ||||||
Software | 1,103 | 976 | ||||||
Construction in progress | 2,881 | 10,986 | ||||||
22,482 | 15,852 | |||||||
Less: Accumulated depreciation and amortization | (4,112 | ) | (3,396 | ) | ||||
$ | 18,370 | $ | 12,456 | |||||
Note 4 — Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potentially dilutive common shares outstanding during the period using the treasury stock method. Potentially dilutive common shares include the effect of stock options. For the three and six months ended October 31, 2002, 4,744,600 and 3,104,100 shares of common stock subject to outstanding options were not included in the calculation of diluted net income per share as they were considered antidilutive (i.e., the per share exercise price for such options exceeded the trading price of the Company’s common stock as reported on The Nasdaq Stock Market). For the six months ended October 31, 2003, 601,750 shares of common stock subject to outstanding options were not included in the calculation of diluted net income per share as they were considered antidilutive. There were no antidilutive shares for the three months ended October 31, 2003.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
The following table sets forth the computation of basic and diluted income per share attributable to common stockholders for the periods indicated (in thousands, except per share data):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 13,826 | $ | 3,015 | $ | 20,050 | $ | 4,637 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares | 53,993 | 45,104 | 50,883 | 44,974 | ||||||||||||
Weighted average unvested common shares subject to repurchase | (47 | ) | (228 | ) | (71 | ) | (278 | ) | ||||||||
Denominator for basic net income per share | 53,946 | 44,876 | 50,812 | 44,696 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Common stock options | 6,302 | 3,778 | 6,771 | 4,936 | ||||||||||||
Unvested common stock subject to repurchase | 47 | 228 | 71 | 278 | ||||||||||||
Denominator for dilutive net income per share | 60,295 | 48,882 | 57,654 | 49,910 | ||||||||||||
Basic net income per share | $ | 0.26 | $ | 0.07 | $ | 0.39 | $ | 0.10 | ||||||||
Diluted net income per share | $ | 0.23 | $ | 0.06 | $ | 0.35 | $ | 0.09 | ||||||||
In July 2003, the Company sold 6,186,452 shares of common stock in a follow-on public offering at a price of $19.38 per share, resulting in net proceeds of approximately $113.2 million. The incremental shares are reflected in the weighted average shares outstanding during the three- and six-month periods ended October 31, 2003.
Note 5 — Segment, Product Line 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.
Revenues from the Company’s two product lines, digital and analog image sensors, were as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Digital image sensors | $ | 71,043 | $ | 16,121 | $ | 109,504 | $ | 24,615 | ||||||||
Analog image sensors | 6,955 | 5,622 | 15,333 | 13,918 | ||||||||||||
Total | $ | 77,998 | $ | 21,743 | $ | 124,837 | $ | 38,533 | ||||||||
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
The Company sells its products primarily to customers in the Asia Pacific region and in the United States of America. Revenues by geographic locations are not necessarily representative of the geographic distribution of sales into end-user markets, as the Company’s customers sell their products globally. The revenues by geographic locations in the following table are based on the country or region in which the customer is located (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Hong Kong | $ | 25,879 | $ | 13,232 | $ | 44,838 | $ | 20,878 | ||||||||
Taiwan | 26,192 | 5,642 | 41,961 | 9,785 | ||||||||||||
China | 16,818 | 1,134 | 22,669 | 1,561 | ||||||||||||
Japan | 868 | 243 | 1,139 | 1,139 | ||||||||||||
United States | 349 | 388 | 974 | 3,166 | ||||||||||||
All other | 7,892 | 1,104 | 13,256 | 2,004 | ||||||||||||
Total | $ | 77,998 | $ | 21,743 | $ | 124,837 | $ | 38,533 | ||||||||
In December 2000, the Company formed a subsidiary to conduct testing operations and other processes associated with the manufacturing of its products in China. The registered capital of this subsidiary was initially $12.0 million, of which $3.8 million was funded by the Company in the fiscal year ended April 30, 2001, as required by Chinese law. The Company funded an additional $3.7 million during fiscal 2002. In August 2002, the Company increased the registered capital to $30.0 million and funded an additional $4.0 million during fiscal 2003. A total of $14.0 million of the $30.0 million of registered capital of the subsidiary had been funded as of October 31, 2003 from the Company’s available working capital. The remaining $16.0 million of registered capital must be funded as follows: $0.7 million by January 2004 and $15.3 million by January 2005. The $14.0 million invested through October 31, 2003 was used primarily to pay for the construction of a building and associated building improvements and purchase of machinery and equipment.
The Company’s long-lived assets are located in the following countries (in thousands):
October 31, | April 30, | |||||||
2003 | 2003 | |||||||
China | $ | 12,354 | $ | 8,968 | ||||
United States | 5,722 | 3,588 | ||||||
Taiwan | 5,234 | 2,845 | ||||||
All other | 295 | 278 | ||||||
Total | $ | 23,605 | $ | 15,679 | ||||
Note 6 — Employee Stock Option and Stock Purchase Plans
Employee Stock Option Grants
Options to purchase 601,750 and 3,444,600 shares of common stock were granted to employees during the three and six months ended October 31, 2003, respectively. As of October 31, 2003, options to purchase 9,777,694 shares of common stock were outstanding.
2000 Employee Stock Purchase Plan
As of October 31, 2003, 1,351,960 shares had been purchased under the 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”).
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
Fair Value Disclosures
Information regarding net income and net income per share, as adjusted, is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted under the fair value method. The fair value for these options was estimated using the Black-Scholes option pricing model. The per share weighted average estimated fair value for employee options granted was $21.47 and $5.26 during the three months ended October 31, 2003 and 2002, respectively. The per share weighted average estimated fair value for employee options granted was $17.29 and $5.96 during the six months ended October 31, 2003 and 2002, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options. Use of an option valuation model, as required by SFAS 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the Company’s employee options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Company’s estimate of the fair value of those options, in the Company’s opinion, the existing valuation models, including Black-Scholes, are not reliable single measures and may misstate the fair value of the Company’s employee options.
The following weighted average assumptions are included in the estimated fair value calculations for stock option grants in the three and six months ended October 31, 2003 and 2002:
Employee Stock Option | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Risk-free interest rate | 2.31 | % | 2.10 | % | 1.74 | % | 2.10 | % | ||||||||
Expected term of options (in years) | 3.5 | 3.5 | 3.5 | 3.5 | ||||||||||||
Expected volatility | 126.6 | % | 134.6 | % | 128.5 | % | 134.6 | % | ||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
Using Black-Scholes, the per share weighted average estimated fair value of rights issued pursuant to the Company’s 2000 Purchase Plan during the three and six months ended October 31, 2003 was $15.46 and $13.12, respectively. Using Black-Scholes, the per share weighted average estimated fair value of rights issued pursuant to the Company’s 2000 Purchase Plan during the three and six months ended October 31, 2002 was $4.09 and $4.65, respectively.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the 2000 Purchase Plan:
Employee Stock Purchase | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Risk-free interest rate | 1.19 | % | 1.80 | % | 1.18 | % | 1.80 | % | ||||||||
Expected term of options (in years) | 0.25 | 0.25 | 0.25 | 0.25 | ||||||||||||
Expected volatility | 126.6 | % | 134.6 | % | 128.5 | % | 134.6 | % | ||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
Note 7 — Commitments and 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.
On November 29, 2001, a complaint captioned McKee v. OmniVision Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the United States District Court for the Southern District of New York against OmniVision, some of the Company’s directors and officers, and various underwriters for the Company’s initial public offering. Plaintiffs generally allege that the named defendants violated federal securities laws because the prospectus related to the Company’s offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in the Company’s offering. The complaint seeks unspecified damages on behalf of a purported class of purchasers of the Company’s common stock between July 14, 2000 and December 6, 2000. Substantially similar actions have been filed concerning the initial public offerings for more than 300 different issuers, and the cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. The Company’s directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part a motion to dismiss brought by defendants including OmniVision. The order dismisses all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933. A proposal has been made for the settlement and release of claims against the issuer defendants, including OmniVision. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the Court. If the settlement does not occur, and litigation against the Company continues, the Company believes that it has meritorious defenses and intends to defend the case vigorously.
On August 21, 2002 the Company initiated a patent infringement action in Taiwan, R.O.C. against IC Media Corporation of San Jose, CA for infringement of Taiwan patent NI-139439 owned by OmniVision. The action was brought in the Civil Tribunal of the Shih Lin District Court and assigned Civil Action Number 91 Su-Zi 1074. The patent infringement action seeks damages and injunctive relief against IC Media Corporation. In response to the Company’s patent infringement action, on October 2, 2002, IC Media Corporation initiated a cancellation proceeding (Cancellation No. 089123560N01) in the Taiwan Intellectual Property Office with respect to its Taiwan patent NI139439. On July 23, 2003, the Taiwan Intellectual Property Office made an initial determination to grant the cancellation of Taiwan patent NI-139439. The decision of the Taiwan Intellectual Property Office was upheld by the Taiwan Ministry of Economic Affairs in November 2003. The Company intends to file an action with the High Administrative Court of Taiwan to reverse the grant of cancellation.
On October 11, 2002, the Company filed a complaint against IC Media Corporation in Superior Court of California, Santa Clara County (Case No. CV 811866). In its complaint, the Company alleges misappropriation of trade secrets, unfair competition and other business torts, and seek damages and injunctive relief. IC Media Corporation has answered the complaint by denying the allegations and raising various defenses; no counterclaims
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the Three and Six Months Ended October 31, 2003 and 2002
(unaudited)
have been asserted against the Company by IC Media. In accordance with the Alternative Dispute Resolution practices of the Superior Court of California, Santa Clara County, this matter has been submitted for non-binding arbitration.
On June 30, 2003, Mr. Chia-Chin Ku filed a complaint in Santa Clara County Superior Court against the Company and its president and chief executive officer, Mr. Shaw Hong. The complaint alleges that, by forming OmniVision in 1995, Mr. Hong breached a fiduciary duty owed to HK Technology, Inc., a privately-held corporation Mr. Hong and others founded in 1988. The complaint further alleges that the Company “misappropriated and converted” assets and technology belonging to HK Technology, Inc. The complaint seeks damages in an unspecified amount. The Company believes that it has meritorious defenses to the allegations and claims and intends to defend itself vigorously. The Company understands that HK Technology, Inc. has not engaged in significant substantive operations since the early 1990s. The Company also understands that HK Technology Inc.’s primary line of business was the design of chipsets for personal computers, and that it did not engage in any business concerning image sensors, which is OmniVision’s primary line of business. The Company does not believe that OmniVision’s technology or products incorporate or use any proprietary technology of HK Technology, Inc.
On July 14, 2003, Sunex, Inc. filed a complaint against OmniVision in San Diego County Superior Court. Sunex was a supplier of optical lenses and lens holders for one of the Company’s cell phone products. Under its complaint, Sunex is seeking to recover approximately $1.8 million plus interest and attorney’s fees. Sunex’s complaint relates to parts delivered by Sunex to OmniVision in the quarters ended January 31, 2003 and April 30, 2003 and the Company’s cancellation in that quarter of additional purchase orders it had previously placed with Sunex. In October 2003, the Superior Court granted Sunex’s request for a prejudgment writ of attachment. The parties stipulated to the filing of a bond in lieu of an attachment which OmniVision posted with the Superior Court in the approximate amount of $1.1 million. The attachment order and subsequent filing of the bond are not reflective of the merits of the case and are expressly prohibited from being referred to at the time of trial. The Company intends to defend itself vigorously and has filed a counterclaim against Sunex in which the Company alleges breach of contract and breach of warranties, and seeks damages in an amount yet to be determined. The Company believes that any amount it may ultimately owe Sunex in excess of the amount it had accrued as of April 30, 2003 will not have a material adverse affect on its financial condition, results of operations or cash flows.
In October 2003, the Company entered into a Shareholders’ Agreement with Taiwan Semiconductor Manufacturing Company, or TSMC, pursuant to which the Company agreed with TSMC to form VisEra Technology Company, or VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services and automated final testing services. The Company has committed with TSMC and certain employees and affiliates of VisEra to provide an aggregate of $50.0 million in total capital to VisEra, which commitments may be made in the form of cash or asset contributions. The Company and TSMC will have equal interests in VisEra. The Company’s share of this capital commitment to VisEra is $23.5 million and becomes due in stages as VisEra’s business and service capabilities develop over a number of years. The Company’s net cash commitment to VisEra is approximately $4.5 million. OmniVision will also contribute approximately $19.0 million of assets to the joint venture, including technology, plant and equipment currently owned by the Company or to be purchased with funds for existing commercial commitments. (See Note 5.)
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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors that include, but are not limited to, the risks discussed in “Factors Affecting Future Results.” These forward-looking statements include, but are not limited to: the statements relating to the transition of our testing operations to China and the expansion of our testing capabilities in the seventh paragraph under “Overview;” the statements relating to the our commitments and TSMC’s commitments to VisEra in the eighth, ninth and tenth paragraphs under “Overview;” the statements relating to the future revenues from sales of CameraChips for digital applications in the third paragraph under “Revenues;” the statements relating to research and development expenses during the remainder of fiscal 2004 in the second paragraph under “Research and Development;” the statements relating to future selling, general and administrative expenses in the second paragraph under “Selling, General and Administrative;” the statements relating to the expected effective tax rate for fiscal 2004 under “Provision for Income Taxes;” the statements relating to increased future revenues made in the second paragraph under “Liquidity and Capital Resources;” the statements relating to research and development expenses during the remainder of fiscal 2004 and to selling, general and administrative expenses during the remainder of fiscal 2004 in the third paragraph under “Liquidity and Capital Resources;” the statements relating to our capital commitments to VisEra in the footnote to the table in “Contractual Obligations and Commercial Commitments;” the statements relating to our efforts to increase capacity and reduce cost through the establishment of a Chinese subsidiary in the second paragraph under “Contractual Obligations and Commercial Commitments;” the statements relating to the our commitments and TSMC’s commitments to VisEra in the second paragraph in “Contractual Obligations and Commercial Commitments;” the statements relating to third party financing, the issuance of equity securities and the issuance of debt securities in the fourth paragraph under “Contractual Obligations and Commercial Commitments;” the statements relating to the expected effect of our contractual obligations and commercial commitments on our liquidity and cash flows in future periods in the fifth paragraph under “Contractual Obligations and Commercial Commitments;” the statements relating to the effect of and exposure to foreign currency exchange rate risk under “Foreign Currency Exchange Risk;” the statements relating to the effect of and exposure to market interest rate risk under “Quantitative and Qualitative Discussion of Market Interest Rate Risk;” and the statements relating to the effect that the implementation of a new enterprise resource planning system will have on our internal controls in the third paragraph under “Controls and Procedures;” among others. These forward-looking statements are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties are set forth below under “Factors Affecting Future Results.” All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.
Recent Events and Restatement
We have restated our financial statements for the first, second and third quarters of fiscal 2004. We have filed Form 10-Q/As for each of these quarters to reflect the restatement of the financial information for such periods.
The restatements arose out of an internal review which was initiated in response to issues raised by an employee. We notified the Audit Committee of the Board of Directors of the issues raised, and the Audit Committee, with assistance from special legal counsel, conducted its own independent investigation. As a result of the internal review and the independent investigation, management and the Audit Committee determined that certain errors had occurred which principally affected the timing of revenue recognition for certain sales. The independent investigation concluded that there was no evidence of wrongdoing in connection with these errors.
The restatement of our financial results for the first three quarters of fiscal 2004 related primarily to two issues identified as part of the internal review and independent investigation. First, beginning in the second half of fiscal 2003 and continuing through the first nine months of fiscal 2004, certain distribution sales, for which we recognize revenue on a “sell-through” basis, were not reported to us by one of our distributors in a timely manner. Additionally, in the second and third quarters of fiscal 2004, during the transition of testing operations and certain international sales functions to overseas locations, some shipments made to customers late in the quarter were incorrectly classified as transferring title upon delivery as opposed to upon shipment, and therefore revenue was not recognized when product was shipped. Both of these issues resulted in delayed revenue
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recognition. Both management and the Audit Committee determined that the errors did not have material effects on quarterly or annual financial statements for fiscal 2003 and, consequently, decided not to restate the quarterly or annual financial results for such periods.
In June 2003, we purchased approximately 27% of the equity of a privately held company based in Taiwan for a total of $2.0 million in cash. The Taiwan company provides plastic packaging services, and we will be a major customer. We have accounted for this investment using the equity method. In November 2003, we increased our investment in this privately held company by an additional $0.8 million to maintain our equity ownership percentage in this company.
Overview
We design, develop and market high performance, highly integrated and cost efficient semiconductor image sensor devices. Our main product, an image sensing device called the CameraChip™, is used to capture an image in a number of consumer and commercial mass market applications. Our CameraChips are designed to use the complementary metal oxide semiconductor, or CMOS, fabrication process. We have designed our CameraChip as a single chip solution that integrates several distinct functions including image capture, image processing, color processing and the conversion and output of a fully processed image or video stream. Our highly integrated CMOS CameraChips help enable mass market camera device manufacturers to build camera applications that generally have high image quality and resolution, are low cost and small in size and consume low amounts of power.
Our CameraChips are currently used in a number of consumer applications including digital still and video cameras, cell phones, personal computers and toys and games such as interactive video games.
Our CameraChips are sold to customers who incorporate them in either digital or analog mass market applications. Some examples of digital mass market applications that currently incorporate our CameraChips are digital still cameras, cell phone cameras and personal computer camera applications. Some examples of analog applications that currently incorporate our CameraChips are security and surveillance cameras and toy cameras.
We sell our products worldwide directly to original equipment manufacturers, or OEMs, which include branded customers and contract manufacturers, and value added resellers, or VARs, and indirectly through distributors.
We currently outsource the wafer fabrication, color filter application and packaging of our CameraChip products. This approach allows us to focus our resources on the design, development and marketing of our products and significantly reduces our capital requirements.
We have designed and developed a complete PC-based system for the testing of our CameraChips. This system has automatic handling capability, an image source, a lighting and lens system and automatic output sorting capability. We believe that this proprietary testing process helps us to reduce our testing costs, maintain consistent product quality, and identify areas for continued improvement in product quality.
We have initiated the process of relocating some of our automated image testing equipment from the United States to China. We anticipate that we will substantially complete this transition prior to the end of fiscal 2004. In addition, we also expect to expand testing capabilities with additional automated testing equipment, which will also be located in China.
In October 2003, we entered into a Shareholders’ Agreement with Taiwan Semiconductor Manufacturing Company, or TSMC, pursuant to which we agreed with TSMC to form VisEra Technology Company, or VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services and automated final testing services. In connection with the formation of VisEra, OmniVision and TSMC have separately agreed to enter into nonexclusive license agreements with VisEra pursuant to which OmniVision and TSMC shall license certain intellectual property to VisEra relating to manufacturing services and automated final testing services. Once VisEra has the capability to deliver high quality manufacturing services and automated final testing services, we have committed to direct a substantial portion of our requirements in these areas to VisEra, subject to pricing and
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technology requirements. Our company and TSMC have also committed not to compete directly or indirectly in the future with VisEra in the fields of certain manufacturing services and automated final testing services.
We have committed with TSMC and certain employees and affiliates of VisEra to provide an aggregate of $50.0 million in total capital to VisEra, which commitments may be made in the form of cash or asset contributions. Our company and TSMC will have equal interests in VisEra. Our share of this capital commitment to VisEra is $23.5 million and becomes due in stages as VisEra’s business and service capabilities develop over a number of years. Our net cash commitment to VisEra is approximately $4.5 million. We will also contribute approximately $19.0 million of assets to the joint venture, including technology, plant and equipment currently owned by us or to be purchased with funds for existing commercial commitments.
Historically, we have relied upon TSMC to provide us with a substantial proportion of our wafers, but we have never before entered into a long-term supply agreement with TSMC and instead have traditionally secured manufacturing availability on a purchase order basis. As a part of the Shareholders’ Agreement, TSMC has agreed to commit substantial wafer manufacturing capacity to us for a period of time in exchange for our commitment over this time period to purchase a substantial portion of our wafers from TSMC, subject to pricing and technology requirements.
As of October 31, 2003, we had approximately $173.8 million in cash and cash equivalents and approximately $11.5 million in short-term investments. To mitigate credit risk related to short-term investments, we have an investment policy designed to preserve the value of capital and to generate interest income from these investments without undue exposure to market fluctuations. Market risk is the potential loss due to the change in value of a financial instrument due to changes in interest rates or bond prices. Our policy is to invest in financial instruments with short durations, limiting interest rate exposure, and to measure performance against comparable benchmarks. We maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations with ratings of A or better and money market funds.
Critical Accounting Policies
For a discussion of the critical accounting policies, please see the discussion in our Annual Report on Form 10-K for the fiscal year ended April 30, 2003.
Results of Operations, 2004 periods as restated, see Note 1
The following table sets forth the results of our operations as a percentage of revenues. Our historical operating results are not necessarily indicative of the results for any future period.
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues | 62.1 | 60.1 | 62.4 | 60.6 | ||||||||||||
Gross profit | 37.9 | 39.9 | 37.6 | 39.4 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 4.1 | 11.4 | 5.4 | 13.3 | ||||||||||||
Selling, general and administrative | 7.6 | 12.5 | 8.3 | 12.4 | ||||||||||||
Stock compensation charge | 0.1 | 0.7 | 0.2 | 0.7 | ||||||||||||
Total operating expenses | 11.8 | 24.6 | 13.9 | 26.4 | ||||||||||||
Income from operations | 26.1 | 15.3 | 23.7 | 13.0 | ||||||||||||
Interest income, net | 0.7 | 1.0 | 0.6 | 1.1 | ||||||||||||
Income before income taxes | 26.8 | 16.3 | 24.3 | 14.1 | ||||||||||||
Provision for income taxes | 9.1 | 2.4 | 8.3 | 2.1 | ||||||||||||
Net income | 17.7 | % | 13.9 | % | 16.0 | % | 12.0 | % | ||||||||
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Three and Six Months Ended October 31, 2003 as Compared to Three and Six Months Ended October 31, 2002
Revenues, 2004 periods as restated, see Note 1
We derive revenues from the sale of our CameraChip products for use in a wide variety of consumer and commercial mass market applications including digital still cameras, cell phones, video game consoles and security and surveillance cameras. Revenues for the three months ended October 31, 2003 and 2002 were approximately $78.0 million and $21.7 million, respectively. Revenues for the six months ended October 31, 2003 and 2002 were approximately $124.8 million and $38.5 million, respectively.
Revenues from Sales of CameraChips for Digital as Compared to Analog Applications.
Our CameraChips are sold to customers who incorporate them into either digital or analog applications. Examples of digital applications that incorporate our CameraChips are digital still cameras, cellular phone cameras, personal computer camera applications and digital toy cameras. Examples of analog applications that incorporate our CameraChips are security and surveillance cameras and toy cameras. We sell a large portion of our products through VARs and distributors, and often we do not know the identity of the manufacturer who is embedding our CameraChips into their products. As a result of our sales to VARs and distributors and because our CameraChips can be used in a wide variety of digital or analog products, we cannot accurately confirm the distribution of our revenues across specific product categories. However, we are able to confirm the distribution of our revenues by digital and analog product categories and they are as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Digital image sensors | $ | 71,043 | $ | 16,121 | $ | 109,504 | $ | 24,615 | ||||||||
Analog image sensors | 6,955 | 5,622 | 15,333 | 13,918 | ||||||||||||
Total | $ | 77,998 | $ | 21,743 | $ | 124,837 | $ | 38,533 | ||||||||
Digital Revenues.For the three months ended October 31, 2003, revenues from sales of CameraChips for digital applications increased 340.7% to approximately $71.0 million from $16.1 million for the three months ended October 31, 2002. Revenues from sales of CameraChips for digital applications represented 91.1% and 74.1% of revenues for the three months ended October 31, 2003 and 2002, respectively. For the six months ended October 31, 2003, revenues from sales of CameraChips for digital applications increased 344.9% to approximately $109.5 million from $24.6 million for the six months ended October 31, 2002. Revenues from sales of CameraChips for digital applications represented 87.7% and 63.9% of revenues for the six months ended October 31, 2003 and 2002, respectively. The increase in revenues from sales of CameraChips for digital applications for the three and six months ended October 31, 2003 was due to increased unit sales and to a shift in product mix toward higher resolution products, which, in general, carry higher average sales prices than lower resolution products. The increased unit sales resulted from heightened demand for CameraChips for digital still cameras, cell phones, and interactive video games. We expect revenues from sales of CameraChips for digital applications to increase in the third quarter of fiscal 2004 primarily as a result of increased sales to the digital still camera and cell phone markets.
Analog Revenues.For the three months ended October 31, 2003, revenues from sales of CameraChips for analog applications increased 23.7% to approximately $7.0 million from $5.6 million for the three months ended October 31, 2002. Revenues from sales of CameraChips for analog applications represented 8.9% and 25.9% of revenues for the three months ended October 31, 2003 and 2002, respectively. For the six months ended October 31, 2003, revenues from sales of CameraChips for analog applications increased 10.2% to approximately $15.3 million from $13.9 million for the six months ended October 31, 2002. Revenues from sales of CameraChips for analog applications represented 12.3% and 36.1% of revenues for the six months ended October 31, 2003 and 2002, respectively. The increase in revenues from sales of CameraChips for analog applications for the three and six months ended October 31, 2003 was due primarily to increased demand for CameraChips for use in cameras for toys and games.
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Revenues from Sales to OEMs and VARs as Compared to Distributors
We sell our CameraChips either directly to OEMs and VARs or through distributors. The following table illustrates the percentage of revenues from sales to OEMs and VARs as compared to distributors in the three and six months ended October 31, 2003 and 2002:
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
OEMs and VARs | 69.2 | % | 68.9 | % | 66.0 | % | 64.9 | % | ||||||||
Distributors | 30.8 | 31.1 | 34.0 | 35.1 | ||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
OEMs and VARs.In the three months ended October 31, 2003, Aiptek International, Inc., or Aiptek, headquartered in Taiwan, accounted for 11.7% of revenues. In the three months ended October 31, 2002, Concord Camera HK Limited, or Concord, headquartered in Hong Kong, accounted for 19.5% of revenues, and Aiptek accounted for 12.7% of revenues. In the six months ended October 31, 2003, Aiptek accounted for 10.7% of revenues. In the six months ended October 31, 2002, Concord accounted for 12.2% of revenues. No other OEM or VAR customer accounted for 10% or more of revenues during any of these periods.
Distributors.In the three months ended October 31, 2003, World Peace Industrial Co. Ltd., or World Peace, headquartered in Taiwan, accounted for 21.8% of revenues. In the three months ended October 31, 2002, World Peace accounted for 20.5% of revenues, including sales to World Peace’s subsidiary, GainTune, based in Hong Kong. In the six months ended October 31, 2003, World Peace accounted for 24.3% of revenues, including sales to GainTune. In the six months ended October 31, 2002, World Peace accounted for 22.2% of revenues, including sales to GainTune. No other distributor accounted for 10% or more of revenues during any of these periods.
Revenues from Domestic Sales as Compared to Foreign Sales
The following table illustrates the percentage of revenues from sales of our CameraChip products to domestic customers as compared to foreign customers for the three and six months ended October 31, 2003 and 2002:
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Domestic sales | 0.4 | % | 1.8 | % | 0.8 | % | 8.2 | % | ||||||||
Foreign sales | 99.6 | 98.2 | 99.2 | 91.8 | ||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
The majority of our foreign sales are attributable to sales made to customers in Asia and, to a lesser extent, in Europe. Over time, our sales to Asia-Pacific customers have increased primarily as a result of the continuing trend of outsourcing production to Asian manufacturers and facilities. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our CameraChips are sold globally, we believe that such figures do not accurately reflect geographic distribution of sales of our products into end-user markets.
Gross Profit, 2004 periods as restated, see Note 1
Gross margins for the three months ended October 31, 2003 and 2002 were 37.9% and 39.9% of revenues, respectively. Gross margins for the six months ended October 31, 2003 and 2002 were 37.6% and 39.4% of revenues, respectively. The decrease in gross margins for the three and six months ended October 31, 2003, as compared to the corresponding periods in the prior year, was primarily due to a reduction in sales of previously written off inventory. For the three months ended October 31, 2003, approximately $0.5 million of gross profit was attributable to the sale of previously written off inventory. For the six months ended October 31, 2003,
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approximately $0.8 million of gross profit was attributable to the sale of previously written off inventory. Excluding the revenues and gross profit from the sale of previously written off inventory, the gross margin for the three months ended October 31, 2003 would have been approximately 37.6% of revenues, as compared to 37.2% of revenues during the comparable period in the prior year. Excluding the revenues and gross profit from the sale of previously written off inventory, the gross margin for the six months ended October 31, 2003 would have been approximately 37.2% of revenues, as compared to 36.6% of revenues during the comparable period in the prior year.
The following table summarizes the effect of sales of previously written-off inventory on gross profits for the three and six months ended October 31, 2003 and 2002 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
October 31, | October 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Sales of all products | $ | 77,998 | $ | 21,743 | $ | 124,837 | $ | 38,533 | ||||||||
Gross profit | $ | 29,573 | $ | 8,680 | $ | 46,952 | $ | 15,196 | ||||||||
Gross margin | 37.9 | % | 39.9 | % | 37.6 | % | 39.4 | % | ||||||||
Sales excluding products for which the costs were previously written off | $ | 77,545 | $ | 20,786 | $ | 124,051 | $ | 36,781 | ||||||||
Gross profit excluding the effect of sales of products for which the costs were previously written off | $ | 29,120 | $ | 7,723 | $ | 46,166 | $ | 13,444 | ||||||||
Gross margin excluding the effect of sales of products for which the costs were previously written off | 37.6 | % | 37.2 | % | 37.2 | % | 36.6 | % |
Research and Development
Research and development expenses consist primarily of compensation and personnel related expenses and costs for purchased materials, designs and tooling, depreciation of computers and workstations, and amortization of computer aided design software, some of which may fluctuate significantly from period to period as a result of our product development cycles. Research and development expenses for the three months ended October 31, 2003 and 2002 were approximately $3.2 million and $2.5 million, respectively. As a percentage of revenues, research and development expenses for the three months ended October 31, 2003 and 2002 represented 4.1% and 11.4%, respectively. Research and development expenses for the six months ended October 31, 2003 and 2002 were approximately $6.8 million and $5.1 million, respectively. As a percentage of revenues, research and development expenses for the six months ended October 31, 2003 and 2002 represented 5.4% and 13.3%, respectively.
The increase in research and development expenses of approximately $0.7 million, or 27.5%, for the three months ended October 31, 2003 from the similar period in the prior year resulted primarily from a $0.4 million increase in expenses related to new product development required to improve our current product line and support new product introductions and a $0.3 million increase in salary and payroll-related expenses associated with additional personnel. Examples of new product development expenses include tape-out and prototype runs with our wafer manufacturers. The decline in research and development as a percentage of revenues for the three months ended October 31, 2003 was due to the proportionately greater increase in revenues from levels in the prior year. The increase in research and development expenses of approximately $1.7 million, or 31.9%, for the six months ended October 31, 2003 from the similar period in the prior year resulted primarily from an $0.8 million increase in salary and payroll-related expenses associated with additional personnel, $0.5 million in expenses related to new product development required to improve our current product line and support new product introductions and $0.1 million each in expenses for patent prosecution, engineering supplies and software, respectively. The decline in research and development as a percentage of revenues was due to the proportionately greater increase in revenues for the six months ended October 31, 2003 from levels in the prior year. We anticipate that our research and development expenses will increase in the remainder of fiscal 2004 as
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we develop our next generation of CameraChip products and as we continue to grow our business, including our research and development team.
Selling, General and Administrative, 2004 periods as restated, see Note 1
Selling, general and administrative expenses consist primarily of compensation and personnel related expenses, commissions paid to distributors and manufacturers’ representatives, and insurance and legal expenses. Selling, general and administrative expenses include some of the expenses associated with the startup of our Chinese subsidiary. Selling, general and administrative expenses for the three months ended October 31, 2003 and 2002 were approximately $5.9 million and $2.7 million, respectively. As a percentage of revenues, selling, general and administrative expenses for the three months ended October 31, 2003 and 2002 represented 7.6% and 12.5%, respectively. Selling, general and administrative expenses for the six months ended October 31, 2003 and 2002 were approximately $10.4 million and $4.8 million, respectively. As a percentage of revenues, selling, general and administrative expenses for the six months ended October 31, 2003 and 2002 represented 8.3% and 12.4%, respectively.
The increase in selling, general and administrative expenses of approximately $3.2 million for the three months ended October 31, 2003 from the similar period in the prior year resulted primarily from a $1.2 million increase in commissions associated with increased revenues, a $0.9 million increase in provisions for bad debts related to the increase in accounts receivable, a $0.6 million increase in employment expenses and a $0.5 million increase in legal and accounting expenses. Selling, general and administrative expenses decreased as a percentage of revenues in the three months ended October 31, 2003 as compared to the similar period in the prior year as a result of the proportionately greater increase in revenues. The increase in selling, general and administrative expenses of approximately $5.6 million for the six months ended October 31, 2003 from the similar period in the prior year resulted primarily from a $2.0 million increase in commissions associated with increased revenues, a $1.4 million increase in salary and payroll-related expenses, a $1.3 million increase in provisions for bad debts related to the increase in accounts receivable and a $1.0 million increase in legal and accounting expenses. Selling, general and administrative expenses decreased as a percentage of revenues for the six months ended October 31, 2003, as compared to the similar period in the prior year, as a result of the proportionately greater increase in revenues. We anticipate that our future selling, general and administrative expenses will increase in absolute dollars as we continue to grow our business.
Interest Income, Net
Our cash, cash equivalents and short-term and long-term investments are invested in interest-bearing accounts consisting primarily of money market accounts and high-grade corporate securities and government bonds maturing approximately twelve months or less from the date of purchase. Interest income, net, increased for the three months ended October 31, 2003 from the similar period in the prior year to approximately $0.5 million. Interest income, net, increased for the six months ended October 31, 2003 from the similar period in the prior year to approximately $0.8 million. Increased interest income, net, resulted from increased investments in interest-bearing accounts resulting from approximately $113.2 million in net proceeds from the issuance of common stock in our follow-on public offering in July 2003 and cash provided by operating activities.
Provision for Income Taxes, 2004 periods as restated, see Note 1
We generated approximately $20.9 million and $3.5 million in income before income taxes for the three months ended October 31, 2003 and 2002, respectively. We recorded provisions for income taxes for the three months ended October 31, 2003 and 2002 of approximately $7.1 million and $0.5 million, respectively. We generated approximately $30.4 million and $5.5 million in income before income taxes for the six months ended October 31, 2003 and 2002, respectively. We recorded provisions for income taxes for the six months ended October 31, 2003 and 2002 of approximately $10.3 million and $0.8 million, respectively. We anticipate the effective tax rate for fiscal 2004 will increase as compared to fiscal 2003 but will be less than the combined federal and state statutory rate for fiscal 2004. The increase in tax rate is due to the anticipated mix of income between domestic and foreign entities for the fiscal year. Achieving an effective tax rate in fiscal 2004 that is less than the combined federal and state statutory rates is principally contingent upon our foreign affiliates generating income.
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Liquidity and Capital Resources, as Restated
Principal sources of liquidity at October 31, 2003 consisted of cash, cash equivalents and short-term investments of $185.3 million.
Our working capital increased by approximately $132.9 million to $213.8 million as of October 31, 2003 from $80.9 million as of April 30, 2003. The increase was primarily attributable to a $123.3 million increase in cash and cash equivalents principally resulting from our follow-on public offering of common stock in July 2003, a $26.6 million increase in accounts receivable, net, consistent with the increase in revenues from prior year levels during the six months ended October 31, 2003, a $11.9 million increase in inventories to support future sales, a $1.3 million increase in short-term investments, a $1.1 million increase in restricted cash and a $0.5 million increase in prepaid expenses and other assets, partially offset by a $27.5 million increase in accounts payable and a $3.1 million increase in accrued liabilities to support increased levels of operations. The $26.6 million increase in accounts receivable, net, reflects the sharply higher level of sales during the six months ended October 31, 2003 and an increase in days of sales outstanding to 54 days as of October 31, 2003 from 43 days as of April 30, 2003. The increase in accounts receivable, net, was partially offset by a $3.0 million increase in the reserve for sales returns, which rose as a result of the sharp increase in revenues for the six months ended October 31, 2003, and by a $1.4 million increase in the allowance for doubtful accounts, which rose as a result of the sharp increase in accounts receivable balances. The $11.9 million increase in inventories is attributable to higher inventory levels to support future sales. Inventory turns, calculated based on the fiscal quarters ended October 31, 2003 and April 30, 2003, increased to 7.6 as of October 31, 2003 as compared to 7.2 as of April 30, 2003.
For the six months ended October 31, 2003, net cash provided by operating activities totaled approximately $17.2 million as compared to our use of cash for operating activities of $2.3 million for the similar period in the prior year, primarily due to net income of approximately $20.0 million for the six months ended October 31, 2003 as compared to $4.6 million for the similar period in the prior year, a $27.5 million increase in accounts payable, a $3.1 million increase in accrued expenses and other liabilities and a $1.2 million decrease in refundable and deferred income taxes, which were partially offset by a $26.6 million increase in accounts receivable, net, a $11.9 million increase in inventories to support future sales and a $0.5 million increase in prepaid expenses and other assets. For the remainder of fiscal 2004, we anticipate that our research and development expenses will increase as we develop our next generation of CameraChip products and as we continue to grow our business. We also anticipate that our selling, general and administrative expenses will increase for the remainder of fiscal 2004 as we continue to grow our business.
For the six months ended October 31, 2003, our cash used in investing activities increased to approximately $11.0 million from $2.8 million for the similar prior year period, due to $6.6 million in purchases of property, plant and equipment, $3.3 million in purchases of short-term and long-term marketable investments and a $1.1 million increase in restricted cash. Net cash used in investing activities of $2.8 million for the six months ended October 31, 2002, resulted from purchases of property, plant and equipment. The $6.6 million increase in property, plant and equipment was due to the additional investment in buildings, building improvements and machinery and equipment to support the expanding operations of our Chinese subsidiary.
For the six months ended October 31, 2003, net cash provided by financing activities increased to approximately $117.2 million from $0.7 million for the similar period in the prior year. The increase was primarily due to approximately $113.2 million in net proceeds resulting from our follow-on public offering of common stock in July 2003 and $4.0 million in proceeds from the issuance and sale of common stock pursuant to the exercise of stock options and from employee purchases through the employee stock purchase plan during the six months ended October 31, 2003 as compared to $1.3 million for the similar period in the prior year. Proceeds from the issuance and sale of common stock for the six months ended October 31, 2002 were partially offset by $0.6 million in refunded deposits related to investments from third parties in our Chinese subsidiary, HuaWei Semiconductor.
In June 2003, we purchased approximately 27% of the equity of a privately held company based in Taiwan for a total of $2.0 million in cash. The Taiwan company provides plastic packaging services, and we will be a major customer. We have accounted for this investment using the equity method. In November 2003, we
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increased our investment in this privately held company by an additional $0.8 million to maintain our equity ownership percentage in this company.
Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations and commercial commitments as of October 31, 2003 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future periods (in thousands):
Less than | After | |||||||||||||||||||
Total | 1 Year | 1 - 3 Years | 4 - 5 Years | 5 Years | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Operating leases | $ | 4,640 | $ | 1,275 | $ | 2,281 | $ | 839 | $ | 245 | ||||||||||
Noncancelable orders | 40,900 | 40,900 | — | — | — | |||||||||||||||
Total contractual obligations | 45,540 | 42,175 | 2,281 | 839 | 245 | |||||||||||||||
Other Commercial Commitments | ||||||||||||||||||||
Investment in China | 16,000 | 700 | 15,300 | — | — | |||||||||||||||
Joint Venture with TSMC | 4,500 | 1 | 1,000 | 3,500 | — | — | ||||||||||||||
Total commercial commitments | 20,500 | 1,700 | 18,800 | — | — | |||||||||||||||
Total contractual obligations and commercial commitments | $ | 66,040 | $ | 43,875 | $ | 21,081 | $ | 839 | $ | 245 | ||||||||||
1 | Pursuant to the Shareholders’ Agreement with TSMC, our share of the capital commitment to VisEra is $23.5 million, which becomes due in stages as VisEra’s business and service capabilities develop over a number of years. Our net cash investment to the joint venture will approximate $4.5 million. We will also contribute approximately $19.0 million of assets to the joint venture, including technology, plant and equipment currently owned by us or to be purchased with funds for existing commercial commitments. Our cash and asset contributions will be made in three phases. In the first phase, we shall contribute $1.5 million in cash to VisEra and a non-exclusive license to certain of our manufacturing and automated final testing technologies and patents. In the second phase, we shall contribute $9.5 million in cash to VisEra and a non-exclusive license to certain of our manufacturing and automated final testing technologies and patents. In the third phase, we shall contribute $12.5 million in cash and assets to VisEra and receive back from VisEra an aggregate cash payment of $17.5 million. |
The $16.0 million cash payment referenced in the table above relates to the remaining $16.0 million of registered capital for our Chinese subsidiary. We established this subsidiary as part of our efforts to increase capacity and reduce costs for testing our CameraChips.
In October 2003, we entered into a Shareholders’ Agreement with TSMC pursuant to which we agreed with TSMC to form VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services and automated final testing services. We have committed with TSMC and certain employees and affiliates of VisEra to provide an aggregate of $50.0 million in total capital to VisEra, which commitments may be made in the form of cash or asset contributions. Our company and TSMC will have equal interests in VisEra. Our share of this capital commitment to VisEra is $23.5 million and becomes due in stages as VisEra’s business and service capabilities develop over a number of years. Our net cash commitment to VisEra is approximately $4.5 million. We will also contribute approximately $19.0 million of assets to the joint venture, including technology, plant and equipment currently owned by us or to be purchased with funds for existing commercial commitments. The $4.5 million commercial commitment referenced in the table above refers to the remaining $4.5 million of net cash capital contributions to VisEra.
We expect to fund the capital commitment to our Chinese subsidiary and to our joint venture with TSMC through a combination of funds from our available working capital, investments from third parties, or equity or debt financing. Third party financing may not be available to us when and as required or on terms that are favorable to our stockholders and us. In addition, Chinese law may limit the sources that may be eligible to invest in our Chinese subsidiary. In the event we are unable to obtain financing from third parties, the issuance of our
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equity securities, including securities convertible into our equity securities, would dilute the ownership interests of our existing stockholders, and the issuance of debt securities could increase the risk or the perceived risk of our business. Issuance of debt securities could also impair our financial condition, and interest payments could have an adverse effect on our results of operation.
We currently expect our available cash, cash equivalents, and short-term investments, together with cash that we anticipate to be generated from business operations, to be sufficient to satisfy our working capital requirements for the next twelve months. Our ability to generate cash from operations is subject to substantial risks described below under the caption“Factors Affecting Future Results.”We encourage you to review these risks carefully. If we are unable to generate sufficient cash from our operations, it would have a material adverse effect on our business and financial condition.
Factors Affecting Future Results
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis, contains forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition or results of operations to differ materially from our historical results or currently anticipated results. For the most recent description of the risks and uncertainties we face, please see “Factors Affecting Future Results” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2004, which Annual Report is being filed with the SEC as of the same date as this amended Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We are an international company, selling our products globally, in particular, to branded customers, contract manufacturers, VARs and distributors in China, Hong Kong, Japan, Korea and Taiwan. Although we transact our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products, gross profits realized, and results of operations. Further, we incur expenses in China, Japan, Korea, Taiwan, Thailand, the United Kingdom and other countries that are denominated in currencies other than the U.S. dollar. We cannot estimate the effect that an immediate 10% change in foreign currency exchange rates would have on our future operating results or cash flows as a direct result of changes in exchange rates. However, we do not believe that we currently have any significant direct foreign currency exchange rate risk, and we have not hedged exposures denominated in foreign currencies or any other derivative financial instruments.
Quantitative and Qualitative Discussion of Market Interest Rate Risk
Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, in the future, the fair market value of our investments. We manage our exposure to financial market risk by performing ongoing evaluations of our investment portfolio. We presently invest in short term bank market rate accounts, certificates of deposit issued by banks, high-grade corporate securities and government bonds maturing approximately 12 months or less from the date of purchase. Due to the short maturities of our investments, the carrying value should approximate the fair market value. In addition, we do not use our investments for trading or other speculative purposes. Due to the short duration of our investment portfolio, we do not expect that an immediate 10% change in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures (as of the date of filing this amended Quarterly Report on Form 10-Q)
We have restated our financial results for the quarters ended July 31, 2003, October 31, 2003 and January 31, 2004 to reflect adjustments to our previously reported financial information. The restatements arose out of an internal review which was initiated in response to issues raised by an employee. We notified the Audit Committee of the Board of Directors of the issues raised, and the Audit Committee, with assistance from special legal counsel, conducted its own independent investigation. As a result of the internal review and the independent investigation, management and the Audit Committee determined that certain errors had occurred which principally affected the timing of revenue recognition for certain sales. The independent investigation concluded that there was no evidence of wrongdoing in connection with these errors.
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The restatement of our financial results for the first three quarters of fiscal 2004 related primarily to two issues identified as part of the internal review and independent investigation. First, beginning in the second half of fiscal 2003 and continuing through the first nine months of fiscal 2004, certain distribution sales, for which we recognize revenue on a “sell-through” basis, were not reported to us by one of our distributors in a timely manner. Additionally, in the second and third quarters of fiscal 2004, during the transition of testing operations and certain international sales functions to overseas locations, some shipments made to customers late in the quarter were incorrectly classified as transferring title upon delivery as opposed to upon shipment, and therefore revenue was not recognized when product was shipped. Both of these issues resulted in delayed revenue recognition.
Partly in connection with the restatement of our financial statements for the first, second and third quarters for fiscal 2004, our Independent Registered Public Accounting Firm have identified material weaknesses in our internal controls and procedures relating to errors in our recognition of revenue resulting from incorrectly reviewing distributor reports and from incorrectly applying revenue recognition policies in accordance with title transfer, risk of loss and related shipping terms. Our Independent Registered Public Accounting Firm also noted a material weakness related to our need to increase our financial reporting and accounting staffing levels to ensure that we can meet our financial reporting obligations given the significant growth in our business in recent periods. In addition, our Independent Registered Public Accounting Firm reported additional observations and recommendations with respect to our financial reporting and internal controls. Correcting the identified material weaknesses and addressing the other issues identified by our Independent Registered Public Accounting Firm, responding to the findings of the internal review and the independent investigation and continuously strengthening our internal controls and financial reporting capabilities are some of our highest priorities. We have adopted and implemented measures to ensure that information required to be disclosed in this amended Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported accurately, and we continue to adopt and implement, several measures in connection with our ongoing efforts to improve our control processes and corporate governance in response to the issues identified in the internal review, independent investigation and the report of our Independent Registered Public Accounting Firm. These measures include the following:
• | Working in cooperation with the distributor who did not report resales of our CameraChips on a timely basis to receive sell-through data from such distributor for the full quarterly period. | |||
• | Additional training of our sales and marketing staff and our financial reporting and accounting staff to be particularly attentive to reviewing distributor reports to prevent revenue recognition errors from occurring. | |||
• | Additional training of our sales and marketing staff and our financial reporting and accounting staff as to be particularly attentive to the terms of purchase orders, including matters related to title transfer, risk of loss and related shipping terms, to prevent revenue recognition errors from occurring. |
• | Augmenting our internal control and financial reporting staff, both domestically and abroad, to help ensure that we can adequately meet our financial reporting responsibilities as our business continues to grow. | |||
• | Improving the documentation of our internal controls. | |||
• | Improving our IT infrastructure on an enterprise-wide basis. |
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We believe that we have addressed the specific accounting issues identified in the internal review and independent investigation. In addition, we believe we have improved, and are in the process of further improving, our infrastructure, personnel, processes and controls to help ensure that we are able to produce accurate financial statements on a timely basis. However, our growth in operations will continue to place a strain on our management systems, controls and resources. To address these issues, we will need to continue to improve our financial and managerial controls, reporting systems and procedures in the future and will need to continue to expand, train and manage our work force company-wide, including the size of our accounting and financial reporting staff. If we are unable to maintain an adequate level of financial processes and controls, we may not be able to accurately report our financial performance on a timely basis and our business and stock price would be harmed.
While we continue to enhance our internal controls and procedures, we have instituted disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures�� in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. Because of inherent limitations in any system of disclosure controls and procedures, no evaluation of controls can provide absolute assurance that all instances of error or fraud, if any, within our company may be detected.
Our management carried out an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of both October 31, 2003, the end of our second quarter of fiscal 2004 and April 30, 2004, the end of fiscal 2004, our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls
Other than as described above, there have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date that we completed our evaluation.
We are continuing to implement modules in our enterprise resource planning system, which we have started in 2003. We believe that we have adequate backup procedures and systems in place such that the process of implementing this enterprise resource planning system will not materially a adversely affect our internal controls.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 29, 2001, a complaint captioned McKee v. OmniVision Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the United States District Court for the Southern District of New York against OmniVision, some of our directors and officers, and various underwriters for our initial public offering. Plaintiffs generally allege that the named defendants violated federal securities laws because the prospectus related to our offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in our offering. The complaint seeks unspecified damages on behalf of a purported class of purchasers of our common stock between July 14, 2000 and December 6, 2000. Substantially similar actions have been filed concerning the initial public offerings for more than 300 different issuers, and the cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. Our directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part a motion to dismiss brought by defendants including OmniVision. The order dismisses all claims against us except for a claim brought under Section 11 of the Securities Act of 1933. A proposal has been made for the settlement and release of claims against the issuer defendants, including OmniVision. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the Court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously.
On August 21, 2002 we initiated a patent infringement action in Taiwan, R.O.C. against IC Media Corporation of San Jose, CA for infringement of Taiwan patent NI-139439 owned by OmniVision. The action was brought in the Civil Tribunal of the Shih Lin District Court and assigned Civil Action Number 91 Su-Zi 1074. The patent infringement action seeks damages and injunctive relief against IC Media Corporation. In response to our patent infringement action, on October 2, 2002, IC Media Corporation initiated a cancellation proceeding (Cancellation No. 089123560N01) in the Taiwan Intellectual Property Office with respect to our Taiwan patent NI-139439. On July 23, 2003, the Taiwan Intellectual Property Office made an initial determination to grant the cancellation of Taiwan patent NI-139439. The decision of the Taiwan Intellectual Property Office was upheld by the Taiwan Ministry of Economic Affairs in November 2003. We intend to file an action with the High Administrative Court of Taiwan to reverse the grant of cancellation.
On October 11, 2002, we filed a complaint against IC Media Corporation in Superior Court of California, Santa Clara County (Case No. CV 811866). In our complaint, we allege misappropriation of trade secrets, unfair competition and other business torts, and seek damages and injunctive relief. IC Media Corporation has answered the complaint by denying the allegations and raising various defenses; no counterclaims have been asserted against us by IC Media. In accordance with the Alternative Dispute Resolution practices of the Superior Court of California, Santa Clara County, this matter has been submitted for non-binding arbitration.
On June 30, 2003, Mr. Chia-Chin Ku filed a complaint in Santa Clara County Superior Court against us and our president and chief executive officer, Mr. Shaw Hong. The complaint alleges that, by forming OmniVision in 1995, Mr. Hong breached a fiduciary duty owed to HK Technology, Inc., a privately-held corporation Mr. Hong and others founded in 1988. The complaint further alleges that we “misappropriated and converted” assets and technology belonging to HK Technology, Inc. The complaint seeks damages in an unspecified amount. We believe that we have meritorious defenses to the allegations and claims and intend to defend ourselves vigorously. We understand that HK Technology, Inc. has not engaged in significant substantive operations since the early 1990s. We also understand that HK Technology Inc.’s primary line of business was the design of chipsets for personal computers, and that it did not engage in any business concerning image sensors, which is OmniVision’s primary line of business. We do not believe that OmniVision’s technology or products incorporate or use any proprietary technology of HK Technology, Inc.
On July 14, 2003, Sunex, Inc. filed a complaint against OmniVision in San Diego County Superior Court. Sunex was a supplier of optical lenses and lens holders for one of our cell phone products. Under its complaint, Sunex is seeking to recover approximately $1.8 million plus interest and attorney’s fees. Sunex’s complaint
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relates to parts delivered by Sunex to OmniVision in the quarters ended January 31, 2003 and April 30, 2003 and our cancellation in that quarter of additional purchase orders we had previously placed with Sunex. In October 2003, the Superior Court granted Sunex’s request for a prejudgment writ of attachment. The parties stipulated to the filing of a bond in lieu of an attachment which OmniVision posted with the Superior Court in the approximate amount of $1.1 million. The attachment order and subsequent filing of the bond are not reflective of the merits of the case and are expressly prohibited from being referred to at the time of trial. We intend to defend ourselves vigorously and have filed a counterclaim against Sunex in which we allege breach of contract and breach of warranties, and seek damages in an amount yet to be determined. We believe that any amount we may ultimately owe Sunex in excess of the amount we had accrued as of April 30, 2003 will not have a material adverse affect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held at our corporate headquarters at 1341 Orleans Drive, Sunnyvale, California on October 1, 2003 at 10:00 a.m. local time. The results of the matters voted upon were as follows:
1. | To elect one Class III director to serve until the expiration of his three-year term or until his successor is duly elected or appointed and qualified. |
Vote | ||||||||
For | Withheld | |||||||
Joseph Jeng | 48,072,828 | 626,100 |
The term of office of directors Shaw Hong, Edward C.V. Winn, Raymond Wu and John T. Rossi continued after the Annual Meeting.
2. | To ratify the appointment of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending April 30, 2004. |
For | Against | Abstained | ||||||
48,565,488 | 144,520 | 8,920 |
3. | To amend and restate our 2000 Stock Plan to increase the number of shares reserved for issuance thereunder by 500,000 shares. |
For | Against | Abstained | Broker Non-Votes | |||||||||
8,677,134 | 23,793,260 | 25,022 | 16,223,512 |
4. | To ratify the option grant limitations contained in our amended and restated 2000 Stock Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. |
For | Against | Abstained | Broker Non-Votes | |||||||||
30,460,246 | 2,012,152 | 23,018 | 16,223,512 |
ITEM 5. OTHER INFORMATION
Non-Audit Services.
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (Act), we are required to disclose the non-audit services approved by our Audit Committee to be performed by PricewaterhouseCoopers LLP (PWC), our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the
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financial statements of a company. The Audit Committee has approved the engagement of PWC for non-audit services consisting of tax planning services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit | ||
Number | Description | |
10.17(a)* | Shareholders’ Agreement, dated October 29, 2003, by and between the Registrant and Taiwan Semiconductor Manufacturing Company. | |
10.17(b)* | Letter of Comfort, dated October 29, 2003, by and between the Registrant and Taiwan Semiconductor Manufacturing Company. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
* | Portions of this agreement have been omitted pursuant to a request for confidential treatment and the omitted portions have been filed separately with the Securities and Exchange Commission. Previously filed. |
(b) Reports onForm 8-K.
We furnished a Current Report on Form 8-K on August 20, 2003 announcing our fiscal results for our first quarter ended July 31, 2003. Such report was “furnished,” but not “filed.”
We filed a Current Report on Form 8-K on September 17, 2003 relating to our announcement of our appointment of John T. Rossi as our new Vice President of Finance and Chief Financial Officer.
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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: July 14, 2004
By: | /s/ Shaw Hong | |||
Shaw Hong | ||||
Chief Executive Officer, President and Director | ||||
(Principal Executive Officer) |
Dated: July 14, 2004
By: | /s/ John T. Rossi | |||
John T. Rossi | ||||
Vice President of Finance and Chief Financial | ||||
Officer (Principal Financial | ||||
and Accounting Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
10.17(a)* | Shareholders’ Agreement, dated October 29, 2003, by and between the Registrant and Taiwan Semiconductor Manufacturing Company. | |
10.17(b)* | Letter of Comfort, dated October 29, 2003, by and between the Registrant and Taiwan Semiconductor Manufacturing Company. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
* | Portions of this agreement have been omitted pursuant to a request for confidential treatment and the omitted portions have been filed separately with the Securities and Exchange Commission. Previously filed. |