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SECURITIES AND EXCHANGE COMMISSION
____________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended January 31, 2004 | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
For the transition period from to |
Delaware (State or other jurisdiction of incorporation or organization) | 77-0401990 (I.R.S. Employer 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. Yes x No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No o
At March 11, 2004, 55,621,527 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 the date of the filing of 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.
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OMNIVISION TECHNOLOGIES, INC.
INDEX
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3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
17 | ||||||||
28 | ||||||||
29 | ||||||||
32 | ||||||||
33 | ||||||||
34 | ||||||||
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)
January 31, | April 30, | |||||||
2004 | 2003 | |||||||
(restated) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 190,622 | $ | 50,438 | ||||
Restricted cash | 1,071 | — | ||||||
Short-term investments | 6,532 | 10,224 | ||||||
Accounts receivable, net | 42,633 | 19,133 | ||||||
Inventories | 41,212 | 13,642 | ||||||
Refundable and deferred income taxes | 6,438 | 7,642 | ||||||
Prepaid expenses and other assets | 1,679 | 1,195 | ||||||
Total current assets | 290,187 | 102,274 | ||||||
Property, plant and equipment, net | 19,290 | 12,456 | ||||||
Long-term investments | 7,110 | 2,845 | ||||||
Other non-current assets | 405 | 378 | ||||||
Total assets | $ | 316,992 | $ | 117,953 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 37,906 | $ | 10,528 | ||||
Accrued expenses and other liabilities | 8,005 | 8,037 | ||||||
Deferred income | 6,320 | 2,845 | ||||||
Total current liabilities | 52,231 | 21,410 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 54,963,776 and 46,805,816 shares issued and outstanding at January 31, 2004 and April 30, 2003, respectively | 55 | 47 | ||||||
Additional paid-in capital | 235,002 | 104,824 | ||||||
Deferred compensation related to stock options | (45 | ) | (159 | ) | ||||
Retained earnings (accumulated deficit) | 29,749 | (8,169 | ) | |||||
Total stockholders’ equity | 264,761 | 96,543 | ||||||
Total liabilities and stockholders’ equity | $ | 316,992 | $ | 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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Revenues | $ | 93,613 | $ | 30,522 | $ | 218,450 | $ | 69,055 | ||||||||
Cost of revenues(1) | 56,668 | 18,980 | 134,553 | 42,317 | ||||||||||||
Gross profit | 36,945 | 11,542 | 83,897 | 26,738 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 4,065 | 3,132 | 10,818 | 8,251 | ||||||||||||
Selling, general and administrative | 5,509 | 2,869 | 15,903 | 7,659 | ||||||||||||
Stock-based compensation(2) | 810 | 68 | 1,006 | 332 | ||||||||||||
Total operating expenses | 10,384 | 6,069 | 27,727 | 16,242 | ||||||||||||
Income from operations | 26,561 | 5,473 | 56,170 | 10,496 | ||||||||||||
Interest income, net | 511 | 199 | 1,281 | 631 | ||||||||||||
Income before income taxes | 27,072 | 5,672 | 57,451 | 11,127 | ||||||||||||
Provision for income taxes | 9,204 | 1,074 | 19,533 | 1,892 | ||||||||||||
Net income | $ | 17,868 | $ | 4,598 | $ | 37,918 | $ | 9,235 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.33 | $ | 0.10 | $ | 0.73 | $ | 0.21 | ||||||||
Diluted | $ | 0.29 | $ | 0.09 | $ | 0.64 | $ | 0.19 | ||||||||
Shares used in computing net income per share: | ||||||||||||||||
Basic | 54,652 | 45,615 | 51,877 | 44,997 | ||||||||||||
Diluted | 60,850 | 51,125 | 58,835 | 49,070 | ||||||||||||
(1)Stock-based compensation included in Cost of revenues | $ | 1 | $ | 2 | $ | 3 | $ | 9 | ||||||||
(2)Stock-based compensation by functional area: | ||||||||||||||||
Research and development | $ | 13 | $ | 35 | $ | 55 | $ | 117 | ||||||||
Selling, general and administrative | 797 | 33 | 951 | 215 | ||||||||||||
$ | 810 | $ | 68 | $ | 1,006 | $ | 332 | |||||||||
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)
Nine Months Ended | ||||||||
January 31, | ||||||||
2004 | 2003 | |||||||
(restated) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 37,918 | $ | 9,235 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,200 | 639 | ||||||
Stock-based compensation | 1,009 | 341 | ||||||
Tax benefits from stock option exercises | 8,651 | — | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (23,500 | ) | (7,284 | ) | ||||
Inventories | (27,570 | ) | (13,053 | ) | ||||
Refundable and deferred income taxes | 1,204 | 205 | ||||||
Prepaid expenses and other assets | (511 | ) | (2,049 | ) | ||||
Accounts payable | 27,378 | 8,417 | ||||||
Accrued expenses and other liabilities | (32 | ) | 1,139 | |||||
Deferred income | 3,475 | 1,593 | ||||||
Net cash provided by (used in) operating activities | 29,222 | (817 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of short-term investments | (17,329 | ) | (5,173 | ) | ||||
Restricted cash | (1,071 | ) | — | |||||
Proceeds from sale of short-term investments | 21,021 | 2,002 | ||||||
Purchase of long-term non-marketable investment | (4,265 | ) | — | |||||
Purchases of property, plant and equipment | (8,034 | ) | (5,234 | ) | ||||
Net cash used in investing activities | (9,678 | ) | (8,405 | ) | ||||
Cash flows from financing activities: | ||||||||
Deposit refunded | — | (900 | ) | |||||
Proceeds from issuance of common stock, net | 120,640 | 2,908 | ||||||
Payment for repurchase of common stock, net | — | (1 | ) | |||||
Net cash provided by financing activities | 120,640 | 2,007 | ||||||
Net increase (decrease) in cash and cash equivalents | 140,184 | (7,215 | ) | |||||
Cash and cash equivalents at beginning of period | 50,438 | 55,803 | ||||||
Cash and cash equivalents at end of period | $ | 190,622 | $ | 48,588 | ||||
Supplemental cash flow information: | ||||||||
Taxes paid | $ | 13,810 | $ | 4,188 | ||||
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 Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 1 — Basis of Presentation and Restatement
Overview
The accompanying interim unaudited condensed consolidated financial statements as of January 31, 2004 and April 30, 2003 and for the three and nine months ended January 31, 2004 and 2003 have been prepared by OmniVision Technologies, Inc. and its 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 for the fiscal year ended April 30, 2003 (the “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 Nine Months Ended January 31, 2004 and 2003
(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 | Nine Months Ended | |||||||||||||||
January 31, 2004 | January 31, 2004 | |||||||||||||||
(Reported) | (Restated) | (Reported) | (Restated) | |||||||||||||
Revenues | $ | 94,510 | $ | 93,613 | $ | 209,542 | $ | 218,450 | ||||||||
Cost of revenues(1) | 58,210 | 56,668 | 129,814 | 134,553 | ||||||||||||
Gross profit | 36,300 | 36,945 | 79,728 | 83,897 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 4,065 | 4,065 | 10,818 | 10,818 | ||||||||||||
Selling, general and administrative | 5,665 | 5,509 | 15,860 | 15,903 | ||||||||||||
Stock-based compensation charge(2) | 810 | 810 | 1,006 | 1,006 | ||||||||||||
Total operating expenses | 10,540 | 10,384 | 27,684 | 27,727 | ||||||||||||
Income from operations | 25,760 | 26,561 | 52,044 | 56,170 | ||||||||||||
Interest income, net | 511 | 511 | 1,281 | 1,281 | ||||||||||||
Income before income taxes | 26,271 | 27,072 | 53,325 | 57,451 | ||||||||||||
Provision for income taxes | 8,932 | 9,204 | 18,130 | 19,533 | ||||||||||||
Net income | $ | 17,339 | $ | 17,868 | $ | 35,195 | $ | 37,918 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.32 | $ | 0.33 | $ | 0.68 | $ | 0.73 | ||||||||
Diluted | $ | 0.28 | $ | 0.29 | $ | 0.60 | $ | 0.64 | ||||||||
Shares used in computing net income per share: | ||||||||||||||||
Basic | 54,652 | 54,652 | 51,877 | 51,877 | ||||||||||||
Diluted | 60,850 | 60,850 | 58,835 | 58,835 | ||||||||||||
(1) Stock-based compensation charges included in Cost of revenues | $ | 1 | $ | 1 | $ | 3 | $ | 3 | ||||||||
(2) Stock-based compensation charges by functional area: | ||||||||||||||||
Research and development | $ | 13 | $ | 13 | $ | 55 | $ | 55 | ||||||||
Selling, general and administrative | 797 | 797 | 951 | 951 | ||||||||||||
$ | 810 | $ | 810 | $ | 1,006 | $ | 1,006 | |||||||||
Balance Sheet Items
Three Months Ended | ||||||||||||||||
January 31, 2004 | ||||||||||||||||
(Reported) | (Restated) | |||||||||||||||
Accounts Receivable, net | $ | 34,721 | $ | 42,633 | ||||||||||||
Inventories | 45,400 | 41,212 | ||||||||||||||
Total Assets | 313,268 | 316,992 | ||||||||||||||
Accrued expenses and other current liabilities | 15,393 | 8,005 | ||||||||||||||
Total current liabilities | 59,881 | 52,231 | ||||||||||||||
Shareholders' equity | 253,387 | 264,761 |
Note 2 — Summary of Significant Accounting Policies
Revenue Recognition
For shipments to original equipment manufacturers (“OEMs”), value added resellers (“VARs”) and distributors without agreements that allow for returns or credits, the Company recognizes revenue using the “sell-to” method. Under this method, the Company recognizes revenue upon the shipment of 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
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
obligations. For shipments to distributors under agreements allowing for returns or credits, revenue is recognized using the “sell-through” method under which revenue is deferred until the distributor actually resells the product to the end-user customer and the Company is notified in writing by the distributor of such sale. Deferred income on shipment to distributors represents the amount billed less the cost of inventory shipped to but not yet sold by distributors. The Company provides for future returns based on historical experience at the time revenue is recognized.
In addition, the Company recognizes revenue from the provision of engineering assistance to a limited number of its customers from time to time. The Company recognizes the associated revenue only upon the completion of and acceptance by the customer of the services performed. The revenue is based on a fixed fee which is agreed upon prior to initiation of the engineering assistance. Historically, revenue generated from such arrangements has been immaterial.
Restricted Cash
Restricted cash represents cash that has been set aside as a result of court proceedings in which the parties stipulated to the filing of a bond, in lieu of an attachment, that the Company posted with the San Diego County Superior Court. As of January 31, 2004, restricted cash of approximately $1.1 million secured the bond. Restricted cash is classified in current assets on the condensed consolidated balance sheet. The Company maintains its restricted cash with a commercial bank.
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 in 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 (loss). Unrealized gains or losses were not significant during any period presented in these financial statements.
Intangible Assets
The Company’s patent, copyright, trademark and trade secrets have been developed internally to date. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets,” the Company recognizes as expense when incurred the associated costs of the internal development of these intellectual property rights.
Warranty Reserve for Defective Products
The Company accounts for its warranty reserve for defective products as a portion of the sales return reserve. The Company warrants to its customers that its products will work in accordance with their specifications. If a product is defective, the customer is to notify the Company and return the defective product to the Company. The Company then sends replacement products to the customer. The Company does not repair any defective products due to cost and other complexities associated with the products.
Land Use Right Acquired in China
In December 2000, the Company established a Chinese subsidiary to conduct testing operations in China. Subsequently, the Company constructed a manufacturing facility in Shanghai owned by the Chinese subsidiary. This manufacturing facility was placed in service in July 2003. However, the Chinese subsidiary does not own the land that underlies the facility; rather, it holds a “land use right” that was acquired from the local Chinese government in December 2000 for approximately $0.8 million, which entitles the Company to use the land for 50 years. The cost of this land use right was recorded as a portion of property, plant and equipment and is being depreciated over the useful life of the right.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(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”) Interpretation 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”), and complies with the disclosure provisions of SFAS 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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Net income, as reported | $ | 17,868 | $ | 4,598 | $ | 37,918 | $ | 9,235 | ||||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 486 | 53 | 544 | 192 | ||||||||||||
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects | 4,671 | 1,888 | 12,367 | 5,265 | ||||||||||||
As adjusted net income | $ | 13,683 | $ | 2,763 | $ | 26,095 | $ | 4,162 | ||||||||
Net income per share – Basic: | ||||||||||||||||
As reported | $ | 0.33 | $ | 0.10 | $ | 0.73 | $ | 0.21 | ||||||||
As adjusted | $ | 0.25 | $ | 0.06 | $ | 0.50 | $ | 0.09 | ||||||||
Net income per share – Diluted: | ||||||||||||||||
As reported | $ | 0.29 | $ | 0.09 | $ | 0.64 | $ | 0.19 | ||||||||
As adjusted | $ | 0.24 | $ | 0.06 | $ | 0.49 | $ | 0.09 | ||||||||
Shares used in computing net income per share – Basic: | ||||||||||||||||
As reported | 54,652 | 45,615 | 51,877 | 44,997 | ||||||||||||
As adjusted | 54,652 | 45,615 | 51,877 | 44,997 | ||||||||||||
Shares used in computing net income per share – Diluted: | ||||||||||||||||
As reported | 60,850 | 51,125 | 58,835 | 49,070 | ||||||||||||
As adjusted | 58,024 | 46,013 | 53,087 | 45,246 | ||||||||||||
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 Nine Months Ended January 31, 2004 and 2003
(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
During December 2003, the U.S. Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition”(“SAB 104”), which supercedes SAB 101,“Revenue Recognition in Financial Statements.”SAB 104 updates portions of the interpretative guidance included in Topic 13 of staff accounting bulletin,“Revenue Recognition,”in order to make this interpretive guidance consistent with current authoritative accounting guidance. The principal revisions relate to the deletion of interpretive material that is no longer necessary because of private sector developments in U.S. generally accepted accounting principles. The revenue recognition principles of SAB 101, however, remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The Company’s adoption of SAB 104 did not have any effect on its financial position or results of operations.
Note 3 — Balance Sheet Accounts (In Thousands)
January 31, | April 30, | |||||||
2004 | 2003 | |||||||
Cash and cash equivalents: | ||||||||
Cash | $ | 4,056 | $ | 941 | ||||
Money market funds | 104,566 | 25,363 | ||||||
Commercial paper | 82,000 | 24,134 | ||||||
$ | 190,622 | $ | 50,438 | |||||
Accounts receivable: | (restated) | |||||||
Accounts receivable | $ | 50,249 | $ | 21,188 | ||||
Less: Allowance for doubtful accounts | (2,615 | ) | (915 | ) | ||||
Sales returns reserve | (5,001 | ) | (1,140 | ) | ||||
$ | 42,633 | $ | 19,133 | |||||
Inventories: | (restated) | |||||||
Work in progress | $ | 11,836 | $ | 8,942 | ||||
Finished goods | 29,376 | 4,700 | ||||||
$ | 41,212 | $ | 13,642 | |||||
Prepaid expenses and other assets: | ||||||||
Prepaid expenses | $ | 1,401 | $ | 1,187 | ||||
Other receivables | 278 | 8 | ||||||
$ | 1,679 | $ | 1,195 | |||||
Property, plant and equipment, net: | ||||||||
Building and land use right | $ | 7,013 | $ | — | ||||
Building improvements | 1,869 | — | ||||||
Machinery and equipment | 9,452 | 3,607 | ||||||
Furniture and fixtures | 217 | 283 | ||||||
Software | 1,112 | 976 | ||||||
Construction in progress | 4,296 | 10,986 | ||||||
23,959 | 15,852 | |||||||
Less: Accumulated depreciation and amortization | (4,669 | ) | (3,396 | ) | ||||
$ | 19,290 | $ | 12,456 | |||||
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 4 — Inventory Write-Off
During the three months ended January 31, 2001, the Company wrote off $18.1 million of inventory due to a significant imbalance in the PC camera market. The following table summarizes the activity in the original $18.1 million of previously written-off inventory (in thousands):
Inventory | ||||
Previously | ||||
Written-off in | ||||
Fiscal 2001 | ||||
Balance at January 31, 2001 | $ | 18,090 | ||
Sale of previously reserved inventory through April 30, 2003 | 12,425 | |||
Balance at April 30, 2003 | 5,665 | |||
Sale of previously reserved inventory during the nine months ended January 31, 2004 | 966 | |||
Balance at January 31, 2004 | $ | 4,699 | ||
Note 5 — 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 according to the treasury stock method using the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the effect of stock options. For the three and nine months ended January 31, 2004, 40,000 and 133,750 shares of common stock, respectively, 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 three and nine months ended January 31, 2003, 5,626 and 33,226 shares of common stock, respectively, subject to outstanding options were not included in the calculation of diluted net income per share as they were considered antidilutive.
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 17,868 | $ | 4,598 | $ | 37,918 | $ | 9,235 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares | 54,686 | 45,791 | 51,941 | 45,247 | ||||||||||||
Weighted average unvested common shares subject to repurchase | (34 | ) | (176 | ) | (64 | ) | (250 | ) | ||||||||
Denominator for basic net income per share | 54,652 | 45,615 | 51,877 | 44,997 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Common stock options | 6,164 | 5,334 | 6,894 | 3,823 | ||||||||||||
Unvested common stock subject to repurchase | 34 | 176 | 64 | 250 | ||||||||||||
Denominator for dilutive net income per share | 60,850 | 51,125 | 58,835 | 49,070 | ||||||||||||
Basic net income per share | $ | 0.33 | $ | 0.10 | $ | 0.73 | $ | 0.21 | ||||||||
Diluted net income per share | $ | 0.29 | $ | 0.09 | $ | 0.64 | $ | 0.19 | ||||||||
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 nine-month periods ended January 31, 2004.
Note 6 — 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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Digital image sensors | $ | 86,912 | $ | 26,745 | $ | 196,416 | $ | 51,360 | ||||||||
Analog image sensors | 6,701 | 3,777 | 22,034 | 17,695 | ||||||||||||
Total | $ | 93,613 | $ | 30,522 | $ | 218,450 | $ | 69,055 | ||||||||
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
The Company sells its products primarily to customers in the Asia Pacific region and the United States of America. Revenues by geographic locations are not necessarily representative of the geographic distribution of sales to end-user markets, as the Company’s customers sell their products globally. The revenues by geographic location in the following table are based on the country or region in which the customers are located (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(restated) | (restated) | |||||||||||||||
Hong Kong | $ | 26,904 | $ | 11,354 | $ | 71,742 | $ | 32,232 | ||||||||
Taiwan | 14,186 | 6,604 | 56,147 | 16,389 | ||||||||||||
China | 27,053 | 8,533 | 49,722 | 10,093 | ||||||||||||
Korea | 15,202 | 1,923 | 24,318 | 3,391 | ||||||||||||
Japan | 7,728 | 336 | 8,867 | 1,475 | ||||||||||||
United States | 1,421 | 1,567 | 2,395 | 4,733 | ||||||||||||
All other | 1,119 | 205 | 5,259 | 742 | ||||||||||||
Total | $ | 93,613 | $ | 30,522 | $ | 218,450 | $ | 69,055 | ||||||||
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 $14.7 million of the $30.0 million of registered capital of the subsidiary had been funded as of January 31, 2004 from the Company’s available working capital. The remaining $15.3 million of registered capital must be funded by January 2005. The $14.7 million invested through January 31, 2004 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):
January 31, | April 30, | |||||||
2004 | 2003 | |||||||
China | $ | 12,966 | $ | 8,968 | ||||
Taiwan | 7,507 | 2,845 | ||||||
United States | 6,034 | 3,588 | ||||||
All other | 298 | 278 | ||||||
Total | $ | 26,805 | $ | 15,679 | ||||
Note 7 — Employee Stock Option and Stock Purchase Plans
Employee Stock Option Grants
Options to purchase 137,750 and 3,582,350 shares of common stock were granted to employees during the three and nine months ended January 31, 2004, respectively. As of January 31, 2004, options to purchase 8,732,216 shares of common stock were outstanding.
2000 Employee Stock Purchase Plan
As of January 31, 2004, 1,425,938 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 Nine Months Ended January 31, 2004 and 2003
(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 $20.39 and $4.60 during the three months ended January 31, 2004 and 2003, respectively. The per share weighted average estimated fair value for employee options granted was $13.39 and $4.63 during the nine months ended January 31, 2004 and 2003, 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 freely traded market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options. The usage 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, it is the Company’s opinion that 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 nine months ended January 31, 2004 and 2003:
Employee Stock Options | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Risk-free interest rate | 2.39 | % | 2.10 | % | 2.14 | % | 2.10 | % | ||||||||
Expected term of options (in years) | 3.5 | 3.5 | 3.5 | 3.5 | ||||||||||||
Expected volatility | 122.8 | % | 134.6 | % | 130.4 | % | 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 nine months ended January 31, 2004 was $8.95 and $5.69, 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 nine months ended January 31, 2003 was $3.88 and $2.86, respectively.
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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Risk-free interest rate | 1.30 | % | 1.32 | % | 1.59 | % | 1.32 | % | ||||||||
Expected term of options (in years) | 0.50 | 0.50 | 0.50 | 0.50 | ||||||||||||
Expected volatility | 59.0 | % | 134.6 | % | 105.3 | % | 134.6 | % | ||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 8 — Commitments and Contingencies
Litigation
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 captionedMcKee 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 asIn re Initial Public Offering Securities Litigation, 21 MC 92. Claims against the Company’s directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court issued an order dismissing 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 the Company. 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. The Company further believes that the settlement is not expected to have any material adverse affect on its financial condition, results of operations or cash flows.
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 that had been issued to the Company related to the integration of certain computer interfacing technology in system designs. The patent infringement action seeks damages and injunctive relief from IC Media Corporation. In response to the Company’s patent infringement action, on October 2, 2002, IC Media Corporation initiated a cancellation proceeding in the Taiwan Intellectual Property Office with respect to the Company’s 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, which decision was upheld by the Taiwan Ministry of Economic Affairs on November 21, 2003. On January 20, 2004, the Company filed 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. In accordance with the Alternative Dispute Resolution practices of the Court, this matter was submitted for non-binding arbitration. On February 19, 2004, the Court issued a notice reflecting the parties’ agreement to withdraw from arbitration and to submit the matter to non-binding mediation.
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. Mr. Ku never served the complaint on the Company. On January 29, 2004, the Court dismissed the complaint on its own motion due to Mr. Ku’s failure to make any appearance in the case, failure to show cause in writing why the dismissal should not be entered, or otherwise pursue the case after filing the complaint.
On July 14, 2003, Sunex, Inc. filed a complaint against the Company 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 the Company in the fiscal quarters ended January 31, 2003 and
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OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
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 the Company 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 January 31, 2004 will not have a material adverse affect on its financial condition, results of operations or cash flows.
Commitments
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. In November 2003, the Company made a $1.5 million cash investment in this joint venture. The Company 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 6.)
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following information should be read in conjunction with the condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report onForm 10-Q. Except for historical information, the following discussion 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, statements including the words “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,” “outlook,” “intends” and words of similar import as well as the negative of those terms. 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” and elsewhere in this Quarterly Report, and other documents we file with the U.S. Securities and Exchange Commission. 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 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.
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
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued) |
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, we and TSMC have separately agreed to enter into nonexclusive license agreements with VisEra pursuant to which both parties will 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 technology requirements. We 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.
Historically, we have relied upon TSMC to provide us with a substantial proportion of our wafers. However, we had never entered into a long-term supply agreement with TSMC and instead had 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 in exchange for our commitment to purchase a substantial portion of our wafers from TSMC, subject to pricing and technology requirements.
As of January 31, 2004, we had approximately $190.6 million in cash and cash equivalents and approximately $6.5 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 material exposure to market fluctuations. Market risk is the potential loss due to the change in value of a financial instrument as a result of 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.
In June 2003, we purchased approximately 27% of a privately held company based in Taiwan for a total of $2.0 million in cash. The Taiwanese company provides plastic packaging services, and we are a major customer. We have accounted for this investment using the equity method. In November 2003, we made an additional cash contribution in the amount of approximately $0.8 million to maintain our equity ownership percentage in this company. This investment is unrelated to our announced transaction in October 2003 to form a joint venture with TSMC.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued) |
On January 20, 2004, we announced that our Board of Directors had approved a 2-for-1 split of our 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 additional shares were distributed on February 18, 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 are presented on a post-split basis.
The Current Economic Environment
We have operated in a challenging economic environment that has undergone significant changes in technology and global trade. We have striven to remain a leader in the development and marketing of image sensing devices based on the CMOS fabrication process and have benefited from the growing market demand for and acceptance of this emerging technology. The shift in global fabrication to Asia has introduced a range of cost pressures on domestic manufacturers. In response to these pressures, and in order to be closer to our primary customer base and our source of offshore fabrication, we relocated a substantial portion of our testing operations to China during the first three quarters of this fiscal year.
We shipped more than 17 million image sensors in the three months ended January 31, 2004, which demonstrated the capabilities of our production system, including our source of offshore fabrication. To enhance our production capabilities, we have initiated partnerships with a number of vendors, including TSMC, one of the largest wafer fabrication companies in Asia.
The digital still camera market demonstrates a continuing trend toward higher resolution products with a growing acceptance of CMOS based image sensors. We have continued to benefit from a shift in product mix toward higher resolution two- and three-megapixel products. We believe that this shift in product mix will continue through 2004.
We believe camera phones are still in the very early stages of adoption and that the opportunity presented by this market is still largely untapped. We believe that, like the digital still camera market, camera phone demand will continue to shift toward higher resolutions. As a result, we released our quarter-inch 1.3 megapixel CameraChip designed specifically for camera phones. We are currently in mass production with this product. Currently, we believe that video graphics array (“VGA”) resolution will account for a large majority of the volume shipments in handsets during 2004, with an increasing transition to higher resolutions towards the end of 2004 and beyond.
Sources of Revenues
We generate our revenue by selling our products directly to OEMs and VARs and indirectly to distributors. In addition, we derive a minimal portion of our revenue by providing engineering assistance to a limited number of our customers. The grouping of sales to OEMs and VARs together, in contrast to sales to distributors, is also consistent with the differences in the Company’s revenue recognition policies between the two groups.
We recognize revenue on sales to OEMs, VARs and all distributors without agreements that allow for returns or credits using the “sell-to” method. Under this method, revenue is recognized upon the shipment of our products to our customer provided that we have received a signed purchase order, the price is fixed or determinable, title and risk of loss has transferred, collection of resulting receivables is considered reasonably assured, product returns are reasonably estimable and there are no remaining significant obligations.
For shipments to distributors under agreements allowing for returns or credits, revenue is recognized using the “sell-through” method under which revenue is deferred until the distributor actually resells the product to the end-user customer and we are notified in writing by the distributor of such sale. Under both methods of revenue recognition, we provide for future returns based on historic experiences at the time revenue is recognized.
With respect to our revenue derived from providing engineering assistance, we recognize the associated revenue only upon the completion and acceptance by the customer of the services performed. The revenue is based on a fixed fee which is agreed upon prior to initiation of the engineering assistance. Historically, we have only
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued) |
entered into such services from time to time, and revenue generated from such arrangements has been immaterial to date.
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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenues | 60.5 | 62.2 | 61.6 | 61.3 | ||||||||||||
Gross profit | 39.5 | 37.8 | 38.4 | 38.7 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 4.3 | 10.3 | 4.9 | 11.9 | ||||||||||||
Selling, general and administrative | 5.9 | 9.4 | 7.3 | 11.1 | ||||||||||||
Stock-based compensation charge | 0.9 | 0.2 | 0.5 | 0.5 | ||||||||||||
Total operating expenses | 11.1 | 19.9 | 12.7 | 23.5 | ||||||||||||
Income from operations | 28.4 | 17.9 | 25.7 | 15.2 | ||||||||||||
Interest income, net | 0.5 | 0.7 | 0.6 | 0.9 | ||||||||||||
Income before income taxes | 28.9 | 18.6 | 26.3 | 16.1 | ||||||||||||
Provision for income taxes | 9.8 | 3.5 | 8.9 | 2.7 | ||||||||||||
Net income | 19.1 | % | 15.1 | % | 17.4 | % | 13.4 | % | ||||||||
Three and Nine Months Ended January 31, 2004 as Compared to Three and Nine Months Ended January 31, 2003
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 January 31, 2004 increased 206.7% to approximately $93.6 million from $30.5 million for the three months ended January 31, 2003. Revenues for the nine months ended January 31, 2004 increased 216.3% to approximately $218.5 million from $69.1 million for the nine months ended January 31, 2003. These increased revenues are primarily due to this substantial increase in unit sales of our CameraChips for digital applications during these time periods.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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, camera phones, personal computer camera applications and digital toy cameras. Examples of analog applications that incorporate our CameraChips are security and surveillance cameras and analog toy cameras. We sell a large portion of our products through VARs and distributors, and often we do not know the identity of the manufacturers who ultimately embed 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 | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Digital image sensors | $ | 86,912 | $ | 26,745 | $ | 196,416 | $ | 51,360 | ||||||||
Analog image sensors | 6,701 | 3,777 | 22,034 | 17,695 | ||||||||||||
Total | $ | 93,613 | $ | 30,522 | $ | 218,450 | $ | 69,055 | ||||||||
Digital Revenues.For the three months ended January 31, 2004, revenues from sales of CameraChips for digital applications increased 225.0% to approximately $86.9 million from $26.7 million for the three months ended January 31, 2003. Revenues from sales of CameraChips for digital applications represented 92.8% and 87.6% of revenues for the three months ended January 31, 2004 and 2003, respectively. For the nine months ended January 31, 2004, revenues from sales of CameraChips for digital applications increased 282.4% to approximately $196.4 million from $51.4 million for the nine months ended January 31, 2003. Revenues from sales of CameraChips for digital applications represented 89.9% and 74.4% of revenues for the nine months ended January 31, 2004 and 2003, respectively. The increase in revenues from sales of CameraChips for digital applications for the three and nine months ended January 31, 2004 primarily was due to increases in unit sales of approximately 12.4 million, or 308.8%, and 25.1 million, or 326.0%, respectively. The increase in unit sales for the three and nine months ended January 31, 2004 was led by increases of approximately 10.6 million, or 424.0%, and 18.5 million, or 433.5%, respectively, in unit sales of lower resolution CameraChips products used primarily in cell phone and toy applications, which carry a lower average sales price than CameraChips used for digital still camera applications. We believe that demand in the cell phone market resulted from increased requirements from service providers to include camera functionality on handsets as consumers upgrade their cell phones due to number portability. The increase in revenues from sales of high resolution CameraChips used primarily for digital still camera applications also resulted from increases in unit sales of 1.7 million, or 114.3%, and 6.5 million, or 189.2%, for the three and nine months ended January 31, 2004, respectively. The increase in unit sales was partially offset by a decline in average sales prices for the three and nine months ended January 31, 2004. We expect revenues from sales of CameraChips for digital applications to increase in the fourth quarter of fiscal 2004 primarily as a result of increased sales to the cell phone market.
Analog Revenues.For the three months ended January 31, 2004, revenues from sales of CameraChips for analog applications increased 77.4% to approximately $6.7 million from $3.8 million for the three months ended January 31, 2003. Revenues from sales of CameraChips for analog applications represented 7.2% and 12.4% of revenues for the three months ended January 31, 2004 and 2003, respectively. For the nine months ended January 31, 2004, revenues from sales of CameraChips for analog applications increased 24.5% to approximately $22.0 million from $17.7 million for the nine months ended January 31, 2003. Revenues from sales of CameraChips for analog applications represented 10.1% and 25.6% of revenues for the nine months ended January 31, 2004 and 2003, respectively. The increase in revenues from sales of CameraChips for analog applications for the three and nine months ended January 31, 2004 primarily was due to increases of approximately 0.5 million, or 108.1%, and 1.5 million, or 76.2%, in unit sales, respectively. The decline in analog revenues as a percentage of revenues for the three and nine month period ended January 31, 2004 resulted from the proportionately greater increase in digital revenues. Such CameraChips for analog applications are used primarily in cameras for toys and games and security applications. The increase in unit sales was partially offset by a decline in average sales prices for the three and nine
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months ended January 31, 2004. We expect revenues from sales of CameraChips for analog applications to increase in the fourth quarter of fiscal 2004 primarily due to increased demand from the security and surveillance markets.
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 nine months ended January 31, 2004 and 2003:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
OEMs and VARs | 82.3 | % | 75.1 | % | 73.0 | % | 69.4 | % | ||||||||
Distributors | 17.7 | 24.9 | 27.0 | 30.6 | ||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
OEMs and VARs.In the three months ended January 31, 2004, Nam Tai Electronics, Inc., or Nam Tai, headquartered in Hong Kong, accounted for 10.3% of revenues. In the three months ended January 31, 2003, Primax Electronics Products Huizhou, or Primax, based in China, accounted for 21.9% of revenues, Aiptek International, Inc., or Aiptek, headquartered in Taiwan, which is a manufacturer and supplier to various OEMs, accounted for 11.5% of revenues., and Nam Tai (both directly and through Actrontech Co., Ltd., a distributor) accounted for approximately 12.5% of revenues. No single OEM or VAR accounted for 10% or more of revenues in the nine months ended January 31, 2004. In the nine months ended January 31, 2003, Primax represented 11.5% of revenues and Aiptek represented 10.2% 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 January 31, 2004, World Peace Industrial Co. Ltd., or World Peace, headquartered in Taiwan, accounted for 13.5% of revenues. In the three months ended January 31, 2003, World Peace accounted for 17.6% of revenues, including sales to World Peace’s subsidiary, GainTune, based in Hong Kong. In the nine months ended January 31, 2004, World Peace accounted for 19.7% of revenues, including sales to GainTune. In the nine months ended January 31, 2003, World Peace accounted for 20.2% 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 nine months ended January 31, 2004 and 2003:
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Domestic sales | 1.5 | % | 5.1 | % | 1.1 | % | 6.9 | % | ||||||||
Foreign sales | 98.5 | 94.9 | 98.9 | 93.1 | ||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
The majority of our foreign sales is 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.
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Gross Profit, 2004 periods as restated, see Note 1
Gross margins for the three months ended January 31, 2004 and 2003 were 39.5% and 37.8% of revenues, respectively. Gross margins for the nine months ended January 31, 2004 and 2003 were 38.4% and 38.7% of revenues, respectively. The increase in gross margins for the three months ended January 31, 2004, as compared to the corresponding period in the prior year, was primarily due to lower unit costs as a result of higher unit volumes, as well as from improved efficiency in our production sequence, particularly in product testing. The decrease in gross margins for the nine months ended January 31, 2004, as compared to the corresponding period in the prior year, was primarily due to a reduction in sales of previously written off inventory. For the three months ended January 31, 2004, approximately $0.6 million of gross profit was attributable to the sale of previously written off inventory. For the nine months ended January 31, 2004, approximately $1.4 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 January 31, 2004 would have increased to approximately 39.1% of revenues, as compared to 37.1% 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 nine months ended January 31, 2004 would have increased to approximately 38.0% of revenues, as compared to 36.8% 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 nine months ended January 31, 2004 and 2003 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Sales of all products | $ | 93,613 | $ | 30,522 | $ | 218,450 | $ | 69,055 | ||||||||
Gross profit | $ | 36,945 | $ | 11,542 | $ | 83,897 | $ | 26,738 | ||||||||
Gross margin | 39.5 | % | 37.8 | % | 38.4 | % | 38.7 | % | ||||||||
Sales excluding products for which the costs were previously written off | $ | 93,032 | $ | 30,175 | $ | 217,083 | $ | 66,956 | ||||||||
Gross profit excluding the effect of sales of products for which the costs were previously written off | $ | 36,364 | $ | 11,195 | $ | 82,530 | $ | 24,639 | ||||||||
Gross margin excluding the effect of sales of products for which the costs were previously written off | 39.1 | % | 37.1 | % | 38.0 | % | 36.8 | % |
Of the previously written-off inventory, $18.1 million was written-off in the three months ended January 31, 2001 due to a significant imbalance in the PC camera market. The following table summarizes the activity with respect to the original $18.1 million of previously written-off inventory (in thousands):
Inventory | ||||
Previously | ||||
Written-off in | ||||
Fiscal 2001 | ||||
Balance at January 31, 2001 | $ | 18,090 | ||
Sale of previously reserved inventory through April 30, 2003 | 12,425 | |||
Balance at April 30, 2003 | 5,665 | |||
Sale of previously reserved inventory during the nine months ended January 31, 2004 | 966 | |||
Balance at January 31, 2004 | $ | 4,699 | ||
We were able to recover and sell $1.0 million of this inventory in the nine months ended January 31, 2004 primarily due to a build-out of internet infrastructure in China that created new demand for PC cameras. However,
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we believe there is little opportunity to sell the remaining $4.7 million of this inventory, primarily because these image sensors are not as technologically advanced as other competing products in this market segment.
Research and Development, 2004 periods as restated, see Note 1
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 January 31, 2004 and 2003 were approximately $4.1 million and $3.1 million, respectively. As a percentage of revenues, research and development expenses for the three months ended January 31, 2004 and 2003 represented 4.3% and 10.3%, respectively. Research and development expenses for the nine months ended January 31, 2004 and 2003 were approximately $10.8 million and $8.3 million, respectively. As a percentage of revenues, research and development expenses for the nine months ended January 31, 2004 and 2003 represented 4.9% and 11.9%, respectively.
The increase in research and development expenses of approximately $0.9 million, or 29.8%, for the three months ended January 31, 2004 from the corresponding period in the prior year resulted primarily from a $0.4 million increase in expenses related to new product development to improve our current product line and support new product introductions, a $0.3 million increase in salary and payroll-related expenses associated with additional personnel, $0.1 million in software expenses and $0.1 million in facility-related expenses. Examples of new product development expenses include tape-out and prototype runs with our wafer manufacturers. The decrease in research and development as a percentage of revenues for the three months ended January 31, 2004 was due to the proportionately greater increase in revenues from levels in the prior year. The increase in research and development expenses of approximately $2.6 million, or 31.1%, for the nine months ended January 31, 2004 from the corresponding period in the prior year resulted primarily from a $0.9 million increase in salary and payroll-related expenses associated with additional personnel, $0.9 million in expenses related to new product development required to improve our current product line and support new product introductions, and $0.4 million in expenses for software, patent prosecution and engineering supplies. The decline in research and development as a percentage of revenues was due to the proportionately greater increase in revenues for the nine months ended January 31, 2004 from levels in the prior year. We anticipate that our research and development expenses will increase in the remainder of fiscal 2004 and the first six months of fiscal 2005 as 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 January 31, 2004 and 2003 were approximately $5.5 million and $2.9 million, respectively. As a percentage of revenues, selling, general and administrative expenses for the three months ended January 31, 2004 and 2003 represented 5.9% and 9.4%, respectively. Selling, general and administrative expenses for the nine months ended January 31, 2004 and 2003 were approximately $15.9 million and $7.7 million, respectively. As a percentage of revenues, selling, general and administrative expenses for the nine months ended January 31, 2004 and 2003 represented 7.3% and 11.1%, respectively.
The increase in selling, general and administrative expenses of approximately $2.6 million, or 92.0%, for the three months ended January 31, 2004 from the corresponding period in the prior year resulted primarily from a $0.4 million increase in selling, general and administrative expenses for our foreign operations, a $1.3 million increase in commissions associated with increased revenues, a $0.3 million increase in employment expenses and a $0.3 million increase in legal and accounting expenses. Selling, general and administrative expenses decreased as a percentage of revenues in the three months ended January 31, 2004 as compared to the corresponding 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 $8.2 million, or 107.6% for the nine months ended January 31, 2004 from the corresponding period in the prior year resulted primarily from a $3.3 million increase in commissions associated with increased revenues, a $0.9 million increase in selling, general and administrative expenses for our foreign
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
operations, a $1.3 million increase in legal and accounting expenses, a $1.0 million increase in salary and payroll-related expenses and a $1.0 million increase in provisions for bad debts related to the increase in accounts receivable. Selling, general and administrative expenses decreased as a percentage of revenues for the nine months ended January 31, 2004, as compared to the corresponding 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.
Stock-based compensation, 2004 periods as restated, see Note 1
Stock-based compensation consists primarily of the amortization of the excess of fair market value over the grant price of options granted prior to our initial public offering. The stock-based compensation for the three months ended January 31, 2004 and 2003 was approximately $0.8 million and $0.1 million, respectively. As a percentage of revenues, the stock-based compensation charge for the three months ended January 31, 2004 and 2003 represented 0.9% and 0.2%, respectively. The stock-based compensation for the nine months ended January 31, 2004 and 2003 were approximately $1.0 million and $0.3 million, respectively. As a percentage of revenues, the stock-based compensation for the nine months ended January 31, 2004 and 2003 represented 0.5%. The increase for the three and nine months ended January 31, 2004 was due to the issuance of stock options to new members of management and the board of directors. These non-cash charges are not expected to continue at the level experienced in the quarter ended January 31, 2004, and we expect stock compensation expense to return to the prior levels.
Interest Income, Net
Our cash, cash equivalents and short-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 January 31, 2004 from the corresponding period in the prior year to approximately $0.5 million from $0.2 million, respectively. Interest income, net, increased for the nine months ended January 31, 2004 from the corresponding period in the prior year to approximately $1.3 million from $0.6 million, respectively. 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, partially offset by lower interest rates.
Provision for Income Taxes, 2004 periods as restated, see Note 1
We generated approximately $27.1 million and $5.7 million in income before income taxes for the three months ended January 31, 2004 and 2003, respectively. We recorded provisions for income taxes for the three months ended January 31, 2004 and 2003 of approximately $9.2 million and $1.1 million, respectively. We generated approximately $57.5 million and $11.1 million in income before income taxes for the nine months ended January 31, 2004 and 2003, respectively. We recorded provisions for income taxes for the nine months ended January 31, 2004 and 2003 of approximately $19.5 million and $1.9 million, respectively. For the three months ended January 31, 2004 and 2003, the effective rate was 34.0% and 18.9%, respectively. For the nine months ended January 31, 2004 and 2003, the effective rate was 34.0% and 17.0%, respectively. The lower effective tax rates for the three and nine months ended January 31, 2003 were due to the release of the valuation allowance offsetting net deferred tax assets. 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 combination of income between domestic and foreign entities for the current 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.
Liquidity and Capital Resources, 2004 periods as restated, see Note 1
Principal sources of liquidity at January 31, 2004 consisted of cash, cash equivalents and short-term investments of $197.2 million.
Our working capital increased by approximately $157.1 million to $238.0 million as of January 31, 2004 from $80.9 million as of April 30, 2003. The increase was primarily attributable to a $140.2 million increase in cash and cash equivalents principally resulting from our follow-on public offering of common stock in July 2003, a
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$27.6 million increase in inventories to support future sales, a $23.5 million increase in accounts receivable, net, consistent with the increase in revenues from prior year levels during the nine months ended January 31, 2004, a $1.1 million increase in restricted cash and a $0.5 million increase in prepaid expenses and other assets, partially offset by a $27.4 million increase in accounts payable, a $3.5 million increase in deferred income and a $3.7 million decrease in short-term investments.
For the nine months ended January 31, 2004, net cash provided by operating activities totaled approximately $29.2 million as compared to cash used for operating activities of $0.8 million for the corresponding period in the prior year, primarily due to net income of approximately $37.9 million for the nine months ended January 31, 2004 as compared to $9.2 million for the corresponding period in the prior year, a $27.4 million increase in accounts payable, a $3.5 million increase in deferred income, and a $1.2 million decrease in refundable and deferred income taxes, which were partially offset by a $27.6 million increase in inventories to support future sales, a $23.5 million increase in accounts receivable, net, and a $0.5 million increase in prepaid expenses and other assets. The $23.5 million increase in accounts receivable, net, reflects the significantly higher level of sales during the nine months ended January 31, 2004, partially offset by a decrease in days of sales outstanding to 42 days as of January 31, 2004 from 43 days as of April 30, 2003. The increase in accounts receivable, net, was partially offset by a $3.9 million increase in the reserve for sales returns, which rose as a result of the large increase in revenues for the nine months ended January 31, 2004, and by a $1.7 million increase in the allowance for doubtful accounts, which rose as a result of the large increase in accounts receivable balances. The $27.6 million increase in inventories was attributable to higher inventory levels to support future sales. Inventory turns, calculated based on the fiscal quarters ended January 31, 2004 and April 30, 2003, decreased to 5.5 as of January 31, 2004 as compared to 7.2 as of April 30, 2003, as we increased inventory levels to reduce supply constraints in anticipation of increased future sales. Accounts payable increased concurrently with the increase in inventory purchases. 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 nine months ended January 31, 2004, our cash used in investing activities increased to approximately $9.7 million from $8.4 million for the corresponding prior year period, due to $8.0 million in purchases of property, plant and equipment, $4.3 million in purchases of long-term non-marketable investments and a $1.1 million increase in restricted cash, partially offset by $3.7 million in net proceeds from the sale of short-term investments. Net cash used in investing activities of $8.4 million for the nine months ended January 31, 2003 resulted from $5.2 million in purchases of property, plant and equipment and net $3.2 million in purchases of short-term investments. The $6.8 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 nine months ended January 31, 2004, net cash provided by financing activities increased to approximately $120.6 million from $2.0 million for the corresponding 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 $7.4 million in proceeds from the issuance and sale of common stock pursuant to the exercise of stock options and employee purchases through our employee stock purchase plan during the nine months ended January 31, 2004 as compared to $2.9 million for the corresponding period in the prior year. Proceeds from the issuance and sale of common stock for the nine months ended January 31, 2003 were partially offset by $0.9 million in refunded deposits related to investments from third parties in our Chinese subsidiary.
In June 2003, we purchased approximately 27% of a privately held company based in Taiwan for a total of $2.0 million in cash. The Taiwanese 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 company by approximately $0.8 million to maintain our equity ownership percentage in this company. This investment is unrelated to our joint venture with TSMC.
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
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subsidiary. In the event we are unable to obtain financing from third parties, the issuance of our equity securities, including securities convertible into our equity securities, would dilute the ownership interests of our existing stockholders, and the issuance of debt securities could increase the risk or 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 generate 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.
Non-audit Services of Independent Auditors
Our auditors, PricewaterhouseCoopers LLP, perform tax planning services for us that had been approved by our Audit Committee of the Board of Directors during the three months ended January 31, 2004.
Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations and commercial commitments as of January 31, 2004 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 | $ | 6,237 | $ | 1,864 | $ | 3,394 | $ | 839 | $ | 140 | ||||||||||
Noncancelable orders | 42,269 | 42,269 | — | — | — | |||||||||||||||
Total contractual obligations | 48,506 | 44,133 | 3,394 | 839 | 140 | |||||||||||||||
Other Commercial Commitments | ||||||||||||||||||||
Investment in China | 15,300 | 1 | 15,300 | — | — | — | ||||||||||||||
Joint Venture with TSMC | 3,500 | 2 | — | 3,500 | — | — | ||||||||||||||
Total commercial commitments | 18,800 | 15,300 | 3,500 | — | — | |||||||||||||||
Total contractual obligations and commercial commitments | $ | 67,306 | $ | 59,433 | $ | 6,894 | $ | 839 | $ | 140 | ||||||||||
1 | Relates to the remaining $15.3 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. | |
2 | Pursuant to the Shareholders’ Agreement with TSMC, our share of the capital commitment to VisEra is $23.5 million, which becomes due as VisEra’s business and service capabilities develop over a number of years. Our net cash investment to the joint venture will be approximately $4.5 million. In November 2003, we made a $1.5 million cash investment in this joint venture. 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 contributed $1.5 million in cash to VisEra and granted a non-exclusive license to certain of our manufacturing and automated final testing technologies and patents. In the second phase, we will 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 will contribute $12.5 million in cash and assets to VisEra and receive back from VisEra an aggregate cash payment of $17.5 million. |
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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. In November 2003, we made a $1.5 million cash investment in this joint venture. 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 $3.5 million commercial commitment referenced in the table above refers to the remaining $3.5 million of net cash capital contributions to VisEra.
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 sell our products globally, in particular, to branded customers, contract manufacturers, VARs and distributors in China, Hong Kong, Japan, Korea and Taiwan.
All of our transactions with our vendors and customers are carried out in U.S. dollars. The only expenses the Company incurs in currencies other than U.S. dollars are certain costs affecting gross profits, selling, general and administrative and research and development expenses, which are primarily incurred in China, where renminbi (“RMB”) is the local currency. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. These certain expenses that are denominated in currencies other than U.S. dollars have not historically been a material percentage of our revenues.
We do not believe that our foreign currency exchange rate fluctuation risk is significant, especially if the Chinese government continues to benchmark the RMB against the U.S. dollar. Moreover, given that the only expenses that we incur in denominations other than U.S. dollars are certain cost affecting gross profits, selling, general and administrative and research and development expenses (which historically have not been a significant percentage of our revenues), we do not believe that a 10% change in foreign currency exchange rates would have a significant effect on our future net income or cash flows.
We have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments as we do not believe that we currently have any significant direct foreign currency exchange rate risk. 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, and results of operations.
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
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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.
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. |
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• | 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. |
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 January 31, 2004, the end of our third quarter for 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.
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(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 captionedMcKee 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. Claims against our directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court issued an order dismissing 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 our Company. 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. We believe that the settlement will not have any material adverse affect on our financial condition, results of operations or cash flows.
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 that had been issued to us related to the integration of certain computer interfacing technology in system designs. The patent infringement action seeks damages and injunctive relief from IC Media Corporation. In response to our patent infringement action, on October 2, 2002, IC Media Corporation initiated a cancellation proceeding 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, which decision was upheld by the Taiwan Ministry of Economic Affairs on November 21, 2003. On January 20, 2004, we filed 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. In accordance with the Alternative Dispute Resolution practices of the Court, this matter was submitted for non-binding arbitration. On February 19, 2004, the Court issued a notice reflecting the parties’ agreement to withdraw from arbitration and to submit the matter to non-binding mediation.
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. Mr. Ku never served the complaint on us. On January 29, 2004, the Court dismissed the complaint on its own motion due to Mr. Ku’s failure to make any appearance in the case, failure to show cause in writing why the dismissal should not be entered, or otherwise pursue the case after filing the complaint.
On July 14, 2003, Sunex, Inc. filed a complaint against us 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 relates to parts delivered by Sunex to us in the fiscal 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 we 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
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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 January 31, 2004 will not have a material adverse affect on our financial condition, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit | ||
Number | Description | |
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. |
(b) Reports onForm 8-K.
We furnished a Current Report on Form 8-K on November 19, 2003 announcing our financial results for our second fiscal quarter ended October 31, 2003. Such report was “furnished,” but not “filed.”
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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 | |
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. |