================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
----------- --------------
Commission file number: 0-29939
------------------
OMNIVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0401990
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
930 Thompson Place, Sunnyvale, CA 94085
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 733-3030
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At September 11, 2001, 22,093,787 shares of common stock of the Registrant
were outstanding.
================================================================================
OMNIVISION TECHNOLOGIES, INC.
INDEX
Page
No.
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- July 31, 2001 and
April 30, 2001............................................... 3
Condensed Consolidated Statements of Operations -- Three
Months Ended July 31, 2001 and 2000.......................... 4
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended July 31, 2001 and 2000.......................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 29
Item 2. Changes in Securities and Use of Proceeds........................ 30
Item 6. Exhibits and Reports on Form 8-K................................. 31
Signatures............................................................... 32
2
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
July 31, April 30,
2001 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................... $ 54,637 $ 51,053
Short-term investments......................... 3,000 3,000
Accounts receivable, net....................... 5,516 5,269
Inventories.................................... 9,736 11,445
Refundable and deferred income taxes........... 3,288 3,288
Prepaid expenses and other assets.............. 955 219
--------- ---------
Total current assets...................... 77,132 74,274
Property, plant and equipment, net.................. 4,206 4,080
Other non-current assets............................ 293 293
--------- ---------
Total assets.............................. $ 81,631 $ 78,647
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 6,425 $ 4,284
Accrued expenses and other liabilities......... 1,974 2,255
Deferred revenue............................... 981 832
--------- ---------
Total current liabilities................. 9,380 7,371
--------- ---------
Commitments and Contingencies (Note 8)
Stockholders equity:
Common stock, $0.001 par value; 100,000 shares
authorized; 22,094 and 22,000 shares issued
and outstanding.............................. 22 22
Additional paid-in capital..................... 94,840 94,531
Deferred compensation related to stock options. (902) (1,058)
Accumulated deficit............................ (21,709) (22,219)
--------- ---------
Total stockholders' equity................ 72,251 71,276
--------- ---------
Total liabilities and stockholders' equity $ 81,631 $ 78,647
========= =========
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
3
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
------------------
July 31, July 31,
2001 2000
---- ----
Revenues: $11,161 $17,819
Cost of revenues*................................... 6,133 12,295
------- -------
Gross profit........................................ 5,028 5,524
------- -------
Operating expenses:
Research and development*...................... 1,688 1,281
Selling, general and administrative*........... 3,239 1,074
Stock compensation charge*..................... 158 284
------- -------
Total operating expenses.................. 5,085 2,639
------- -------
Income (loss) from operations....................... (57) 2,885
Interest income (expense), net...................... 567 160
------- -------
Income before income taxes.......................... 510 3,045
Provision for income taxes.......................... -- 1,157
------- -------
Net income.......................................... $ 510 $ 1,888
======= =======
Net income per share:
Basic.......................................... $ 0.02 $ 0.42
======= =======
Diluted ....................................... $ 0.02 $ 0.11
======= =======
Shares used in computing net income per share:
Basic.......................................... 21,693 4,486
======= =======
Diluted ....................................... 24,377 17,534
======= =======
(*) Stock-based compensation charges included in:
Cost of revenues............................... $ 9 $ 39
======= =======
Operating expenses:
Research and development.................. $ 87 $ 183
Selling, general and administrative....... 71 101
------- -------
$ 158 $ 284
======= =======
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
4
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
-----------------------
July 31, July 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income............................................ $ 510 $ 1,888
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 191 133
Allowance for doubtful accounts and sales returns... (132) (31)
Amortization of deferred compensation............... 167 323
Changes in assets and liabilities:
Accounts receivable............................... (115) 142
Inventories....................................... 1,709 (10,076)
Prepaid expenses and other assets................. (736) 108
Accounts payable.................................. 2,141 2
Accrued expenses and other liabilities............ (281) 1,159
Deferred revenue.................................. 149 415
------- -------
Net cash provided by (used in) operating
activities................................... 3,603 (5,937)
------- -------
Cash flows from investing activities:
Purchase of short-term investments.................... -- (55,586)
Purchases of property, plant and equipment............ (317) (138)
------- -------
Net cash used in investing activities.......... (317) (55,724)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net........... 302 59,196
Payment for repurchase of common stock, net........... (4) --
------- -------
Net cash provided by financing activities...... 298 59,196
------- -------
Net increase (decrease) in cash and cash equivalents.... 3,584 (2,465)
Cash and cash equivalents at beginning of period........ 51,053 5,888
------- -------
Cash and cash equivalents at end of period.............. $54,637 $ 3,423
======= =======
Supplemental cash flow information:
Taxes paid ........................................... $ -- $ 212
======= =======
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
5
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended July 31, 2001 and 2000
(unaudited)
Note 1 -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as
of July 31, 2001 and April 30, 2001 and for the three months ended July 31, 2001
and 2000 have been prepared by OmniVision Technologies, Inc. and subsidiaries
(the "Company" or "OmniVision") in accordance with the rules and regulations of
the Securities and Exchange Commission. The amounts as of April 30, 2001 have
been derived from our annual audited financial statements. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company and its results of
operations and cash flows. These financial statements should be read in
conjunction with the annual audited financial statements and notes as of and for
the year ended April 30, 2001, included in the Company's Annual Report on Form
10-K.
The results of operations for the three months ended July 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
April 30, 2002 or any other future interim period, and the Company makes no
representations related thereto.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 -- Revenue Recognition
The Company recognizes revenue upon the shipment of its products to the
customer provided that the Company has received a signed purchase order, the
price is fixed, title has transferred, collection of resulting receivables is
probable, product returns are reasonably estimable, there are no customer
acceptance requirements and there are no remaining significant obligations. For
certain shipments to distributors under agreements allowing for return or
credits, revenue is deferred until the distributor resells the product. The
Company provides for future returns based on historical experiences at the time
revenue is recognized.
Note 3 -- Short-term Investments
The Company's short-term investments, which are classified as
available-for-sale, are invested in high-grade corporate securities and
government bonds maturing approximately twelve months or less from the date of
purchase. These investments are reported at fair value. Unrealized gains or
losses are recorded in stockholders' equity and included in other comprehensive
income (losses). Unrealized gains or losses were not significant during any
period covered.
6
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Three Months Ended July 31, 2001 and 2000
(unaudited)
Note 4 -- Balance Sheet Accounts (In Thousands)
July 31, April 30,
2001 2001
---- ----
Cash and cash equivalents:
Cash......................................... $ 1,570 $ 1,918
Money market funds........................... 6,979 3,563
Commercial paper............................. 46,088 45,572
------- -------
$54,637 $51,053
======= =======
Short-term investments:
Corporate notes.............................. $ 3,000 $ 3,000
------- -------
$ 3,000 $ 3,000
======= =======
Work in progress.................................. $ 2,454 $ 3,752
Finished goods.................................... 7,282 7,693
------- -------
Total inventory.............................. $ 9,736 $11,445
======= =======
Note 5 -- Net Income Per Share
The following table sets forth the computation of basic and diluted income
per share attributable to common stockholders for the period indicated (in
thousands, except per share data):
Three Months Ended
July 31, July 31,
2001 2000
----- ----
Numerator:
Net income.................................. $ 510 $ 1,888
======= =======
Denominator:
Weighted average shares....................... 22,066 5,327
Weighted average unvested common stock
subject to repurchase....................... (373) (841)
------- -------
Denominator for basic net income per share.... 21,693 4,486
Effect of dilutive securities
Common stock options....................... 2,311 927
Unvested common stock subject to repurchase 373 841
Convertible preferred stock................ -- 11,280
------- -------
Denominator for dilutive net income per share.... 24,377 17,534
======= =======
Basic net income per share....................... $ 0.02 $ 0.42
======= =======
Diluted net income per share..................... $ 0.02 $ 0.11
======= =======
Note 6 -- Equity
In July 2000, the Company completed its initial public offering of
5,000,000 shares of common stock at $13.00 per share. Net proceeds aggregated
approximately $59.2 million after paying the underwriters' fee and related
expenses. At the closing of the offering, all issued and outstanding shares of
the Company's preferred stock were converted into an aggregate of 12,305,001
shares of common stock. In August 2000, the underwriters' of the Company's
initial public offering exercised their over-allotment option to purchase an
additional 750,000 shares of common stock at $13.00 per share. Net proceeds
aggregated approximately $8.5 million after paying the underwriters' fee and
related expenses.
7
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Three Months Ended July 31, 2001 and 2000
(unaudited)
Note 7 -- Segment and Geographic Information
The Company identifies its operating segments based on business activities,
management responsibility and geographic location. For all periods presented,
the Company operated in a single business segment.
The Company sells its products primarily in the United States and to the
Asia Pacific region. Revenues by geographic locations based on the country or
region of the customer were as follows (in thousands):
Three Months Ended
------------------
July 31, July 31,
2001 2000
---- ----
United States.................................... $ 6,489 $ 1,735
Taiwan........................................... 1,471 8,088
Hong Kong........................................ 1,368 1,887
Japan............................................ 670 1,131
Korea............................................ 461 2,703
Singapore........................................ 315 1,577
Europe........................................... 220 402
All Other........................................ 167 296
------- -------
$11,161 $17,819
======= =======
Note 8 -- Commitments and Contingencies
In December 2000, the Company formed a new subsidiary to conduct design and
testing operations in Shanghai, the People's Republic of China. The registered
capital of this new company is $12.0 million, of which $3.8 million was funded
by the Company in the fiscal year ended April 30, 2001, as required. The Company
is further obligated to fund the remaining $8.2 million of registered capital by
December 2003. As of July 31, 2001, $2.1 million of the $3.8 million was paid
for land use rights and to building contractors, $1.5 million was deposited in a
bank account in China and $0.2 million was expended for general purposes. The
formation and operation of the new company in China requires a large initial
capital investment, and there may be significant administrative, legal and
governmental barriers in China, which may prevent the Company's ability to begin
operation of the new company as well as using the funds outside of China.
From time to time, the Company has been subject to legal proceedings and
claims with respect to such matters as patents, product liabilities and other
actions arising out of the normal course of business.
In March 2000, the Company received written notice from Koninklijke Philips
N.V. ("Philips") in which Philips claimed to have patent rights in a serial bus
system for data transmission, known as the I2C bus system. Although the Company
does not believe that any of its products infringe any Philips patent, the
Company is currently discussing possible royalty or licensing arrangements as a
means of business resolution. In the meantime, the Company has completed
implementation of a new serial bus system for its products.
During the fiscal year ended April 30, 2001, the Company received written
notice from Photobit Corporation ("Photobit") and California Institute of
Technology ("CalTech") asserting infringement of patents which relate to various
aspects of image sensors. The Company filed an action with the U.S. District
Court, Northern District of California, seeking declaratory judgment that the
patents identified are invalid and/or not infringed by any of the Company's
products. Discovery is in process, and trial is scheduled for July 2002. In
addition, Photobit and CalTech filed a complaint with the U.S. International
Trade Commission for the same patents. The investigation is in process and the
target date for completion of the investigation is May 13, 2002. As with the
action pending in the Northern District of California, the Company believes that
the claims of Photobit and CalTech are meritless, and plan to vigorously defend
itself in the ITC investigation.
8
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Three Months Ended July 31, 2001 and 2000
(unaudited)
While the effect on future financial results cannot be predicted with
certainty, the Company believes that the final outcome of such matters will not
have a material adverse effect on its financial position and results of
operations or cash flows.
Note 9 -- Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS 141
will not have a significant impact on its consolidated financial statements.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward
looking statements as a result of certain factors that include, but are not
limited to, the risks discussed in "Factors Affecting Future Results". These
forward looking statements include, but are not limited to: the statements
relating to the development of new products in new and existing markets, the
expansion of the range of picture resolutions offered, the development of new
products which require only three volts for portable applications, the
improvement of image quality, the integration of additional functions and the
improvement to the interface chip in the third paragraph under "Overview;" the
statements relating to the generation of revenues from five volt products in the
remainder of fiscal year 2002 in the fourth paragraph under "Overview;" the
statements relating to technology leadership and increase in research and
development expenses in the eighth paragraph under "Overview;" the statements
regarding factors which may continue gross margins in the future under "Gross
Profit;" the statements regarding the potential fluctuations and expected
increases of research and development costs under "Research and Development;"
the statements regarding increases in selling, general and administrative
expenses under "Selling, General and Administrative;" the statements regarding
the size of and amortization of compensation charges under "Stock Compensation
Charge;" the statements regarding cash resources available to meet capital
requirements, the factors affecting capital requirements and the raising and
availability of additional funds and investment in the sixth paragraph under
"Liquidity and Capital Resources;" and the statements regarding evaluation of
acquisitions in the seventh paragraph under "Liquidity and Capital Resources,"
the statements under "Part II Other Information - Item 1. Legal Proceedings,"
and the statements under "Part II Other Information - Item 2. Changes in
Securities and Use of Proceeds", among others. These forward-looking statements
are based on current expectations and entail various risks and uncertainties
that could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Future Results."
Overview
- --------
We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our highly
integrated image sensors are used in a variety of electronic cameras and camera
related products for both still picture and live video applications. Our image
sensors are used in cameras and camera related products such as personal
computer cameras, digital still cameras, closed circuit TV's, mobile phone
cameras and personal digital assistant cameras, security and surveillance
cameras and cameras for toys. Our image sensors are designed to use the
complementary metal oxide semiconductor, or CMOS, fabrication process. Our
single chip image sensors can allow our customers to build cameras that are
smaller, require fewer chips, consume less power and cost less to build than
cameras using traditional charged couple device, CCD, technology, or multiple
chip CMOS image sensors. Unlike competitive image sensors, which require
multiple chips to achieve the same functions, we are able to integrate nearly
all camera functions into a single chip. This leads us to believe that we supply
one of the most highly integrated single chip CMOS image sensor solutions.
We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers' representatives. Our image sensors are
sold to camera manufacturers who market camera products under their own brand.
We also sell to large manufacturing companies that produce camera products for
others to market under different brand names.
Image sensors are characterized by several important attributes such as
picture resolution, color, lens size, voltage requirements and type of video
output. We intend to continue developing new products aimed at new and existing
markets. We plan to expand the range of picture resolutions we offer, provide
additional products that require only three volts for portable applications and
further improve image quality and integrate additional functions into our image
sensor. In addition, we developed and market an interface chip that connects a
camera to the universal serial bus on personal computers, and we plan to
continue to make improvements to that product as well.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Our first image sensor was a low resolution, black and white sensor
introduced in 1996. We introduced an improved version of this sensor in early
1997. In addition, we introduced color and digital image sensors in 1997 and
higher resolution and higher quality image sensors in 1998, 1999 and 2000. For
the year ended April 30, 2001 and the three months ended July 31, 2001, the
majority of our revenues were generated from sales of our five-volt color image
sensors. Given the growth of the Internet and multimedia applications which
allow for digital images to be captured, stored and transported, we expect that
a significant portion of our revenues in the remainder of fiscal year 2002 will
be generated from our five volt color image sensors, which are used primarily in
affordable and easy to use personal computer and security cameras and
increasingly, from 3.2 volt color image sensors which are used in both personal
computer cameras and cellular phone accessories.
We outsource all of our semiconductor manufacturing and assembly. This
approach allows us to focus our resources on the design, development and
marketing of our products and significantly reduces our capital requirements. We
outsource our wafer manufacturing to Taiwan Semiconductor Manufacturing Company,
or TSMC, and Powerchip Semiconductor Company, or PSC. We have a signed agreement
with Samsung Electronics Co., Ltd., or Samsung, who is one of our suppliers for
our universal serial bus interface chip that we sometimes sell along with our
image sensor. A majority of our unit sales of image sensors for the three months
ended July 31, 2001 are color image sensors. These require a color filter to be
applied to the wafer before packaging. We outsource the application of this
color filter to Toppan Printing Co., or Toppan and TSMC. We outsource the
packaging of our image sensors to Kyocera Corporation, or Kyocera, Taiwan
Electronic Packaging Company, or TEPC, and Alphatec Semiconductor Packaging Co.,
or Alphatec. Outside testing services do not offer suitable tests for the key
parameter of product performance and image quality. Therefore, we design and
produce our own automatic testing equipment specifically for image sensor
testing, and we do substantially all of our testing in house. Our control over
the testing process helps us maintain consistent product quality and identify
areas to improve product quality and reduce costs.
We recognize revenue upon the shipment of our products to the customer
provided that we have received a signed purchase order, the price is fixed,
title has transferred, collection of resulting receivables is probable, product
returns are reasonably estimable, there are no customer acceptance requirements
and there are no remaining significant obligations. For certain shipments to
distributors under agreements allowing for return or credits, revenue is
deferred until the distributor resells the product. We provide for future
returns based on historical experiences at the time revenue is recognized.
Sales of our image sensors are subject to seasonality. Some of the products
using our image sensors such as personal computer video cameras and digital
still cameras are consumer electronics goods. Typically, these goods are subject
to seasonality with generally increased sales in November and December due to
the holidays. As a result, product sales are impacted by seasonal purchasing
patterns with higher sales generally occurring in the second half of the year.
We intend to maintain our technology leadership by continuing to develop
our core technology through our in house research and development efforts. As a
result, we expect our research and development expenses to increase on a dollar
basis and may increase on a percentage of revenue basis during the remainder of
fiscal year 2002.
In December 2000, we formed a new subsidiary to conduct design and testing
operations in Shanghai, the People's Republic of China. The registered capital
of this new company is $12.0 million, of which $3.8 million was funded by us in
Fiscal Year 2001, as required by Chinese law. We are further obligated to fund
the remaining $8.2 million of registered capital by December 2003. As of July
31, 2001, $2.1 million of the $3.8 million was paid for land use rights and to
building contractors, $1.5 million was deposited in a bank account in China and
$0.2 million was expended for general purposes. The formation and operation of
the new company in China requires a large initial capital investment, and there
may be significant administrative, legal and governmental barriers in China,
which may prevent our ability to begin operation of the new company as well as
using the funds outside of China.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Results of Operations
The following table sets forth the results of our operations as a
percentage of revenues. Our historical operating results are not necessarily
indicative of the results for any future period.
Three Months Ended
------------------
July 31 July 31,
2001 2000
---- ----
Revenues.......................................... 100.0% 100.0%
Cost of revenues.................................. 55.0 69.0
------ ------
Gross profit................................. 45.0 31.0
------ ------
Operating expenses:
Research and development..................... 15.1 7.2
Selling, general and administrative.......... 29.0 6.0
Stock compensation charge.................... 1.4 1.6
------ ------
Total operating expenses................ 45.5 14.8
------ ------
Income (loss) from operations..................... (0.5) 16.2
Interest income (expense), net.................... 5.1 0.9
------ ------
Income before income taxes........................ 4.6 17.1
Provision for income taxes........................ -- 6.5
------ ------
Net income........................................ 4.6% 10.6%
====== ======
The Three Months Ended July 31, 2001 as Compared to the Three Months Ended
July 31, 2000
Revenues
- --------
We derive revenues from the sale of our standard image sensor array
products and other companion circuits for use in a variety of applications.
Revenues for the three months ended July 31, 2001 decreased 37% to approximately
$11.2 million from $17.8 million for the three months ended July 31, 2000. The
decrease in revenues during the three months ended July 31, 2001 was due to a
decrease in the number of units sold, primarily caused by excess customer
inventory in the personal computer camera manufacturing business and the general
economic slowdown. Domestic and international revenues for the three months
ended July 31, 2001 were $6.5 million and $4.7 million, respectively, as
compared to $1.7 million and $16.1 million, respectively, for the three months
ended July 31, 2000. For the three months ended July 31, 2001, one of our
security camera manufacturer customers, X-10 Wireless Technology, Inc., or X10,
represented approximately 54% of revenues. No other single customer accounted
for 10% or more of revenues in the three months ended July 31, 2001. Our two
largest distributors during the three months ended July 31, 2001 were World
Peace Industrial Co. Ltd., or World Peace, headquartered in Taiwan, which
accounted for 8% of revenues, and SEC Development Co. Ltd., or SEC,
headquartered in Hong Kong, which accounted for 6% of revenues. For the three
months ended July 31, 2000, one of our distributors, World Peace, represented
approximately 30% of total revenues and one of our camera manufacturer
customers, Viewquest Technologies, Inc., accounted for approximately 13% of
total revenues.
Gross Profit
- ------------
Gross margins for the three months ended July 31, 2001 and 2000 were 45.0%
and 31.0% respectively. The increase in gross margin for the three months ended
July 31, 2001 was primarily due to favorable product mix and improved yields on
certain products. Gross margins also benefited from the sale of approximately
$1.1 million of product that was written off in the January quarter of fiscal
2001. On a pro-forma basis, excluding the benefit of previously written-off
inventory, the gross margin was 34.8% for the quarter ended July 31, 2001 as
compared to 31.0% in the corresponding quarter of the previous fiscal year. The
increase in gross margins on a pro-forma basis for the three months ended July
31, 2001 was due to favorable changes in product mix. These factors may continue
to influence gross margin in the future.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Research and Development
- ------------------------
Research and development expenses for the three months ended July 31, 2001
and 2000 were approximately $1.7 million and $1.3 million, respectively. As a
percentage of revenues, research and development expenses represented 15.1% and
7.2%, respectively. Our research and development expenses for the three months
ended July 31, 2001 increased by $407,000 from the same period in the prior year
due to an increase in salaries, payroll related expenses associated with
additional personnel, and a higher cost of engineering supplies, materials, and
contracted costs associated with new product development. Research and
development expenses consist primarily of compensation and personnel related
expenses and costs for purchased materials, designs and tooling, depreciation of
computers and workstations, and amortization of computer aided design software,
all of which may fluctuate significantly from period to period as a result of
our product development cycles. We expect that our future research and
development expenses will increase in absolute dollars and may increase as a
percentage of revenues as we design and develop our next generation of image
sensor products.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses for the three months ended
July 31, 2001 and 2000 were approximately $3.2 million and $1.1 million,
respectively. The increase in selling, general and administrative expenses of
approximately $2.2 million for the three months ended July 31, 2001 from the
same period in the prior year was principally due to higher than normal expenses
for legal fees resulting from patent litigation. As a percentage of revenues,
selling, general and administrative expenses represented 29.0% and 6.0%,
respectively. We expect that our future selling, general and administrative
expenses will increase in absolute dollars and may increase as a percentage of
revenues.
Stock Compensation Charge
- -------------------------
We incurred stock compensation charges of approximately $158,000 and
$284,000 for the three months ended July 31, 2001 and 2000, respectively.
Deferred compensation represents the difference between the deemed fair market
value of our common stock on the date of grant and the exercise price of stock
options to purchase our common stock on the date of grant, is amortized on an
accelerated basis as the options vest. We expect deferred compensation charges
of approximately $902,000 as of July 31, 2001 to be amortized on an accelerated
basis over the vesting period of generally five years.
Interest Income (Expense), Net
- ------------------------------
Interest income and interest expense, net for the three months ended July
31, 2001 and 2000 were income of approximately $567,000 and $160,000,
respectively. Interest income and interest expense, net, increased primarily due
to the investment of the net proceeds from our initial public offering in
interest-bearing accounts consisting primarily of high-grade corporate
securities and government bonds maturing approximately twelve months or less
from the date of purchase.
Provision for Income Taxes
- --------------------------
We generated approximately $510,000 and $3.0 million in income before
income taxes for the three months ended July 31, 2001 and 2000, respectively.
During the three months ended July 31, 2001, there was no provision for income
taxes as a result of prior years' net operating loss carryforwards and credits.
During the three months ended July 31, 2000, we recorded a provision for income
taxes amounting to approximately $1.2 million after taking into consideration
the utilization of prior years' net operating loss carryforwards and credits.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. We believe that the adoption of SFAS 141 will not
have a significant impact on our consolidated financial statements.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but has not yet determined the impact of SFAS 142 on our
financial position and results of operations.
Liquidity and Capital Resources
- -------------------------------
Since inception, we have financed our growth through sales of common stock
and private sales of equity securities, totaling approximately $90.1 million.
Principal sources of liquidity at July 31, 2001 consisted of cash, cash
equivalents and short-term investments of $57.6 million.
Our working capital increased by approximately $0.8 million to $67.8
million as of July 31, 2001 from $66.9 million as of April 30, 2001. The
increase was attributable to a $3.6 million increase in cash and cash
equivalents and $0.7 million increase in prepaid expenses and other assets,
which were partially offset by $2.1 million increase in accounts payable and a
$1.7 million decrease in inventories.
For the three months ended July 31, 2001, net cash provided by operating
activities increased to approximately $3.6 million as compared to our use of
cash for operating activities of $5.9 million for the similar period in the
prior year, primarily due to net income of approximately $0.5 million as
compared to net income of $1.9 million for the corresponding prior year period,
a net $1.7 million decrease in inventory, combined with a $2.1 million increase
in accounts payable, partially offset by a $0.7 million increase in prepaid
expenses and other assets. For the three month period ended July 31, 2000, we
used approximately $5.9 million in cash for operating activities, primarily due
to increased working capital to acquire inventory as sales increased.
For the three months ended July 31, 2001, our use of cash for investing
activities decreased to approximately $0.3 million from a use of $55.7 million
for the similar period in the prior year, primarily due to a $55.6 million
reduction in purchases of short-term investments. This decrease was partially
offset by a $0.2 million increase in purchases of property, plant and equipment.
For the three months ended July 31, 2001, net cash provided from financing
activities decreased to approximately $0.3 million from $59.2 million for the
similar period in the prior year. The decrease was primarily due to a reduction
in proceeds from the issuance and sale of common stock purchased through the
employee stock purchase plan which totaled $0.3 million during the three months
ended July 31, 2001 as compared to $59.2 million net proceeds from the issuance
and sale of 5.0 million shares of common stock in our initial public offering
which was completed on July 14, 2000. Approximately $41.2 million of these
proceeds was invested in cash equivalents and short-term investments.
Based on our current working capital position and the cash flows that
we expect to generate through the end of fiscal 2002, we believe these cash
resources will be sufficient to meet our capital and investment requirements,
including anticipated capital expenditures in the amount of approximately $2.0
million and anticipated investment expenditures of approximately $7.0 million
associated with the new company that we have formed in China and other
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
potential investments, for at least the next 12 months. After this period,
capital requirements will depend on many factors, including the levels at which
we maintain inventory and accounts receivable, costs of securing access to
adequate manufacturing capacity and increases in our operating expenses. To the
extent that existing cash resources are insufficient to fund our future
activities, we may need to raise additional funds through public or private
equity or debt financing. Additional funds may not be available, or if
available, we may not be able to obtain them on terms favorable to us or to our
shareholders. In the event that we do raise additional cash through financings,
current investors could be further diluted.
From time to time, we may evaluate acquisitions of companies, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of securities that may result in further
dilution to existing stockholders.
FACTORS AFFECTING FUTURE RESULTS
Our limited operating history makes it difficult to evaluate our future
- -----------------------------------------------------------------------
prospects and your investment.
- -----------------------------
We were incorporated in May 1995 and only began selling our products in
1996. We introduced our first black and white image sensor for the security and
surveillance and toy and game markets in 1996 and our first color image sensor
for the PC video camera and toy and game markets in October 1997. We are
continuing to develop and produce new products for the digital still camera and
PC video camera markets. Thus, we have a limited operating history, which makes
an evaluation of our future prospects and your investment difficult.
Accordingly, we face risks and difficulties frequently encountered by early
stage companies in new and rapidly evolving markets.
We have a history of losses, we were only profitable on an annual basis in
- --------------------------------------------------------------------------
Fiscal Year 2000 and we may not ever return to profitability.
- ------------------------------------------------------------
We incurred net losses of approximately $11.6 million in Fiscal Year 2001
and approximately $4.0 million in Fiscal Year 1999. For the year ended April 30,
2000, the only year in which we have been profitable, our net income was
approximately $3.4 million. In the three months ended July 31, 2001, our net
income was $510,000. In the future, as we develop new products, we expect
research and development expenses to increase. Also, as we continue to litigate
intellectual property claims. and possibly engage in larger business
transactions, we expect selling, general and administrative expenses to
increase. In addition, if we are not able to accurately forecast the number of
wafers we need, our operating expenses will increase. If these expenses increase
and our revenues do not increase for any reason including the recent economic
slowdown and the rapid deterioration in PC video camera demand, we may not
subsequently sustain profitability.
We may not adequately forecast the number of wafers we need, and therefore we
- -----------------------------------------------------------------------------
may not be able to react to fluctuations in demand for our products, which could
- --------------------------------------------------------------------------------
result in higher operating expenses and lower revenues.
- ------------------------------------------------------
We must forecast the number of wafers we need from each of our
foundries. However, if customer demand falls below our forecast and we are
unable to reschedule or cancel our wafer orders, we may retain excess wafer
inventories, which could result in higher operating expenses and reduced gross
margins. Conversely, if customer demand exceeds our forecasts, we may be unable
to obtain an adequate supply of wafers to fill customer orders, which could
result in lower revenues and could harm our relationship with key customers. For
example, as a consequence of a product order forecast which proved to be greater
than market demand for our products, we recognized an $18.7 million inventory
adjustment in Fiscal Year 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
The recent economic slowdown, particularly the rapid deterioration in PC video
- ------------------------------------------------------------------------------
camera demand, has reduced and may continue to reduce our revenues and to harm
- ------------------------------------------------------------------------------
our business.
- ------------
In the third and fourth quarters of Fiscal Year 2001 and the first
quarter of Fiscal Year 2002, our customers and distributors, primarily our PC
video camera customers and distributors, were impacted by significantly lower
demand for camera related products, which forced them to unexpectedly reschedule
or cancel orders for our products in the third and fourth quarters of Fiscal
Year 2001 and the first quarter of Fiscal Year 2002. As a result, our revenues
and earnings were adversely affected. In August 2001, we announced projected
revenues and earnings for the second quarter of Fiscal Year 2002. If demand for
camera related products, in particular PC video cameras, does not recover in
Fiscal Year 2002, or if we are unable to manage our operating expenses, we will
not be able to meet these projections.
Fluctuations in our quarterly operating results make it difficult to predict our
- --------------------------------------------------------------------------------
future performance and may result in volatility in the market price of our
- --------------------------------------------------------------------------
common stock.
- ------------
Our quarterly operating results have varied significantly from quarter to
quarter in the past and are likely to vary significantly in the future based on
a number of factors related to how we manage our business. These factors, many
of which are more fully discussed in other risk factors, include:
o our ability to manage our product transitions;
o our ability to accurately forecast the number of wafers we need;
o the mix of the products we sell and the distribution channels through
which they are sold; and
o the availability of production capacities at the semiconductor
foundries that manufacture our products or components of our products.
In the past, our introduction of new products and our product mix have
affected our quarterly operating results. We also anticipate that the rate of
orders from our customers may vary significantly from quarter to quarter. Our
expenses and inventory levels are based on our expectations of future revenues
and our expenses are relatively fixed in the short term. Consequently, if
revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high and our operating results for that
quarter and, potentially future quarters, may be harmed.
Certain other factors have in the past caused and are likely in the future
to cause fluctuations in our quarterly operating results. These factors are
industry risks over which we have little or no control. These factors include:
o the growth of the market for products and applications using CMOS
image sensors;
o the timing and amount of orders from our camera manufacturers and
distributor customers;
o the deferral of customer orders in anticipation of new products, designs
or enhancements by us or our competitors; and
o the announcement and introduction of products and technologies by our
competitors.
Any one or more of these factors is difficult to forecast and could result
in fluctuations in our quarterly operating results. Fluctuations in our
quarterly operating results could adversely affect the price of our common stock
in a manner unrelated to our long term operating performance. Due to the
potential volatility of our stock price, you should not rely on the results of
any one quarter as an indication of our future performance. It is likely that at
some point our quarterly operating results will fall below the expectations of
security analysts and investors. In this event, the price of our common stock
would likely decrease.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
We depend on the acceptance of CMOS technology for mass market image sensor
- ---------------------------------------------------------------------------
applications, and any delay in the widespread acceptance of this technology
- ---------------------------------------------------------------------------
could adversely affect our ability to increase our revenues and improve our
- ---------------------------------------------------------------------------
earnings.
- --------
Our business strategy depends on the rapid and widespread adoption of the
CMOS fabrication process for image sensors and the acceptance of our single chip
technology. The image sensor market has been dominated by CCD technology for
over 25 years. Although CMOS technology has been available for over 20 years,
CMOS technology has only recently been used in image sensors. Along with the
other risk factors described in this section, the following factors may delay
the widespread adoption of the CMOS fabrication process and our single chip
technology, the occurrence of any of which could adversely affect our ability to
increase our revenues and earnings:
o the failure of the emergence of a universal platform for imaging
solutions for computers and the Internet;
o the limited availability of bandwidth to run CMOS image sensor
applications;
o the uncertainty of emerging markets for products incorporating CMOS
technology;
o the failure of development of user friendly and affordable products; and
o improvements or cost reductions to CCD image sensors, which could slow
the adoption of CMOS image sensors in markets already dominated by CCD
image sensors, such as the security and surveillance market.
We depend on a limited number of third party wafer foundries to manufacture a
- -----------------------------------------------------------------------------
substantial majority of our products, which reduces our ability to control the
- ------------------------------------------------------------------------------
manufacturing process.
- ---------------------
We do not own or operate a semiconductor fabrication facility. We rely on
TSMC, PSC and Samsung to produce a substantial majority of our wafers and final
products. Our reliance on these third party foundries involves a number of
significant risks, including:
o reduced control over delivery schedules, quality assurance, manufacturing
yields and production costs;
o lack of guaranteed production capacity or product supply; and
o unavailability of, or delayed access to, next generation or key process
technologies.
We do not have long term supply agreements with any of our foundries and
instead secure manufacturing availability on a purchase order basis. These
foundries have no obligation to supply products to us for any specific period,
in any specific quantity or at any specific price, except as set forth in a
particular purchase order. Our requirements represent a small portion of the
total production capacities of these foundries and TSMC, PSC, or Samsung may
reallocate capacity to other customers, even during periods of high demand for
our products. If any of our foundries were to become unable or unwilling to
continue manufacturing our wafers in the required volumes, at acceptable
quality, yields and costs and in a timely manner, our business would be
seriously harmed. As a result, we would have to identify and qualify substitute
foundries, which would be time consuming and difficult and could result in
unforeseen manufacturing and operations problems. In addition, if competition
for foundry capacity increases, our product costs may increase, and we may be
required to pay or invest significant amounts to secure access to manufacturing
services. We are also exposed to additional risks if we decide to transfer our
production of semiconductors from one foundry to another. We may qualify
additional foundries in the future. If we do not qualify additional foundries,
we may be exposed to increased risk of capacity shortages due to our complete
dependence on our foundries.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
If we do not achieve acceptable wafer manufacturing yields, our costs could
- ---------------------------------------------------------------------------
increase, and our products may not be deliverable which could lead to higher
- ----------------------------------------------------------------------------
operating expenses and lower revenues and damage to our customer relationships.
- ------------------------------------------------------------------------------
The fabrication of our products requires wafers to be produced in a highly
controlled and clean environment. Semiconductor companies that supply our wafers
sometimes have experienced problems achieving acceptable wafer manufacturing
yields. Semiconductor manufacturing yields are a function of both our design
technology and the particular foundry's manufacturing process technology. Low
yields may result from design errors or manufacturing failures in new or
existing products. Yield problems may not be determined or improved until an
actual image sensor is made and can be tested. As a result, yield problems may
not be identified until the wafers are well into the production process. We only
test our products after they are assembled, as their optical nature makes
earlier testing difficult and expensive. The risks associated with yields are
even greater because we rely on third party offshore foundries for our wafers
which increases the effort and time required to identify, communicate and
resolve manufacturing yield problems. If the foundries cannot achieve the
planned yields, this will result in higher costs and reduced product
availability.
We depend on third party vendors for color filter processing and assembly, which
- --------------------------------------------------------------------------------
reduces our control over delivery schedules, product quality and cost.
- ---------------------------------------------------------------------
After our wafers are produced, they are color filter processed and
assembled by six independent vendors: TSMC, PSC and Toppan for the color
filtering process and Kyocera, TEPC, and Alphatec for additional processing and
assembly. We do not have long-term agreements with any of these vendors and
typically obtain services from them on a purchase order basis. Our reliance on
these vendors involves risks such as reduced control over delivery schedules,
quality assurance and costs. These risks could result in product shortages or
could increase our costs of manufacturing, assembling or testing our products.
If these vendors are unable or unwilling to continue to provide color filter
processing and assembly services and deliver products of acceptable quality, at
acceptable costs and in a timely manner, our business would be seriously harmed.
We would also have to identify and qualify substitute vendors, which could be
time consuming and difficult and result in unforeseen operations problems.
Our lengthy manufacturing, packaging and assembly cycle, in addition to our
- ---------------------------------------------------------------------------
customers' design cycle, may result in uncertainty and delays in generating
- ---------------------------------------------------------------------------
revenues.
- --------
A lengthy manufacturing, packaging and assembly process, typically lasting
four months or more, is required to manufacture our image sensors. It can take
additional time before a customer commences volume shipments of products that
incorporate our image sensors. Even when a manufacturer decides to design our
image sensors into its products, the manufacturer may never ship final products
incorporating our image sensors. Given this lengthy cycle, we experience a delay
between the time we incur expenditures for research and development, sales and
marketing efforts and inventory and the time we generate revenues, if any, from
these expenditures. As a result, our revenues and profits could be seriously
harmed if a significant customer reduces or delays orders or chooses not to
release products incorporating our products.
If the demand for our products in current markets and emerging markets fails to
- -------------------------------------------------------------------------------
increase as we anticipate, our growth prospects would be diminished.
- -------------------------------------------------------------------
Our success depends in large part on the continued growth of various
markets that use our products and the emergence of new markets for our products.
The current markets that use our products include digital still cameras,
personal computer video cameras, personal digital assistant cameras, mobile
phone cameras, security and surveillance systems, closed circuit television
systems, toys and games and automotive applications. Emerging markets for our
products include personal identification systems, medical imaging devices,
machine control systems, videophones and automotive applications. If these
markets do not continue to grow and develop, the need for cameras which are
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
lower in cost, smaller, lighter in weight, consume less power and are more
reliable might not fully develop. In such case, it would be unlikely that our
products would achieve commercial success.
Failure to obtain design wins could cause our revenues to level off or decline.
- ------------------------------------------------------------------------------
Our future success will depend on camera manufacturers designing our image
sensors into their systems. To achieve design wins, which are decisions by those
manufacturers to design our products into their systems, we must define and
deliver cost effective, innovative and integrated semiconductor solutions. Once
a manufacturer has designed a supplier's products into its systems, the
manufacturer may be reluctant to change its source of components due to the
significant costs associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key camera manufacturers could decrease our
market share or revenues.
Continuing declines in our average sales prices since the first quarter of
- --------------------------------------------------------------------------
Fiscal Year 1999 may result in declines in our gross margins.
- ------------------------------------------------------------
Because the image sensor market is characterized by intense competition,
and price reductions for our products are necessary to meet consumer
price-points, we expect to experience market driven pricing pressures. This will
likely result in a decline in average sales prices for our products. We believe
that we can offset declining average sales prices by achieving manufacturing
cost efficiencies, developing new products that incorporate more advanced
technology and including more advanced features that can be sold at stable
average gross margins. However, if we are unable to achieve such cost reductions
and technological advances, or are unable to timely introduce new products, we
will lose revenues and gross margins will decline.
Seasonality in our business will cause our results of operations to fluctuate
- -----------------------------------------------------------------------------
from period to period and could cause our stock price to fluctuate or decline.
- -----------------------------------------------------------------------------
Sales of our image sensors are subject to seasonality. Some of the products
using our image sensors such as PC video cameras and digital still cameras are
consumer electronics goods. Typically, these goods are subject to seasonality
with generally increased sales in November and December due to the holidays. In
addition, we typically experience a decrease in orders in the quarter ended
April 30 from our Chinese and Taiwanese customers primarily due to the Chinese
New Year. As a result, we believe product sales are impacted by seasonal
purchasing patterns with higher sales generally occurring in the second half of
each year.
We depend on a few key customers, and the loss of any of them could
- -------------------------------------------------------------------
significantly reduce our revenues.
- ---------------------------------
Historically, a relatively small number of customers and distributors has
accounted for a significant portion of our product revenues. For the three
months ended July 31, 2001, one of our security camera manufacturer customers,
X10, represented approximately 54 % of revenues. No other single customer
accounted for 10% or more of revenues in the three months ended July 31, 2001.
Our two largest distributors during the three months ended July 31, 2001 were
World Peace headquartered in Taiwan, which accounted for 8% of revenues, and SEC
headquartered in Hong Kong, which accounted for 6% or revenues.
A significant reduction, delay or cancellation of orders from our key
customers or distributors, or a decision by them to select or distribute
products manufactured by a competitor could seriously harm our business. For
example, in 1999, we had to replace one of our largest distributors with Wintek
Electronics Co., Ltd. because that distributor decided to distribute a
competitor's products. We expect our operating results to continue to depend on
sales to or design decisions of a relatively small number of distributors and
camera manufacturers.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
We do not have long-term commitments from our customers, and we allocate
- ------------------------------------------------------------------------
resources based on our estimates of customer demand, which could lead to excess
- -------------------------------------------------------------------------------
inventory and lost revenue opportunities.
- ----------------------------------------
Our sales are generally made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may cancel or defer
purchase orders. We manufacture our products according to our estimates of
customer demand. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand, we may allocate resources to manufacturing
products which we may not be able to sell or we may have to sell our products to
other customers for lower prices. As a result, we would have excess inventory,
which would have an adverse impact on our results of operations. For example,
one customer, Creative unexpectedly cancelled its purchase orders for one of our
products in the second quarter of Fiscal Year 2001 which resulted in our
shipping substantially fewer quantities to them in the third and fourth quarters
of Fiscal Year 2001 and contributed to a higher than expected inventory
position. Conversely, if we underestimate customer demand or if sufficient
manufacturing capacity is unavailable, we may forego revenue opportunities, lose
market share and damage our customer relationships.
We face foreign business, political and economic risks because a majority of our
- --------------------------------------------------------------------------------
products, and our customers' products are manufactured and sold outside of the
- ------------------------------------------------------------------------------
United States.
- -------------
A substantial portion of our business, in particular, the manufacturing,
processing and assembly of our products, is conducted outside of the United
States, and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are camera manufacturers or are the manufacturers
or suppliers for camera manufacturers and are located in Japan, Korea, Singapore
and Taiwan. In addition, sales outside of the United States accounted for
approximately 41.5% of our revenues for three months ended July 31, 2001 and
90.3% of our revenues for three months ended July 31, 2000. We anticipate that
sales outside of the United States will continue to account for a substantial
portion of our revenue in future periods. Accordingly, we are subject to foreign
risks, including:
o difficulties in managing distributors;
o difficulties in staffing and managing foreign operations;
o difficulties in managing foundries and third party manufacturers;
o political and economic instability which may have an adverse impact on
foreign exchange rates in Asia;
o inadequacy of local infrastructure, in particular with respect to our
future expansion in China; and
o difficulties in accounts receivable collections.
In addition, camera manufacturers who design our solutions into their
products sell them outside of the United States. This exposes us indirectly to
foreign risks. Because sales of our products have been denominated to date
exclusively in United States dollars, increases in the value of the United
States dollar will increase the price of our products so that they become
relatively more expensive to customers in the local currency of a particular
country, leading to a reduction in revenues and profitability in that country. A
portion of our international revenues may be denominated in foreign currencies
in the future, which will subject us to risks associated with fluctuations in
those foreign currencies.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Our dependence on selling through distributors increases the complexity of our
- ------------------------------------------------------------------------------
business which may increase our operating costs and may reduce our ability to
- -----------------------------------------------------------------------------
forecast revenues.
- -----------------
Our revenues depend on design wins with new camera manufacturers which, in
turn, rely on third party manufacturers or distributors to provide inventory
management and purchasing functions. Selling through distributors reduces our
ability to forecast sales and increases the complexity of our business,
requiring us to:
o manage a more complex supply chain;
o manage the level of inventory at each distributor;
o provide for credits, return rights and price protection;
o estimate the impact of credits, return rights, price protection and
unsold inventory at distributors; and
o monitor the financial condition and credit worthiness of our
distributors. Any failure to manage these challenges could reduce our
revenues and damage our relationships with our distributors.
We face intense competition in our markets from more established CCD image
- --------------------------------------------------------------------------
sensor manufacturers and CMOS image sensor manufacturers and if we are unable to
- --------------------------------------------------------------------------------
compete successfully, we will not achieve our financial objectives.
- ------------------------------------------------------------------
The image sensor market is intensely competitive. These markets are
characterized by rapid technological change, evolving standards, short product
life cycles and decreasing prices. Our current products face competition from a
number of sources including companies which sell charged couple device image
sensors as well as other companies which sell multiple chip CMOS image sensors.
We expect competition in our markets to increase.
Many of our competitors have longer operating histories and greater
presence in key markets, greater name recognition, access to large customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. As a result, they may be
able to adapt more quickly to new or emerging technologies and customer
requirements or devote greater resources to the promotion and sale of their
product than we may. Our competition includes CCD image sensor manufacturers,
including Fuji Corporation, or Fuji, Matsushita Electric Industrial, or
Matsushita, Nippon Electric Corporation or NEC, Sharp Corporation, or Sharp,
Sony Corporation, or Sony, and Toshiba Corporation, or Toshiba, as well as CMOS
image sensor manufacturers such as Agilent Technologies, Inc., ST
Microelectronics, Conexant Systems, Inc., Hyundai Electronics Industries Co.
Ltd., Mitsubishi Electronic, Motorola, Inc., and Toshiba Corporation. In
addition, there are a large number of smaller startup companies including
Photobit Corporation and Zoran Corporation, which may or do compete with us. In
particular, Hyundai and Agilent Technologies have introduced multiple chip CMOS
image sensors. We cannot assure you that we can compete successfully against
current or potential competitors, or that competition will not seriously harm
our business by reducing sales of our products, reducing our profits and
reducing our market share.
Our success depends on the development and introduction of new products, which
- ------------------------------------------------------------------------------
we may not be able to do in a timely manner because the process of developing
- -----------------------------------------------------------------------------
products using CMOS image sensors is complex and costly.
- -------------------------------------------------------
The development of new products is highly complex, and we have experienced
delays in completing the development and introduction of new products on several
occasions in the past, some of which exceeded six months. As our products
integrate new and more advanced functions, they become more complex and
increasingly difficult to design and debug. Successful product development and
introduction depend on a number of factors, including:
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
o accurate prediction of market requirements and evolving standards,
including pixel resolution, output interface standards, power
requirements, optical lens size, input standards and operating systems
for personal computers and other platforms;
o development of advanced technologies and capabilities;
o definition of new products which satisfy customer requirements;
o timely completion and introduction of new product designs;
o use of leading edge foundry processes and achievement of high
manufacturing yields; and
o market acceptance of the new products.
Accomplishing all of this is extremely challenging, time consuming and
expensive. We cannot assure you that any new products or product enhancements
will be developed in time to capture market opportunities or achieve a
significant or sustainable level of acceptance in new and existing markets.
The high level of complexity and integration of functions of our products
- -------------------------------------------------------------------------
increases the risk of latent defects which could damage customer relationships
- ------------------------------------------------------------------------------
and increase our costs.
- ----------------------
Because we integrate many functions on a single chip, our products are
complex. The greater integration of functions and complexity of operations of
our products, the greater the risk that latent defects or subtle faults could be
discovered by customers or end users after volumes of product have been shipped.
Although we test our products, they may contain defects and errors. In the past
we have encountered defects and errors in our products. Delivery of products
with defects or reliability, quality or compatibility problems may damage our
reputation and our ability to retain existing customers and attract new
customers. In addition, product defects and errors could result in additional
development costs, diversion of technical resources, delayed product shipments,
increased product returns, product warranty costs for recall and replacement and
product liability claims against us which may not be fully covered by insurance.
We maintain a backlog of customer orders which is subject to cancellation or
- ----------------------------------------------------------------------------
delay in delivery schedules, and any cancellation or delay may result in lower
- ------------------------------------------------------------------------------
than anticipated revenues.
- -------------------------
We manufacture and market primarily standard products. Our sales are
generally made pursuant to standard purchase orders. We include in our backlog
only those customer orders for which we have accepted purchase orders and
assigned shipment dates within the upcoming 12 months. Although our backlog is
typically filled within two to four quarters, orders constituting our current
backlog are subject to cancellation or changes in delivery schedules, and
backlog may not necessarily be an indication of future revenue. In addition, the
current backlog will not necessarily lead to revenues in any future period. Any
cancellation or delay in orders which constitute our current or future backlog
may result in lower than expected revenues. Our bookings visibility continues to
be limited with a substantial majority of our quarterly product revenues coming
from orders that are received and fulfilled in the same quarter.
We must attract and retain qualified personnel to be successful, and competition
- --------------------------------------------------------------------------------
for qualified personnel is intense in our market.
- ------------------------------------------------
Our success depends to a significant extent upon the continued
contributions of our key management, technical and sales personnel, many of who
would be difficult to replace. The loss of one or more of these employees could
seriously harm our business. We do not have key person life insurance on any of
our key personnel. We have no agreements which obligate our employees to
continue working for us. Our success also depends on our ability to identify,
attract and retain qualified technical (particularly analog or mixed signal
design engineers), sales, marketing, finance and management personnel.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Competition for qualified personnel is particularly intense in our industry and
in Silicon Valley, California. This is due to a number of factors, including the
high concentration of established and emerging growth technology companies. This
competition makes it difficult to retain our key personnel and to recruit new
qualified personnel. We have experienced, and may continue to experience,
difficulty in hiring and retaining candidates with appropriate qualifications.
If we do not succeed in hiring and retaining candidates with appropriate
qualifications, our revenues and product development efforts could be harmed.
We may be unable to adequately protect our intellectual property and therefore
- ------------------------------------------------------------------------------
we may lose some of our competitive advantage.
- ---------------------------------------------
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies. We have been issued patents and have a number of
pending United States and foreign patent applications. However, we cannot assure
you that any patent will issue as a result of any applications or, if issued,
that any claims allowed will be sufficiently broad to protect our technology. In
addition, it is possible that existing or future patents may be challenged,
invalidated or circumvented. It may be possible for a third party to copy or
otherwise obtain and use our products, or technology without authorization,
develop corresponding technology independently or design around our patents.
Effective copyright, trademark and trade secret protection may be unavailable or
limited in foreign countries. These disputes may result in costly and time
consuming litigation or the license of additional elements of our intellectual
property for free.
We could become subject to litigation regarding intellectual property, which
- ----------------------------------------------------------------------------
could divert management attention, be costly to defend and prevent us from using
- --------------------------------------------------------------------------------
or selling the challenged technology.
- ------------------------------------
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents, product liabilities and other actions
arising out of the normal course of business.
In March 2000, we received a letter from Koninklijke Philips N.V. in which
Philips claimed to have patent rights in a serial bus system for data
transmission, known as the I2C bus system. Although we do not believe any of our
products infringe any Philips patent, we are currently discussing possible
royalty or licensing arrangements as a means of business resolution. In the
meantime, we have completed implementation of a new serial bus system for our
products.
In March 1999, we received a letter from Photobit Corporation, requesting
that we review our products in light U.S. Patent No. 5,841,126. Photobit did
not respond to our inquiry regarding this letter. In June 2000, we received
additional correspondence from counsel for Photobit and California Institute
of Technology ("CalTech"), asserting infringement of U.S. Patent No.
5,841,126, U.S. Patent No. 5,886,659, U.S. Patent No. 5,990,506, U.S.
Patent No. 6,005,619 and U.S. Patent No. 6,021,172, which relate to various
aspects of image sensors. Photobit did not indicate which of our products were
implicated nor the manner in which it believed any of our products might
infringe on any of those patents. Following unsuccessful licensing
negotiations, we filed, on October 13, 2000, an action in the U.S. District
Court, Northern District of California, case number C-00-3791 PJH, against
Photobit and CalTech, seeking declaratory judgment that the five specifically
identified patents (the `126, `659, `506, `619 and `172 patents) are invalid
and/or not infringed by any of our products. Photobit filed counterclaims
alleging infringement of the '126, '506, and '619 patents only, despite
previous claims of infringement of all five specifically-identified patents
in connection with the prior licensing negotiations.
Upon being granted leave to amend by the district court on June 6, 2001, we
filed our first amended complaint against Photobit and CalTech on June 21, 2001,
which included additional claims of inequitable conduct, patent misuse, unfair
competition, and violation of the Racketeer Influenced and Corrupt Organizations
Act ("RICO"). On July 25, 2001, Photobit and CalTech filed their answer to the
first amended complaint and a motion to dismiss the unfair competition, patent
misuse, and RICO claims and to strike portions of the allegations relating to
inequitable conduct. Photobit also re-filed its counterclaims of infringement of
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
the '126, '506, and the '619 patents on July 25, 2001. We filed our reply to the
counterclaims on August 14, 2001, as well as a motion to dismiss the
counterclaims as to the '126 patent and the '506 patents. Both motions are
scheduled to be heard during September of 2001.
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission ("ITC"), based on the same three patents that are
the subject of Photobit's counterclaims in the Northern District of California
action, against us and against Creative Labs, Inc. and X10 Wireless Technology,
Inc., requesting that the ITC institute an investigation pursuant to Section 337
of the Tariff Act of 1930, as amended. A supplement to the complaint was filed
on February 27, 2001. The ITC voted to institute an investigation (In the Matter
of Certain CMOS Active Pixel Image Sensors and Products Containing Same, Inv.
No. 337-TA-451), and a Notice of Investigation was published in March 12, 2001.
By instituting the investigation, the ITC has not yet made any decision on the
merits of the case.
At present, the target date for completion of the ITC investigation is May
13, 2002, and trial in the Northern District of California is scheduled for July
of 2002. Discovery in the Northern District of California action and in the ITC
investigation are still on-going. To date, we have made substantial expenditures
in defense of the claims made by Photobit and Caltech. We continue to believe
that the claims of Photobit and CalTech are meritless, and are vigorously
pursuing our claims and defenses in both proceedings.
Other companies may pursue litigation with respect to these or other
claims. The results of any litigation are inherently uncertain. In the event of
an adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required to
obtain licenses to the infringing technology, pay substantial damages under
applicable law, including treble damages if we are held to have willfully
infringed, cease the manufacture, use and sale of infringing products or to
expend significant resources to develop noninfringing technology. Litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail.
Failure to effectively manage our growth could adversely affect our ability to
- ------------------------------------------------------------------------------
increase our revenues and improve our earnings.
- ----------------------------------------------
Our growth has placed, and will continue to place, a significant strain on
our management and other resources. To manage our growth effectively, we must,
among other things:
o implement and improve operational and financial systems;
o train and manage our employee base; and
o attract and retain qualified personnel with relevant experience.
We must also manage multiple relationships with customers, business
partners and other third parties, such as our foundries and process and assembly
vendors. Moreover, our growth may significantly overburden our management and
financial systems and other resources. We also cannot assure you that we have
made adequate allowances for the costs and risks associated with our expansion.
In addition, our systems, procedures or controls may not be adequate to support
our operations, and we may not be able to expand quickly enough to capitalize on
potential market opportunities. Our future operating results will also depend on
expanding sales and marketing, research and development and administrative
support.
Our investment in a Chinese entity to conduct design and testing operations may
- -------------------------------------------------------------------------------
not reduce our design and testing costs nor improve our gross margins and as a
- ------------------------------------------------------------------------------
result our earnings would be adversely affected.
- ------------------------------------------------
In December 2000, we formed a new subsidiary to conduct design and testing
operations in Shanghai, the People's Republic of China. The registered capital
of this Chinese subsidiary is $12.0 million, of which $3.8 million was funded by
us in Fiscal Year 2001, as required by Chinese law. We are further obligated to
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
fund the remaining $8.2 million of registered capital by December 2003. As of
July 31, 2001, $2.1 million of the $3.8 million was paid for land use rights and
to building contractors, $1.5 million was deposited in a bank account in China
and $0.2 million was expended for general purposes. The formation and operation
of this Chinese subsidiary requires a large initial capital investment, and
there may be significant administrative, legal and governmental barriers in
China, which may prevent or harm us from beginning operation of this Chinese
subsidiary.
We cannot be sure that our investment in our Chinese subsidiary will
eventually result in the reduction of our design and testing costs. The
formation and operation of our Chinese subsidiary requires a large initial
capital investment and will also require significant future capital investment
as we continue to maintain and upgrade our facility. In addition, the design and
testing of our products is a highly complex, sensitive and precise process which
is subject to a wide variety of factors, any number of which could result in an
increase of our costs. If our design and testing costs fail to decrease as a
result of our investment in our China subsidiary our earnings may be adversely
affected.
The incorporation, formation and development of our Chinese subsidiary has
resulted and will continue to result in the diversion of capital away from other
business issues, as the operation of our design and testing facility will
require that we constantly upgrade our technology to remain competitive. The
incorporation, formation and development of our Chinese subsidiary has also
resulted in the diversion of management's attention away from other business
issues. If our ongoing investment in the Chinese subsidiary does not result in
offsetting gains in the form of design and testing improvements accompanied by
reduced design and testing costs, whether because of the risks and difficulties
entailed by foreign operations or for other reasons, our business and financial
condition will be adversely affected.
Provisions in our charter documents and Delaware law, as well as our
- --------------------------------------------------------------------
Stockholders Rights Plan, could prevent or delay a change in control of us and
- ------------------------------------------------------------------------------
may reduce the market price of our common stock.
- -----------------------------------------------
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
o adjusting the price, rights, preferences, privileges and restrictions of
preferred stock without stockholder approval;
o providing for a classified board of directors with staggered, three year
terms;
o requiring supermajority voting to amend some provisions in our
certificate of incorporation and bylaws;
o limiting the persons who may call special meetings of stockholders; and
o prohibiting stockholder actions by written consent.
Provisions of Delaware law also may discourage, delay or prevent another
company from acquiring or merging with us. Our Board of Directors adopted a
Preferred Stock Rights Agreement in August 2001 (the "Rights Agreement").
Pursuant to the Rights Agreement, our Board of Directors will declare a dividend
of one right (a "Right") to purchase one one-thousandth share of our Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of our common stock. The dividend is payable on September 28, 2001 to
stockholders of record as of the close of business on that date. Each Right
entitles the registered holder to purchase from us one one-thousandth of a share
of Series A Preferred at an exercise price of $40.00, subject to adjustment. The
exercise of the Rights could have the effect of delaying, deferring or
preventing a change of control of us, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of our common stock. The Rights Agreement could also limit the
price that investors might be willing to pay in the future for our common stock.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Our stock has been and will likely continue to be subject to substantial price
- ------------------------------------------------------------------------------
and volume fluctuations due to a number of factors, many of which will be beyond
- --------------------------------------------------------------------------------
our control, that may prevent our stockholders from reselling our common stock
- ------------------------------------------------------------------------------
at a profit.
- -----------
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of
semiconductor companies have been especially volatile. This market volatility,
as well as general economic, market or political conditions, could reduce the
market price of our common stock in spite of our operating performance. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:
o actual or anticipated fluctuations in our operating results;
o changes in expectations as to our future financial performance;
o changes in financial estimates of securities analysts;
o release of lock-up or the transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock;
o changes in market valuations of other technology companies; and
o announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions.
Due to these factors, the price of our stock may decline and investors may
be unable to resell their shares of our stock for a profit. In addition, the
stock market experiences extreme volatility that often is unrelated to the
performance of particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance.
We rely on a continuous power supply to conduct our operations and California's
- -------------------------------------------------------------------------------
current energy crisis could disrupt our operations and increase our expenses.
- ----------------------------------------------------------------------------
The State of California is in the midst of an energy crisis that could
disrupt our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for the State of California fall below
one and one-half percent, the State of California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout the state. We currently do not have backup generators or alternate
sources of power in the event of a blackout, and our current insurance does not
provide coverage for any damages we or our customers or distributors may suffer
as a result of any interruption in our power supply. If blackouts interrupt our
ability to continue operations at our facilities, then our reputation could be
damaged, our ability to retain existing customers could be harmed and we could
fail to obtain new customers. These interruptions could also result in lost
revenue, any of which could substantially harm our business and results of
operations.
Furthermore, the deregulation of the energy industry instituted in 1996
by the California state government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale energy prices continue to increase, our operating expenses
will likely increase, as our U.S. facilities are located in California.
26
Class action litigation due to stock price volatility could lead to substantial
- -------------------------------------------------------------------------------
costs and divert our management's attention and resources.
- ---------------------------------------------------------
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the semiconductor industry and other technology
industries are particularly vulnerable to this kind of litigation due to the
high volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are an international company, selling our products globally and, in
particular in China, Japan, Korea, Singapore and Taiwan. Although we transact
our business in U.S. dollars, future fluctuations in the value of the U.S.
dollar may affect the competitiveness of our products, gross profits realized,
and results of operations. Further, we incur expenses in Japan, Korea, Taiwan,
Thailand, China and other countries that are denominated in currencies other
than the U.S. dollar. We cannot estimate the effect that an immediate 10% change
in foreign currency exchange rates would have on our future operating results or
cash flows as a direct result of changes in exchange rates. However, we do not
believe that we currently have any significant direct foreign currency exchange
rate risk, and we have not hedged exposures denominated in foreign currencies or
any other derivative financial instruments.
Our cash equivalents and short term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
our exposure to financial market risk by performing ongoing evaluations of our
investment portfolio. We presently invest in short term bank market rate
accounts, certificates of deposit issued by banks, high-grade corporate
securities and government bonds maturing approximately 12 months or less from
the date of purchase. Due to the short maturities of our investments, the
carrying value should approximate the fair market value. In addition, we do not
use our investments for trading or other speculative purposes. Due to the short
duration of our investment portfolio, we do not expect that an immediate 10%
change in interest rates would have a material effect on the fair market value
or our portfolio. Therefore, we would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden change
in market interest rates.
28
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents, product liabilities and other actions
arising out of the normal course of business.
In March 2000, we received a letter from Koninklijke Philips N.V. in which
Philips claimed to have patent rights in a serial bus system for data
transmission, known as the I2C bus system. Although we do not believe any of our
products infringe any Philips patent, we are currently discussing possible
royalty or licensing arrangements as a means of business resolution. In the
meantime, we have completed implementation of a new serial bus system for our
products.
In March 1999, we received a letter from Photobit Corporation, requesting
that we review our products in light of U.S. Patent No. 5,841,126. Photobit
did not respond to our inquiry regarding this letter. In June 2000, we received
additional correspondence from counsel for Photobit and California Institute
of Technology ("CalTech"), asserting infringement of U.S. Patent No.
5,841,126, U.S. Patent No. 5,886,659, U.S. Patent No. 5,990,506, U.S.
Patent No. 6,005,619 and U.S. Patent No. 6,021,172, which relate to various
aspects of image sensors. Photobit did not indicate which of our products were
implicated nor the manner in which it believed any of our products might
infringe on any of those patents. Following unsuccessful licensing
negotiations, we filed, on October 13, 2000, an action in the U.S. District
Court, Northern District of California, case number C-00-3791 PJH, against
Photobit and CalTech, seeking declaratory judgment that the five specifically
identified patents (the `126, `659, `506, `619 and `172 patents) are invalid
and/or not infringed by any of our products. Photobit filed counterclaims
alleging infringement of the '126, '506, and '619 patents only, despite
previous claims of infringement of all five specifically-identified patents
in connection with the prior licensing negotiations.
Upon being granted leave to amend by the district court on June 6, 2001, we
filed our first amended complaint against Photobit and CalTech on June 21, 2001,
which included additional claims of inequitable conduct, patent misuse, unfair
competition, and violation of the Racketeer Influenced and Corrupt Organizations
Act ("RICO"). On July 25, 2001, Photobit and CalTech filed their answer to the
first amended complaint and a motion to dismiss the unfair competition, patent
misuse, and RICO claims and to strike portions of the allegations relating to
inequitable conduct. Photobit also re-filed its counterclaims of infringement of
the '126 patent, '506 patent, and the '619 patents on July 25, 2001. We filed
our reply to the counterclaims on August 14, 2001, as well as a motion to
dismiss the counterclaims as to the '126 patent and the '506 patents. Both
motions are scheduled to be heard during September of 2001.
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission ("ITC"), based on the same three patents that are
the subject of Photobit's counterclaims in the Northern District of California
action, against us and against Creative Labs, Inc. and X10 Wireless Technology,
Inc., requesting that the ITC institute an investigation pursuant to Section 337
of the Tariff Act of 1930, as amended. A supplement to the complaint was filed
on February 27, 2001. The ITC voted to institute an investigation (In the Matter
of Certain CMOS Active Pixel Image Sensors and Products Containing Same, Inv.
No. 337-TA-451), and a Notice of Investigation was published in March 12, 2001.
By instituting the investigation, the ITC has not yet made any decision on the
merits of the case.
At present, the target date for completion of the ITC investigation is May
13, 2002, and trial in the Northern District of California is scheduled for July
of 2002. Discovery in the Northern District of California action and in the ITC
investigation are still on-going. We continue to believe that the claims of
Photobit and CalTech are meritless, and are vigorously pursuing our claims and
defenses in both proceedings.
29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We completed our initial public offering, or IPO, on July 14, 2000,
pursuant to a Registration Statement on Form S-1 (File No. 333-31926), which was
declared effective by the Securities and Exchange Commission on July 13, 2000.
In the IPO, we sold an aggregate of 5.0 million shares of common stock. In
August 2000, the underwriters of the Company's initial public offering exercised
their over-allotment option to purchase an additional 750,000 shares of common
stock at $13.00 per share. Net proceeds from exercise of the over-allotment
option aggregated approximately $8.5 million after paying the underwriters' fee
and related expenses. The sale of the shares of common stock generated aggregate
gross proceeds of approximately $74.8 million, including proceeds from the
exercise of the over-allotment option. The aggregate net proceeds were
approximately $67.7 million, including the proceeds from the exercise of the
over-allotment option, after deducting underwriting discounts and commissions of
approximately $5.2 million and directly paying expenses of the offering of
approximately $1.9 million. Fleet Boston Robertson Stephens Inc., Prudential
Volpe Technology and Needham & Company, Inc. were the lead underwriters for the
IPO. As of July 31, 2001, approximately $26.5 million of the net proceeds were
used for working capital purposes and the remaining $41.2 million were invested
in cash equivalents and short-term investments.
From July 14, 2000 to July 31, 2001, we used such net offering proceeds, in
direct or indirect payments to others, as follows (in thousands):
Purchase and installment of property, plant and equipment... $ 905
Working capital............................................. 21,795
Investment in short-term, interest-bearing obligations...... 41,161
Investment in China subsidiary.............................. 3,800
--------
Total $ 67,661
========
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds.
Other than anticipated capital expenditures in the amount of approximately
$2.0 million and anticipated investment expenditures of approximately $7.0
million in the next twelve months, we have no specific plan for the proceeds
from our initial public offering. The primary purpose of the offering has been
to use the proceeds for general corporate purposes, including working capital.
We may also use some of the proceeds to meet capacity commitments or to acquire
other companies, technology or products that complement our business, although
we are not currently planning any of these transactions. Pending these uses, the
net proceeds of the offering have been invested in interest bearing, investment
grade securities.
On August 21, 2001, pursuant to the Rights Agreement between us and
EquiServe Trust Company, N.A., as Rights Agent, our Board of Directors declared
a dividend of a Right to purchase one one-thousandth share of our Series A
Preferred Stock for each outstanding share of our common stock. The dividend is
payable on September 28, 2001 to stockholders of record as of the close of
business on that date. Each Right entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series A Preferred at an
exercise price of $40.00, subject to adjustment.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
4.3 (3) Preferred Stocks Rights Agreement, dated August 21, 2001, between
the Registrant and Equiserve Trust Company, N.A., including the
Certificate of Designation, the form of Rights Certificate and
Summary of Rights attached thereto as Exhibits A, B and C,
respectively.
-----------------------------
(3) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A (Reg. No. 000-29939 as declared
effective by the securities and Exchange Commission on September 12,
2001.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended July 31, 2001. The following report was filed on August 28, 2001: A Form
8-K dated August 28, 2001 regarding the Company's issuance of a press release on
August 23, 2001 announcing that the Company's Board of Directors approved the
adoption of a Preferred Stock Rights Plan.
31
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: September 13, 2001
By: /s/ SHAW HONG
------------------------------------------
Shaw Hong
Chief Executive Officer, President and Director
(Principal Executive Officer)
Dated: September 13, 2001
By: /s/ H. GENE MCCOWN
------------------------------------------
H. Gene McCown
Vice President of Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
32