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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2001.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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, California 94085
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (408) 733-3030
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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 Exchange Act of
1934 during the preceding 12 months (or for such 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on July
17, 2001 as reported on the Nasdaq National Market, was approximately
$97,780,890. Shares of Common Stock held by each executive officer and director
and by each person who owns five percent or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of July 17, 2001, registrant had outstanding 22,093,787 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2001 Annual Meeting
of Stockholders.
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OMNIVISION TECHNOLOGIES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED APRIL 30, 2001
Page
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PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 17
Item 3. Legal Proceedings................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 19
Item 6. Selected Financial Data.......................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 40
Item 8. Financial Statements and Supplementary Data...................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management... 42
Item 13. Certain Relationships and Related Transactions................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 43
Signatures................................................................ 45
2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K, including the information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All of the statements contained in this Annual Report on Form
10-K, other than statements of historical fact, should be considered forward
looking statements, including, but not limited to, the statements regarding the
timing of the marketability of emerging applications; the growth of the PC
camera market; the growth of the number of pictures generated as different uses
of imaging and video emerge; the ease of transferring images across PC systems
and communication networks; opportunities for small, low power, low cost
digital still cameras to be integrated directly into portable devices; the
growth of the market for digital still cameras; the growth of the CMOS image
sensor market and the time at which the CMOS image sensor market will surpass
the CCD image sensor market; the role which new CMOS image sensors will play in
moving video applications into many new mass markets; the suitability of
multiple chip image sensors for many new mass market applications; the
advantages derived by us and our customers from directly working together; our
continued investment of significant funds in research and development; our
future success being dependent upon our ability to protect our intellectual
property; our plan to vigorously defend ourselves in lawsuits regarding
intellectual property; our continued evaluation of the benefits of migrating to
a smaller circuit technology, using other color filter vendors and other
packaging technologies and making our testing facilities available to third
parties; the retention of future earnings and the payment of cash dividends;
our plan for the use of the net proceeds of our initial public offering; our
current foreign currency exchange rate risk; the effect of a 10% change on
interest rates on our fair market value and our portfolio and our expectation
of the effect of a sudden change in market interest rates on our operating
results and cash flows. There can be no assurance that these expectations will
prove to have been correct. Certain important factors that could cause actual
results to differ materially from our expectations are disclosed in this Annual
Report on Form 10-K, including, without limitation, in the section entitled
"Factors Affecting Future Results" in Item 7. -- Management's Discussion and
Analysis of Financial Condition and Results of Operation and this section. All
subsequent written and oral forward-looking statements by or attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
such factors.
Overview
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We were organized in 1995 as a California corporation and completed a
reincorporation in Delaware in March 2000 prior to our initial public offering.
We design, develop and market high performance, high quality and cost efficient
semiconductor imaging devices for computing, communications and consumer
electronics applications. Our main product, an image sensor, is used to capture
an image in cameras and camera related products such as personal computer
cameras, digital still cameras, personal digital assistant cameras and mobile
phone cameras. We have developed our image sensors using the standard
semiconductor manufacturing process used for approximately ninety percent of
modern integrated circuits. This enables us to take advantage of the many
benefits of high volume, mainstream semiconductor manufacturing such as low
cost, high reliability, volume capacity and competitive lead times. In
addition, unlike competitive image sensors which require multiple chips to
achieve the same functions, we are able to integrate nearly all camera
functions into a single chip. This leads us to believe that we supply the most
highly integrated, single chip image sensor. Our single chip design offers
competitive advantages that can allow our customers to design cameras that are
lower in cost, smaller, lighter in weight, consume less power, are more
reliable and more easily integrated with other circuits than cameras using
multiple chip image sensors. Our image sensors are currently used for the
following applications:
o digital still cameras, personal computer video cameras, personal digital
assistant cameras and mobile phone cameras which are used for capturing
images that can be stored, downloaded, viewed, edited and manipulated,
and for Internet applications such as creating still and live video for
websites and e-mail;
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o security and surveillance systems and closed circuit television systems
including onsite and remote security cameras for both home and business
and surveillance systems such as baby monitors and door phones; and
o toys and games such as highly interactive participatory video games
where the users' motions and images can be incorporated into the game
and his or her motions, rather than a joystick or mouse, control actions
in the game.
We assist our customers in developing new image sensor specifications that
are required for emerging applications. We believe that these applications will
be marketable within the next three years. Examples of such applications
include:
o personal identification systems such as fingerprint scanners, retina
scanners and face recognition systems;
o medical imaging devices used for routine doctors' office examinations;
o machine control systems such as bar code readers, production control
systems and quality inspection systems;
o automotive applications such as cameras that may replace rear and side
view mirrors to security systems, air bag inflation sensors, accident
recorders, driver monitors and maintenance inspection systems; and
o videophones integrated in tabletop phones.
We have shipped approximately 6.5 million image sensors in the year ended
April 30, 2001, or Fiscal Year 2001, as compared to approximately 4.0 million
image sensors in the year ended April 30, 2000 or Fiscal Year 2000. Our
customers include industry leading original equipment manufacturers, or OEM,
such as Alaris, Inc., or Alaris, Creative Technologies Ltd., or Creative,
Teksel Co., Ltd., or Teksel, who distributes our products to Kyocera
Corporation, or Kyocera, X10 Wireless Technology, Inc., or X10, and Viewquest
Technologies, Inc., or Viewquest.
Our objective is to be a leading supplier of image sensors for camera
manufacturers by:
o focusing on capturing mass market applications;
o targeting camera manufacturers by assisting them in the design and
development of their products;
o maintaining our technology leadership by continuing to develop our core
technology;
o continuing to develop new products aimed at new and existing markets;
and
o continuing to establish both formal and informal strategic relationships
with key suppliers and customers.
Industry Background
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Growth of Digital Video Imaging
Multimedia technology and its uses have grown in the past decade. A
significant driver of this growth in multimedia has been the growth of video
technologies. Many large industries including the movie, television, publishing
and computer industries depend directly on video technologies to create and
deliver their products. Traditionally all video, still image and sound products
were based on analog technologies. More recently, computer based video
technology has been replacing traditional analog image and sound capture
technologies, such as conventional cameras, film and tape recorders. This has
begun to occur because digital technology offers enhanced quality, manipulation
and storage capabilities that analog technologies lack. For example, a movie
recorded and stored digitally can be easily searched and will not suffer
degradation over time.
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The Internet and Miniaturization of Electronics Fuel Demand for Video
Imaging
Video and image capture on PCs was first used in videoconferencing
applications. However, early videoconferencing applications were expensive, and
suffered from poor image quality and inadequate network infrastructure. Video
conferencing grew rapidly as image quality improved and cameras became more
affordable. Cahners In-Stat Group predicts that the market for PC cameras will
grow from approximately 9 million units in 2000 to approximately 35 million
units by 2004. As cameras became readily available on PCs, applications other
than videoconferencing quickly followed. The introduction of the World Wide Web
browser, with its hypertext and Uniform Resource Locator, or URL, address
system, changed the Internet from a text based system to a multimedia driven
network that features sound, pictures and live video clips. Fueled by the
growth of the Internet as a method to publish, transport and store images, the
number of pictures generated is expected to grow significantly as different
uses of imaging and video continue to emerge. Today PC video cameras are used
for capturing still pictures and live video clips used for web sites, video
email, video greeting cards, web based photo exchanges, desktop publishing and
interactive games. As network bandwidth continues to improve, transferring
images across PC systems and communication networks will become even easier,
further driving the demand for video and multimedia applications.
Miniaturization has moved computing from the desktop to a wide assortment
of portable and hand held devices including laptops, personal digital
assistants, electronic games and mobile phones. These battery operated devices
are creating an opportunity for small, low power, low cost digital still
cameras to be integrated directly into the portable device so that images can
be captured for transfer to computer systems using wired or wireless methods.
Examples of commercial uses for these captured images include property damage
pictures for insurance claims, images of competitive products for analysis, or
enhancement of computer contact databases.
The more recent digital still cameras use a live video image sensor to
display a real time image on a miniature, built in display which serves as a
viewfinder. Still images captured by the same sensor and stored in the camera
are transferred to a computer system for viewing, editing, transmitting and
printing. When connected to the computer, digital still cameras can also
function like PC video cameras. These devices have made a significant impact on
the camera market by taking market share from film based cameras and are one of
the fastest growing consumer electronic products.
Advances in Image Sensor Technology
Image sensors are at the center of all electronic cameras. Image sensors
capture an image through a lens and convert that image into electronic signals.
Charged couple device, or CCD, technology has dominated the image sensor market
for over 25 years. However, production is concentrated with relatively few,
large, primarily vertically integrated camcorder manufacturers. According to a
study published by the Cahners In-Stat Group in October 2000, the top six CCD
image sensor manufacturers, 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, account for approximately 97.3% of total CCD image sensor production.
A newer, easier to use semiconductor technology, complementary metal oxide
semiconductor, or CMOS, has been adopted for most common integrated circuits.
Although CMOS technology has been available for image sensor designs for over
20 years, until recently it has not been used in commercial products because of
poor image quality. Recent improvements in CMOS, including smaller size
circuits, better current control, and a more stable fabrication process, have
made it possible to design CMOS image sensors that provide high image quality
and that have many advantages over CCD sensors.
Advantages of CMOS Over CCD Technology
CMOS technology has many advantages over CCD technology including:
o Cameras using CMOS image sensors consume as little as one tenth as much
power as those using CCD technology, making them more suitable for
battery operated applications.
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o CMOS image sensors require only one voltage, the three or five volts
typically used for modern integrated CMOS circuits, while CCD image
sensors require three separate and different voltages, which means that
CMOS image sensors are easier and less costly to integrate into
companion circuit boards.
o CMOS technology permits integration of more functions into fewer chips,
providing space, cost, product design and reliability advantages.
Cameras using CMOS technology do not require as many semiconductors as cameras
using CCD technology.
o The CMOS fabrication process requires fewer masking steps than the CCD
fabrication process. The CCD fabrication process generally requires 20
to 40 masking steps, which is two to three times more complex than the
typical CMOS fabrication process.
o CMOS image sensors do not cause an image to lose definition when
directed towards bright light while CCD image sensors create a blurry or
smeared image.
In addition, since CCD technology is used only for image sensors, future
improvements in the core technology and the fabrication process are
concentrated among a few large, vertically integrated equipment manufactures.
Such concentration tends to limit innovation and investments, and according to
Frost & Sullivan, economies of scale for the manufacture of CCD image sensors
have already been reached. By contrast, CMOS technology is used for
approximately 90% of modern integrated circuits.
Because of the advantages of CMOS technology, the market for CMOS image
sensors is expected to surpass the market for CCD image sensors in 2003. The
Cahners In-Stat Group forecasts in its study published in October 2000, that
CMOS's share of the image sensor market will grow from approximately 30% in
2000 to 75% in 2004. In particular, Cahners In-Stat Group predicts that in
2004, approximately 88.6% of the 35 million PC cameras will use CMOS image
sensors. Cahners In-Stat Group also predicts that in 2004 CMOS technology will
account for approximately 45.8% of the 34.9 million digital still cameras.
Applications for CMOS Image Sensors
Based on discussions with current and potential customers, we anticipate
that the newer CMOS image sensors will help move video applications into many
new mass markets, particularly where low cost, low power consumption and small
size are important. Some of these applications include:
o a wide array of personal identification systems, including fingerprint
scanners, retina scanners and face recognition systems that can be used
for credit card and debit card authorization, opening a hotel door,
entering a car or home, accessing a computer or online network, and any
number of applications where a system needs to identify a person as a
valid user;
o a wide array of medical instruments used for routine doctors' office
examinations;
o videophones integrated into tabletop phones;
o automotive applications that range from cameras that may replace rear
and side view mirrors to security systems, air bag inflation sensors,
accident recorders, driver monitors and maintenance inspection systems;
and
o machine control applications, including bar code readers, production
control systems and quality control monitors.
However, we believe that multiple chip CMOS image sensors do not fully
take advantage of the benefits enabled by CMOS technology. Image sensors that
require more than one chip are more expensive, larger, heavier, consume more
power, are less reliable and are more difficult to integrate with other
electronic circuits. As a result, multiple chip image sensors may not be ideal
for many new mass market applications.
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Our Solution
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We design, develop and market our high performance, high quality and cost
efficient image sensors for computing, communications and consumer electronics
applications. We have developed our image sensors using the standard CMOS
manufacturing process used for approximately 90% of modern integrated circuits.
As a result, unlike competitive image sensors which require multiple chips to
achieve the same functions, we are able to integrate nearly all the camera
functions into a single chip. This leads us to believe that we supply the most
highly integrated single chip image sensor. Customers can use our highly
integrated image sensor to design camera products that are lower in cost,
smaller in size, lighter in weight, consume less power and are more reliable
and easier to integrate with other electronic circuits than cameras using the
traditional CCD technology or multiple chip CMOS image sensors.
Our proprietary circuit design integrates the image capture, the image
processing function, the color processing and the conversion and output into a
single chip. Our image sensors are used in conjunction with our interface chips
or other manufacturers' adaptor chips to connect directly with a personal
computer.
Our image sensors provide a number of benefits to our customers, including
the following:
o Lower Cost. The highly integrated design of our image sensors allows
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our customers to build a camera that can be generally less expensive
than one using CCD technology. Our single chip image sensor also allows
our customers to build cameras that generally are less expensive than
cameras using multiple chip CMOS image sensors.
o Lower Power Consumption. A camera using our image sensor can require as
------------------------
little as one tenth of the power required for a CCD camera and half the
power required for a multiple chip CMOS camera, making our solution more
suitable for battery powered operation. In addition, CMOS image sensors
use a single voltage while CCD image sensors require three voltages. As
a result of this simplicity, our customers can more easily and quickly
design camera products.
o Smaller Size. Our highly integrated, single chip design allows our
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customers to develop cameras that are smaller in size and lighter in
weight than cameras that use CCD or multiple chip CMOS image sensors.
For portable applications, size and weight are critical factors in a
consumer's buying decision. Additionally, devices using our image
sensors are more reliable because there are fewer parts to fail.
o Streamlined Manufacturing and Production. Our image sensors provide
-----------------------------------------
consistent quality that makes them easier to use for large-scale
production than CCD image sensors because CCD image sensors must each be
hand calibrated to match companion components. Our image sensors can be
mounted with automatic insertion equipment and run through standard
automatic re-flow soldering lines, whereas CCD must each be individually
placed and soldered by hand.
o Ease of Use for End Users. As opposed to other CCD and CMOS image sensor
--------------------------
manufacturers, we offer a complete solution for our customers' end
users. Use of our image sensors along with our interface chips and our
Windows(r) and Apple Computer iMac(r) software drivers enables a plug
and play connection of the camera to a personal computer.
o Accelerated Time to Market. The highly integrated nature of our image
---------------------------
sensors and their programming ease simplify the design of cameras and
allow our customers to shorten their product design time. We can also
help our customers accelerate their time to market by providing camera
reference designs, engineering design review services and customer
product evaluation testing and debugging services.
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Our Strategy
- ------------
Our objective for Fiscal Year 2001 was to maintain and grow our leadership
position as a supplier of CMOS image sensors for the camera manufacturer
marketplace. Key elements of our strategy included:
o Target Mass Market Applications. We focused our efforts on mass market
--------------------------------
opportunities for image sensors. These markets included cameras for
closed circuit television systems, digital still cameras, personal
computer video cameras, personal digital assistant cameras, mobile phone
cameras, cameras for security and surveillance systems, cameras for toys
and games, videophones, personal identification systems, medical imaging
devices, machine control systems and automotive applications.
o Focus on Camera Manufacturers. We used our expertise in the design of
------------------------------
consumer cameras to assist our camera manufacturer customers to design
and develop their products using our image sensors.
o Maintain Technology Leadership. We maintained our technology leadership
-------------------------------
by developing our core technology. Our product and technology strategy
is focused on developing image sensors that are smaller in size, consume
less power and have higher pixel resolutions. During Fiscal Year 2001,
we achieved progress along all of these parameters and made
announcements of new products in all of these categories, including our
new higher resolution sensors, smaller, lower power consuming versions
of the CIF and VGA sensors, and new software drivers for the Apple iMac
market.
o Developed New Products. In Fiscal Year 2001, we developed new products
-----------------------
aimed at new and existing markets. We introduced three new product
families, which included the OV8110 and related OV8610 medium resolution
chips and the OV9110 and related OV9610 high resolution megapixel chips.
o Continued to Develop Strategic Relationships. We continued to establish
---------------------------------------------
both formal and informal strategic relationships with key manufacturers
and customers. Relationships with manufacturers enable us to gain access
to wafer capacity and develop joint engineering projects aimed at
enhancing the application of our image sensors and improving the
production yield and the sensor image quality of our image sensors.
Relationships with customers have allowed us to collaborate in the
design and development of cameras using our image sensors.
Products
- --------
We design, develop and market our high performance, high quality and cost
efficient CMOS image sensors for computing, communications, automotive and
consumer electronics applications.
We have developed proprietary designs for a single chip image sensor that
includes the image capture, image processing circuitry, color processing and
conversion and output. Our products are programmable and allow our customers to
provide custom, proprietary features in their application software or hardware
design so that they can offer unique products to end users. Our technology
provides a platform for different products that allow our customers to choose
the most appropriate features for their applications. These features include:
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Product Features
Complementary Metal Oxide
Semiconductor Image Sensors Black and white or color
Resolutions Low resolution
Medium resolution
High resolution
Output Signal For television
For computers
Operating Voltage 5 volt or 3 volt
Optical Lens Size 1/6, 1/5, 1/4, 1/3 or 1/2 inch format
Interface Chips For connecting to computers
Software Drivers Windows and Apple computer
software drivers
The following table summarizes our current image sensor product offerings:
CMOS Image Sensors
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Product
Black and Color Introduction
White Sensors Sensors Resolution Output Target Markets Date
- -------------- ------- ---------- ------ -------------- ----
OV5116 Low NTSC or PAL Security and 2/01
for TV surveillance
Toys and games
OV5017 Low For computers Machine control 5/97
OV7410 OV7910 Medium NTSC or PAL 2/99
for TV Security and
surveillance
Close circuit
television
Toys and games
OV6120 OV6620 Low For computers PC video cameras 4/99
Toys and games
Machine control
OV7120 OV7620 Medium For computers PC video cameras 10/99
Digital still cameras
Machine control
Security and
surveillance
OV6130 OV6630 Low For computers PC video cameras 2/00
Toys and games
Machine control
OV8110 OV8610 Medium For computers PC video cameras 2/01
High Digital still cameras
Machine control
Security and
surveillance
OV9110 OV9610 High For computers PC video cameras 4/01
Digital still cameras
Machine control
Security and
surveillance
We also provide a companion chip used to interface our image sensors to
the universal serial bus, a connection which allows add on devices to be
connected to personal computers. These low cost, proprietary designed chips
accept the live video output from our image sensors, perform data compression
and handle the bus protocol for transferring the image data to the personal
computer. They also act as a master for passing programming information to and
from our image sensor.
We also design, develop and license plug and play software drivers for
Microsoft Windows and Apple Computer's iMac system. These software drivers
accept the image data being received from the universal serial bus,
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provide the data decompression if required and manage interface protocols with
the camera. These drivers have been designed for speed and flexibility and
allow easy customization of the user interface to give the appearance of the
customer's branded product or application software.
Customers
- ---------
Our customers include industry leading camera manufacturers, contract
manufacturers and distributors. During Fiscal Year 2001, we shipped
approximately 6.5 million image sensors as compared to approximately 4.0
million image sensors during Fiscal Year 2000. The following table describes
representative camera manufacturer customers who purchase our products for
their own branded products and contract manufacturers who build products for a
camera manufacturer. Also shown are representative distributors who purchase
our products for resale.
Customer Product Family Markets
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Camera Manufacturer and Contract Manufacturer Customers
- -------------------------------------------------------------------------------
Alaris Color digital sensors PC video cameras
Color analog sensors Toys and games
COMedia Black and white analog Security and surveillance
sensors
Color analog sensors
Creative Technology Color digital sensors PC video cameras
USB interface Digital still cameras
CRS Electronic Color analog sensors Toys and games
Philips Color digital sensors PC video cameras
USB interface
Olympus Optical Co. Color digital sensors Security and surveillance
Color analog sensors PC video cameras
Prochips Technology Color digital sensors PC video cameras
USB interface
Teksel/Kyocera Color digital sensors Cell phone accessory
Samsung Color digital sensors PC video cameras
USB interface
Mtek Vision Color digital sensors PC video cameras
USB interface
Viewquest Technologies Color digital sensors Toys and games
USB interface PC video cameras
Personal digital assistant
cameras
Welch Allyn Black and white analog Bar code readers
sensors
Color analog sensors
X10 Wireless
Technology, Inc. Color analog sensors Security and surveillance
Distributors
- -------------------------------------------------------------------------------
World Peace Color digital sensors PC video cameras
Industrial (Taiwan) Black and white digital Digital still cameras
Sensors Security and surveillance
Color analog sensors General purpose cameras
USB interface
In many cases, our camera manufacturer customers outsource manufacturing
functions to third parties. In these cases we typically help these third party
manufacturers bring the design to production. Once the production is ready, we
sell our products to these third party manufacturers either directly or through
distributors. For example, Viewquest, a major manufacturer in Taiwan,
manufactures a personal digital assistant camera for Kodak. In many cases these
third party manufacturers may also introduce us to additional camera
manufacturers with whom they have relationships.
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In Fiscal Year 2001, approximately 71% of our revenues were derived from
camera manufacturers and their contract manufacturers. Our largest customer,
Creative, accounted for 14% of our total revenues. No other single camera
manufacturer customer represented more than 10% of total revenues.
We have signed an agreement with Creative under which Creative has agreed
to purchase various products of ours which are used in personal computer video
cameras and digital still cameras. This agreement expires in February of 2002.
We have also entered into a software license agreement with Creative. Pursuant
to this agreement, we have granted to Creative a non-exclusive, royalty free
license to use our software in connection with Creative's manufacture of
products which incorporate our image sensors.
In Fiscal Year 2001, approximately 29% of our revenues were from
distributors. The largest distributor was World Peace Industrial Co. Ltd., or
World Peace, who represented approximately 17% of total revenues. No other
single distributor represented more than 10% of total revenues. We have signed
agreements with most of our distributors, including World Peace.
Strategic Relationships
- -----------------------
We have established an informal strategic relationship with Taiwan
Semiconductor Manufacturing Corp., or TSMC, both in Taiwan and in the United
States. TSMC is one of our primary sources of wafer fabrication. This
relationship includes joint engineering projects aimed at improving production
yields, improving image quality and correlating final packaged chip testing and
wafer level testing. We provide extensive, in depth technical expertise on
image sensor design issues, which has allowed TSMC to develop an image sensor
production business. TSMC provides us with extensive, in depth technical
expertise on variations of the CMOS semiconductor fabrication process which
assists us in improving the design and production of our image sensors. We are
one of TSMC's largest customer for CMOS image sensors and in the past we have
received preferential capacity scheduling.
We have signed an agreement with Powerchip Semiconductor Corp., or PSC, as
a second source for wafer fabrication. By working closely with PSC's engineers,
we have been able to design new image sensor products that take advantage of
PSC's memory chip fabrication processes. PSC's fabrication process gives us a
number of important improvements, including better current control for better
image quality, three-volt power for portable applications and more image sensor
chips per wafer. In return, we have assisted PSC in the image sensor
fabrication and the color filter application process business.
We have several informal strategic relationships with key customers in the
development of new camera products incorporating our image sensors. By working
directly with key customers, we can help them take advantage of our image
sensors and can inform them of new developments so they can market their
products more quickly. By learning more about our customers' desires and
requirements we are able to plan and prioritize our product development
projects. These key customers include Creative, for PC video cameras and
digital still cameras, Alaris for PC video cameras, Viewquest for cameras for
toys, PC video cameras and personal digital assistant cameras, Teksel/Kyocera
for cameras for mobile telephones, Welch Allyn for cameras for bar code
readers, and X10 for cameras for home entertainment and surveillance cameras.
Sales and Marketing
- -------------------
We sell our products through a direct sales force and indirectly through
distributors and manufacturer's representatives. As of April 30, 2001, our
sales and marketing organizations had a total of 30 employees. We also have 24
independent distributors and manufacturers' representatives, four of whom are
domestic and 20 of whom are located outside the United States.
Our sales and marketing strategy in Fiscal Year 2001 was to achieve design
wins with key industry leaders who target mass market applications. We sold our
image sensors to camera manufacturers who market camera products under their
own brand. We also sold image sensors to large manufacturing companies that
produce camera products for others to market under different brand names.
Through our relationships, we have developed considerable expertise in the
design of consumer cameras. We have used that expertise to assist our customers
in developing their
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products which incorporate our image sensors. We also have provided reference
designs and engineering design review and engineering product evaluation
testing and debugging services for our customers.
Technology
- ----------
We have key technical competencies in analog signal processing design,
mixed signal circuit design, advanced CMOS image sensor design, automatic
testing and single chip semiconductor design.
Analog Circuit Design
We have in-house expertise to design sophisticated analog semiconductor
circuits. This expertise is unique because most semiconductor design engineers
today work in the area of digital circuit design. Our in house expertise has
allowed us to process the video data captured in the analog domain, which has
many significant advantages over digital processing. Analog processing works
directly on the original image signals without the loss of data typical with
conversion to digital processing. Analog circuits require considerably less
space which means we can design smaller chips with far less noise caused by
heat or cross talk than digital circuits. The image processing circuits take
approximately 20% to 30% of the space in our typical image sensor design,
leaving 70% to 80% for the image sensing array. Most CCD image sensors and
other competitive CMOS image sensor products convert the image signal to
digital as the very first step. In our product designs, conversion to a digital
signal is the last step taken before the output step rather than the first.
Analog processing is the key for integrating all the functions on a single chip
thereby taking full advantage of the benefits of CMOS technology.
Mixed Analog/Digital Circuit Design
We have developed extensive in house expertise in the technology of mixing
analog and digital signals in the same semiconductor design without suffering
the common problems of interference from noise caused by heat or crosstalk. We
use digital circuits in our image sensors to interface to the outside digital
world. We have developed a method of programming the analog processing circuits
which gives our customers extensive and flexible programming capability from
digitally based microprocessors and micro controllers.
Advanced CMOS Image Sensor Design
Our in house semiconductor design engineers are skilled in the design of
high speed, low power and mixed analog/digital CMOS image sensors. We use
advanced design techniques to develop high speed, highly integrated
semiconductors which can be fabricated using standard CMOS processes and which
can be manufactured using conventional low cost packages.
Automatic Testing
Automatic testing methods and equipment designed for conventional CMOS
devices are not sufficient for testing an image sensor. In addition to testing
all the normal logic and electrical functions, an optical test must be
performed on the image sensor. The sensor is turned on and captures a live
image, which is subsequently analyzed for quality and color. Our in house
expertise has allowed us to design automatic testing equipment, specifically
for CMOS image sensors. Using commercially available off the shelf modules and
components, we have designed and developed a complete microcomputer based
testing system that has automatic handling capability, an image source, a
lighting and lens system and automatic output sorting. This low cost system is
programmable so that testing criteria and testing methodology can be easily
changed and can be replicated to meet increased production requirements. The
system produces detailed reports on test results that are used for feedback to
our quality control and operations department. We currently use these systems
to deliver a high quality product at high production volumes.
Single Chip Semiconductor Design
Our expertise has allowed us to create a single chip CMOS image sensor.
Our single chip integrates the image capture, the image processing, the color
processing and conversion and output for either television or computers.
12
Research and Development
- ------------------------
The internal design of our CMOS image sensors has been done in a modular
fashion. The major functions, such as the image capture, image sensor control
logic, color processing, analog output, digital output and programming control,
are stand alone circuits that can rapidly be modified or used as is in new
product developments. As a result, circuit improvements automatically migrate
to each new product, and the total development time and cost for new products
is greatly reduced.
We use a team approach to design new products, which includes a senior
design engineer and additional engineers with specific design expertise. As of
April 30, 2001, we had a total of 45 employees in R&D, including 14 employees
in our core logic group responsible for image sensor design and development and
31 employees in our engineering systems group responsible for the design and
development of interface chips, software drivers, reference camera designs,
automated test equipment and customer engineering support services.
We have invested, and expect that we will continue to invest, significant
funds on research and development. Our research and development expenses were
approximately $5.5 million in Fiscal Year 2001, $3.7 million in Fiscal Year
2000, and $3.3 million in the fiscal year ended April 30, 1999 or Fiscal Year
1999.
Intellectual Property
- ---------------------
Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely on a combination of patent,
copyright, trademark and trade secrets, as well as nondisclosure agreements and
other methods to protect various aspects of our image sensors such as the image
capture and the image processing circuit. As of April 30, 2001, we have been
issued 14 United States patents. We have also received nine foreign patents. We
have filed 24 additional United States patent applications, of which two have
been allowed. We have also filed 33 additional foreign patent applications, of
which one has been allowed. These patents and patent applications protect the
single chip image sensor design, noise reduction and cancellation circuits,
image enhancement, color processing, and applications technologies of our
semiconductor image sensors.
In March 2000, we received a letter from Koninklijke Philips N.V., or
Philips, 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
its patents. Following unsuccessful licensing negotiations, we filed, on
October 13, 2000, an action in the U.S. District Court, Northern District of
California, civil action number CV-00-3791, 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. An answer to our complaint was filed by Photobit and
CalTech on November 22, 2000, including counterclaims alleging infringement as
to the '126, '506 and '619 patents only. Our answer to those counterclaims was
filed on December 12, 2000. Upon being granted leave to amend by the district
court on June 6, 2001, OmniVision filed its amended complaint against Photobit
and CalTech on June 21, 2001, which includes claims of inequitable conduct,
patent misuse, unfair competition, and violation of the Racketeer Influenced
and Corrupt Organizations Act. Photobit and CalTech's response to the amended
complaint is due by late July. Discovery is currently in process, and trial is
scheduled for July of 2002. We plan to vigorously protect our rights in this
matter.
13
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 the counterclaims in the Northern District of California
action (the '126, '506 and '619 patents) 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 (19 U.S.C. Sec.
1337). 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," Investigation No. 337-TA-
451), and a Notice of Investigation was published on March 12, 2001. By
instituting this investigation, the ITC has not yet made any decision on the
merits of the case. In the event that the ITC ultimately determines that a
violation of Section 337 has occurred, the involved products may be precluded
from importation into and/or sale in the United States. At present, the target
date for completion of the investigation is May 13, 2002. As with the action
pending in the Northern District of California, we believe the claims of
Photobit and CalTech are meritless, and plan to vigorously defend ourselves in
the ITC investigation.
Manufacturing
- -------------
Wafer Fabrication
Our semiconductor products are fabricated using standard CMOS processes,
which permit us to engage independent wafer foundries to fabricate our
semiconductors. By outsourcing our manufacturing to semiconductor foundries, we
are able to avoid the high cost of owning and operating a semiconductor wafer
fabrication facility. This allows us to focus our resources on the design,
development and marketing of our image sensors.
We outsource our wafer manufacturing to TSMC and PSC. Our image sensors
are currently fabricated using a standard process at 0.25, 0.40, 0.50 and 0.60
microns. We continue to evaluate the benefits and feasibility of migrating to a
smaller circuit technology in order to reduce costs or to increase quality and
performance.
We have signed agreements with Samsung Electronics Co. Ltd., or Samsung,
and CoAsia Microelectronics Corp., Samsung's sales agent, under which Samsung
fabricates one of our interface chips on its standard fabrication line. Samsung
not only fabricates the wafers, but also packages the chips and performs a
final test, delivering a final product that can be shipped by CoAsia
Microelectronics Corp. directly to our customers when required. We also have a
signed agreement with Winbond Electronics Corp., or Winbond, to supply
interface chips to our customers.
Color Filter Application
A majority of our unit sales of image sensors for Fiscal Year 2001 are
color image sensors. These require a color filter to be applied to the wafer
before packaging. This color filter application uses a series of masks to place
red, green and blue dyes on the individual picture elements in an industry
standard Bayer pattern. As a final step, a micro lens is applied to each
picture element. We outsource the application of our color filters to Toppan
Printing Co., Ltd. in Japan and to TSMC in Taiwan.
Assembly
After wafer fabrication, and color filter application if required, the
wafers are diced into chips, which are then assembled into packages. Our
products are designed to use low cost standard packages that are widely in use
for optical sensor chips. These packages have a glass lid to allow light to
pass through to the image sensor array. We outsource the majority of our
packaging requirements to Alphatec in Thailand and Kyocera in Japan. We
continue to evaluate the benefits of using other vendors and other packaging
technologies in order to further reduce costs or increase quality or
performance.
Testing
High volume product testing is an important part of the production of
image sensors and is a substantial barrier to entry for many companies.
Production testing equipment designed for conventional CMOSs is not sufficient
for testing image sensors because an optical image must be captured and checked
in addition to checking the normal
14
logic and electrical functions. The few commercially available image sensor
testers are expensive and do not meet our high standards.
We have designed our own automatic test equipment, using readily available
modules and components. These testers are computer based and have automatic
handling capability, a lighting and lens system, a changeable image source and
automatic output sorting by grade. The system is programmable so that testing
criteria and methodology can be changed easily to accommodate new products or
special testing requests. Our cost to build a system is substantially less than
that of commercially available testers. We can expand our production capability
by building additional systems at a low cost. Current testing capacity is in
excess of one million units per month.
Our policy is to do a complete optical test of all our image sensors.
Currently, substantially all of our testing is done on our testing machines
installed at our headquarters facility in Sunnyvale, California, although a
very small amount of testing for a few older products is done by hand by a
third party. We continue to evaluate the benefits of making our testing
machines available to outside vendors who could perform our testing in order to
reduce costs.
We use the reports from our testing machines to monitor the cause of any
failure in order to place responsibility with the appropriate vendor, i.e.
wafer fabrication, color filter application and packaging. Since image sensors
are optical products, the introduction of impurities is a major concern during
the color filter application and packaging process. We use test data to
establish yield goals at each step of the manufacturing process and take
remedial action as appropriate.
Quality Assurance
We focus on product quality through all stages of the design and
manufacturing process. Our designs are subjected to in depth circuit simulation
before being committed to silicon. Test wafers are fabricated and test chips
are packaged and live tested before a new product is committed to production.
Initial production runs are kept at a minimum until sufficient products have
completed the entire manufacturing and testing process and are delivered to and
approved by customers. Full production runs are committed only at that time.
We qualify each of our vendors through a series of industry standard
environmental product stress tests, as well as an audit and an analysis of the
subcontractor's quality system and manufacturing capability. We also
participate in quality and reliability monitoring through each stage of the
production cycle by reviewing electrical parametric data from our foundries and
other subcontractors. We closely monitor wafer foundry production to obtain
consistent overall quality, reliability and yield levels.
Competition
- -----------
We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. We believe that the principal factors
affecting competition in our markets are time to market, quality, total system
design cost, availability of foundry capacity, customer support and reputation.
Our primary competition comes from CCD image sensor manufacturers and CMOS
image sensor manufacturers:
o CCD Image Sensor Manufacturers. Image sensor manufacturers using CCD
technology include a number of well established companies, particularly
vertically integrated camcorder manufacturers. Our main competition
comes from Cahners In-Stat Group believes the top six companies that
collectively account for approximately 97.3% of the total CCD image
sensor market. These six include Fuji, Matsushita, NEC, Sharp, Sony, and
Toshiba; and
o CMOS Image Sensor Manufacturers. Image sensor manufacturers using CMOS
technology include a number of well established companies such as
Agilent Technologies, Inc., ST Microelectronics, Conexant Systems, Inc.,
Hyundai Electronics Industries Co. Ltd., Mitsubishi Electronic,
Motorola, Inc., and Toshiba Corporation. In addition, we compete with a
large number of smaller companies including Zoran and Photobit
Corporation.
15
Our competitors include many large domestic and international companies
that have greater access to advanced wafer foundry capacity, substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines, access to large customer bases and longer standing
relationships with suppliers and customers than we do.
Backlog
- -------
Sales are generally made pursuant to standard purchase orders. Our backlog
includes only those customer orders for which we have accepted purchase orders
and assigned shipment dates within the upcoming twelve months. As of April 30,
2001 and 2000, our backlog was approximately $8.3 million and $23.7 million,
respectively. Although our backlog is typically filled within two to four
quarters, our current backlog is subject to changes in delivery schedules and
backlog may not necessarily be an indication of future revenue.
Employees
- ---------
As of April 30, 2001 we had a total of 104 full time employees, 81 located
at our headquarters in Sunnyvale, California and 23 in foreign sales support
offices. Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly qualified technical and management
personnel. None of our employees are represented by a collective bargaining
agreement, and we have never experienced any work stoppage. We believe that our
employee relations are good.
Executive Officers of the Registrant
The following table sets forth, as of April 30, 2001, certain information
concerning our executive officers and directors:
Name Age Position
---- --- --------
Shaw Hong.................. 63 Chief Executive Officer and Director
H. Gene McCown............. 65 Vice President of Finance and Chief
Financial Officer
Robert J. Stroh............ 61 Vice President of Strategic Marketing and
Business Development
Raymond Wu................. 46 Executive Vice President and Director
Hank O'Hara (1)............ 66 Vice President of Worldwide Sales
- ---------------------
(1) Mr. O'Hara resigned his position with us effective May 25, 2001.
Shaw Hong, one of our cofounders, has served as one of our directors and
---------
as our Chief Executive Officer and President since May 1995. From January 1990
to April 1995, Mr. Hong was the President of HK Technology, Inc., an integrated
circuit design company. Mr. Hong holds a B.S. in Electrical Engineering from
Jiao Tong University in China and a M.S. in Electrical Engineering from Oregon
State University.
H. Gene McCown has served as our Vice President of Finance and Chief
--------------
Financial Officer since July 1999. From July 1998 to January 1999, Mr. McCown
served as Vice President of Finance and Chief Financial Officer of Innovative
Robotic Solutions, Inc, a manufacturer of semiconductor equipment. From July
1991 to July 1998, Mr. McCown served as Vice President of Finance and Chief
Financial Officer of Chrontel, Inc., a semiconductor manufacturer. Mr. McCown
holds a B.S. in Accounting from San Jose State University.
Robert J. Stroh has served as our Vice President of Strategic Marketing
---------------
and Business Development since November 2000. From June 1998 to November 2000,
Mr. Stroh served as our Vice President of Sales and Marketing. From January
1997 to June 1998, Mr. Stroh served as our Director of Marketing and Sales.
From June 1993 to December 1996, Mr. Stroh founded and was president of Stroh
Golf Ventures, a company that conducted golf camps, Stroh Holdings LLC, an
Internet sales company, and Direct Product Network, Inc., an Internet sales
16
company. Mr. Stroh holds a M.B.A. from Indiana University and a B.S. in
Business from Pennsylvania State University.
Raymond Wu, one of our cofounders, has served as one of our directors
----------
since May 1995 and as our Executive Vice President since October of 1999. From
July 1998 to October 1999, Mr. Wu served as our Vice President of Business
Development. From May 1995 to July 1998, Mr. Wu was the head of our Sales
department and our Engineering department. From January 1990 to April 1995, Mr.
Wu held various positions within the design and mechanical engineering
departments of HK Technology, Inc. Mr. Wu received a B.S. degree in Electrical
Engineering from Chung-Yuan University in Taiwan and a M.S. in Electrical
Engineering from Wayne State University.
Hank O'Hara resigned as our Vice President of Worldwide Sales in May 2001.
-----------
From April 2000 to May 2001, Mr. O'Hara served as our Vice President of
Worldwide Sales. From February 1997 to April 2000, Mr. O'Hara co-founded and
served as Vice President Sales and Marketing of Alacritech, a designer and
manufacturer of high performance networking boards. From January 1994 to
February 1997, he served as Vice President of Sales of Pericom Semiconductor, a
manufacturer of high performance digital and mixed-signal integrated circuits.
In addition, over the past 30 years, Mr. O'Hara has held sales and marketing
positions at various public companies. Mr. O'Hara received a B.S. in Mechanical
Engineering from California Polytechnical Institute at San Luis Obispo.
ITEM 2. PROPERTIES
Our headquarters, including our principal engineering, administrative,
marketing and testing facilities, are located in approximately 21,280 square
feet of space we have leased in Sunnyvale, California under a lease expiring
April 30, 2003.
ITEM 3. 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 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, 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 its patents.
Following unsuccessful licensing negotiations, we filed, on October 13, 2000,
an action in the U.S. District Court, Northern District of California, civil
action number CV-00-3791, 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.
An answer to our complaint was filed by Photobit and CalTech on November 22,
2000, including counterclaims alleging infringement as to the '126, '506 and
'619 patents only. Our answer to those counterclaims was filed on December 12,
2000. Upon being granted leave to amend by the district court on June 6, 2001,
OmniVision filed its amended complaint against Photobit and CalTech on June 21,
2001, which includes claims of inequitable conduct, patent misuse, unfair
competition, and violation of the Racketeer Influenced and Corrupt
Organizations Act. Photobit and CalTech's response to the amended complaint is
due by late July. Discovery is currently in process, and trial is scheduled
for July of 2002. We plan to vigorously protect our rights in this matter.
On February 7, 2001, Photobit and CalTech filed a complaint with the U.S.
International Trade Commission, based on the same three patents that are the
subject of the counterclaims in the Northern District of California action
17
(the '126, '506 and '619 patents) 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 (19 U.S.C. Sec.
1337). 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," Investigation No. 337-TA-
451), and a Notice of Investigation was published on March 12, 2001. By
instituting this investigation, the ITC has not yet made any decision on the
merits of the case. In the event that the ITC ultimately determines that a
violation of Section 337 has occurred, the involved products may be precluded
from importation into and/or sale in the United States. At present, the target
date for completion of the investigation is May 13, 2002. As with the action
pending in the Northern District of California, we believe the claims of
Photobit and CalTech are meritless, and plan to vigorously defend ourselves in
the ITC investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
------------------
Our Common Stock has been traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the trading symbol "OVTI" since July 14, 2000. The
following table sets forth for the period indicated the high and low closing
prices for our Common Stock, as reported by the Nasdaq National Market.
Period Ended July 17, 2001 High Low
---- ---
First Quarter (through July 17, 2001) $ 6.200 $ 3.480
Fiscal Year Ended April 30, 2001 High Low
---- ---
Fourth Quarter $ 5.781 $ 2.370
Third Quarter $35.000 $ 2.938
Second Quarter $47.250 $23.141
First Quarter (from July 14, 2000) $40.438 $22.750
The reported last sale price of our Common Stock on the Nasdaq National
Market on July 17, 2001 was $5.00. The approximate number of holders of record
of the shares of our Common Stock was 224 as of July 17, 2001. This number
does not include stockholders whose shares are held in trust by other entities.
The actual number of stockholders is greater than this number of holders of
record. We estimate that the number of beneficial stockholders of the shares of
our Common Stock as of July 17, 2001 was approximately 2,700.
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the next 12 months.
(b) Report of offering securities and use of proceeds therefrom
-----------------------------------------------------------
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 5,000,000 shares of common stock. In
August 2000, the underwriters of the Company's initial public offering
exercised their over-allotment option to purchase an additional 750,000 shares
of common stock at $13.00 per share. Net proceeds 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 $74,750,000, including
proceeds from the exercise of the over-allotment option. The aggregate net
proceeds were approximately $67,661,000, including the proceeds from the
exercise of the over-allotment option, after deducting underwriting discounts
and commissions of approximately $5,233,000 and directly paying expenses of the
offering of approximately $1,857,000. Fleet Boston Robertson Stephens Inc.,
Prudential Volpe Technology and Needham & Company, Inc. were the lead
underwriters for the IPO.
From July 14, 2000 to April 30, 2001, we used such net offering proceeds,
in direct or indirect payments to others, as follows:
Purchase and installment of machinery and equipment....... $ 588,000
Working capital........................................... 19,112,000
Investment in short-term, interest-bearing obligations.... 44,161,000
Investment in China subsidiary............................ 3,800,000
-----------
Total..................................................... $67,661,000
===========
19
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
$2.5 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.
20
ITEM 6: SELECTED FINANCIAL DATA
Fiscal Year Ended April 30,
----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues..................................... $ 53,707 $40,253 $ 5,243 $ 1,476 $ 59
Cost of revenues............................. 54,696(1) 28,191 4,085 2,652 557
-------- ------- ------- ------- -------
Gross profit (loss).......................... (989) 12,062 1,158 (1,176) (498)
-------- ------- ------- ------- -------
Operating expenses:
Research and development................... 5,539 3,702 3,290 3,440 1,698
Selling, general and administrative........ 6,703 3,243 1,853 1,323 706
Stock compensation charge.................. 1,018 1,552 459 206 44
-------- ------- ------- ------- -------
Total operating expenses................. 13,260 8,497 5,602 4,969 2,448
-------- ------- ------- ------- -------
Income (loss) from operations................ (14,249) 3,565 (4,444) (6,145) (2,946)
Interest income (expense), net............... 2,692 174 396 106 108
-------- ------- ------- ------- -------
Income (loss) before income taxes............ (11,557) 3,739 (4,048) (6,039) (2,838)
Provision for income taxes................... -- 300 -- -- --
-------- ------- ------- ------- -------
Net income (loss)............................ $(11,557) $ 3,439 $(4,048) $(6,039) $(2,838)
======== ======= ======= ======= =======
Net income (loss) per share:
Basic...................................... $ (0.67) $ 1.15 $ (5.59) $(12.71) $(16.89)
======== ======= ======= ======= =======
Diluted.................................... $ (0.67) $ 0.21 $ (5.59) $(12.71) $(16.89)
======== ======= ======= ======= =======
Shares used in computing per share amounts:
Basic...................................... 17,134 2,985 724 475 168
======== ======= ======= ======= =======
Diluted.................................... 17,134 16,399 724 475 168
======== ======= ======= ======= =======
April 30,
-----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.................... $ 51,053 $ 5,888 $ 5,374 $ 2,686 $ 3,747
Working capital.............................. 66,903 11,667 6,819 2,343 3,669
Total assets................................. 78,647 26,298 10,536 3,721 4,516
Total current liabilities.................... 7,371 12,529 2,632 633 268
Total redeemable convertible preferred stock. -- 21,082 21,082 12,745 8,118
Accumulated deficit.......................... (22,219) (10,662) (14,101) (10,053) (4,014)
Total stockholders' equity................... $ 71,276 $ (7,313) $(13,178) $ (9,658) $(3,870)
(1) Includes inventory write-off of $18,652 in the fiscal year ended April 30,
2001.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Discussion and
Results of Operations contains forward looking statements that 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 2001 in the fourth paragraph under "Overview;" the
statements relating to technology leadership and increase in research and
development expenses in the eighth paragraph under "Overview;" the statements
regarding the potential fluctuations and expected increases of research and
development costs under "Research and Development;" the statements regarding
increases in selling, general and administrative expenses under "Selling,
General and Administrative;" the statements regarding amortization of
compensation charges under "Stock Compensation Charge;" the statements
regarding cash resources available to meet capital requirements, the factors
affecting capital requirements and the raising and availability of additional
funds in the sixth paragraph under "Liquidity and Capital Resources;" and the
statements regarding evaluation of acquisitions in the seventh paragraph under
"Liquidity and Capital Resources."
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 CMOS
fabrication process, a new, easier to use semiconductor technology for image
sensors. Our single chip image sensors can allow our customers to build cameras
that are smaller, require fewer chips, consume less power and cost less to
build than cameras using traditional 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.
Our first image sensor was a low resolution, black and white sensor
introduced in 1996. We introduced an improved version of this sensor in early
1997. In addition, we introduced color and digital image sensors in 1997 and
higher resolution and higher quality image sensors in 1998 and 1999. For Fiscal
Years 2001 and 2000, the majority of our revenues were generated from sales of
our five-volt color image sensors. Given the growth of the Internet and
multimedia applications which allow for digital images to be captured, stored
and transported, we expect that a significant portion of our revenues in fiscal
year ended April 30, 2002, will be generated from our five-volt color image
sensors, which are used primarily in affordable and easy to use personal
computer cameras, and increasingly, from 3.2 volt color image sensors which are
used in both personal computer cameras and cellular phone accessories.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We sell our products 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.
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 TSMC and PSC. We have a signed
agreement with 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 Fiscal Year 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, 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 Fiscal Year
2002.
In December 2000, we formed a new subsidiary to conduct testing and
packaging operations in Shanghai, the Peoples' Republic of China, or China. The
registered capital of this new company is $12.0 million of which we funded $3.8
million in the year ended April 30, 2001, as required. We are further obligated
to fund the remaining $8.2 million of registered capital by December 2003. As
of April 30, 2001, $1.9 million of the $3.8 million was paid for land use
rights and to building contractors, $1.8 million was deposited in a bank
account in China and $0.1 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. We
expect that we will enter into additional commitments in connection with
constructing the facility in Shanghai.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Results of Operations
- ---------------------
The following tables set forth, for the periods indicated, certain
statement of operations data reflected as a percentage of revenues. Our results
of operations are reported as a single business segment.
Year Ended April 30,
-----------------------
2001 2000 1999
---- ---- ----
Statement of Operations Data as a Percentage of Revenues:
Revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues (including inventory write-off of
$18,652 in Fiscal Year 2001)...................... 101.8 70.0 77.9
----- ----- -----
Gross profit (loss)............................... (1.8) 30.0 22.1
----- ----- -----
Operating expenses:
Research and development............................ 10.3 9.2 62.8
Selling, general and administrative................. 12.5 8.1 35.3
Stock compensation charge........................... 1.9 3.9 8.8
----- ----- -----
Total operating expenses.......................... 24.7 21.2 106.9
----- ----- -----
Income (loss) from operations......................... (26.5) 8.8 (84.8)
Interest income, net.................................. 5.0 0.4 7.6
----- ----- -----
Income (loss) before income taxes..................... (21.5) 9.2 (77.2)
Provision for income taxes............................ -- 0.7 --
----- ----- -----
Net income (loss)..................................... (21.5)% 8.5% (77.2)%
===== ===== =====
Results of Operations for the Fiscal Years Ended April 30, 2001, 2000 and 1999
Revenues. We derive revenues from the sale of our standard image sensor
---------
array products and other companion circuits for use in a variety of
applications. Revenues for Fiscal Years 2001, 2000 and 1999 were approximately
$53.7 million, $40.3 million and $5.2 million, respectively. Revenues increased
$13.5 million, or 33%, from Fiscal Year 2000 to fiscal 2001 primarily as a
result of greater demand for PC cameras and security and surveillance cameras
relative to the prior year. Revenues increased $35.1 million or 668% from
Fiscal Year 1999 to Fiscal Year 2000 primarily as a result of an increase in
sales of our color image sensor products to camera manufacturer customers and
increased demand for our image sensor products through our distribution
channels. In the first quarter of Fiscal Year 1999, we decreased the prices of
our image sensor products in order to stimulate demand. Subsequently, the
average selling price has continued to decline, but at a slower rate.
Nonetheless, revenues have increased because of higher volumes shipped. For
Fiscal Year 2001, one of our distributors, World Peace, represented
approximately 17% of revenues and one of our camera manufacturer customers,
Creative, accounted for approximately 14% of revenues. For Fiscal Year 2000,
one of our distributors, World Peace, represented approximately 30% of total
revenues and two of our camera manufacturer customers, Creative and Alaris,
accounted for approximately 18% and 11% of total revenues, respectively. For
the Fiscal Year 1999, two of our distributors, World Peace and Holy Stone
represented approximately 43% and 24% of total revenues, respectively. No other
customers accounted for 10% or more of total revenues in Fiscal Years 2001,
2000 and 1999. Domestic and international revenues for Fiscal Year 2001 were
$8.4 million and $45.3 million, respectively, as compared to $8.7 million and
$31.6 million for Fiscal Year 2000 and $0.7 million and $4.5 million for Fiscal
Year 1999, respectively.
Gross profit (loss). Gross margins for Fiscal Years 2001, 2000 and 1999
--------------------
were (1.8%), 30.0% and 22.1%, respectively. The decrease in gross margins for
Fiscal Year 2001 was primarily due to an $18.7 million charge for excess
inventory that we recognized in Fiscal Year 2001. During the quarters ended
April 30 and July 31, 2000, we placed non-cancelable orders with our contract
manufacturers for a large quantity of color image sensors designed for use in
PC cameras based on increased sales levels from the preceding year and on our
expectations of increased demand for the sensors following the four- to six-
month production lead time. However, due primarily to continued weakness in the
PC camera manufacturing business segment, the demand for these color image
sensors did not meet our expectations. The current inventory of the color image
sensors designed for PC cameras significantly exceeds
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
the forecasted demand. We, therefore, recorded an $18.7 million charge for
excess inventories in Fiscal Year 2001. On a pro-forma basis, before
recognition of the inventory reserves, gross margins were 32.9% for fiscal 2001
as compared to 30.0% and 22.1% in Fiscal Years 2000 and 1999. The increase in
gross margins on a pro-forma basis from Fiscal Year 2000 to Fiscal Year 2001
was due to modest yield improvements resulting from higher capacity utilization
and favorable changes in product mix. The increase in gross margins from Fiscal
Year 1999 to Fiscal Year 2000 was primarily due to the increase in sales of
higher margin color image sensors, improved final test yields and the benefit
of fixed period costs being spread over a larger sales volume. These
improvements to gross margins in Fiscal Year 2000 were partly offset by the
effect of a cumulative royalty reserve of $944,000. Gross margins for Fiscal
Year 2000 would have been 32.3%, excluding the effect of the charge for
cumulative royalties.
Research and development. Research and development expenses consist
-------------------------
primarily of compensation and personnel related expenses and costs for
purchased materials, designs and tooling, depreciation of computers and
workstations, and amortization of computer aided design software. Research and
development expenses for Fiscal Years 2001, 2000 and 1999 were approximately
$5.5 million, $3.7 million and $3.3 million, respectively. As a percentage of
revenues, research and development expenses represented 10.3%, 9.2% and 62.8%
of revenues, respectively. Our research and development expenses for Fiscal
Year 2001 increased at a rate proportionately greater than revenues. Research
and development expenses increased by approximately $1.8 million from Fiscal
Year 2000 to Fiscal Year 2001 due to an increase in salaries and payroll
related expenses associated with additional personnel, contracted costs
associated with new product development, software installation and expenses
related to the application for new patents. As revenues increased from Fiscal
Year 1999 to Fiscal Year 2000, research and development expenses declined as a
percentage of revenues. Our research and development expenses increased by
approximately $412,000 from Fiscal Year 1999 to Fiscal Year 2000 due to an
increase in salaries and payroll related expenses associated with additional
personnel. This increase on a dollar basis was partially offset by reductions
in the cost of engineering supplies and materials and a reduction in
engineering consulting fees. Research and development expenses decreased as a
percent of revenues from Fiscal Year 1999 to Fiscal Year 2000 because revenues
increased at a rate greater than the rate of increase in expenses. Research and
development expenses 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 consist primarily of compensation and personnel related expenses and
commissions paid to distributors and manufacturers' representatives. Selling,
general and administrative expenses were $6.7 million, $3.2 million and $1.9
million for Fiscal Years 2001, 2000 and 1999, respectively. As a percentage of
revenues, selling general and administrative expenses represented 12.5%, 8.1%
and 35.3% during Fiscal Years 2001, 2000 and 1999, respectively. Our selling,
general and administrative expenses increased on an absolute dollar basis in
Fiscal Year 2001 by approximately $3.5 million due to an increase in salaries
and payroll related expenses associated with additional personnel, an increase
in commissions paid to distributors and manufacturers' representatives, and
increased legal expenses associated with legal actions resulting from
infringement claims by Photobit and Cal Tech and accounting costs associated
with business development and operations. Our selling, general and
administrative expenses increased on an absolute dollar basis in Fiscal Years
2000 and 1999 by approximately $1.4 million and $0.5 million, respectively, due
to increases in salaries and commissions to distributors and manufacturers'
representatives. The increase in selling, general and administrative expenses
as a percentage of revenues for Fiscal Year 2001 resulted from expenses that
increased at a rate greater than the rate of increase in revenues. The decrease
in our selling, general and administrative expenses as a percentage of revenues
for Fiscal Years 2000 and 1999 was primarily due to the increased revenues,
only partially offset by increased compensation and personnel expenses and an
increase in commissions paid to distributors. 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 $1.1 million, $1.9 million and $519,000 for Fiscal Years 2001,
2000 and 1999, respectively. Deferred compensation totaled approximately $5.2
million and 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 $1.1 million as of April 30, 2001 to be amortized on an accelerated basis
over the vesting period of generally five years.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Interest income, net. Interest income, net for Fiscal Year 2001 was
---------------------
approximately $2.3 million. Interest income, 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 12 months or less from
the date of purchase. Interest income, net for Fiscal Years 2000 and 1999
were minor because we have financed our business operations primarily through a
series of relatively small private equity transactions prior to our initial
public offering of common stock in July 2000.
Provision for income taxes. We generated a loss before income taxes of
---------------------------
approximately $11.6 million in Fiscal Year 2001 and therefore had no provision
for income taxes in the period. We generated approximately $3.7 million in
operating profits for the Fiscal Year ended April 30, 2000 and had a provision
for income taxes amounting to $300,000 after taking into consideration the
utilization of the prior years' net operating loss carryforwards and credits.
We incurred an operating loss for Fiscal Year 1999 and therefore had no
provision for income taxes in the period.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," or SFAS No. 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138 "Accounting for Certain Hedging Activities, an
amendment of FASB Statement No. 133," effective for all interim and annual
periods beginning after June 15, 2000. SFAS No 138 amends accounting and
reporting standards for certain derivative instruments and certain hedging
activities. We will adopt the standard no later than the first quarter of
fiscal year 2002 and our management does not expect the adoption of these
standards to have a material effect on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," as amended by SAB 101A and 101B. SAB 101 provides interpretive
guidance on the recognition, presentation and disclosure of revenue in
financial statements under certain circumstances. We adopted the provisions of
SAB 101 in our consolidated financial statements for all periods presented.
On June 29, 2001, the FASB approved its proposed SFAS No. 141, or FAS 141,
"Business Combinations," and SFAS No. 142, or FAS 142, "Goodwill and Other
Intangible Assets."
Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests (pooling) method
is prohibited. The provisions of the statement will apply to all business
combinations initiated after June 30, 2001.
FAS 142 will apply to all acquired intangible assets whether acquired
singly, as part of a group, or in a business combination. The statement will
supersede Accounting Principals Board, or APB, Opinion No. 17, "Intangible
Assets," and will carry forward provisions in APB Opinion No.17 related to
internally developed intangible assets. Adoption of FAS 142 will result in
ceasing amortization of goodwill. All of the provisions of the statement should
be applied in fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized.
We do not expect the adoption of these standards to have a material effect
on our consolidated financial statements.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Liquidity and Capital Resources
Since inception, we have financed our growth principally through sales of
common stock and private sales of equity securities, totaling approximately
$89.8 million. Principal sources of liquidity at April 30, 2001 consisted of
cash, cash equivalents and short-term investments of $54.1 million.
Our working capital increased by $55.3 million to $66.9 million as of
April 30, 2001 from $11.6 million as of April 30, 2000. The increase was
primarily attributable to a $48.2 million increase in cash, cash equivalents
and short-term investments resulting principally from $67.7 million in proceeds
from our initial public offering in July 2000. Our increased working capital
was also attributable to a $2.8 million increase in refundable and deferred
income taxes, combined with a $5.7 million reduction in accounts payable, which
were partially offset by a $1.0 million reduction in accounts receivable, net.
For Fiscal Year 2001, our use of cash for operating activities increased
to approximately $17.2 million from cash provided of $1.5 million in Fiscal
Year 2000, primarily due to a net loss of $11.6 million in Fiscal Year 2001 as
compared to net income of $3.4 million for Fiscal Year 2000, a $5.7 million
decrease in accounts payable and a $2.8 million increase in refundable and
deferred income taxes partially offset by a $1.0 million decrease in accounts
receivable combined with a $0.4 million increase in accrued expenses and other
liabilities and a net $66,000 decrease in inventory including the recognition
of an $18.7 million charge for excess inventory. For Fiscal Year 2000, we
generated $1.5 million in cash from operating activities. During Fiscal Year
1999, we used $5.0 million for operating activities, primarily due to operating
losses and increased working capital as sales increased.
For Fiscal Year 2001, our use of cash for investing activities increased
to approximately $5.6 million from a use of $1.6 million in Fiscal Year 2000
and $0.6 million in Fiscal Year 1999, due to $3.0 million in net purchases of
short-term investments combined with $2.6 million in purchases of property,
plant and equipment. Net cash used for investing activities for Fiscal Years
2000 and 1999 resulted from purchases of property, plant and equipment.
For Fiscal Year 2001, net cash provided from financing activities
increased to approximately $68.0 million from $0.6 million for Fiscal Year 2000
and $8.3 million for Fiscal Year 1999. The increase was primarily due to
proceeds from the issuance and sale of 5,000,000 shares of common stock in our
initial public offering and the issuance and sale of an additional 750,000
shares of common stock following the exercise by the underwriters' of their
over-allotment option. Approximately $44.2 million of these proceeds were
invested in short-term interest-bearing investments. Net cash provided from
financing activities for Fiscal Year 2000 resulted from the issuance and sale
of common stock upon the exercise of employee stock options during the year.
Net cash provided from financing activities for Fiscal Year 1999 resulted from
the issuance and sale of preferred stock.
Based on our current working capital position and the cash flows that we
expect to generate through mid-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 $2.5 million
and anticipated investment expenditures of approximately $7.0 million
associated with the new company that we have formed in China, 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 business, 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.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
FACTORS AFFECTING FUTURE RESULTS
You should carefully consider these risk factors, together with all of the
other information included in this Annual Report on Form 10-K. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business.
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 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 future, as we develop new products, we
expect research and development expenses to increase. Also, as we hire
additional personnel and possibly engage in larger business transactions, we
expect selling, general and administrative expenses to increase. We will also
incur substantial noncash charges relating to the amortization of unearned
compensation. If these expenses increase and our revenues do not increase, we
may not subsequently sustain profitability.
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. As a
consequence of a forecast which proved to be greater than market demand for our
products, we recognized an $18.7 million inventory adjustment in Fiscal Year
2001.
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, 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. As a result, our revenues and
earnings were adversely affected. In June 2001, we announced projected
revenues and earnings for the first 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.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Fluctuations in our quarterly operating results make it difficult to predict
- ----------------------------------------------------------------------------
our future performance and may result in volatility in the market price of our
- ------------------------------------------------------------------------------
common stock.
- -------------
Our quarterly operating results have varied significantly from quarter to
quarter in the past and are likely to vary significantly in the future based on
a number of factors 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 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.
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;
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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 secur