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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(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, 2002.
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
19, 2002 as reported on the Nasdaq National Market, was approximately
$274,635,891. 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 19, 2002, registrant had outstanding 22,498,279 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 2002 Annual Meeting
of Stockholders.
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OMNIVISION TECHNOLOGIES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED APRIL 30, 2002
Page
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PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 15
Item 3. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................ 17
Item 6. Selected Financial Data.......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 19
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................... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 44
Signatures................................................................ 46
2
PART I
ITEM 1. BUSINESS
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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 Item 1, other than
statements of historical fact, should be considered forward-looking statements,
including, but not limited to, the statements relating 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 increased 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 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 expectation of international
sales continuing to account for a significant portion of our revenues; 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 and the retention of future earnings and the payment of cash dividends.
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.
All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.
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, industrial,
automotive and consumer electronics applications. Our main product, an image
sensing device called a CameraChip(tm), is used to capture an image in cameras
and camera related products in high-volume imaging applications such as
personal computer cameras, digital still cameras, security and surveillance
cameras, personal digital assistant cameras and mobile phone cameras and
cameras for automobiles and toys for both still picture and live video
applications. We have developed our CameraChips 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 CameraChip. This leads us to believe that we supply the
most highly integrated, single chip image sensing device. Our highly integrated
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 CameraChips 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 CameraChip 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, provide inadvertent lane departure and blind-spot
collision detection, air bag inflation sensors, rear-approach headlight
auto-dimming sensors, accident recorders, driver monitors and
maintenance inspection systems; and
o videophones integrated in tabletop phones.
We have shipped approximately 6.0 million CameraChips in the year ended
April 30, 2002, or Fiscal Year 2002, as compared to approximately 6.5 million
CameraChips in the year ended April 30, 2001, or Fiscal Year 2001. 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 CameraChips for camera
manufacturers by:
o focusing on capturing and expanding 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
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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 edited and enhanced, 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
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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. According to a study published by the Cahners In-Stat Group in July
2001, the market for PC cameras is predicted to grow from approximately 10.5
million units in 2000 to approximately 42.5 million units by 2005. 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 image 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 manufacturers. According to the Cahners
July 2001 study, 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 97.1% 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
poorer 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 image sensors.
Advantages of CMOS Over CCD Technology
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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.
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.
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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. Because of the
advantages of CMOS technology as compared to CCD technology, CMOS image sensors
are projected to constitute the majority of all image sensor units shipped by
2004 according to the Cahners July 2001 study. Again, according to that study,
Cahners forecasts that CMOS's share of the image sensor market will grow from
approximately 29.4% in 2000 to 76.8% in 2005. In particular, Cahners In-Stat
Group predicts that in 2005, approximately 100.0% of the expected 42.5 million
PC cameras will use CMOS image sensors. Cahners In-Stat Group also predicts
that in 2005, CMOS technology will account for approximately 41.5% of the 41.0
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 validate an individual's
identity;
o a wide array of medical instruments used for routine doctors' office
examinations;
o videophones integrated into tabletop phones;
o automotive applications such as cameras that may replace rear and side
view mirrors, sensors that provide inadvertent lane departure and blind
spot collision detection, air bag inflation sensors, rear-approach
headlight auto-dimming 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 and 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.
Our Solution
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We design, develop and market our high performance, high quality and cost
efficient CameraChips for computing, communications, industrial, automotive,
and consumer electronics applications. We have developed our CameraChips using
the standard CMOS manufacturing process used for approximately 90% of modern
integrated circuits. Our proprietary circuit design integrates the image
capture, the image processing function, the color processing and the conversion
and output into a single chip. The result is a fully processed and formatted
image or video stream capable of being easily utilized by industry standard
digital or analog equipment. This allows
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integrators of our technology to focus on their specific image application
without specialized development or specific expertise on image sensor
functions.
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. Customers can use our highly integrated
CameraChip 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 CameraChips are used in
conjunction with our interface chips or other manufacturers' adaptor chips to
connect directly to a personal computer or to provide additional functions such
as video and still image compression.
Our CameraChips provide a number of benefits to our customers, including
the following:
o Lower Cost. The highly integrated design of our CameraChips allows our
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customers to build cameras that are generally less expensive than ones
using CCD technology. Our single chip technology 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 device using our CameraChip 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 CameraChips
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 chip design allows our customers to
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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 CameraChips are
generally more reliable because there are fewer parts to fail.
o Streamlined Manufacturing and Production. Our CameraChips are well
----------------------------------------
suited for large-scale production. Competing CCD image sensors must
each be individually hand calibrated to match companion components to
maximize the image quality due to the inconsistency of the image output.
Our CameraChips provide consistent quality making streamlined
manufacturing possible. Additionally, our CameraChips can be mounted
onto a printed circuit board using automatic insertion equipment and can
run through standard automatic re-flow soldering lines, whereas CCD
image sensors must each be individually placed and soldered by hand.
o Ease of Use. Our CameraChips are offered as part of a complete design
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solution for many markets. As opposed to CCD and other CMOS image sensor
manufacturers, we offer a complete solution for our customers which
includes camera designs, optimized interface chips, and Windows(r) and
Apple Computer iMac(r) software drivers to enable a plug and play
connection of the camera to a personal computer.
o Accelerated Time to Market. The highly integrated nature of our
--------------------------
CameraChips simplifies the design of cameras and allows our customers to
shorten their product design time. We 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.
Products
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We design, develop and market our high performance, high quality and cost
efficient CMOS CameraChips for computing, communications, industrial,
automotive and consumer electronics applications.
We have developed proprietary designs for CameraChips that include the
image capture, image processing circuitry, color processing and image
formatting. Our products allow our customers to control the chip functions and
thereby 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
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Complementary Metal Oxide
Semiconductor CameraChip Black and white or color
Low resolution
Resolutions Medium resolution
High resolution
Output Signal Analog (for television)
Digital (for computers & other digital devices)
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 & other devices
Software Drivers Windows, Windows CE, Linux and Apple(tm)
computer software drivers
The following table summarizes our current CameraChip product offerings:
CMOS CameraChips
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Product
Black and Color Introduction
White Sensors Sensors Resolution Output Target Markets Date
- ------------- ------- ---------- ------------------ -------------- ----
OV5116 Low NTSC or PAL for TV Security and
surveillance 2/01
Toys and games
OV7410 OV7910 Medium NTSC or PAL for TV Security and
surveillance
Close circuit 2/99
television
Toys and games
OV6120 OV6620 Low For computers PC video cameras
Toys and games 4/99
Machine control
OV6130 OV6630 Low For computers PC video cameras
Toys and games 2/00
Machine control
OV6140 OV6640 Low For computers Mobile devices
(3.3 Volt) 7/01
PC video cameras
OV7120 OV7620 Medium For computers PC video cameras
Digital still
cameras 10/99
Machine control
OV7130 OV7630 Medium For computers Mobile devices
(3.3 Volt)
PC video cameras
Digital still 7/01
cameras
Machine control
OV8110 OV8610 Medium For computers PC video cameras
High Digital still 2/01
cameras
Machine control
OV9120 OV9620 High For computers PC video cameras
Digital still 10/01
cameras
Machine control
We also provide companion chips used to interface our CameraChips 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 CameraChips, 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
CameraChip.
We also design, develop and license plug and play software drivers for
Microsoft Windows and Apple Computer iMac system. These software drivers accept
the image data being received from the universal serial bus, provide the data
decompression if required and manage interface protocols with the camera. These
drivers have been
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designed for speed and flexibility and allow easy customization of the user
interface to represent the customer's brand to the end-user.
Customers
- ---------
Our customers include industry leading camera manufacturers, contract
manufacturers and distributors. During Fiscal Year 2002, we shipped
approximately 6.0 million CameraChips as compared to approximately 6.5 million
CameraChips during Fiscal Year 2001. 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, Inc. Color digital CameraChips Toys and games
Color analog CameraChips
COMedia Ltd. Black and white analog Security and
CameraChips surveillance
Color analog CameraChips
Concord Camera HK Limited Color digital CameraChips Digital still cameras
Cell phone accessory
Creative Technologies Color digital CameraChips PC video cameras
Limited USB interface companion chips Digital still cameras
CRS Electronic Co. Color analog CameraChips Toys and games
Curitel Communications,
Inc. Color digital CameraChips Embedded cell phone
Mtek Vision Co., Ltd. Color digital CameraChips PC video cameras
USB interface companion chips
Olympus Optical Co., Ltd. Color digital CameraChips Security and
Color analog CameraChips surveillance
PC video cameras
Philips Portuguosa, SA Color digital CameraChips PC video cameras
Sector Industrial de USB interface companion chips
Ovar
Samsung Electro-Mechanics Color digital CameraChips PC video cameras
Co., Ltd. USB interface companion chips
Teksel Co. Ltd./Kyocera Color digital CameraChips Cell phone accessory
Viewquest Technologies, Color digital CameraChips PC video cameras
Inc. USB interface companion chips
Welch Allyn Corporation Black and white analog Bar code readers
CameraChips
Color analog CameraChips
X10 Wireless Technology, Color analog CameraChips Security and
Inc. surveillance
Distributors
- -------------------------------------------------------------------------------
SEC Development Co., Ltd. Color digital CameraChips PC video cameras
(Hong Kong) Black and white digital Digital still cameras
CameraChips Security and
Color analog CameraChips surveillance
USB interface companion chips General purpose
cameras
World Peace Industrial Color digital CameraChips PC video cameras
(Taiwan) Black and white digital Digital still cameras
CameraChips Security and
Color analog CameraChips surveillance
USB interface companion chips General purpose
cameras
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, Samsung Electronics Manufacturing Company, or SEMCO,
a major manufacturer in Korea, manufactures a personal digital assistant camera
for Creative. 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 2002, approximately 66% of our revenues were derived from
camera manufacturers and their contract manufacturers. Our largest customer,
X10, accounted for approximately 20% of our revenues. No other single camera
manufacturer customer represented more than 10% of revenues.
In Fiscal Year 2002, approximately 34% of our revenues were derived from
distributors. The largest distributor was World Peace Industrial Co. Ltd., or
World Peace, which represented approximately 15% of revenues. No other single
distributor represented more than 10% of revenues. We have signed distribution
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
CameraChip 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 CameraChips. We are
one of TSMC's largest customers 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 CameraChip 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. In return, we have assisted PSC in image sensor fabrication.
We have several informal strategic relationships with key customers in the
development of new camera products incorporating our CameraChips. By working
directly with key customers, we can help them take advantage of our
CameraChips' capabilities 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. Some of these key customers include Creative, for PC
video cameras and digital still cameras, Alaris for cameras for toys, Viewquest
for PC video 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, 2002, our
sales and marketing organizations had a total of 36 employees. We also have 18
independent distributors and manufacturers' representatives, four of whom are
domestic and 14 of whom are located outside the United States. We continuously
evaluate whether to use a direct sales force or to utilize independent
representatives in a particular region or for a given potential customer
depending upon the scope of the potential sales opportunities. Sales outside of
the United States represented 74% of revenues in Fiscal Year 2002, 84% of
revenues in Fiscal Year 2001, and 78% of revenues for the fiscal year ended
April 30, 2000, or Fiscal Year 2000. Sales outside of the United States are
primarily denominated in U.S. dollars in order to reduce the risks associated
with the fluctuations of foreign currency exchange rates. We expect that sales
outside of the United States will continue to account for a significant portion
of our revenues.
In Fiscal Year 2002, we sold our CameraChips to camera manufacturers who
market camera products under their own brand. We also sold CameraChips to large
manufacturing companies that produce camera products for others to market under
different brand names. Through our relationships, we have developed expertise
in the design of cameras. We have used that expertise to assist our customers
in developing their products which incorporate our CameraChips. We also have
provided reference designs and engineering design review and engineering
product evaluation testing and debugging services for our customers.
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Technology
- ----------
We have key technical competencies in analog signal processing design,
mixed signal circuit design, advanced CMOS CameraChip 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 CameraChip 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 and then export the data to another chip for image
processing and formatting. In our digital output 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.
Analog Output Designs
---------------------
Our analog output CameraChips are designed to output a PAL or NTSC video
signal that can be used directly by standard television equipment without any
additional conversion technology. These CameraChips take advantage of the
analog processing technology on our digital output chips. Prior to output, the
signal is formatted specifically for industry-adopted television standards.
There is no digital conversion on our analog output CameraChips. CCD image
sensors and other competitive CMOS image sensor products that process their
images in a digital format must convert their video signal to a standard
television format in a separate chip in order to generate the same output,
resulting in an increase in complexity, cost and space needed for a product
design.
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 CameraChips 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 CameraChip Design
-------------------------------
Our in house semiconductor design engineers are skilled in the design of
high speed, low power and mixed analog/digital CMOS CameraChips. 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. In our proprietary testing process, the
CameraChip 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 low
cost commercially available 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.
11
Single Chip Semiconductor Design
--------------------------------
Our expertise has allowed us to create single chip CMOS image sensing
devices. Our single chip integrates the image capture, the image processing,
the color processing and conversion and output for either television or
computers.
Research and Development
- ------------------------
The internal design of our CMOS CameraChips 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 in new product
developments. As a result, circuit improvements easily 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, 2002, we had a total of 53 employees in research and development.
We have invested, and expect that we will continue to invest, significant
funds in research and development. Our research and development expenses were
approximately $7.8 million in Fiscal Year 2002, $5.5 million in Fiscal Year
2001, and $3.7 million in Fiscal Year 2000.
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 CameraChips such as the image
capture and the image processing circuit. As of April 30, 2002, we have been
issued 19 United States patents. We have also received 11 foreign patents. We
have filed and pending 31 additional United States patent applications, of
which two have 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 CameraChips.
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents and other actions arising out of the
normal course of business. It is possible that companies might pursue
litigation with respect to any claims such companies purport to have against
us. The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required
to obtain licenses to the infringing technology, pay substantial damages under
applicable law, including treble damages if we are held to have willfully
infringed, cease the manufacture, use and sale of infringing products or to
expend significant resources to develop non-infringing technology. Litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail.
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 CameraChips.
We outsource our wafer manufacturing to TSMC and PSC. Our CameraChips 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.
12
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
purchase selected interface chips from Winbond Electronics Corp., or Winbond,
for re-sale to our customers.
Color Filter Application
------------------------
A majority of our unit sales of CameraChips for Fiscal Year 2002 are color
CameraChips. 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. In Fiscal Year 2002, we outsourced the
majority of our packaging requirements to Alphatec Semiconductor Packaging Co.,
or Alphatec, in Thailand, Pan Pacific Semiconductor Co., Ltd., or PPSC, in
Taiwan, 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
CameraChips and is a substantial barrier to entry for many companies.
Production testing equipment designed for conventional CMOS devices is not
sufficient for testing image sensors because an optical image must be captured
and checked in addition to checking the normal 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 CameraChips.
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 or packaging and to assist with
corrective actions. Since CameraChips are optical products, the exposure to
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 to take appropriate remedial action.
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 at that time.
13
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 supplier
reputation. Our primary competition comes from CCD image sensor manufacturers
and multi-chip 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 and high-resolution digital still camera
manufacturers. Our main competition comes from the top six companies
that collectively account for approximately 97.1% of the total CCD image
sensor market, according to the Cahners In-Stat Group. These six
companies are Fuji, Matsushita, NEC, Sharp, Sony, and Toshiba.
o Multiple-chip 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 CMOS manufacturers
including Zoran Corporation, or Zoran, and IC Media Corporation.
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,
2002 and 2001, our backlog was approximately $11.7 million and $8.3 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, 2002 we had a total of 119 full-time employees, 94 located
at our headquarters in Sunnyvale, California and 25 in foreign sales support
offices located in Taiwan, China, Republic of South Korea and Japan. 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.
14
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth, as of April 30, 2002, certain information
concerning our executive officers and directors:
Name Age Position
- --------------------------------- --- ---------------------------------------
Shaw Hong........................ 64 Chief Executive Officer, President and
Director
Qi Dong.......................... 36 Vice President of Systems
Xinping He....................... 38 Vice President of Core Technologies
John A. Lynch.................... 37 Vice President of Sales and Marketing
H. Gene McCown................... 66 Vice President of Finance and Chief
Financial Officer
Robert J. Stroh.................. 62 Vice President of Strategic Marketing
and Business Development
Raymond Wu....................... 47 Executive Vice President and Director
Shaw Hong, one of our cofounders, has served as one of our directors and
---------
as our Chief Executive Officer and President since May 1995. Mr. Hong holds a
B.S. degree in Electrical Engineering from Jiao Tong University in China and an
M.S. degree in Electrical Engineering from Oregon State University.
Qi Dong has served as our Vice President of Systems since May 2000. From
-------
July 1998 to May 2000, Mr. Dong served as a Design Manager in our Core
Technologies Group. Mr. Dong joined our company in February 1996 and served as
a Senior Design Engineer until his promotion in July 1998. Mr. Dong holds a
B.S. degree and an M.S. degree in Electrical Engineering from Tsinghua
University in Beijing.
Xinping He has served as our Vice President of Core Technologies since May
----------
2000. From July 1998 to May 2000, Mr. He served as a Design Manager in our Core
Technologies Group. Mr. He joined our company in June 1995 and served as a
Senior Design Engineer until his promotion in July 1998. Mr. He holds a B.S.
degree and an M.S. degree in Electrical Engineering from Tsinghua University in
Beijing.
John A. Lynch has served as our Vice President of Sales and Marketing
-------------
since August 2001. From May 2000 to August 2001, Mr. Lynch served as Vice
President of Sales of SCM Microsystems Inc., a technology company providing
chips and products to the digital camera, digital TV and video editing markets.
From April 1995 to May 2000, Mr. Lynch served in various sales and marketing
management positions at SCM Microsystems Inc. Mr. Lynch attended Brigham Young
University where he majored in International Relations.
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. degree 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. Mr.
Stroh holds an M.B.A. degree from Indiana University and a B.S. degree 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. Mr. Wu received a B.S. degree in
Electrical Engineering from Chung-Yuan University in Taiwan and an M.S. degree
in Electrical Engineering from Wayne State University.
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.
15
In December 2001, our subsidiary in Shanghai entered into an agreement to
lease 41,564 square meters of space in Shanghai, People's Republic of China
which will be used for product design and testing. This agreement expires in
December 2051.
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., 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 have discussed 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.
On November 29, 2001, a complaint captioned McKee v. OmniVision
Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the
United States District Court for the Southern District of New York against our
company, some of our directors and officers, and various underwriters for our
initial public offering. Plaintiffs generally allege that the named defendants
violated federal securities laws because the prospectus related to our offering
failed to disclose, and contained false and misleading statements regarding,
certain commissions purported to have been received by the underwriters, and
other purported underwriter practices in connection with their allocation of
shares in our offering. Substantially similar actions have been filed
concerning the initial public offerings for more than 300 different issuers,
and the cases have been coordinated as In re Initial Public Offering Securities
Litigation, 21 MC 92. The complaint against us was amended in April 2002, and
seeks unspecified damages on behalf of a purported class of purchasers of our
common stock between July 14, 2000 and December 6, 2000. We believe that we
have meritorious defenses to this lawsuit and will defend this lawsuit
vigorously.
It is possible that other companies might pursue litigation with respect
to any claims such companies purport to have against us. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our
products that could arise in the future, we could be required to obtain
licenses to the infringing technology, pay substantial damages under applicable
law, including treble damages if we are held to have willfully infringed, cease
the manufacture, use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
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 19, 2002 High Low
- -------------------------- ---- ---
First Quarter (through July 19, 2002)............... $ 14.290 $ 10.000
Fiscal Year Ended April 30, 2002 High Low
- -------------------------------- ---- ---
Fourth Quarter...................................... $ 13.500 $ 6.180
Third Quarter....................................... $ 12.200 $ 3.360
Second Quarter...................................... $ 5.000 $ 2.530
First Quarter....................................... $ 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 19, 2002 was $12.31. The approximate number of holders of record
of the shares of our Common Stock was 109 as of July 19, 2002. This number does
not include stockholders whose shares are held in trust by other entities. The
actual number of stockholders is greater than this number of holders of record.
We estimate that the number of beneficial stockholders of the shares of our
Common Stock as of July 19, 2002 was approximately 3,000.
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the next 12 months.
17
ITEM 6: SELECTED FINANCIAL DATA
Year Ended April 30,
-----------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues......................$ 46,518 $ 53,707 $ 40,253 $ 5,243 $ 1,476
Cost of revenues (1)(2)....... 25,983 54,696 28,191 4,085 2,652
-------- -------- -------- -------- --------
Gross profit (loss)........... 20,535 (989) 12,062 1,158 (1,176)
-------- -------- -------- -------- --------
Operating expenses:
Research and development(2). 7,754 5,539 3,702 3,290 3,440
Selling, general and
administrative(2)......... 11,505 6,703 3,243 1,853 1,323
Stock compensation charge(2) 527 1,018 1,552 459 206
Litigation settlement....... 3,500 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses...... 23,286 13,260 8,497 5,602 4,969
-------- -------- -------- -------- --------
Income (loss) from operations. (2,751) (14,249) 3,565 (4,444) (6,145)
Interest income (expense), net 1,477 2,692 174 396 106
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... (1,274) (11,557) 3,739 (4,048) (6,039)
Provision for income taxes.... -- -- 300 -- --
-------- -------- -------- -------- --------
Net income (loss).............$ (1,274) $(11,557) $ 3,439 $ (4,048)$ (6,039)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic.......................$ (0.06) $ (0.67) $ 1.15 $ (5.59)$ (12.71)
======== ======== ======== ======== ========
Diluted.....................$ (0.06) $ (0.67) $ 0.21 $ (5.59)$ (12.71)
======== ======== ======== ======== ========
Shares used in computing per
share amounts:
Basic....................... 21,862 17,134 2,985 724 475
======== ======== ======== ======== ========
Diluted..................... 21,862 17,134 16,399 724 475
======== ======== ======== ======== ========
April 30,
-------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.... $ 55,803 $ 51,053 $ 5,888 $ 5,374 $ 2,686
Working capital.............. 65,067 66,903 11,667 6,819 2,343
Total assets................. 82,341 78,647 26,298 10,536 3,721
Total current liabilities.... 10,822 7,371 12,529 2,632 633
Total redeemable convertible
preferred stock............ -- -- 21,082 21,082 12,745
Accumulated deficit.......... (23,493) (22,219) (10,662) (14,101) (10,053)
Total stockholders' equity
(deficit).................. $ 71,519 $ 71,276 $(7,313) $ (13,178)$ (9,658)
- ---------------------------
(1) Includes inventory write-off of $18,652 in the fiscal year ended April
30, 2001 and a related benefit of $4,966 in the fiscal year ended April
30, 2002.
(2) Stock-based compensation charges included in:
Year Ended April 30,
-----------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cost of revenues............. $ 25 $ 59 $ 310 $ 86 $ 42
======== ======== ======== ======== ========
Operating expenses:
Research and development... $ 232 $ 618 $ 997 $ 278 $ 134
Selling, general and
administrative........... 295 400 555 155 75
-------- -------- -------- -------- --------
$ 527 $ 1,018 $ 1,552 $ 433 $ 209
======== ======== ======== ======== ========
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The 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 ("Exchange Act).
All of the statements contained in this Item 7 and Item 7A, other than
statements of historical fact, should be considered forward-looking statements,
including but 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 in our products, 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 continued improvement
to the interface chip in the second paragraph under "Overview;" the statements
under "Overview;" the statements relating to the generation of revenues from
five-volt and three-volt products in 2002 in the third paragraph under
"Overview;" the statements relating to technology leadership and increase in
research and development expenses in the seventh paragraph under "Overview;"
the statements regarding the administrative, legal and governmental barriers in
China in the last paragraph under "Overview;" the statements regarding the
expected increases of research and development costs under "Research and
Development;" the statements regarding potential decreases in selling, general
and administrative expenses under "Selling, General and Administrative;" the
statements regarding the amortization of compensation charges under "Stock
Compensation Charge;" the statements regarding cash resources available to meet
capital requirements, the statements regarding the factors affecting future
capital requirements, the raising and availability of additional funds and the
factors affecting capital requirements in the sixth paragraph under "Liquidity
and Capital Resources;" the statements regarding evaluation of acquisitions in
the seventh paragraph under "Liquidity and Capital Resources;" the statements
regarding the effect of and exposure to foreign currency exchange rate risk
under "Foreign Currency Exchange Risk;" and the effect of and exposure to
market interest rate risk under "Quantitative and Qualitative Discussion of
Market Interest Rate Risk." 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 Operations and in
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.
All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.
Overview
- --------
We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our main
product, an image sensing device called a CameraChip(tm), is used to capture an
image in cameras and camera related products in high-volume imaging
applications such as personal computer cameras, digital still cameras, security
and surveillance cameras, personal digital assistant cameras and mobile phone
cameras and cameras for automobiles and toys for both still picture and live
video applications. Our CameraChips are designed to use the CMOS fabrication
process. Our single chip image sensors can allow our customers to build cameras
that are smaller, require fewer chips, consume less power and cost less to
build than cameras using traditional 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.
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 CameraChips aimed at new and
existing markets. We plan to expand the range of picture resolutions we offer,
provide additional CameraChips 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
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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 2002, 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 ending April 30, 2003, or Fiscal Year 2003, 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.
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.
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. A majority of our unit
sales of CameraChips for the Fiscal Year 2002 were 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 and TSMC. We outsource
the packaging of our image sensors to Kyocera, PPSC and 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 CameraChips are subject to seasonality. Some of the products
using our CameraChips such as personal computer video cameras and digital still
cameras are consumer electronics goods. Typically, these goods are subject to
seasonality with generally increased consumer 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 calendar year. In addition, we typically experience a decrease in orders in
the quarter ended January 31 from our Chinese and Taiwanese customers primarily
due to the Chinese New 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 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 during Fiscal
Year 2003.
In December 2000, we formed a subsidiary to conduct design and testing
operations in Shanghai, the People's Republic of China. The registered capital
of this company is $12.0 million, of which $3.8 million was funded by us in the
fiscal year ended April 30, 2001, as required by Chinese law. We funded an
additional $3.7 million during Fiscal Year 2002. We are further obligated to
fund the remaining $4.5 million of registered capital by December 2003. As of
April 30, 2002, $4.4 million of the $7.5 million funded to date was paid for
land use rights and to building contractors in partial payment for the
construction of the facility, $2.5 million was deposited in a bank account in
China and $0.6 million was expended for general purposes. The formation and
operation of our subsidiary in China requires a large initial capital
investment. Also there may be significant administrative, legal and
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
governmental barriers in China, which may prevent our ability to begin
operation of the subsidiary and prevent us from using the funds outside of
China.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. By their nature, these estimates and
judgments are subject to an inherent degree of uncertainty. On an ongoing
basis we re-evaluate our judgments and estimates including those related to
product returns, bad debts, inventories, long-lived assets, income taxes,
litigation and contingencies. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our beliefs of what
could occur in the future considering available information. Actual results
could differ from those estimates, and material effects on our operating
results and financial position may result. Our significant accounting policies
are more fully described in Note 1 to the consolidated financial statements
included in this Annual Report on Form 10-K. Our estimates are guided by
observing the following critical accounting policies:
We believe the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.
o revenue recognition,
o allowance for doubtful accounts and sales return reserve,
o inventory valuation,
o valuation of long-lived assets,
o accounting for income taxes, and
o litigation and contingencies.
Revenue Recognition
-------------------
We generate our revenue by selling our products to original equipment
manufacturers, or OEMs, and distributors. We recognize revenue upon the
shipment of our products to our customer provided that we have received a
signed purchase order, the price is fixed, title has transferred, collection of
resulting receivables is considered 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.
In order to determine whether collection is probable, we assess a number
of factors, including past transaction history with the customer and the
credit-worthiness of the customer. We do not request collateral from our
customers. If we determine that collection is not reasonably assured, we defer
the recognition of revenue at the time until collection becomes reasonably
assured, which is generally upon receipt of cash.
Allowance For Doubtful Accounts and Sales Return Reserve
--------------------------------------------------------
Credit evaluations are undertaken for all major sale transactions before
shipment is authorized. Normal payment terms require payment upon transfer of
risk of loss. On an on-going basis, we analyze the payment history of customer
accounts, including recent customer purchases. We evaluate aged items in the
accounts receivable aging and provide reserves for doubtful accounts and
estimated sales returns. Customer credit-worthiness and economic conditions
may change and increase the risk of collectibility and potential sales returns
and may require additional provisions, which would negatively impact our
operating results. As of April 30, 2002, our allowance for doubtful accounts
represented approximately 5.5% of total accounts receivable and our sales
return reserve represented approximately 6.2% of total accounts receivable.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Inventory Valuation
-------------------
The semiconductor manufacturing industry is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements, and evolving industry standards. Inventories are stated at the
lower of cost, determined on first-in, first-out, or FIFO, basis, or market. We
regularly monitor inventory quantities on hand and record a provision for
excess and obsolete inventories based primarily on historical usage rates and
our estimated forecast of product demand and production requirements for the
next six months. These reserves are associated with specific inventory items
and will be relieved when specific inventory is scrapped or sold. Actual demand
and market conditions may be different from those projected by our management.
This could have a material effect on our operating results and financial
position. In Fiscal Year 2001, as a result of unfavorable economic conditions
in the PC cameras market, the demand for certain color CameraChips did not meet
our expectations. Therefore, we recorded an $18.7 million charge for excess
inventories in Fiscal Year 2001.
Valuation of Long-lived assets
------------------------------
We evaluate the recoverability of our long-lived assets under Statement of
Financial Accounting Standards, or SFAS, No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
or SFAS No. 121. SFAS No. 121 requires us to review for impairment of our long-
lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. Impairment evaluations
involve management estimates of asset useful lives and future cash flows. When
such an event occurs, we estimate the future cash flows expected to result from
the use of the asset and its eventual disposition. If the undiscounted expected
future cash flows are less than the carrying amount of the asset, an impairment
loss is recognized. Actual useful lives and cash flows could be different from
those estimated by our management. This could have a material effect on our
operating results and financial position. To date, no impairment loss has been
recognized.
We assess the impairment in value to our long-lived assets whenever events
or circumstances indicate that their carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include
the following:
o significant negative industry trends,
o significant underutilization of the assets, and
o significant changes in how we use the assets or our plans for their use.
On May 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" became effective. This standard supersedes SFAS No. 121
and requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. Our
adoption is not expected to have a material effect on our consolidated
financial statements.
Accounting for Income Taxes
---------------------------
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We consider historical
levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event that we determine
that we would be able to realize deferred tax assets in the future in excess of
the net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of the net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. We have recorded valuation
allowances against our deferred tax assets of $6.0 million and $6.3 million at
April 30, 2002 and 2001, respectively.
Litigation and Contingencies
----------------------------
From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents and other actions arising out of the
normal course of business.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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 secret laws, as well as nondisclosure agreements
and other methods to protect our proprietary technologies. We have been issued
patents and have a number of pending United States and foreign patent
applications. However, we cannot assure you that any patent will be issued as a
result of any applications or, if issued, that any claims allowed will be
sufficiently broad to protect our technology. In addition, it is possible that
existing or future patents may be challenged, invalidated or circumvented. It
may be possible for a third party to copy or otherwise obtain and use our
products, or technology without authorization, develop corresponding technology
independently or design around our patents. Effective copyright, trademark and
trade secret protection may be unavailable or limited in foreign countries.
These disputes may result in costly and time consuming litigation or the
license of additional elements of our intellectual property for free.
It is possible that other companies might pursue litigation with respect
to any claims such companies purport to have against us. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our
products that could arise in the future, we could be required to obtain
licenses to the infringing technology, pay substantial damages under applicable
law, including treble damages if we are held to have willfully infringed, cease
the manufacture, use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail.
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,
----------------------------------
2002 2001 2000
---- ---- ----
Statement of Operations Data as a Percentage
of Revenues:
Revenues....................................... 100.0% 100.0% 100.0%
Cost of revenues............................. 55.9 101.8 70.0
Gross profit (loss).......................... 44.1 (1.8) 30.0
Operating expenses:
Research and development..................... 16.7 10.3 9.2
Selling, general and administrative.......... 24.7 12.5 8.1
Stock compensation charge.................... 1.1 1.9 3.9
Litigation settlement........................ 7.5 -- --
------ ------ ------
Total operating expenses................... 50.0 24.7 21.2
------ ------ ------
Income (loss) from operations.................. (5.9) (26.5) 8.8
Interest income, net........................... 3.2 5.0 0.4
------ ------ ------
Income (loss) before income taxes.............. (2.7) (21.5) 9.2
Provision for income taxes..................... -- -- 0.7
------ ------ ------
Net income (loss).............................. (2.7)% (21.5)% 8.5%
====== ====== ======
Results of Operations for the Fiscal Years Ended April 30, 2002, 2001 and 2000
- ------------------------------------------------------------------------------
Revenues. We derive revenues from the sale of our CameraChip products and
--------
other companion circuits for use in a variety of applications. Revenues for
Fiscal Years 2002, 2001 and 2000 were approximately $46.5 million, $53.7
million and $40.3 million, respectively. Revenues decreased $7.2 million, or
13%, from Fiscal Year 2001 to Fiscal Year 2002. From Fiscal Year 2001 to Fiscal
Year 2002, revenues from PC camera sales declined by an estimated $16.2 million
as a result of a decrease in the number of PC camera units sold due in large
part to the customer inventory build-up that occurred in the October through
November 2000 time frame. The effect of this decline was partially offset by
an estimated $5.3 million increase in security camera revenues and by an
estimated
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
$4.9 million increase in digital still camera revenues. Revenues increased
$13.4 million, or 33%, from Fiscal Year 2000 to Fiscal Year 2001 primarily as a
result of greater demand for PC cameras and security and surveillance cameras.
Domestic and international revenues for Fiscal Year 2002 were $11.9 million and
$34.6 million, respectively, as compared to $8.4 million and $45.3 million,
respectively, for Fiscal Year 2001 and $8.7 million and $31.6 million,
respectively, for Fiscal Year 2000. For Fiscal Year 2002, one of our
distributors, World Peace, represented approximately 15% of revenues and one of
our camera manufacturer customers, X10, accounted for approximately 20% of
revenues. For Fiscal Year 2001, 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, 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. No other distributor or camera manufacturer
customer accounted for 10% or more of total revenues in Fiscal Years 2002, 2001
and 2000.
Gross profit (loss). Gross margins for Fiscal Years 2002, 2001 and 2000
-------------------
were 44.1%, (1.8)% and 30.0%, respectively. Gross margins during Fiscal Year
2002 included an approximately $5.0 million one-time benefit from the sale of
inventory that was previously written off in Fiscal Year 2001. During Fiscal
Year 2001, we recognized an $18.7 million charge for excess inventory.
Excluding the benefit of previously written-off inventory, the adjusted gross
margin for Fiscal Year 2002 was 40.8% of revenues as compared to adjusted gross
margin of 32.9% and 30.0% of revenues in Fiscal Years 2001 and 2000,
respectively. The increase in gross margins on an adjusted basis for Fiscal
Year 2002 was due to favorable changes in product mix and yield improvements on
certain products. The decrease in gross margins from Fiscal Year 2000 to Fiscal
Year 2001 was primarily due to an $18.7 million charge for excess inventory
that we recognized in Fiscal Year 2001. The increase in gross margins on an
adjusted 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.
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 2002, 2001 and 2000 were approximately
$7.8 million, $5.5 million and $3.7 million, respectively. For Fiscal Years
2002, 2001 and 2000, research and development expenses represented 16.7%, 10.3%
and 9.2% of revenues, respectively. Research and development expenses increased
on an absolute dollar and percentage of revenue basis due primarily to lower
revenue levels on a year-to-year basis and increases in salaries, payroll-
related expenses associated with additional personnel, and contracted costs
associated with new product development. Our research and development expenses
for Fiscal Year 2001 increased at a rate proportionately greater than revenues.
Research and development expenses increased for Fiscal Year 2001 due to
increases 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. 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
CameraChips.
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 $11.5 million, $6.7 million and $3.2
million for Fiscal Years 2002, 2001 and 2000, respectively. For Fiscal Years
2000, 2001 and 2002, selling, general and administrative expenses represented
24.7%, 12.5% and 8.1% of revenues, respectively. The increase in selling,
general and administrative expenses in Fiscal Year 2002 was due principally to
approximately $2.1 million in increased litigation expenses associated with
patent litigation, an increase of $1.0 million in salaries and payroll related
expenses associated with additional personnel, and an increase of $0.7 million
associated with sales activities in Asia. 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 Corporation, or Photobit, and the California
Institute of Technology, or Cal Tech and accounting costs associated with
business development and operations. 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. As a result of
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
our recent settlement of certain intellectual property claims, we expect that
our future selling, general and administrative expenses may decrease in
absolute dollars and are likely to decrease as a percentage of revenues.
Stock compensation charge. We incurred stock compensation charges of
-------------------------
approximately $0.5 million, $1.1 million and $1.9 million for Fiscal Years
2002, 2001 and 2000, respectively. As of April 30, 2002, 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. Deferred
compensation charges of $0.5 million as of April 30, 2002 are to be amortized
on an accelerated basis over the vesting period of the stock options of
generally five years.
Stock option exchange program. On November 1, 2001, we announced a
-----------------------------
voluntary stock option exchange program for our employees. Under the program,
our employees were given the opportunity to elect to cancel outstanding stock
options held by them in exchange for an equal number of new options to be
granted on June 5, 2002. The exchange program was not available to our
executives, directors or any of our employees who live or work outside the
United States. These elections were required to be made by December 3, 2001.
On June 5, 2002, we issued options to purchase 46,400 shares of common stock at
an exercise price equal to the closing price of our common stock on June 4,
2002. We did not record any compensation expenses associated with this
exchange program.
Litigation settlement. Litigation settlement expense for Fiscal Year 2002
---------------------
amounted to $3.5 million. The litigation settlement expense for Fiscal Year
2002 was due to a one-time payment of $3.5 million to Photobit, to settle all
pending litigation that we had with Photobit and CalTech. As a percentage of
revenues, litigation settlement expenses for Fiscal Year 2002, 2001 and 2000
represented 7.5%, zero and zero, respectively.
Interest income, net. Interest income, net for Fiscal Years 2002 and 2001
--------------------
was approximately $1.5 million and $2.7 million, respectively. Interest income
and interest expense, net, decreased from Fiscal Year 2001 to Fiscal Year 2002
primarily due to a decline in interest rates. These funds are invested in
interest-bearing accounts consisting primarily of high-grade corporate
securities and government bonds maturing approximately twelve months or less
from the date of purchase. Interest income, net for Fiscal Year 2000 was minor
because our cash balances were minor prior to our initial public offering of
common stock in July 2000.
Provision for income taxes. We generated losses before income taxes in
--------------------------
Fiscal Years 2002 and 2001 and therefore had no provision for income taxes in
those periods. We generated approximately $3.7 million in operating profits for
the Fiscal Year 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.
Recent Accounting Pronouncements
- --------------------------------
On June 29, 2001, the Financial Accounting Standards Board, or FASB,
approved its Statement of Financial Accounting Standards, or SFAS, No. 141, or
SFAS No. 141, "Business Combinations," and SFAS No. 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, or pooling,
method is prohibited. The provisions of the statement will apply to all
business combinations initiated after June 30, 2001.
SFAS No. 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 SFAS No. 142 will result in
ceasing amortization of goodwill. We will adopt SFAS No. 142 effective May 1,
2002. We do not expect the adoption of SFAS No. 142 to have any material effect
on our consolidated financial statements.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." It establishes a single accounting
method, based on the framework established in SFAS 121, for long-lived assets
to be disposed of by sale. We are currently assessing, but have not yet
determined, the impact of SFAS 144 on our consolidated financial position and
results of operations.
We do not expect the adoption of these standards to have a material effect
on our consolidated financial statements.
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
$90.8 million. Principal sources of liquidity at April 30, 2002 consisted of
cash, cash equivalents and short-term investments of $57.8 million.
Our working capital decreased by $1.8 million to $65.1 million as of April
30, 2002 from $66.9 million as of April 30, 2001. The decrease primarily was
attributable to an $8.2 million decrease in inventories due principally to an
improvement in inventory turnover and a reduction in inventory levels
consistent with the decline in revenues from Fiscal Year 2001 to Fiscal Year
2002 partially offset by a $5.5 million increase in accounts receivable, net.
Our decreased working capital was also attributable to a $2.1 million increase
in accrued expenses and other liabilities, combined with a $1.6 million
increase in accounts payable and a $1.0 million decrease in short-term
investments.
For Fiscal Year 2002, cash provided by operating activities was
approximately $4.7 million as compared to our use of cash for operating
activities of $17.2 million in Fiscal Year 2001, primarily due to an $8.2
million reduction in inventories, a $1.6 million increase in accounts payable
and a $1.2 million increase in accrued expenses and other liabilities, which
was partially offset by a net loss of $1.3 million for Fiscal Year 2002 as
compared to a net loss of $11.6 million for Fiscal Year 2001, and a $6.2
million increase in accounts receivable. For Fiscal Year 2001, our use of cash
for operating activities was 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.
For Fiscal Year 2002, our use of cash in investing activities decreased to
approximately $1.9 million from a use of approximately $5.6 million for Fiscal
Year 2001, due to $2.9 million in purchases of property, plant and equipment
combined with a reduction of approximately $1.0 million in purchases of short-
term investments, partially offset by $3.0 million in proceeds from sales of
short-term investments. 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, 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 Year 2000 resulted
from purchases of property, plant and equipment.
Our net cash provided by financing activities was approximately $1.9
million for Fiscal Year 2002 compared to approximately $68.0 million for Fiscal
Year 2001 and $600,000 for Fiscal Year 2000. Net cash provided by financing
activities for Fiscal Year 2002 resulted principally from issuance and sale of
common stock from employee purchases through the employee stock purchase plan
and exercises under employee stock option plans. In Fiscal Year 2001 we
received approximately $68.0 million in aggregate net proceeds from our initial
public offering, or IPO. IPO proceeds resulted from the issuance and sale in
Fiscal Year 2001 of 5,000,000 shares of common stock 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. 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.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Based on our current working capital position and the cash flows that we
expect to generate, 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 $5.5 million associated with the
subsidiary that we have formed in China, and other potential investments, for
at least the next 12 months. After this period, capital requirements will
depend on many factors, including the levels at which we maintain inventory and
accounts receivable, costs of establishing and maintaining our Chinese
subsidiary, costs of securing access to adequate manufacturing capacity,
product yields, average selling price of our products, 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.
Related Party Transactions
- --------------------------
Frank Huang, a former director of our company who resigned in May 2001, is
the Chairman of the Board of Directors of Powerchip Semiconductor Corp., or
Powerchip, a joint venture between UMAX Group and Mitsubishi Electrical
Corporation. Mr. Huang is also the Chairman of the Board of Directors of UMAX
Group. In March 1998, we entered into a Foundry Agreement with Powerchip
pursuant to which we purchase semiconductor wafers from Powerchip. Our total
purchases from Powerchip were approximately $2.0 million, $22.0 million, and
$6.9 million for Fiscal Years 2002, 2001 and 2000, respectively. We believe
these transactions were on terms no less favorable than we could have obtained
from unaffiliated third parties. In addition, Powerchip owns 233,333 shares of
our common stock.
Mr. Huang is also the Chairman of the Board of Directors of Power World
Capital Management, Inc. ("Power World") and Tsuey-Jiuan Chen, a director of
our company, was an Executive Vice President of Power World until February 2002
when she resigned her employment with Power World. Power World is the general
partner of each of Universal Venture Fund and Power World Venture Fund, which
own 330,333 shares of our common stock and 125,000 shares of our common stock,
respectively.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The following summarizes our contractual obligations and commercial
commitments as of April 3