===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file number: 0-29939
----------------------
OMNIVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0401990
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1341 Orleans Drive, Sunnyvale, California 94089-1136
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 542-3000
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
At March 11, 2004, 55,621,527 shares of common stock of the Registrant
were outstanding.
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OMNIVISION TECHNOLOGIES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) - January 31,
2004 and April 30, 2003......................................... 3
Condensed Consolidated Income Statements (unaudited) - Three and
Nine Months Ended January 31, 2004 and 2003..................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
Months Ended January 31, 2004 and 2003.......................... 5
Notes to Condensed Consolidated Financial Statements (unaudited).. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 41
Item 4. Controls and Procedures........................................... 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 43
Item 6. Exhibits and Reports on Form 8-K.................................. 44
Signatures................................................................ 45
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and per share data)
(unaudited)
January 31, April 30,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................... $ 190,622 $ 50,438
Restricted cash......................................... 1,071 --
Short-term investments.................................. 6,532 10,224
Accounts receivable, net................................ 34,721 19,133
Inventories............................................. 45,400 13,642
Refundable and deferred income taxes.................... 6,438 7,642
Prepaid expenses and other assets....................... 1,679 1,195
--------- ---------
Total current assets.................................. 286,463 102,274
Property, plant and equipment, net........................ 19,290 12,456
Long-term investments..................................... 7,110 2,845
Other non-current assets.................................. 405 378
--------- ---------
Total assets.......................................... $ 313,268 $ 117,953
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 37,906 $ 10,528
Accrued expenses and other liabilities.................. 15,343 8,037
Deferred income......................................... 6,632 2,845
--------- ---------
Total current liabilities............................. 59,881 21,410
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 54,963,776 and 46,805,816 shares issued
and outstanding at January 31, 2004 and April 30,
2003, respectively.................................... 27 23
Additional paid-in capital.............................. 226,379 104,848
Deferred compensation related to stock options.......... (45) (159)
Retained earnings (accumulated deficit)................. 27,026 (8,169)
--------- ---------
Total stockholders' equity............................ 253,387 96,543
--------- ---------
Total liabilities and stockholders' equity............ $ 313,268 $ 117,953
========= =========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements (unaudited).
3
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues.............................. $ 94,510 $ 30,522 $ 209,542 $ 69,055
Cost of revenues (1).................. 58,210 18,980 129,814 42,317
--------- --------- --------- ---------
Gross profit.......................... 36,300 11,542 79,728 26,738
--------- --------- --------- ---------
Operating expenses:
Research and development............ 4,065 3,132 10,818 8,251
Selling, general and administrative. 5,665 2,869 15,860 7,659
Stock-based compensation (2)........ 810 68 1,006 332
--------- --------- --------- ---------
Total operating expenses.......... 10,540 6,069 27,684 16,242
--------- --------- --------- ---------
Income from operations................ 25,760 5,473 52,044 10,496
Interest income, net.................. 511 199 1,281 631
--------- --------- --------- ---------
Income before income taxes............ 26,271 5,672 53,325 11,127
Provision for income taxes............ 8,932 1,074 18,130 1,892
--------- --------- --------- ---------
Net income............................ $ 17,339 $ 4,598 $ 35,195 $ 9,235
========= ========= ========= =========
Net income per share:
Basic............................... $ 0.32 $ 0.10 $ 0.68 $ 0.21
========= ========= ========= =========
Diluted............................. $ 0.28 $ 0.09 $ 0.60 $ 0.19
========= ========= ========= =========
Shares used in computing net income
per share:
Basic............................... 54,652 45,615 51,877 44,997
========= ========= ========= =========
Diluted............................. 60,850 51,125 58,835 49,070
========= ========= ========= =========
(1) Stock-based compensation included
in Cost of revenues............. $ -- $ 2 $ 3 $ 9
========= ========= ========= =========
(2) Stock-based compensation by
functional area:
Research and development........ $ 13 $ 35 $ 55 $ 117
Selling, general and
administrative................ 797 33 951 215
--------- --------- --------- ---------
$ 810 $ 68 $ 1,006 $ 332
========= ========= ========= =========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements (unaudited).
4
OMNIVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
January 31,
---------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income............................................... $ 35,195 $ 9,235
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,200 639
Stock-based compensation............................... 1,009 341
Changes in assets and liabilities:
Accounts receivable, net............................. (15,588) (7,284)
Inventories.......................................... (31,758) (13,053)
Refundable and deferred income taxes................. 1,204 205
Prepaid expenses and other assets.................... (511) (2,049)
Accounts payable..................................... 27,378 8,417
Accrued expenses and other liabilities............... 7,306 1,139
Deferred income...................................... 3,787 1,593
-------- --------
Net cash provided by (used in) operating activities 29,222 (817)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments....................... (17,329) (5,173)
Restricted cash.......................................... (1,071) --
Proceeds from sale of short-term investments............. 21,021 2,002
Purchase of long-term non-marketable investment.......... (4,265) --
Purchases of property, plant and equipment............... (8,034) (5,234)
-------- --------
Net cash used in investing activities.............. (9,678) (8,405)
-------- --------
Cash flows from financing activities:
Deposit refunded......................................... -- (900)
Proceeds from issuance of common stock, net.............. 120,640 2,908
Payment for repurchase of common stock, net.............. -- (1)
-------- --------
Net cash provided by financing activities.............. 120,640 2,007
-------- --------
Net increase (decrease) in cash and cash equivalents....... 140,184 (7,215)
Cash and cash equivalents at beginning of period........... 50,438 55,803
-------- --------
Cash and cash equivalents at end of period................. $190,622 $ 48,588
======== ========
Supplemental cash flow information:
Taxes paid............................................... $ 13,810 $ 4,188
======== ========
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements (unaudited).
5
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 1 - Basis of Presentation
---------------------
The accompanying interim unaudited condensed consolidated financial
statements as of January 31, 2004 and April 30, 2003 and for the three and nine
months ended January 31, 2004 and 2003 have been prepared by OmniVision
Technologies, Inc. and its subsidiaries (the "Company" or "OmniVision") in
accordance with the rules and regulations of the Securities and Exchange
Commission. The amounts as of April 30, 2003 have been derived from the
Company's annual audited financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
accordance with such rules and regulations. In the opinion of management, the
accompanying unaudited financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company and its results of operations and cash flows as of and
for the periods presented. These financial statements should be read in
conjunction with the annual audited financial statements and notes thereto as
of and for the year ended April 30, 2003, included in the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 2003 (the "Form 10-K").
The results of operations for the three and nine months ended January 31,
2004 are not necessarily indicative of the results that may be expected for the
year ending April 30, 2004 or any other future period, and the Company makes no
representations related thereto.
On January 20, 2004, the Company announced that its Board of Directors had
approved a 2-for-1 split of the Company's common stock to be effected in the
form of a stock dividend payable to stockholders of record on January 30, 2004.
Stockholders of record received one additional share of common stock for every
share held on January 30, 2004. The stock split was effected after the close of
market on February 17, 2004 and the additional shares were distributed on
February 18, 2004. All share and per share data in this Quarterly Report on
Form 10-Q are presented on a post-stock split basis.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Note 2 - Summary of Significant Accounting Policies
------------------------------------------
Revenue Recognition
-------------------
For shipments to original equipment manufacturers ("OEMs"), value added
resellers ("VARs") and distributors without agreements that allow for returns
or credits, the Company recognizes revenue using the "sell-to" method. Under
this method, the Company recognizes revenue upon the shipment of products to
the customer provided that the Company has received a signed purchase order,
the price is fixed or determinable, title and risk of loss has transferred to
the customer, collection of resulting receivables is considered reasonably
assured, product returns are reasonably estimable, there are no customer
acceptance requirements and there are no remaining significant obligations. For
shipments to distributors under agreements allowing for returns or credits,
revenue is recognized using the "sell-through" method under which revenue is
deferred until the distributor actually resells the product to the end-user
customer and the Company is notified in writing by the distributor of such
sale. Deferred income on shipment to distributors represents the amount billed
less the cost of inventory shipped to but not yet sold by distributors. The
Company provides for future returns based on historical experience at the time
revenue is recognized.
In addition, the Company recognizes revenue from the provision of
engineering assistance to a limited number of its customers from time to time.
The Company recognizes the associated revenue only upon the completion of and
acceptance by the customer of the services performed. The revenue is based on a
fixed fee which is agreed upon prior to initiation of the engineering
assistance. Historically, revenue generated from such arrangements has been
immaterial.
6
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Restricted Cash
---------------
Restricted cash represents cash that has been set aside as a result of
court proceedings in which the parties stipulated to the filing of a bond, in
lieu of an attachment, that the Company posted with the San Diego County
Superior Court. As of January 31, 2004, restricted cash of approximately $1.1
million secured the bond. Restricted cash is classified in current assets on
the condensed consolidated balance sheet. The Company maintains its restricted
cash with a commercial bank.
Short-Term Investments
----------------------
The Company's short-term investments, which are classified as available-
for-sale, are invested in marketable high-grade corporate securities and
government bonds maturing in twelve months or less from the date of purchase.
These investments are reported at fair value which approximates cost.
Unrealized gains or losses are recorded in stockholders' equity and included in
other comprehensive income (loss). Unrealized gains or losses were not
significant during any period presented in these financial statements.
Intangible Assets
-----------------
The Company's patent, copyright, trademark and trade secrets have been
developed internally to date. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
the Company recognizes as expense when incurred the associated costs of the
internal development of these intellectual property rights.
Warranty Reserve for Defective Products
---------------------------------------
The Company accounts for its warranty reserve for defective products as a
portion of the sales return reserve. The Company warrants to its customers that
its products will work in accordance with their specifications. If a product
is defective, the customer is to notify the Company and return the defective
product to the Company. The Company then sends replacement products to the
customer. The Company does not repair any defective products due to cost and
other complexities associated with the products.
Land Use Right Acquired in China
--------------------------------
In December 2000, the Company established a Chinese subsidiary to conduct
testing operations in China. Subsequently, the Company constructed a
manufacturing facility in Shanghai owned by the Chinese subsidiary. This
manufacturing facility was placed in service in July 2003. However, the Chinese
subsidiary does not own the land that underlies the facility; rather, it holds
a "land use right" that was acquired from the local Chinese government in
December 2000 for approximately $0.8 million, which entitles the Company to use
the land for 50 years. The cost of this land use right was recorded as a
portion of property, plant and equipment and is being depreciated over the
useful life of the right.
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
------------------------------
Employees" ("APB 25"), and the Financial Accounting Standards Board ("FASB")
- ---------
Interpretation 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by
---------------------------------------
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
------------------------------------------------------
Disclosure-An Amendment of FASB Statement No. 123" ("SFAS 148"). Under APB 25,
- -------------------------------------------------
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Deferred stock-based compensation is then
amortized over the vesting period of the option on an accelerated basis using
the multiple option approach as defined in paragraph 24 of FIN 28. SFAS 123
describes a "fair value" based method of accounting for an employee stock
option or similar equity instrument. The following table illustrates the effect
7
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
on net income and net income per share as if the Company had applied the fair
value recognition provisions of SFAS 123 and SFAS 148 to stock-based employee
grants compensation and is referenced to in this Note as "as adjusted" (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported............... $ 17,339 $ 4,598 $ 35,195 $ 9,235
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 486 53 544 192
Deduct: Total stock-based employee
compensation determined under
fair value based method for all
awards, net of related tax
effects....................... 4,671 1,888 12,367 5,265
--------- --------- --------- ---------
As adjusted net income................ $ 13,154 $ 2,763 $ 23,372 $ 4,162
========= ========= ========= =========
Net income per share - Basic:
As reported......................... $ 0.32 $ 0.10 $ 0.68 $ 0.21
========= ========= ========= =========
As adjusted......................... $ 0.24 $ 0.06 $ 0.45 $ 0.09
========= ========= ========= =========
Net income per share - Diluted:
As reported......................... $ 0.28 $ 0.09 $ 0.60 $ 0.19
========= ========= ========= =========
As adjusted......................... $ 0.23 $ 0.06 $ 0.44 $ 0.09
========= ========= ========= =========
Shares used in computing net income
per share - Basic:
As reported......................... 54,652 45,615 51,877 44,997
========= ========= ========= =========
As adjusted......................... 54,652 45,615 51,877 44,997
========= ========= ========= =========
Shares used in computing net income
per share - Diluted:
As reported......................... 60,850 51,125 58,835 49,070
========= ========= ========= =========
As adjusted......................... 58,024 46,013 53,087 45,246
========= ========= ========= =========
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments that are Offered to Other than Employees for
------------------------------------------------------------------------------
Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18").
----------------------------------------------------------
Under SFAS 123 and EITF 96-18, stock option awards issued to non-employees are
accounted for at their fair value, determined using the Black-Scholes option
pricing model.
Recent Accounting Pronouncements
--------------------------------
During December 2003, the U.S. Securities and Exchange Commission released
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104"),
-------------------
which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB
--------------------------------------------
104 updates portions of the interpretative guidance included in Topic 13 of
staff accounting bulletin, "Revenue Recognition," in order to make this
--------------------
interpretive guidance consistent with current authoritative accounting
guidance. The principal revisions relate to the deletion of interpretive
material that is no longer necessary because of private sector developments in
U.S. generally accepted accounting principles. The revenue recognition
principles of SAB 101, however, remain largely unchanged by the issuance of SAB
104, which was effective upon issuance. The Company's adoption of SAB 104 did
not have any effect on its financial position or results of operations.
8
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 3 - Balance Sheet Accounts (In Thousands)
------------------------------------
January 31, April 30,
2004 2003
---- ----
Cash and cash equivalents:
Cash.................................................... $ 4,056 $ 941
Money market funds...................................... 104,566 25,363
Commercial paper........................................ 82,000 24,134
--------- ---------
$ 190,622 $ 50,438
========= =========
Accounts receivable:
Accounts receivable..................................... $ 43,537 $ 21,188
Less: Allowance for doubtful accounts................... (2,615) (915)
Sales returns reserve............................. (6,201) (1,140)
--------- ---------
$ 34,721 $ 19,133
========= =========
Inventories:
Work in progress........................................ $ 11,836 $ 8,942
Finished goods.......................................... 33,564 4,700
--------- ---------
$ 45,400 $ 13,642
========= =========
Prepaid expenses and other assets:
Prepaid expenses........................................ $ 1,401 $ 1,187
Other receivables....................................... 278 8
--------- ---------
$ 1,679 $ 1,195
========= =========
Property, plant and equipment, net:
Building and land use right............................. $ 7,013 $ --
Building improvements................................... 1,869 --
Machinery and equipment................................. 9,452 3,607
Furniture and fixtures.................................. 217 283
Software................................................ 1,112 976
Construction in progress................................ 4,296 10,986
--------- ---------
23,959 15,852
Less: Accumulated depreciation and amortization......... (4,669) (3,396)
--------- ---------
$ 19,290 $ 12,456
========= =========
9
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 4 - Inventory Write-Off
-------------------
During the three months ended January 31, 2001, the Company wrote off
$18.1 million of inventory due to a significant imbalance in the PC camera
market. The following table summarizes the activity in the original $18.1
million of previously written-off inventory (in thousands):
Inventory
Previously
Written-off in
Fiscal 2001
-----------
Balance at January 31, 2001....................................... $ 18,090
Sale of previously reserved inventory through April 30, 2003...... 12,765
---------
Balance at April 30, 2003......................................... 5,325
Sale of previously reserved inventory during the nine months ended
January 31, 2004................................................ 1,189
---------
Balance at January 31, 2004....................................... $ 4,136
=========
Note 5 - Net Income Per Share
--------------------
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is computed according to the treasury stock method using
the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares include the
effect of stock options. For the three and nine months ended January 31, 2004,
40,000 and 133,750 shares of common stock, respectively, subject to outstanding
options were not included in the calculation of diluted net income per share as
they were considered antidilutive (i.e., the per share exercise price for such
options exceeded the trading price of the Company's common stock as reported on
The Nasdaq Stock Market). For the three and nine months ended January 31, 2003,
5,626 and 33,226 shares of common stock, respectively, subject to outstanding
options were not included in the calculation of diluted net income per share as
they were considered antidilutive.
10
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
The following table sets forth the computation of basic and diluted income
per share attributable to common stockholders for the periods indicated (in
thousands, except per share data):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net income.......................... $ 17,339 $ 4,598 $ 35,195 $ 9,235
========= ========= ========= =========
Denominator:
Weighted average shares............. 54,686 45,791 51,941 45,247
Weighted average unvested common
shares subject to repurchase...... (34) (176) (64) (250)
--------- --------- --------- ---------
Denominator for basic net income per
share............................. 54,652 45,615 51,877 44,997
Effect of dilutive securities:
Common stock options................ 6,164 5,334 6,894 3,823
Unvested common stock subject to
repurchase........................ 34 176 64 250
--------- --------- --------- ---------
Denominator for dilutive net income
per share......................... 60,850 51,125 58,835 49,070
========= ========= ========= =========
Basic net income per share............ $ 0.32 $ 0.10 $ 0.68 $ 0.21
========= ========= ========= =========
Diluted net income per share.......... $ 0.28 $ 0.09 $ 0.60 $ 0.19
========= ========= ========= =========
In July 2003, the Company sold 6,186,452 shares of common stock in a
follow-on public offering at a price of $19.38 per share, resulting in net
proceeds of approximately $113.2 million. The incremental shares are reflected
in the weighted average shares outstanding during the three- and nine-month
periods ended January 31, 2004.
Note 6 - Segment, Product Line and Geographic Information
------------------------------------------------
The Company identifies its operating segments based on business
activities, management responsibility and geographic location. For all periods
presented, the Company operated in a single business segment.
Revenues from the Company's two product lines, digital and analog image
sensors, were as follows (in thousands):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Digital image sensors................. $ 87,939 $ 26,745 $ 187,660 $ 51,360
Analog image sensors.................. 6,571 3,777 21,882 17,695
--------- --------- --------- ---------
Total............................... $ 94,510 $ 30,522 $ 209,542 $ 69,055
========= ========= ========= =========
11
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
The Company sells its products primarily to customers in the Asia Pacific
region and the United States of America. Revenues by geographic locations are
not necessarily representative of the geographic distribution of sales to end-
user markets, as the Company's customers sell their products globally. The
revenues by geographic location in the following table are based on the country
or region in which the customers are located (in thousands):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Hong Kong............................. $ 26,483 $ 11,354 $ 66,988 $ 32,232
Taiwan................................ 16,960 6,604 55,501 16,389
China................................. 28,339 8,533 49,833 10,093
Korea................................. 14,753 1,923 22,940 3,391
Japan................................. 5,433 336 6,624 1,475
United States......................... 1,435 1,567 2,409 4,733
All other............................. 1,107 205 5,247 742
--------- --------- --------- ---------
Total............................... $ 94,510 $ 30,522 $ 209,542 $ 69,055
========= ========= ========= =========
In December 2000, the Company formed a subsidiary to conduct testing
operations and other processes associated with the manufacturing of its
products in China. The registered capital of this subsidiary was initially
$12.0 million, of which $3.8 million was funded by the Company in the fiscal
year ended April 30, 2001, as required by Chinese law. The Company funded an
additional $3.7 million during fiscal 2002. In August 2002, the Company
increased the registered capital to $30.0 million and funded an additional $4.0
million during fiscal 2003. A total of $14.7 million of the $30.0 million of
registered capital of the subsidiary had been funded as of January 31, 2004
from the Company's available working capital. The remaining $15.3 million of
registered capital must be funded by January 2005. The $14.7 million invested
through January 31, 2004 was used primarily to pay for the construction of a
building and associated building improvements and purchase of machinery and
equipment.
The Company's long-lived assets are located in the following countries (in
thousands):
January 31, April 30,
2004 2003
---- ----
China..................................................... $ 12,966 $ 8,968
Taiwan.................................................... 7,507 2,845
United States............................................. 6,034 3,588
All other................................................. 298 278
--------- ---------
Total................................................... $ 26,805 $ 15,679
========= =========
Note 7 - Employee Stock Option and Stock Purchase Plans
----------------------------------------------
Employee Stock Option Grants
----------------------------
Options to purchase 137,750 and 3,582,350 shares of common stock were
granted to employees during the three and nine months ended January 31, 2004,
respectively. As of January 31, 2004, options to purchase 8,732,216 shares of
common stock were outstanding.
2000 Employee Stock Purchase Plan
---------------------------------
As of January 31, 2004, 1,425,938 shares had been purchased under the 2000
Employee Stock Purchase Plan (the "2000 Purchase Plan").
12
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Fair Value Disclosures
----------------------
Information regarding net income and net income per share, as adjusted, is
required by SFAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options granted under the
fair value method. The fair value for these options was estimated using the
Black-Scholes option pricing model. The per share weighted average estimated
fair value for employee options granted was $20.39 and $4.60 during the three
months ended January 31, 2004 and 2003, respectively. The per share weighted
average estimated fair value for employee options granted was $13.39 and $4.63
during the nine months ended January 31, 2004 and 2003, respectively. The
Black-Scholes model was developed for use in estimating the fair value of
traded options that have no restrictions and are fully transferable and
negotiable in a freely traded market. Black-Scholes does not consider the
employment, transfer or vesting restrictions that are inherent in the Company's
employee options. The usage of an option valuation model, as required by SFAS
123, includes highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life of each option
grant. Because the Company's employee options have characteristics
significantly different from those of freely traded options, and because
changes in the subjective input assumptions can materially affect the Company's
estimate of the fair value of those options, it is the Company's opinion that
the existing valuation models, including Black-Scholes, are not reliable single
measures and may misstate the fair value of the Company's employee options.
The following weighted average assumptions are included in the estimated
fair value calculations for stock option grants in the three and nine months
ended January 31, 2004 and 2003:
Employee Stock Options
---------------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate................. 2.39% 2.10% 2.14% 2.10%
Expected term of options (in years)..... 3.5 3.5 3.5 3.5
Expected volatility..................... 122.8% 134.6% 130.4% 134.6%
Expected dividend yield................. 0% 0% 0% 0%
Using Black-Scholes, the per share weighted average estimated fair value
of rights issued pursuant to the Company's 2000 Purchase Plan during the three
and nine months ended January 31, 2004 was $8.95 and $5.69, respectively. Using
Black-Scholes, the per share weighted average estimated fair value of rights
issued pursuant to the Company's 2000 Purchase Plan during the three and nine
months ended January 31, 2003 was $3.88 and $2.86, respectively.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the 2000
Purchase Plan:
Employee Stock Purchase
---------------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate................. 1.30% 1.32% 1.59% 1.32%
Expected term of options (in years)..... 0.50 0.50 0.50 0.50
Expected volatility..................... 59.0% 134.6% 105.3% 134.6%
Expected dividend yield................. 0% 0% 0% 0%
13
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Note 8 - Commitments and Contingencies
-----------------------------
Litigation
----------
From time to time, the Company has been subject to legal proceedings and
claims with respect to such matters as patents, product liabilities and other
actions arising out of the normal course of business.
On November 29, 2001, a complaint captioned McKee v. OmniVision
-------------------
Technologies, Inc., et. al., Civil Action No. 01 CV 10775, was filed in the
- ---------------------------------------------------------
United States District Court for the Southern District of New York against
OmniVision, some of the Company's directors and officers, and various
underwriters for the Company's initial public offering. Plaintiffs generally
allege that the named defendants violated federal securities laws because the
prospectus related to the Company's offering failed to disclose, and contained
false and misleading statements regarding, certain commissions purported to
have been received by the underwriters, and other purported underwriter
practices in connection with their allocation of shares in the Company's
offering. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of the Company's common stock between July 14, 2000 and
December 6, 2000. Substantially similar actions have been filed concerning the
initial public offerings for more than 300 different issuers, and the cases
have been coordinated as In re Initial Public Offering Securities Litigation,
---------------------------------------------------
21 MC 92. Claims against the Company's directors and officers have been
- --------
dismissed without prejudice pursuant to a stipulation. On February 19, 2003,
the Court issued an order dismissing all claims against the Company except for
a claim brought under Section 11 of the Securities Act of 1933. A proposal has
been made for the settlement and release of claims against the issuer
defendants, including the Company. The settlement is subject to a number of
conditions, including approval of the proposed settling parties and the Court.
If the settlement does not occur and litigation against the Company continues,
the Company believes that it has meritorious defenses and intends to defend the
case vigorously. The Company further believes that the settlement is not
expected to have any material adverse affect on its financial condition,
results of operations or cash flows.
On August 21, 2002, the Company initiated a patent infringement action in
Taiwan, R.O.C. against IC Media Corporation of San Jose, CA for infringement of
Taiwan patent NI-139439 that had been issued to the Company related to the
integration of certain computer interfacing technology in system designs. The
patent infringement action seeks damages and injunctive relief from IC Media
Corporation. In response to the Company's patent infringement action, on
October 2, 2002, IC Media Corporation initiated a cancellation proceeding in
the Taiwan Intellectual Property Office with respect to the Company's Taiwan
patent NI-139439. On July 23, 2003, the Taiwan Intellectual Property Office
made an initial determination to grant the cancellation of Taiwan patent NI-
139439, which decision was upheld by the Taiwan Ministry of Economic Affairs on
November 21, 2003. On January 20, 2004, the Company filed an action with the
High Administrative Court of Taiwan to reverse the grant of cancellation.
On October 11, 2002, the Company filed a complaint against IC Media
Corporation in Superior Court of California, Santa Clara County (Case No. CV
811866). In its complaint, the Company alleges misappropriation of trade
secrets, unfair competition and other business torts, and seek damages and
injunctive relief. IC Media Corporation has answered the complaint by denying
the allegations and raising various defenses. In accordance with the
Alternative Dispute Resolution practices of the Court, this matter was
submitted for non-binding arbitration. On February 19, 2004, the Court issued
a notice reflecting the parties' agreement to withdraw from arbitration and to
submit the matter to non-binding mediation.
On June 30, 2003, Mr. Chia-Chin Ku filed a complaint in Santa Clara County
Superior Court against the Company and its president and chief executive
officer, Mr. Shaw Hong. Mr. Ku never served the complaint on the Company. On
January 29, 2004, the Court dismissed the complaint on its own motion due to
Mr. Ku's failure to make any appearance in the case, failure to show cause in
writing why the dismissal should not be entered, or otherwise pursue the case
after filing the complaint.
On July 14, 2003, Sunex, Inc. filed a complaint against the Company in San
Diego County Superior Court. Sunex was a supplier of optical lenses and lens
holders for one of the Company's cell phone products. Under its complaint,
Sunex is seeking to recover approximately $1.8 million plus interest and
attorney's fees. Sunex's complaint relates to parts delivered by Sunex to the
14
OMNIVISION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Three and Nine Months Ended January 31, 2004 and 2003
(unaudited)
Company in the fiscal quarters ended January 31, 2003 and April 30, 2003 and
the Company's cancellation in that quarter of additional purchase orders it had
previously placed with Sunex. In October 2003, the Superior Court granted
Sunex's request for a prejudgment writ of attachment. The parties stipulated to
the filing of a bond in lieu of an attachment which the Company posted with the
Superior Court in the approximate amount of $1.1 million. The attachment order
and subsequent filing of the bond are not reflective of the merits of the case
and are expressly prohibited from being referred to at the time of trial. The
Company intends to defend itself vigorously and has filed a counterclaim
against Sunex in which the Company alleges breach of contract and breach of
warranties, and seeks damages in an amount yet to be determined. The Company
believes that any amount it may ultimately owe Sunex in excess of the amount it
had accrued as of January 31, 2004 will not have a material adverse affect on
its financial condition, results of operations or cash flows.
Commitments
-----------
In October 2003, the Company entered into a Shareholders' Agreement with
Taiwan Semiconductor Manufacturing Company, or TSMC, pursuant to which the
Company agreed with TSMC to form VisEra Technology Company, or VisEra, a joint
venture in Taiwan, for the purposes of providing manufacturing services and
automated final testing services. The Company has committed with TSMC and
certain employees and affiliates of VisEra to provide an aggregate of $50.0
million in total capital to VisEra, which commitments may be made in the form
of cash or asset contributions. The Company and TSMC will have equal interests
in VisEra. The Company's share of this capital commitment to VisEra is $23.5
million and becomes due in stages as VisEra's business and service capabilities
develop over a number of years. The Company's net cash commitment to VisEra is
approximately $4.5 million. In November 2003, the Company made a $1.5 million
cash investment in this joint venture. The Company will also contribute
approximately $19.0 million of assets to the joint venture, including
technology, plant and equipment currently owned by the Company or to be
purchased with funds for existing commercial commitments. (See Note 6.)
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the condensed
interim financial statements and the notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q. Except for historical information, the following
discussion contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors that include, but are not limited to, the risks
discussed in "Factors Affecting Future Results." These forward-looking
statements include, but are not limited to, statements including the words
"may," "will," "plans," "seeks," "expects," "anticipates," "outlook," "intends"
and words of similar import as well as the negative of those terms. These
forward-looking statements are based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties are set forth below under "Factors Affecting Future Results" and
elsewhere in this Quarterly Report, and other documents we file with the U.S.
Securities and Exchange Commission. All subsequent written and oral forward-
looking statements by or attributable to us or persons acting on our behalf are
expressly qualified in their entirety by such factors.
Overview
- --------
We design, develop and market high performance, highly integrated and cost
efficient semiconductor image sensor devices. Our main product, an image
sensing device called the CameraChip(tm), is used to capture an image in a
number of consumer and commercial mass market applications. Our CameraChips are
designed to use the complementary metal oxide semiconductor, or CMOS,
fabrication process. We have designed our CameraChip as a single chip solution
that integrates several distinct functions including image capture, image
processing, color processing and the conversion and output of a fully processed
image or video stream. Our highly integrated CMOS CameraChips help enable mass
market camera device manufacturers to build camera applications that generally
have high image quality and resolution, are low cost and small in size and
consume low amounts of power.
Our CameraChips are currently used in a number of consumer applications
including digital still and video cameras, cell phones, personal computers and
toys and games such as interactive video games.
Our CameraChips are sold to customers who incorporate them in either
digital or analog mass market applications. Some examples of digital mass
market applications that currently incorporate our CameraChips are digital
still cameras, cell phone cameras and personal computer camera applications.
Some examples of analog applications that currently incorporate our CameraChips
are security and surveillance cameras and toy cameras.
We sell our products worldwide directly to original equipment
manufacturers, or OEMs, which include branded customers and contract
manufacturers, and value added resellers, or VARs, and indirectly through
distributors.
We currently outsource the wafer fabrication, color filter application and
packaging of our CameraChip products. This approach allows us to focus our
resources on the design, development and marketing of our products and
significantly reduces our capital requirements.
We have designed and developed a complete PC-based system for the testing
of our CameraChips. This system has automatic handling capability, an image
source, a lighting and lens system and automatic output sorting capability. We
believe that this proprietary testing process helps us to reduce our testing
costs, maintain consistent product quality and identify areas for continued
improvement in product quality.
We have initiated the process of relocating some of our automated image
testing equipment from the United States to China. We anticipate that we will
substantially complete this transition prior to the end of fiscal 2004. In
addition, we also expect to expand testing capabilities with additional
automated testing equipment, which will also be located in China.
In October 2003, we entered into a Shareholders' Agreement with Taiwan
Semiconductor Manufacturing Company, or TSMC, pursuant to which we agreed with
TSMC to form VisEra Technology Company, or VisEra, a joint venture in Taiwan,
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
for the purposes of providing manufacturing services and automated final
testing services. In connection with the formation of VisEra, we and TSMC have
separately agreed to enter into nonexclusive license agreements with VisEra
pursuant to which both parties will license certain intellectual property to
VisEra relating to manufacturing services and automated final testing services.
Once VisEra has the capability to deliver high quality manufacturing services
and automated final testing services, we have committed to direct a substantial
portion of our requirements in these areas to VisEra, subject to pricing and
technology requirements. We and TSMC have also committed not to compete
directly or indirectly in the future with VisEra in the fields of certain
manufacturing services and automated final testing services.
Historically, we have relied upon TSMC to provide us with a substantial
proportion of our wafers. However, we had never entered into a long-term supply
agreement with TSMC and instead had traditionally secured manufacturing
availability on a purchase order basis. As a part of the Shareholders'
Agreement, TSMC has agreed to commit substantial wafer manufacturing capacity
to us in exchange for our commitment to purchase a substantial portion of our
wafers from TSMC, subject to pricing and technology requirements.
As of January 31, 2004, we had approximately $190.6 million in cash and
cash equivalents and approximately $6.5 million in short-term investments. To
mitigate credit risk related to short-term investments, we have an investment
policy designed to preserve the value of capital and to generate interest
income from these investments without material exposure to market fluctuations.
Market risk is the potential loss due to the change in value of a financial
instrument as a result of changes in interest rates or bond prices. Our policy
is to invest in financial instruments with short durations, limiting interest
rate exposure, and to measure performance against comparable benchmarks. We
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including both government and corporate obligations with
ratings of A or better and money market funds.
In June 2003, we purchased approximately 27% of a privately held company
based in Taiwan for a total of $2.0 million in cash. The Taiwanese company
provides plastic packaging services, and we are a major customer. We have
accounted for this investment using the equity method. In November 2003, we
made an additional cash contribution in the amount of approximately $0.8
million to maintain our equity ownership percentage in this company. This
investment is unrelated to our announced transaction in October 2003 to form a
joint venture with TSMC.
On January 20, 2004, we announced that our Board of Directors had approved
a 2-for-1 split of our common stock to be effected in the form of a stock
dividend payable to stockholders of record on January 30, 2004. Stockholders of
record received one additional share of common stock for every share held on
January 30, 2004. The additional shares were distributed on February 18, 2004.
The stock split was effected after the close of market on February 17, 2004 and
the additional shares were distributed on February 18, 2004. All share and per
share data in this Quarterly Report on Form 10-Q are presented on a post-split
basis.
The Current Economic Environment
--------------------------------
We have operated in a challenging economic environment that has undergone
significant changes in technology and global trade. We have striven to remain
a leader in the development and marketing of image sensing devices based on the
CMOS fabrication process and have benefited from the growing market demand for
and acceptance of this emerging technology. The shift in global fabrication to
Asia has introduced a range of cost pressures on domestic manufacturers. In
response to these pressures, and in order to be closer to our primary customer
base and our source of offshore fabrication, we relocated a substantial portion
of our testing operations to China during the first three quarters of this
fiscal year.
We shipped more than 17 million image sensors in the three months ended
January 31, 2004, which demonstrated the capabilities of our production system,
including our source of offshore fabrication. To enhance our production
capabilities, we have initiated partnerships with a number of vendors,
including TSMC, one of the largest wafer fabrication companies in Asia.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
The digital still camera market demonstrates a continuing trend toward
higher resolution products with a growing acceptance of CMOS based image
sensors. We have continued to benefit from a shift in product mix toward higher
resolution two- and three-megapixel products. We believe that this shift in
product mix will continue through 2004.
We believe camera phones are still in the very early stages of adoption
and that the opportunity presented by this market is still largely untapped. We
believe that, like the digital still camera market, camera phone demand will
continue to shift toward higher resolutions. As a result, we released our
quarter-inch 1.3 megapixel CameraChip designed specifically for camera phones.
We are currently in mass production with this product. Currently, we believe
that video graphics array ("VGA") resolution will account for a large majority
of the volume shipments in handsets during 2004, with an increasing transition
to higher resolutions towards the end of 2004 and beyond.
Sources of Revenues
-------------------
We generate our revenue by selling our products directly to OEMs and VARs
and indirectly to distributors. In addition, we derive a minimal portion of our
revenue by providing engineering assistance to a limited number of our
customers. The grouping of sales to OEMs and VARs together, in contrast to
sales to distributors, is also consistent with the differences in the Company's
revenue recognition policies between the two groups.
We recognize revenue on sales to OEMs, VARs and all distributors without
agreements that allow for returns or credits using the "sell-to" method. Under
this method, revenue is recognized upon the shipment of our products to our
customer provided that we have received a signed purchase order, the price is
fixed or determinable, title and risk of loss has transferred, collection of
resulting receivables is considered reasonably assured, product returns are
reasonably estimable and there are no remaining significant obligations.
For shipments to distributors under agreements allowing for returns or
credits, revenue is recognized using the "sell-through" method under which
revenue is deferred until the distributor actually resells the product to the
end-user customer and we are notified in writing by the distributor of such
sale. Under both methods of revenue recognition, we provide for future returns
based on historic experiences at the time revenue is recognized.
With respect to our revenue derived from providing engineering assistance,
we recognize the associated revenue only upon the completion and acceptance by
the customer of the services performed. The revenue is based on a fixed fee
which is agreed upon prior to initiation of the engineering assistance.
Historically, we have only entered into such services from time to time, and
revenue generated from such arrangements has been immaterial to date.
Critical Accounting Policies
----------------------------
For a discussion of the critical accounting policies, please see the
discussion in our Annual Report on Form 10-K for the fiscal year ended April
30, 2003.
Results of Operations
- ---------------------
The following table sets forth the results of our operations as a
percentage of revenues. Our historical operating results are not necessarily
indicative of the results for any future period.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 61.6 62.2 62.0 61.3
------- ------- ------- -------
Gross profit........................ 38.4 37.8 38.0 38.7
------- ------- ------- -------
Operating expenses:
Research and development............ 4.3 10.3 5.1 11.9
Selling, general and administrative. 6.0 9.4 7.6 11.1
Stock-based compensation charge..... 0.8 0.2 0.5 0.5
------- ------- ------- -------
Total operating expenses.......... 11.1 19.9 13.2 23.5
------- ------- ------- -------
Income from operations................ 27.3 17.9 24.8 15.2
Interest income, net.................. 0.5 0.7 0.6 0.9
------- ------- ------- -------
Income before income taxes............ 27.8 18.6 25.4 16.1
Provision for income taxes............ 9.5 3.5 8.6 2.7
------- ------- ------- -------
Net income............................ 18.3% 15.1% 16.8% 13.4%
======= ======= ======= =======
Three and Nine Months Ended January 31, 2004 as Compared to Three and Nine
- --------------------------------------------------------------------------
Months Ended January 31, 2003
- -----------------------------
Revenues
- --------
We derive revenues from the sale of our CameraChip products for use in a
wide variety of consumer and commercial mass market applications including
digital still cameras, cell phones, video game consoles and security and
surveillance cameras. Revenues for the three months ended January 31, 2004
increased 209.6% to approximately $94.5 million from $30.5 million for the
three months ended January 31, 2003. Revenues for the nine months ended January
31, 2004 increased 203.4% to approximately $209.5 million from $69.1 million
for the nine months ended January 31, 2003. These increased revenues are
primarily due to this substantial increase in unit sales of our CameraChips for
digital applications during these time periods.
Revenues from Sales of CameraChips for Digital as Compared to Analog
- --------------------------------------------------------------------
Applications.
- ------------
Our CameraChips are sold to customers who incorporate them into either
digital or analog applications. Examples of digital applications that
incorporate our CameraChips are digital still cameras, camera phones, personal
computer camera applications and digital toy cameras. Examples of analog
applications that incorporate our CameraChips are security and surveillance
cameras and analog toy cameras. We sell a large portion of our products through
VARs and distributors, and often we do not know the identity of the
manufacturers who ultimately embed our CameraChips into their products. As a
result of our sales to VARs and distributors and because our CameraChips can be
used in a wide variety of digital or analog products, we cannot accurately
confirm the distribution of our revenues across specific product categories.
However, we are able to confirm the distribution of our revenues by digital and
analog product categories, and they are as follows (in thousands):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Digital image sensors................. $ 87,939 $ 26,745 $ 187,660 $ 51,360
Analog image sensors.................. 6,571 3,777 21,882 17,695
--------- --------- --------- ---------
Total............................... $ 94,510 $ 30,522 $ 209,542 $ 69,055
========= ========= ========= =========
Digital Revenues. For the three months ended January 31, 2004, revenues
----------------
from sales of CameraChips for digital applications increased 228.8% to
approximately $87.9 million from $26.7 million for the three months ended
January 31, 2003. Revenues from sales of CameraChips for digital applications
represented 93.0% and 87.6% of revenues for the three months ended January 31,
2004 and 2003, respectively. For the nine months ended January 31, 2004,
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
revenues from sales of CameraChips for digital applications increased 265.4% to
approximately $187.7 million from $51.4 million for the nine months ended
January 31, 2003. Revenues from sales of CameraChips for digital applications
represented 89.6% and 74.4% of revenues for the nine months ended January 31,
2004 and 2003, respectively. The increase in revenues from sales of CameraChips
for digital applications for the three and nine months ended January 31, 2004
primarily was due to increases in unit sales of approximately 12.1 million, or
302.5%, and 23.0 million, or 299.6%, respectively. The increase in unit sales
for the three and nine months ended January 31, 2004 was led by increases of
approximately 9.9 million, or 399.8%, and 17.0 million, or 454.4%,
respectively, in unit sales of lower resolution CameraChips products used
primarily in cell phone and toy applications, which carry a lower average sales
price than CameraChips used for digital still camera applications. We believe
that demand in the cell phone market resulted from increased requirements from
service providers to include camera functionality on handsets as consumers
upgrade their cell phones due to number portability. The increase in revenues
from sales of high resolution CameraChips used primarily for digital still
camera applications also resulted from increases in unit sales of 2.1 million,
or 140.1%, and 6.3 million, or 184.1%, for the three and nine months ended
January 31, 2004, respectively. The increase in unit sales was partially offset
by a decline in average sales prices for the three and nine months ended
January 31, 2004. We expect revenues from sales of CameraChips for digital
applications to increase in the fourth quarter of fiscal 2004 primarily as a
result of increased sales to the cell phone market.
Analog Revenues. For the three months ended January 31, 2004, revenues
---------------
from sales of CameraChips for analog applications increased 74.0% to
approximately $6.6 million from $3.8 million for the three months ended January
31, 2003. Revenues from sales of CameraChips for analog applications
represented 7.0% and 12.4% of revenues for the three months ended January 31,
2004 and 2003, respectively. For the nine months ended January 31, 2004,
revenues from sales of CameraChips for analog applications increased 23.7% to
approximately $21.9 million from $17.7 million for the nine months ended
January 31, 2003. Revenues from sales of CameraChips for analog applications
represented 10.4% and 25.6% of revenues for the nine months ended January 31,
2004 and 2003, respectively. The increase in revenues from sales of CameraChips
for analog applications for the three and nine months ended January 31, 2004
primarily was due to increases of approximately 0.5 million, or 105.9%, and 1.5
million, or 75.6%, in unit sales, respectively. The decline in analog revenues
as a percentage of revenues for the three and nine month period ended January
31, 2004 resulted from the proportionately greater increase in digital
revenues. Such CameraChips for analog applications are used primarily in
cameras for toys and games and security applications. The increase in unit
sales was partially offset by a decline in average sales prices for the three
and nine months ended January 31, 2004. We expect revenues from sales of
CameraChips for analog applications to increase in the fourth quarter of fiscal
2004 primarily due to increased demand from the security and surveillance
markets.
Revenues from Sales to OEMs and VARs as Compared to Distributors
----------------------------------------------------------------
We sell our CameraChips either directly to OEMs and VARs or through
distributors. The following table illustrates the percentage of revenues from
sales to OEMs and VARs as compared to distributors in the three and nine months
ended January 31, 2004 and 2003:
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
OEMs and VARs......................... 79.7% 75.1% 72.5% 69.4%
Distributors.......................... 20.3 24.9 27.5 30.6
------- ------- ------- -------
Total............................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
OEMs and VARs. In the three months ended January 31, 2004, Nam Tai
-------------
Electronics, Inc., or Nam Tai, headquartered in Hong Kong, accounted for 10.6%
of revenues. In the three months ended January 31, 2003, Primax Electronics
Products Huizhou, or Primax, based in China, accounted for 21.9% of revenues,
Aiptek International, Inc., or Aiptek, headquartered in Taiwan, which is a
manufacturer and supplier to various OEMs, accounted for 11.5% of revenues, and
Nam Tai (both directly and through Actrontech Co., Ltd., a distributor)
accounted for approximately 12.5% of revenues. No single OEM or VAR accounted
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
for 10% or more of revenues in the nine months ended January 31, 2004. In the
nine months ended January 31, 2003, Primax represented 11.5% of revenues and
Aiptek represented 10.2% of revenues. No other OEM or VAR customer accounted
for 10% or more of revenues during any of these periods.
Distributors. In the three months ended January 31, 2004, World Peace
------------
Industrial Co. Ltd., or World Peace, headquartered in Taiwan, accounted for
16.3% of revenues. In the three months ended January 31, 2003, World Peace
accounted for 17.6% of revenues, including sales to World Peace's subsidiary,
GainTune, based in Hong Kong. In the nine months ended January 31, 2004, World
Peace accounted for 19.9% of revenues, including sales to GainTune. In the nine
months ended January 31, 2003, World Peace accounted for 20.2% of revenues,
including sales to GainTune. No other distributor accounted for 10% or more of
revenues during any of these periods.
Revenues from Domestic Sales as Compared to Foreign Sales
---------------------------------------------------------
The following table illustrates the percentage of revenues from sales of
our CameraChip products to domestic customers as compared to foreign customers
for the three and nine months ended January 31, 2004 and 2003:
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Domestic sales........................ 1.5% 5.1% 1.1% 6.9%
Foreign sales......................... 98.5 94.9 98.9 93.1
------- ------- ------- -------
Total............................... 100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
The majority of our foreign sales is attributable to sales made to
customers in Asia and, to a lesser extent, in Europe. Over time, our sales to
Asia-Pacific customers have increased primarily as a result of the continuing
trend of outsourcing production to Asian manufacturers and facilities. Because
of the preponderance of Asia-Pacific manufacturers and the fact that virtually
all products incorporating our CameraChips are sold globally, we believe that
such figures do not accurately reflect geographic distribution of sales of our
products into end-user markets.
Gross Profit
- ------------
Gross margins for the three months ended January 31, 2004 and 2003 were
38.4% and 37.8% of revenues, respectively. Gross margins for the nine months
ended January 31, 2004 and 2003 were 38.0% and 38.7% of revenues, respectively.
The increase in gross margins for the three months ended January 31, 2004, as
compared to the corresponding period in the prior year, was primarily due to
lower unit costs as a result of higher unit volumes, as well as from improved
efficiency in our production sequence, particularly in product testing. The
decrease in gross margins for the nine months ended January 31, 2004, as
compared to the corresponding period in the prior year, was primarily due to a
reduction in sales of previously written off inventory. For the three months
ended January 31, 2004, approximately $0.6 million of gross profit was
attributable to the sale of previously written off inventory. For the nine
months ended January 31, 2004, approximately $1.4 million of gross profit was
attributable to the sale of previously written off inventory. Excluding the
revenues and gross profit from the sale of previously written off inventory,
the gross margin for the three months ended January 31, 2004 would have
increased to approximately 38.0% of revenues, as compared to 37.1% of revenues
during the comparable period in the prior year. Excluding the revenues and
gross profit from the sale of previously written off inventory, the gross
margin for the nine months ended January 31, 2004 would have increased to
approximately 37.6% of revenues, as compared to 36.8% of revenues during the
comparable period in the prior year.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
The following table summarizes the effect of sales of previously written-
off inventory on gross profits for the three and nine months ended January 31,
2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Sales of all products................. $ 94,510 $ 30,522 $ 209,542 $ 69,055
Gross profit.......................... $ 36,300 $ 11,542 $ 79,728 $ 26,738
Gross margin.......................... 38.4% 37.8% 38.0% 38.7%
Sales excluding products for which the
costs were previously written off... $ 93,939 $ 30,175 $ 208,187 $ 66,956
Gross profit excluding the effect of
sales of products for which the
costs were previously written off... $ 35,729 $ 11,195 $ 78,373 $ 24,639
Gross margin excluding the effect of
sales of products for which the
costs were previously written off... 38.0% 37.1% 37.6% 36.8%
Of the previously written-off inventory, $18.1 million was written-off in
the three months ended January 31, 2001 due to a significant imbalance in the
PC camera market. The following table summarizes the activity with respect to
the original $18.1 million of previously written-off inventory (in thousands):
Inventory
Previously
Written-off in
Fiscal 2001
-----------
Balance at January 31, 2001....................................... $ 18,090
Sale of previously reserved inventory through April 30, 2003...... 12,765
---------
Balance at April 30, 2003......................................... 5,325
Sale of previously reserved inventory during the nine months ended
January 31, 2004................................................ 1,189
---------
Balance at January 31, 2004....................................... $ 4,136
=========
We were able to recover and sell $1.2 million of this inventory in the
nine months ended January 31, 2004 primarily due to a build-out of internet
infrastructure in China that created new demand for PC cameras. However, we
believe there is little opportunity to sell the remaining $4.1 million of this
inventory, primarily because these image sensors are not as technologically
advanced as other competing products in this market segment.
Research and Development
- ------------------------
Research and development expenses consist primarily of compensation and
personnel related expenses and costs for purchased materials, designs and
tooling, depreciation of computers and workstations, and amortization of
computer aided design software, some of which may fluctuate significantly from
period to period as a result of our product development cycles. Research and
development expenses for the three months ended January 31, 2004 and 2003 were
approximately $4.1 million and $3.1 million, respectively. As a percentage of
revenues, research and development expenses for the three months ended January
31, 2004 and 2003 represented 4.3% and 10.3%, respectively. Research and
development expenses for the nine months ended January 31, 2004 and 2003 were
approximately $10.8 million and $8.3 million, respectively. As a percentage of
revenues, research and development expenses for the nine months ended January
31, 2004 and 2003 represented 5.1% and 11.9%, respectively.
The increase in research and development expenses of approximately $0.9
million, or 29.8%, for the three months ended January 31, 2004 from the
corresponding period in the prior year resulted primarily from a $0.4 million
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
increase in expenses related to new product development to improve our current
product line and support new product introductions, a $0.3 million increase in
salary and payroll-related expenses associated with additional personnel, $0.1
million in software expenses and $0.1 million in facility-related expenses.
Examples of new product development expenses include tape-out and prototype
runs with our wafer manufacturers. The decrease in research and development as
a percentage of revenues for the three months ended January 31, 2004 was due to
the proportionately greater increase in revenues from levels in the prior year.
The increase in research and development expenses of approximately $2.6
million, or 31.1%, for the nine months ended January 31, 2004 from the
corresponding period in the prior year resulted primarily from a $0.9 million
increase in salary and payroll-related expenses associated with additional
personnel, $0.9 million in expenses related to new product development required
to improve our current product line and support new product introductions, and
$0.4 million in expenses for software, patent prosecution and engineering
supplies. The decline in research and development as a percentage of revenues
was due to the proportionately greater increase in revenues for the nine months
ended January 31, 2004 from levels in the prior year. We anticipate that our
research and development expenses will increase in the remainder of fiscal 2004
and the first six months of fiscal 2005 as we develop our next generation of
CameraChip products and as we continue to grow our business, including our
research and development team.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses consist primarily of
compensation and personnel related expenses, commissions paid to distributors
and manufacturers' representatives and insurance and legal expenses. Selling,
general and administrative expenses include some of the expenses associated
with the startup of our Chinese subsidiary. Selling, general and administrative
expenses for the three months ended January 31, 2004 and 2003 were
approximately $5.7 million and $2.9 million, respectively. As a percentage of
revenues, selling, general and administrative expenses for the three months
ended January 31, 2004 and 2003 represented 6.0% and 9.4%, respectively.
Selling, general and administrative expenses for the nine months ended January
31, 2004 and 2003 were approximately $15.9 million and $7.7 million,
respectively. As a percentage of revenues, selling, general and administrative
expenses for the nine months ended January 31, 2004 and 2003 represented 7.6%
and 11.1%, respectively.
The increase in selling, general and administrative expenses of
approximately $2.8 million, or 97.5%, for the three months ended January 31,
2004 from the corresponding period in the prior year resulted primarily from a
$1.0 million increase in selling, general and administrative expenses for our
foreign operations, a $0.9 million increase in commissions associated with
increased revenues, a $0.3 million increase in employment expenses and a $0.3
million increase in legal and accounting expenses. Selling, general and
administrative expenses decreased as a percentage of revenues in the three
months ended January 31, 2004 as compared to the corresponding period in the
prior year as a result of the proportionately greater increase in revenues. The
increase in selling, general and administrative expenses of approximately $8.2
million, or 107.1% for the nine months ended January 31, 2004 from the
corresponding period in the prior year resulted primarily from a $2.7 million
increase in commissions associated with increased revenues, a $1.5 million
increase in selling, general and administrative expenses for our foreign
operations, a $1.3 million increase in legal and accounting expenses, a $1.0
million increase in salary and payroll-related expenses and a $1.0 million
increase in provisions for bad debts related to the increase in accounts
receivable. Selling, general and administrative expenses decreased as a
percentage of revenues for the nine months ended January 31, 2004, as compared
to the corresponding period in the prior year, as a result of the
proportionately greater increase in revenues. We anticipate that our future
selling, general and administrative expenses will increase in absolute dollars
as we continue to grow our business.
Stock-based compensation
- ------------------------
Stock-based compensation consists primarily of the amortization of the
excess of fair market value over the grant price of options granted prior to
our initial public offering. The stock-based compensation for the three months
ended January 31, 2004 and 2003 was approximately $0.8 million and $0.1
million, respectively. As a percentage of revenues, the stock-based
compensation charge for the three months ended January 31, 2004 and 2003
represented 0.8% and 0.2%, respectively. The stock-based compensation for the
nine months ended January 31, 2004 and 2003 were approximately $1.0 million and
$0.3 million, respectively. As a percentage of revenues, the stock-based
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
compensation for the nine months ended January 31, 2004 and 2003 represented
0.5%. The increase for the three and nine months ended January 31, 2004 was due
to the issuance of stock options to new members of management and the board of
directors. These non-cash charges are not expected to continue at the level
experienced in the quarter ended January 31, 2004, and we expect stock
compensation expense to return to the prior levels.
Interest Income, Net
- --------------------
Our cash, cash equivalents and short-term investments are invested in
interest-bearing accounts consisting primarily of money market accounts and
high-grade corporate securities and government bonds maturing approximately
twelve months or less from the date of purchase. Interest income, net,
increased for the three months ended January 31, 2004 from the corresponding
period in the prior year to approximately $0.5 million from $0.2 million,
respectively. Interest income, net, increased for the nine months ended January
31, 2004 from the corresponding period in the prior year to approximately $1.3
million from $0.6 million, respectively. Increased interest income, net,
resulted from increased investments in interest-bearing accounts resulting from
approximately $113.2 million in net proceeds from the issuance of common stock
in our follow-on public offering in July 2003 and cash provided by operating
activities, partially offset by lower interest rates.
Provision for Income Taxes
- --------------------------
We generated approximately $26.3 million and $5.7 million in income before
income taxes for the three months ended January 31, 2004 and 2003,
respectively. We recorded provisions for income taxes for the three months
ended January 31, 2004 and 2003 of approximately $8.9 million and $1.1 million,
respectively. We generated approximately $53.3 million and $11.1 million in
income before income taxes for the nine months ended January 31, 2004 and 2003,
respectively. We recorded provisions for income taxes for the nine months ended
January 31, 2004 and 2003 of approximately $18.1 million and $1.9 million,
respectively. For the three months ended January 31, 2004 and 2003, the
effective rate was 34.0% and 18.9%, respectively. For the nine months ended
January 31, 2004 and 2003, the effective rate was 34.0% and 17.0%,
respectively. The lower effective tax rates for the three and nine months ended
January 31, 2003 were due to the release of the valuation allowance offsetting
net deferred tax assets. We anticipate the effective tax rate for fiscal 2004
will increase as compared to fiscal 2003 but will be less than the combined
federal and state statutory rate for fiscal 2004. The increase in tax rate is
due to the anticipated combination of income between domestic and foreign
entities for the current fiscal year. Achieving an effective tax rate in fiscal
2004 that is less than the combined federal and state statutory rates is
principally contingent upon our foreign affiliates generating income.
Liquidity and Capital Resources
- -------------------------------
Principal sources of liquidity at January 31, 2004 consisted of cash, cash
equivalents and short-term investments of $197.2 million.
Our working capital increased by approximately $145.7 million to $226.6
million as of January 31, 2004 from $80.9 million as of April 30, 2003. The
increase was primarily attributable to a $140.2 million increase in cash and
cash equivalents principally resulting from our follow-on public offering of
common stock in July 2003, a $31.8 million increase in inventories to support
future sales, a $15.6 million increase in accounts receivable, net, consistent
with the increase in revenues from prior year levels during the nine months
ended January 31, 2004, a $1.1 million increase in restricted cash and a $0.5
million increase in prepaid expenses and other assets, partially offset by a
$27.4 million increase in accounts payable, a $7.3 million increase in accrued
liabilities to support increased levels of operations, a $3.8 million increase
in deferred income and a $3.7 million decrease in short-term investments.
For the nine months ended January 31, 2004, net cash provided by operating
activities totaled approximately $29.2 million as compared to cash used for
operating activities of $0.8 million for the corresponding period in the prior
year, primarily due to net income of approximately $35.2 million for the nine
months ended January 31, 2004 as compared to $9.2 million for the corresponding
period in the prior year, a $27.4 million increase in accounts payable, a $7.3
million increase in accrued expenses and other liabilities, a $3.8 million
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
increase in deferred income, and a $1.2 million decrease in refundable and
deferred income taxes, which were partially offset by a $31.8 million increase
in inventories to support future sales, a $15.6 million increase in accounts
receivable, net, and a $0.5 million increase in prepaid expenses and other
assets. The $15.6 million increase in accounts receivable, net, reflects the
significantly higher level of sales during the nine months ended January 31,
2004, partially offset by a decrease in days of sales outstanding to 33 days as
of January 31, 2004 from 43 days as of April 30, 2003. The increase in accounts
receivable, net, was partially offset by a $5.1 million increase in the reserve
for sales returns, which rose as a result of the large increase in revenues for
the nine months ended January 31, 2004, and by a $1.7 million increase in the
allowance for doubtful accounts, which rose as a result of the large increase
in accounts receivable balances. The $31.8 million increase in inventories was
attributable to higher inventory levels to support future sales. Inventory
turns, calculated based on the fiscal quarters ended January 31, 2004 and April
30, 2003, decreased to 5.1 as of January 31, 2004 as compared to 7.2 as of
April 30, 2003, as we increased inventory levels to reduce supply constraints
in anticipation of increased future sales. Accounts payable increased
concurrently with the increase in inventory purchases. Accrued liabilities
increased primarily due to an increase in our effective tax rate and timing
differences in tax payments. For the remainder of fiscal 2004, we anticipate
that our research and development expenses will increase as we develop our next
generation of CameraChip products and as we continue to grow our business. We
also anticipate that our selling, general and administrative expenses will
increase for the remainder of fiscal 2004 as we continue to grow our business.
For the nine months ended January 31, 2004, our cash used in investing
activities increased to approximately $9.7 million from $8.4 million for the
corresponding prior year period, due to $8.0 million in purchases of property,
plant and equipment, $4.3 million in purchases of long-term non-marketable
investments and a $1.1 million increase in restricted cash, partially offset by
$3.7 million in proceeds from the sale of short-term investments. Net cash used
in investing activities of $8.4 million for the nine months ended January 31,
2003 resulted from $5.2 million in purchases of property, plant and equipment
and net $3.2 million in purchases of short-term investments. The $6.8 million
increase in property, plant and equipment was due to the additional investment
in buildings, building improvements and machinery and equipment to support the
expanding operations of our Chinese subsidiary.
For the nine months ended January 31, 2004, net cash provided by financing
activities increased to approximately $120.6 million from $2.0 million for the
corresponding period in the prior year. The increase was primarily due to
approximately $113.2 million in net proceeds resulting from our follow-on
public offering of common stock in July 2003 and $7.4 million in proceeds from
the issuance and sale of common stock pursuant to the exercise of stock options
and employee purchases through our employee stock purchase plan during the nine
months ended January 31, 2004 as compared to $2.9 million for the corresponding
period in the prior year. Proceeds from the issuance and sale of common stock
for the nine months ended January 31, 2003 were partially offset by $0.9
million in refunded deposits related to investments from third parties in our
Chinese subsidiary.
In June 2003, we purchased approximately 27% of a privately held company
based in Taiwan for a total of $2.0 million in cash. The Taiwanese company
provides plastic packaging services, and we will be a major customer. We have
accounted for this investment using the equity method. In November 2003, we
increased our investment in this company by approximately $0.8 million to
maintain our equity ownership percentage in this company. This investment is
unrelated to our joint venture with TSMC.
We expect to fund the capital commitment to our Chinese subsidiary and to
our joint venture with TSMC through a combination of funds from our available
working capital, investments from third parties, or equity or debt financing.
Third party financing may not be available to us when and as required or on
terms that are favorable to our stockholders and us. In addition, Chinese law
may limit the sources that may be eligible to invest in our Chinese subsidiary.
In the event we are unable to obtain financing from third parties, the issuance
of our equity securities, including securities convertible into our equity
securities, would dilute the ownership interests of our existing stockholders,
and the issuance of debt securities could increase the risk or the perceived
risk of our business. Issuance of debt securities could also impair our
financial condition, and interest payments could have an adverse effect on our
results of operation.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
We currently expect our available cash, cash equivalents, and short-term
investments, together with cash that we anticipate to generate from business
operations, to be sufficient to satisfy our working capital requirements for
the next twelve months. Our ability to generate cash from operations is subject
to substantial risks described below under the caption "Factors Affecting
-----------------
Future Results." We encourage you to review these risks carefully. If we are
- --------------
unable to generate sufficient cash from our operations, it would have a
material adverse effect on our business and financial condition.
Non-audit Services of Independent Auditors
- ------------------------------------------
Our auditors, PricewaterhouseCoopers LLP, perform tax planning services
for us that had been approved by our Audit Committee of the Board of Directors
during the three months ended January 31, 2004.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The following summarizes our contractual obligations and commercial
commitments as of January 31, 2004 and the effect such obligations and
commitments are expected to have on our liquidity and cash flows in future
periods (in thousands):
Less than 1 - 3 4 - 5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Contractual Obligations
Operating leases........... $ 6,237 $ 1,864 $ 3,394 $ 839 $ 140
Noncancelable orders....... 42,269 42,269 -- -- --
-------- -------- -------- -------- --------
Total contractual
obligations............ 48,506 44,133 3,394 839 140
-------- -------- -------- -------- --------
Other Commercial Commitments
Investment in China........ 15,300 1 15,300 -- -- --
Joint Venture with TSMC.... 3,500 2 -- 3,500 -- --
-------- -------- -------- -------- --------
Total commercial
commitments............ 18,800 15,300 3,500 -- --
-------- -------- -------- -------- --------
Total contractual
obligations and
commercial commitments. $ 67,306 $ 59,433 $ 6,894 $ 839 $ 140
======== ======== ======== ======== ========
- -------------------------
1 Relates to the remaining $15.3 million of registered capital for our
Chinese subsidiary. We established this subsidiary as part of our
efforts to increase capacity and reduce costs for testing our
CameraChips.
2 Pursuant to the Shareholders' Agreement with TSMC, our share of the
capital commitment to VisEra is $23.5 million, which becomes due as
VisEra's business and service capabilities develop over a number of
years. Our net cash investment to the joint venture will be
approximately $4.5 million. In November 2003, we made a $1.5 million
cash investment in this joint venture. We will also contribute
approximately $19.0 million of assets to the joint venture, including
technology, plant and equipment currently owned by us or to be purchased
with funds for existing commercial commitments. Our cash and asset
contributions will be made in three phases. In the first phase, we
contributed $1.5 million in cash to VisEra and granted a non-exclusive
license to certain of our manufacturing and automated final testing
technologies and patents. In the second phase, we will contribute $9.5
million in cash to VisEra and a non-exclusive license to certain of our
manufacturing and automated final testing technologies and patents. In
the third phase, we will contribute $12.5 million in cash and assets to
VisEra and receive back from VisEra an aggregate cash payment of $17.5
million.
In October 2003, we entered into a Shareholders' Agreement with TSMC
pursuant to which we agreed with TSMC to form VisEra, a joint venture in
Taiwan, for the purposes of providing manufacturing services and automated
final testing services. We have committed with TSMC and certain employees and
affiliates of VisEra to provide an aggregate of $50.0 million in total capital
to VisEra, which commitments may be made in the form of cash or asset
contributions. Our company and TSMC will have equal interests in VisEra. Our
share of this capital commitment to VisEra is $23.5 million and becomes due in
stages as VisEra's business and service capabilities develop over a number of
years. Our net cash commitment to VisEra is approximately $4.5 million. In
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
November 2003, we made a $1.5 million cash investment in this joint venture. We
will also contribute approximately $19.0 million of assets to the joint
venture, including technology, plant and equipment currently owned by us or to
be purchased with funds for existing commercial commitments. The $3.5 million
commercial commitment referenced in the table above refers to the remaining
$3.5 million of net cash capital contributions to VisEra.
Factors Affecting Future Results
- --------------------------------
This Quarterly Report on Form 10-Q, including this Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements. These forward-looking statements are subject to
substantial risks and uncertainties that could cause our future business,
financial condition or results of operations to differ materially from our
historical results or currently anticipated results, including those set forth
below.
Risks Related to Our Business
-----------------------------
We face intense competition in our markets from more established CCD and
------------------------------------------------------------------------
CMOS image sensor manufacturers, and if we are unable to compete
----------------------------------------------------------------
successfully we may not be able to maintain or grow our business.
----------------------------------------------------------------
The image sensor market is intensely competitive, and we expect
competition in this industry to continue to increase. This competition has
resulted in rapid technological change, evolving standards, reductions in
product sales prices and rapid product obsolescence. If we are unable to
successfully meet these competitive challenges, we may be unable to maintain
and grow our business. Any failure to compete successfully would also adversely
affect our results of operation and impair our financial condition.
Our CameraChips face competition from a number of sources, including
companies that sell CCD image sensors, as well as other companies that sell
CMOS image sensors. Many of our competitors have longer operating histories,
greater presence in key markets, greater name recognition, larger customer
bases, more established strategic and financial relationships and significantly
greater financial, sales and marketing, manufacturing, distribution, technical
and other resources than we do. As a result, they may be able to adapt more
quickly to new or emerging technologies and customer requirements or devote
greater resources to the promotion and sale of their products. Our competitors
include CCD image sensor manufacturers such as Fuji, Matsushita, NEC, Sharp,
Sony, Sanyo and Toshiba, as well as established CMOS image sensor manufacturers
such as Agilent, ESS, Fujitsu, Hynix, Micron, Mitsubishi Electronic, Motorola,
National Semiconductor, Samsung, Sharp, Sony, STMicroelectronics and Toshiba.
In addition, we compete with a large number of smaller CMOS manufacturers
including Foveon, IC Media Corporation, PixArt and Zoran.
We released a 1.3-megapixel and 2.0-megapixel CMOS image sensor, as well
as a 1/7-inch low-resolution CMOS image sensor, for cameraphone manufacturers
in February 2004. Our new releases compete against CCD image sensors, and we
cannot guarantee the adoption of our new image sensors by existing or new
customers. We also cannot guarantee the growth of end-user markets that would
embed these new image sensors. If our enhanced products and technologies do
not gain market acceptance, we may not be able to maintain our market share in
this competitive environment.
Our competitors may acquire or enter into strategic or commercial
agreements or arrangements with foundries or providers of color filter
processing, assembly or packaging services. These strategic arrangements
between our competitors and third party service providers could involve
preferential or exclusive arrangements for our competitors. As a result, these
strategic alliances could impair our ability to secure sufficient capacity from
foundries and service providers to meet our demand for wafer manufacturing,
color filter processing, assembly or packaging services, adversely affecting
our ability to meet customer demand for our products. In addition, competitors
may enter into exclusive relationships with distributors, which could reduce
available distribution channels for our products and impair our ability to sell
our products and grow our business.
In addition, some of our customers may also be developers of image
sensors, and this could potentially adversely affect our results of operations,
business and prospects. Samsung, for example, is a current customer that uses
our CMOS products in certain of its products, but also independently
manufactures CMOS image sensors. A customer such as Samsung that develops its
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
own image sensors may reduce or cease purchases from us, and this could
materially and adversely affect our ability to sustain and grow our business
and could impair our financial results. Samsung is also a third party service
provider that has fabricated, and may in the future fabricate, our interface
chips or other products. If Samsung were to decide not to fabricate our
interface chips for competitive or other reasons, that could impair our ability
to meet customer demand for our products.
We depend on the increased acceptance of CMOS technology for mass market
------------------------------------------------------------------------
image sensor applications, and any delay in the acceptance of this
------------------------------------------------------------------
technology could adversely affect our ability to grow our business and
----------------------------------------------------------------------
increase our revenues.
---------------------
Our business strategy depends in large part on the continued growth of
various markets into which we sell our CameraChips, including the markets for
digital still and video cameras, cell phones, personal computers, toys and
games, including interactive video games, and commercial and home security and
surveillance applications. Our ability to sustain and grow our business also
depends on the emergence of new markets for our products such as cameras for
automotive applications, personal identification systems and medical imaging
devices. If these current and new markets do not grow and develop as
anticipated, we may be unable to sustain or grow the sales of our products.
Although CMOS technology has been available for over 20 years, CMOS
technology has been used in image sensors only relatively recently. Along with
the other risk factors described in this section, the following are examples of
factors that may delay the adoption of the CMOS fabrication process and our
single chip technology for mass market image sensor applications:
o the failure of the emergence of a universal platform for imaging solutions
for computers and the Internet;
o improvements in or price reductions for CCD image sensors, which could
slow the adoption of CMOS image sensors in markets already dominated by
CCD image sensors or prevent or delay the adoption of CMOS image sensors
in emerging markets;
o the failure of manufacturers that have been using CCD products to adopt
our CMOS CameraChips; and
o the failure to develop easy to use and affordable products using CMOS
image sensors.
The occurrence of any of these factors could adversely affect our ability
to susta