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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended October 31, 2009

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)

 

4275 Burton Drive, Santa Clara, California 95054

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code:  (408) 567-3000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer   £ (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

 

At December 4, 2009, 51,253,446 shares of common stock of the registrant were outstanding, exclusive of 12,541,000 shares of treasury stock.

 

 

 



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

3

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) — October 31, 2009 and April 30, 2009

3

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) — Three and Six Months Ended October 31, 2009 and 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) — Six Months Ended October 31, 2009 and 2008

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

47

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

62

 

 

 

Item 6.

Exhibits

63

 

 

 

Signatures

64

 

 

Exhibit Index

 

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

OMNIVISION TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

 

October 31,

 

April 30,

 

 

 

2009

 

2009 (1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

315,931

 

$

257,808

 

Short-term investments

 

38,055

 

16,973

 

Accounts receivable, net of allowances for doubtful accounts and sales returns

 

67,727

 

43,978

 

Inventories

 

92,242

 

105,024

 

Deferred income taxes

 

1,391

 

1,092

 

Prepaid expenses and other current assets

 

8,467

 

7,779

 

Total current assets

 

523,813

 

432,654

 

Property, plant and equipment, net

 

117,652

 

119,071

 

Long-term investments

 

87,154

 

85,469

 

Intangibles, net

 

4,130

 

7,396

 

Other long-term assets

 

22,737

 

22,341

 

Total assets

 

$

755,486

 

$

666,931

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

85,085

 

$

28,775

 

Accrued expenses and other current liabilities

 

20,913

 

12,153

 

Income taxes payable

 

3,264

 

692

 

Deferred revenues, less cost of revenues

 

9,415

 

7,176

 

Current portion of long-term debt

 

3,554

 

3,555

 

Total current liabilities

 

122,231

 

52,351

 

Long-term liabilities:

 

 

 

 

 

Long-term income taxes payable

 

82,667

 

81,266

 

Non-current portion of long-term debt

 

37,681

 

32,867

 

Other long-term liabilities

 

6,502

 

8,109

 

Total long-term liabilities

 

126,850

 

122,242

 

Total liabilities

 

249,081

 

174,593

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

OmniVision Technologies, Inc. stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized; 63,345 shares issued and 50,804 outstanding at October 31, 2009 and 62,590 shares issued and 50,049 outstanding at April 30, 2009, respectively

 

63

 

63

 

Additional paid-in capital

 

418,917

 

403,159

 

Accumulated other comprehensive income

 

846

 

773

 

Treasury stock, 12,541 at October 31, 2009 and April 30, 2009, respectively

 

(178,683

)

(178,683

)

Retained earnings

 

261,757

 

263,529

 

Total OmniVision Technologies, Inc. stockholders’ equity

 

502,900

 

488,841

 

Noncontrolling interest

 

3,505

 

3,497

 

Total equity

 

506,405

 

492,338

 

Total liabilities and equity

 

$

755,486

 

$

666,931

 

 


(1)    As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).

 

3



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008(1)

 

2009

 

2008(1)

 

Revenues

 

$

183,344

 

$

163,935

 

$

288,904

 

$

338,214

 

Cost of revenues

 

139,382

 

123,018

 

221,272

 

253,404

 

Gross profit

 

43,962

 

40,917

 

67,632

 

84,810

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research, development and related

 

18,853

 

23,199

 

37,285

 

43,499

 

Selling, general and administrative

 

16,209

 

16,890

 

30,369

 

34,272

 

Goodwill impairment

 

 

7,541

 

 

7,541

 

Total operating expenses

 

35,062

 

47,630

 

67,654

 

85,312

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

8,900

 

(6,713

)

(22

)

(502

)

Interest income (expense), net

 

(244

)

478

 

(448

)

1,754

 

Other income (expense), net

 

223

 

(854

)

791

 

(805

)

Income (loss) before income taxes

 

8,879

 

(7,089

)

321

 

447

 

 

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

961

 

(1,494

)

2,149

 

(81

)

Net income (loss)

 

7,918

 

(5,595

)

(1,828

)

528

 

Net loss attributable to noncontrolling interest

 

(166

)

(287

)

(56

)

(392

)

Net income (loss) attributable to OmniVision Technologies, Inc.

 

$

8,084

 

$

(5,308

)

$

(1,772

)

$

920

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

$

(0.10

)

$

(0.03

)

$

0.02

 

Diluted

 

$

0.16

 

$

(0.10

)

$

(0.03

)

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

50,763

 

50,754

 

50,668

 

51,006

 

Diluted

 

51,769

 

50,754

 

50,668

 

51,591

 

 


(1)    As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).

 

4



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008 (1)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(1,828

)

$

528

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

11,662

 

9,245

 

Change in fair value of interest rate swap

 

(645

)

165

 

Stock-based compensation

 

12,201

 

13,851

 

Gain on equity investments, net

 

(1,398

)

(1,198

)

Write-down of inventories

 

10,149

 

11,641

 

Loss on disposal of property, plant and equipment

 

108

 

505

 

Goodwill impairment

 

 

7,541

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(23,735

)

4,872

 

Inventories

 

7,696

 

(21,887

)

Deferred income taxes

 

(1,260

)

(2,582

)

Prepaid expenses and other assets

 

235

 

(2,288

)

Accounts payable

 

53,713

 

21,253

 

Accrued expenses and other current liabilities

 

2,957

 

(1,768

)

Income taxes payable

 

3,975

 

(1,194

)

Deferred revenues, less cost of revenues

 

2,233

 

4,455

 

Deferred tax liabilities

 

(967

)

(994

)

Net cash provided by operating activities

 

75,096

 

42,145

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(45,140

)

(45,393

)

Proceeds from sales or maturities of short-term investments

 

23,916

 

53,186

 

Purchases of property, plant and equipment, net of sales

 

(4,257

)

(21,289

)

Purchases of long-term investments

 

 

(1,376

)

Net cash used in investing activities

 

(25,481

)

(14,872

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term borrowings

 

6,590

 

6,000

 

Repayment of long-term borrowings

 

(1,778

)

(1,196

)

Cash contribution by noncontrolling interest

 

4

 

 

Affiliate cash dividend paid to noncontrolling interest

 

 

(201

)

Proceeds from exercise of stock options and from employee stock purchase plan

 

3,610

 

2,737

 

Payments for repurchases of common stock

 

 

(12,915

)

Net cash provided by (used in) financing activities

 

8,426

 

(5,575

)

Effect of exchange rate changes on cash and cash equivalents

 

82

 

(110

)

Net increase in cash and cash equivalents

 

58,123

 

21,588

 

Cash and cash equivalents at beginning of period

 

257,808

 

217,340

 

Cash and cash equivalents at end of period

 

$

315,931

 

$

238,928

 

Supplemental cash flow information:

 

 

 

 

 

Taxes paid

 

$

472

 

$

4,607

 

Interest paid

 

$

1,085

 

$

714

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Additions to property, plant and equipment included in accounts payable and accrued expenses

 

$

2,592

 

$

5,820

 

Capitalized interest and other costs

 

$

46

 

$

183

 

 


(1)    As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).

 

5



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 1 — Basis of Presentation

 

Overview

 

The accompanying interim unaudited condensed consolidated financial statements as of October 31, 2009 and April 30, 2009 and for the three and six months ended October 31, 2009 and 2008 have been prepared by OmniVision Technologies, Inc., and its subsidiaries (“OmniVision” or the “Company”) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Except for the retrospective adjustments related to the adoption of an authoritative accounting guidance for noncontrolling interests as discussed in further detail below, the amounts as of April 30, 2009 come from the Company’s audited annual 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 condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2009 (the “Form 10-K”).

 

On May 1, 2009, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s condensed consolidated financial statements. Consequently, the Company’s noncontrolling interest is now disclosed as a separate component of the Company’s consolidated equity on the balance sheet, rather than a “mezzanine” item between liabilities and equity. Further, earnings and other comprehensive income are now separately attributed to both the controlling and noncontrolling interests. Earnings per share continues to be calculated based on net income attributable to the Company’s controlling interest. The impact on the Company’s financial position as of April 30, 2009, results of operations for the three and six months ended October 31, 2008, and cash flows for the six months ended October 31, 2008 from the adoption of this authoritative accounting guidance is presented in the tables below (in thousands):

 

 

 

April 30, 2009
Condensed Consolidated
Balance Sheet

 

 

 

As Reported

 

As Adjusted

 

Minority interest

 

$

3,497

 

$

 

Noncontrolling interest

 

 

3,497

 

 

 

 

 

 

 

 

 

Three months ended
October 31, 2008
Condensed Consolidated
Statement of Operations

 

Six months ended
October 31, 2008
Condensed Consolidated
Statement of Operations

 

 

 

As Reported

 

As Adjusted

 

As Reported

 

As Adjusted

 

Minority interest

 

$

(287

)

$

 

$

(392

)

$

 

Net income (loss)

 

(5,308

)

(5,595

)

920

 

528

 

Net loss attributable to noncontrolling interest

 

 

(287

)

 

(392

)

Net income (loss) attributable to OmniVision Technologies, Inc.

 

 

(5,308

)

 

920

 

 

 

 

 

 

 

Six months ended
October 31, 2008
Condensed Consolidated
Statement of Cash flows

 

 

 

As Reported

 

As Adjusted

 

Net income

 

$

920

 

$

528

 

Minority interest in net loss of consolidated affiliates

 

(392

)

 

 

6



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

The results of operations for the three and six months ended October 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2010 or any other future period.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and beliefs of what could occur in the future considering available information. Actual results could differ from these estimates.

 

Note 2 — Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its consolidated affiliate. All significant inter-company accounts and transactions have been eliminated.

 

Foreign Currency Translation

 

Certain of the Company’s subsidiaries or consolidated affiliates have functional currencies other than the U.S. dollar and the assets and liabilities of the subsidiaries are translated into U.S. dollars at the rates of exchange prevailing on the balance sheet date. Revenue and expense items are translated into U.S. dollars at the average rate of exchange for the period. Unrealized gains and losses from foreign currency translation are included in “Accumulated other comprehensive income,” a component of stockholders’ equity. For subsidiaries with the U.S. dollar as the functional currency, and with assets or liabilities denominated in currencies other than the U.S. dollar, non-monetary assets are remeasured into U.S. dollars using historical rates of exchange. Monetary assets are remeasured into U.S. dollars using exchange rates prevailing on the balance sheet date. The remeasurement gains or losses are included in “Other income (expense), net.” For the three and six months ended October 31, 2009, the Company recorded remeasurement losses of $25,000 and $43,000, respectively. For the three and six months ended October 31, 2008, the Company recorded remeasurement losses of $0.7 million and $368,000, respectively.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with a maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist principally of government bonds, certificates of deposit and money market funds. (See Note 10.)

 

The Company maintains the majority of its cash and cash equivalent balances with major financial institutions in the United States. These balances are subject to a concentration of credit risk and only a small proportion of these balances are covered by Federal Deposit Insurance Corporation (“FDIC”) insurance. The Company places its cash investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines.

 

Inventories

 

Inventories are stated at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or market.

 

The Company records a provision to reduce the carrying value of inventories to their net realizable value when the Company believes that the net realizable value is less than cost. The Company also records a provision for the cost of inventories when the number of units on hand exceeds the number of units that the Company forecasts will be sold over a certain period of time, generally 12 months. Where necessary, these provisions take into account the inventories owned and not yet sold by certain of the Company’s distributors. The recording of these provisions establishes a new and lower cost basis for each specifically identified inventory item, and the Company does not restore the cost basis to its original level regardless of any subsequent changes in facts or circumstances. Recoveries are only recognized upon the sale of previously written-down inventories.

 

7



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Goodwill

 

The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. During the second quarter of fiscal 2009, based on a combination of factors, including the significant decline in the Company’s market capitalization and the global economic downturn then, the Company concluded that there were sufficient factual circumstances for interim impairment analyses. Based on the analyses, the Company wrote off the carrying value of goodwill and recorded an impairment charge of $7.5 million, which was included in “Goodwill impairment” for the three and six months ended October 31, 2008.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is defined as the change in the equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The following table sets forth the calculation of comprehensive income (loss) for all periods presented (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008 (1)

 

2009

 

2008 (1)

 

Net income (loss)

 

$

7,918

 

$

(5,595

)

$

(1,828

)

$

528

 

Translation gains (losses)

 

54

 

(615

)

125

 

(666

)

Unrealized gains on available-for-sale securities, net

 

5

 

133

 

8

 

67

 

Comprehensive income (loss)

 

7,977

 

(6,077

)

(1,695

)

(71

)

Comprehensive income (loss) attributable to noncontrolling interest

 

(135

)

(287

)

4

 

(392

)

Comprehensive income (loss) attributable to OmniVision Technologies, Inc.

 

$

8,112

 

$

(5,790

)

$

(1,699

)

$

321

 

 


(1)    As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

The following table reconciles equity attributable to noncontrolling interest (in thousands):

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008 (1)

 

Noncontrolling interest, May 1

 

$

3,497

 

$

4,444

 

Cash contribution by noncontrolling interest

 

4

 

 

Dividend distributed to noncontrolling interest

 

 

(201

)

Net loss attributable to noncontrolling interest

 

(56

)

(392

)

Translation gain

 

60

 

1

 

Noncontrolling interest, October 31

 

$

3,505

 

$

3,852

 

 


(1)    As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

8



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Revenue Recognition

 

For shipments to customers without agreements that allow for returns or credits, principally original equipment manufacturers (“OEMs”) and value added resellers (“VARs”), the Company recognizes revenue using the “sell-in” 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 material obligations. At the time revenue is recognized, the Company provides for future returns of potentially defective product based on historical experience. For cash consideration given to customers for which the Company does not receive a separately identifiable benefit or cannot reasonably estimate fair value, the Company records the amounts as reductions of revenue.

 

For shipment of products sold to distributors under agreements allowing for returns or credits, title and the risk of ownership to the products transfer to the distributor upon shipment, and the distributor is obligated to pay for the products whether or not the distributor has sold them at the time payment is due. Under the terms of the Company’s agreements with such distributors and subject to the Company’s prior approval, distributors are entitled to reclaim from the Company as price adjustments the difference, if any, between the prices at which the Company sold the product to the distributors and the prices at which the product is subsequently sold by the distributor. In addition, distributors have limited rights to return inventory that they determine is in excess of their requirements, and accordingly, in determining the appropriate level of provision for excess and obsolete inventory, the Company takes into account the inventories held by its distributors. For these reasons, prices and revenues are not fixed or determinable until the distributor resells the products to the Company’s end-user customers and the distributor notifies the Company in writing of the details of such sales transactions. Accordingly, the Company recognizes revenue using the “sell-through” method. Under the “sell-through” method, the Company defers the revenue, adjustments to revenue and the related costs of revenue until the final resale of such products to end customers. The amounts billed to these distributors and adjustments to revenue and the cost of inventory shipped to, but not yet sold by, the distributors are shown net on the Consolidated Balance Sheets as “Deferred revenues, less cost of revenues.”

 

In addition, the Company recognizes revenue from the performance of services to a limited number of customers, under either the completed-contract or the percentage-of-completion methods. The percentage-of-completion method of accounting is used for cost reimbursement-type contracts, where revenues recognized are that portion of the total contract price equal to the ratio of costs expended to date to the anticipated final total costs based on current estimates of the costs to complete the projects. The amount of service-related revenue has not been material in any of the periods presented. At its consolidated affiliate, Silicon Optronics, Inc. (“SOI”), the Company recognizes the limited amount of SOI-related service revenue on a completed-contract basis.

 

Recent Accounting Pronouncements

 

In August 2009, the Financial Accounting Standards Board (“FASB”) updated the authoritative guidance for fair value measurements as it pertains to liabilities. The update clarifies what valuation technique a company should use when quoted prices in an active market for an identical liability is not available. The Company is required to adopt the guidance in its third quarter of fiscal 2010. The Company does not expect the adoption of this guidance to have any material impact on its financial position, results of operations or cash flows.

 

In October 2009, the FASB revised the authoritative guidance for revenue recognition for arrangements with multiple deliverables. The new guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for the undelivered elements. In allocating transaction consideration among the deliverables, the guidance also introduced the concept of using management’s best estimate of a standalone selling price as an alternate basis for allocation. The guidance is effective in fiscal years beginning on or after June 15, 2010, and the Company is required to adopt this guidance in its first quarter of fiscal 2012. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.

 

In October 2009, the FASB issued authoritative guidance addressing certain revenue arrangements that include software elements. This guidance states that tangible products with hardware and software components that work together to deliver the product functionality are considered non-software products, and the accounting guidance under the revenue arrangements with multiple deliverables is to be followed. The guidance is effective in fiscal years beginning on or after June 15, 2010, and the Company is required to adopt this guidance in its first quarter of fiscal 2012. The Company is currently evaluating the impact this guidance may have on its financial position, results of operations and cash flows.

 

9



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 3 — Short-Term Investments

 

Available-for-sale securities at October 31, 2009 and April 30, 2009 were as follows (in thousands):

 

 

 

As of October 31, 2009

 

 

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Certificates of deposit

 

$

4,778

 

$

 

$

 

$

4,778

 

U.S. government debt securities with maturities less than one year

 

14,992

 

7

 

 

14,999

 

U.S. government debt securities with maturities over one year

 

13,265

 

24

 

 

13,289

 

Commercial paper and bond fund

 

4,987

 

2

 

 

4,989

 

 

 

$

38,022

 

$

33

 

$

 

$

38,055

 

Contractual maturity dates, less than one year

 

 

 

 

 

 

 

$

24,766

 

Contractual maturity dates, one year to two years

 

 

 

 

 

 

 

13,289

 

 

 

 

 

 

 

 

 

$

38,055

 

 

 

 

 

 

 

 

 

 

 

 

 

As of April 30, 2009

 

 

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Certificates of deposit

 

$

3,602

 

$

 

$

 

$

3,602

 

U.S. government debt securities with maturities less than one year

 

5,111

 

6

 

 

5,117

 

U.S. government debt securities with maturities over one year

 

5,000

 

11

 

 

5,011

 

Commercial paper and bond funds

 

3,242

 

1

 

 

3,243

 

 

 

$

16,955

 

$

18

 

$

 

$

16,973

 

Contractual maturity dates, less than one year

 

 

 

 

 

 

 

$

11,962

 

Contractual maturity dates, one year to two years

 

 

 

 

 

 

 

5,011

 

 

 

 

 

 

 

 

 

$

16,973

 

 

10



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 4 — Supplemental Balance Sheet Account Information (in thousands)

 

 

 

October 31,

 

April 30,

 

 

 

2009

 

2009

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

209,349

 

$

120,754

 

Money market funds, certificates of deposit and government bonds

 

106,582

 

137,054

 

 

 

$

315,931

 

$

257,808

 

Accounts receivable, net:

 

 

 

 

 

Accounts receivable

 

$

70,995

 

$

48,105

 

Less:

Allowance for doubtful accounts

 

(671

)

(691

)

 

Allowance for sales returns

 

(2,597

)

(3,436

)

 

 

$

67,727

 

$

43,978

 

Inventories:

 

 

 

 

 

Work in progress

 

$

55,097

 

$

26,860

 

Finished goods

 

37,145

 

78,164

 

 

 

$

92,242

 

$

105,024

 

Prepaid expenses and other current assets:

 

 

 

 

 

Prepaid expenses

 

$

5,673

 

$

5,254

 

Deposits and other

 

1,262

 

2,439

 

Employee loan receivable

 

1,000

 

 

Interest receivable

 

532

 

86

 

 

 

$

8,467

 

$

7,779

 

Property, plant and equipment, net:

 

 

 

 

 

Land

 

$

13,000

 

$

13,000

 

Buildings and land use right

 

39,428

 

39,428

 

Buildings/leasehold improvements

 

17,306

 

17,110

 

Machinery and equipment

 

63,226

 

58,641

 

Furniture and fixtures

 

4,807

 

4,825

 

Software

 

5,839

 

6,188

 

Construction in progress

 

13,890

 

11,878

 

 

 

157,496

 

151,070

 

Less: Accumulated depreciation and amortization

 

(39,844

)

(31,999

)

 

 

$

117,652

 

$

119,071

 

Other long-term assets:

 

 

 

 

 

Deferred income tax assets — non-current

 

$

18,519

 

$

17,233

 

Prepaid wafer credits

 

2,990

 

2,990

 

Long-term employee loan receivable

 

 

1,000

 

Other long-term assets

 

1,228

 

1,118

 

 

 

$

22,737

 

$

22,341

 

Accrued expenses and other current liabilities:

 

 

 

 

 

Employee compensation

 

$

7,211

 

$

4,848

 

Third party commissions

 

1,154

 

1,532

 

Professional services

 

1,997

 

1,269

 

Noncancelable purchase commitments

 

6,096

 

411

 

Distributor pricing adjustments

 

2,435

 

2,399

 

Deferred income tax liabilities — current

 

12

 

8

 

Other

 

2,008

 

1,686

 

 

 

$

20,913

 

$

12,153

 

Other long-term liabilities:

 

 

 

 

 

Deferred income tax liabilities — non-current

 

$

2,684

 

$

3,646

 

Interest rate swaps

 

3,818

 

4,463

 

 

 

$

6,502

 

$

8,109

 

 

11



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

 

Note 5 — Long-term Investments

 

Long-term investments as of October 31, 2009 and April 30, 2009 consisted of the following (in thousands):

 

 

 

October 31,

 

April 30,

 

 

 

2009

 

2009

 

VisEra

 

$

69,220

 

$

67,619

 

WLCSP

 

11,693

 

10,996

 

XinTec

 

4,661

 

4,661

 

ImPac

 

1,580

 

2,193

 

Total

 

$

87,154

 

$

85,469

 

 

VisEra Technologies Company, Ltd.

 

On October 29, 2003, the Company and Taiwan Semiconductor Manufacturing Company Limited (“TSMC”) entered into an agreement to form VisEra Technologies Company, Ltd. (“VisEra”), a joint venture in Taiwan, for the purposes of providing certain manufacturing and automated final testing services related to complementary metal oxide semiconductor (“CMOS”) image sensors. In August 2005, under an amendment to the original 2003 joint-venture agreement, the Company and TSMC formed VisEra Holding Company (“VisEra Cayman”), a company incorporated in the Cayman Islands, and VisEra became a subsidiary of VisEra Cayman. The Company and TSMC have equal interests in VisEra Cayman.

 

Through April 2007, the Company’s contribution to VisEra and VisEra Cayman totaled $51.6 million, effectively meeting its commitment under the terms of a January 2007 amendment to the joint-venture agreement, in which the Company and TSMC have agreed to commit a total of $112.9 million to the joint venture. The Company has not made any subsequent contributions into VisEra and VisEra Cayman.

 

The Company initially accounted for its investment in VisEra under the equity method. Between August 1, 2005 and December 31, 2006, VisEra was considered a variable interest entity (“VIE”), and the Company was the primary beneficiary, as defined under the accounting guidance for consolidating VIEs. Accordingly, the Company consolidated VisEra’s operating results. On January 1, 2007, VisEra ceased to meet the definition of a VIE. Consequently, the Company deconsolidated VisEra on January 1, 2007, and has accounted for its investment in VisEra under the equity method. (See Note 17.)

 

China WLCSP Limited

 

China WLCSP Limited (“WLCSP”) is in the business of designing, manufacturing, packaging and selling certain wafer level chip scale packaging related services. In May 2007, the Company acquired 4,500,000 units of WLCSP’s equity interests, or 20.0% of WLCSP’s registered capital on a fully-diluted basis, for an aggregate purchase amount of $9.0 million. The Company has appointed a member to WLCSP’s board of directors and a supervisor to monitor the actions of WLCSP’s board of directors and officers.

 

At the date of the transaction, the Company’s $9.0 million investment in WLCSP exceeded its share of the book value of WLCSP’s assets by $5.7 million. Of this $5.7 million difference, $4.1 million represents equity method goodwill that is not subject to amortization. This amount is recorded as a portion of the Company’s investment in WLCSP. The Company is amortizing the remaining basis difference of $1.6 million, which is attributable to intangible assets of WLCSP, over various periods up to a maximum of five years.

 

The Company accounts for its investment in WLCSP under the equity method. For the three and six months ended October 31, 2009, the Company recorded equity income of $245,000 and $0.7 million, respectively, in “Other income (expense), net,” consisting of its portion of the net income recorded by WLCSP during those periods, partially offset by equity method investment adjustments. For the three and six months ended October 31, 2008, the Company recorded equity income of $405,000 and $412,000, respectively, in “Other income (expense), net,” consisting of its portion of the net income recorded by WLCSP during the periods, partially offset by equity method investment adjustments. (See Note 17.)

 

12



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

XinTec, Inc.

 

XinTec, Inc. (“XinTec”) is a Taiwan-based supplier of chip scale packaging services. The Company first made investments in XinTec in April 2003, for $2.8 million. As of October 31, 2009, the Company’s direct ownership percentage in XinTec was 4.3%. Separately, VisEra owns a 16.2% interest in XinTec. Consequently, the Company’s beneficial ownership percentage in XinTec was approximately 12.2%. The Company accounts for XinTec as a cost method investment.

 

ImPac Technology Co., Ltd.

 

In June 2003, in order to enhance its access to plastic and ceramic packaging services, the Company invested $2.0 million in ImPac Technology Co., Ltd. (“ImPac”), a privately-held company based in Taiwan. After additional cash contributions of approximately $0.8 million in December 2003 and $1.4 million in July 2008, the Company owns 25.7% of ImPac. The Company accounts for this investment using the equity method.

 

In August 2009, ImPac’s board of directors accepted a merger proposal from a listed company in Taiwan, Tong Hsing Electronic Industries, Limited (“Tong Hsing”). Tong Hsing is a current investor in ImPac, and will become the surviving entity after consummation of the transaction. Subsequently, in September 2009, ImPac’s shareholders approved the merger proposal. According to the merger agreement between ImPac and Tong Hsing, the parties will complete the transaction on December 31, 2009. In return for its ownership in ImPac, the Company will receive approximately 996,000 shares of common stock of Tong Hsing, representing approximately 0.8% of Tong Hsing.

 

The Company recorded equity income of $317,000 and an equity loss of $0.6 million, respectively, in “Other income (expense), net,” as its portion of ImPac’s net income and loss for the three and six months ended October 31, 2009. The Company recorded an equity loss of $140,000 and $0.5 million, respectively, in “Other income (expense), net,” as its portion of ImPac’s net loss for the three and six months ended October 31, 2008.

 

The following table presents the summary combined financial information of ImPac, VisEra and WLCSP, as derived from their financial statements for the three and six months ended October 31, 2009 and 2008, and prepared under GAAP (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Operating data:

 

 

 

 

 

 

 

 

 

Revenues

 

$

32,736

 

$

31,658

 

$

53,063

 

$

57,994

 

Gross profit

 

8,350

 

6,986

 

9,380

 

13,086

 

Income from operations

 

4,770

 

3,590

 

2,875

 

6,374

 

Net income

 

$

4,828

 

$

1,349

 

$

3,470

 

$

2,579

 

 

The Company’s share of undistributed earnings of the investees accounted for by the equity method totaled $15.4 million and $14.1 million at October 31, 2009 and April 30, 2009, respectively.

 

Note 6 — Consolidated Affiliate — Silicon Optronics, Inc.

 

In May 2004, the Company entered into an agreement with Powerchip Semiconductor Corporation (“PSC”), a Taiwan based company that produces memory chips and provides semiconductor foundry services, to establish SOI, a joint venture in Taiwan. The purpose of SOI is to conduct manufacturing, marketing and selling of certain of the Company’s legacy products. Toward the end of fiscal 2009, SOI began to investigate the market potential of touch panels that track touches with optical sensors. These devices compete with the current resistive and capacitive touch panels. The Company contributed approximately $2.1 million to SOI in exchange for an ownership percentage of 49.0%. In March 2005, the Company assumed control of the board of directors of SOI and the Company has consolidated SOI since April 30, 2005. As of October 31, 2009, the Company owned 43.9% of SOI. (See Note 17.)

 

13



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 7 — Intangible Assets

 

Intangible assets as of October 31, 2009 consist of the following (in thousands):

 

 

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Core technology

 

$

17,800

 

$

16,020

 

$

1,780

 

Patents and licenses

 

13,487

 

11,277

 

2,210

 

Trademarks and tradenames

 

1,400

 

1,260

 

140

 

Customer relationships

 

100

 

100

 

 

Intangible assets, net

 

$

32,787

 

$

28,657

 

$

4,130

 

 

Intangible assets as of April 30, 2009 consist of the following (in thousands):

 

 

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Core technology

 

$

17,800

 

$

14,240

 

$

3,560

 

Patents and licenses

 

13,487

 

9,931

 

3,556

 

Trademarks and tradenames

 

1,400

 

1,120

 

280

 

Customer relationships

 

100

 

100

 

 

Intangible assets, net

 

$

32,787

 

$

25,391

 

$

7,396

 

 

For each of the three and six months ended October 31, 2009 and 2008, the Company amortized $1.6 million and $3.3 million, respectively, of its intangible assets. The total expected future annual amortization of these intangible assets is as follows (in thousands):

 

Years Ending April 30,

 

 

 

2010

 

$

3,120

 

2011

 

973

 

2012

 

37

 

Total

 

$

4,130

 

 

Note 8 — Borrowing Arrangements

 

The following table shows the Company’s debt and capital lease obligations (in thousands):

 

 

 

October 31,
2009

 

April 30,
2009

 

 

 

 

 

 

 

Mortgage loan

 

$

26,145

 

$

26,421

 

Term loan

 

8,500

 

10,000

 

Construction loan

 

6,590

 

 

Capital lease obligations

 

 

1

 

 

 

41,235

 

36,422

 

Less: amount due within one year

 

(3,554

)

(3,555

)

Non-current portion of long-term debt

 

$

37,681

 

$

32,867

 

 

14



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

At October 31, 2009, aggregate debt maturities were as follows (in thousands):

 

Years Ending April 30,

 

Mortgage
and Term
Loan

 

Construction
Loan

 

Total

 

2010

 

$

1,777

 

$

 

$

1,777

 

2011

 

3,554

 

732

 

4,286

 

2012

 

3,554

 

732

 

4,286

 

2013

 

1,554

 

1,465

 

3,019

 

2014

 

554

 

2,929

 

3,483

 

Thereafter

 

23,652

 

732

 

24,384

 

Total

 

$

34,645

 

$

6,590

 

$

41,235

 

 

Mortgage Loan and Term Loan

 

On March 16, 2007, the Company entered into a Loan and Security Agreement with a domestic bank for the purchase of a complex of four buildings located in Santa Clara, California (the “Santa Clara Property”). The Loan and Security Agreement provides for a mortgage loan in the principal amount of $27.9 million (the “Mortgage Loan”) and a secured line of credit with an aggregate maximum principal amount of up to $12.0 million (the “Term Loan”). In March 2008, the Company borrowed $6.0 million under the Term Loan to finance improvements to the Santa Clara Property. The Company drew down the remaining $6.0 million under the Term Loan in July 2008.

 

Borrowings under the Mortgage Loan accrue interest at the London Interbank Borrowing Rate (“LIBOR”) plus 90 basis points. Borrowings under the Term Loan accrue interest at the LIBOR rate plus 125 basis points. The Mortgage and Term Loans mature on March 31, 2017 and July 31, 2012, respectively.

 

Interest rates under the Mortgage Loan were 1.1% and 1.4% at October 31, 2009 and April 30, 2009, respectively. Interest rates under the Term Loan were 1.5% and 1.8% at October 31, 2009 and April 30, 2009, respectively. The Company was in compliance with the financial covenants of the Loan and Security Agreement as of October 31, 2009.

 

In conjunction with the Mortgage Loan, the Company entered into an interest rate swap with the same bank to effectively convert the variable interest rate described above to a fixed rate. The swap is for a period of ten years, and the notional amount of the swap approximates the principal outstanding under the Mortgage Loan. The Company is the fixed rate payer under the swap and the rate is fixed at 5.3% per annum and the effective rate on the Mortgage Loan is fixed at approximately 6.2%. In July 2008, in connection with the Term Loan, the Company entered into a second interest rate swap with the bank to effectively convert the variable interest rate described above to a fixed rate. This second swap is for a period of four years. The Company is the fixed rate payer and the rate is fixed at 4.3% per annum and the effective rate on the Term Loan is fixed at approximately 5.5%.

 

Construction Loan

 

On August 3, 2009, OmniVision Technologies (Shanghai) Co., Ltd., a wholly-owned subsidiary of the Company, entered into a Fixed Assets Loan Agreement with a bank in China. The Fixed Assets Loan Agreement provides for a fixed asset loan in the principal amount of Chinese Yuan 159.0 million, which is equal to approximately $23.3 million (the “Construction Loan”). The purpose of the Construction Loan is to construct a research center for the Company in Pudong Development Zone, the Zhang Jiang Science Park in Shanghai, China. Subsequently, on August 27, 2009, the Construction Loan was approved by the Chinese government and the final loan amount was modified to Chinese Yuan 140.0 million or approximately $20.5 million. As of October 31, 2009, the Company borrowed Chinese Yuan 45.0 million, or approximately $6.6 million, under the Construction Loan. The Company is scheduled to draw down the remaining $13.9 million by December 2011. The Construction Loan matures on June 30, 2016.

 

Interest rate under the Construction Loan is based on an indicative rate as published by the Chinese government, and will be adjusted every September to the then current published rate. Interest rate under the Construction Loan was 5.3% at October 31, 2009. The Company was in compliance with the financial covenants of the Fixed Assets Loan Agreement as of October 31, 2009.

 

15



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Lines of Credit at SOI

 

SOI maintains four unsecured lines of credit with three commercial banks, which provide a total of approximately $3.5 million in available credit. All borrowings under these lines of credit bear interest at the market interest rate prevailing at the time of borrowing. There are no financial covenant requirements for these facilities. At October 31, 2009 and April 30, 2009, there were no borrowings outstanding under these facilities.

 

Derivative Instruments and Hedging Activities

 

As indicated above, the Company holds two separate interest rate swaps in connection with the Mortgage Loan and the Term Loan. The Company utilizes the swaps to reduce the effect of interest rate variability on the two loans’ interest payments. The Company has not designated the two interest rate swaps as hedging instruments. Consequently, the Company remeasures the two interest rate swaps at fair value at each balance sheet date, and immediately recognizes any changes to the fair values in earnings. On the balance sheet, the Company records the swaps as either assets or liabilities, depending on whether the fair value represents net gains or net losses.

 

The table below presents the location of the swaps on the Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets, and the related effects on the Company’s results of operations and financial positions (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Location of amounts recognized in Condensed Consolidated Statements of Operations and amount of gains (losses):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

$

(236

)

$

(598

)

$

645

 

$

(165

)

 

 

 

 

 

 

 

October 31,

 

April 30,

 

 

 

 

 

 

 

2009

 

2009

 

Location of amounts on Condensed Consolidated Balance Sheets and fair values:

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

 

 

 

$

3,818

 

$

4,463

 

 

Note 9 — Net Income (Loss) Per Share Attributable to OmniVision Technologies, Inc. Common Stockholders

 

Basic net income (loss) per share attributable to OmniVision common stockholders is computed by dividing net income (loss) attributable to OmniVision by the weighted average number of common shares outstanding during the period.

 

Diluted net income per share attributable to OmniVision common stockholders 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 represent the effect of stock options. For the three months ended October 31, 2009, 11,012,000 shares of common stock subject to outstanding options were not included in the calculation of diluted net income per share because they were antidilutive. For the six months ended October 31, 2009, the Company excluded all options and restricted stock units outstanding as the Company recorded a net loss of $1.8 million. For the three months ended October 31, 2008, the Company excluded all options and restricted stock units outstanding as the Company recorded a net loss of $5.3 million. For the six months ended October 31, 2008, 12,261,000 shares of common stock subject to outstanding options were not included in the calculation of diluted net income per share because they were antidilutive.

 

16



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

The Company takes into account the effect on consolidated earnings per share of options, warrants and convertible securities issued by its subsidiaries. The effect on consolidated earnings per share depends on whether the securities issued by the subsidiary enable their holders to obtain common stock of the subsidiary company or common stock of the parent company. Securities issued by a subsidiary that enable their holders to obtain the subsidiary’s common stock are included in computing the subsidiary’s earnings per share data. The diluted per-share earnings of the subsidiary are included in the Company’s consolidated earnings per share computations based on the consolidated group’s holding of the subsidiary’s securities. Through October 31, 2009, SOI issued options to various of its employees exercisable for 3,300,000 shares of its common stock. In the calculation of its earnings per share for the three and six months ended October 31, 2009 and 2008, the Company included the effect of SOI’s options in its consolidated earnings per share, if dilutive.

 

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated (in thousands, except per share data):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008 (1)

 

2009

 

2008 (1)

 

Basic:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OmniVision Technologies, Inc.

 

$

8,084

 

$

(5,308

)

$

(1,772

)

$

920

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares for net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders

 

50,763

 

50,754

 

50,668

 

51,006

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders

 

$

0.16

 

$

(0.10

)

$

(0.03

)

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OmniVision Technologies. Inc.

 

$

8,084

 

$

(5,308

)

$

(1,772

)

$

920

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders

 

50,763

 

50,754

 

50,668

 

51,006

 

Weighted average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options, restricted stock units and employee stock purchase plan shares

 

1,006

 

 

 

585

 

Weighted average common shares for diluted net income (loss) per share

 

51,769

 

50,754

 

50,668

 

51,591

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per share attributable to OmniVision Technologies, Inc. common stockholders

 

$

0.16

 

$

(0.10

)

$

(0.03

)

$

0.02

 

 


(1)   As adjusted due to the adoption of authoritative accounting guidance for noncontrolling interests. See Note 1 — “Basis of Presentation.”

 

17



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 10 — Fair Value Measurements

 

The authoritative guidance for fair value measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:

 

·                  Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities.

 

·                  Level 2 — Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

 

·                  Level 3 — Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of October 31, 2009 (in thousands):

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

89,244

 

$

89,244

 

$

 

$

 

Certificates of deposit

 

6,795

 

 

6,795

 

 

Debt securities issued by U.S. government and U.S. government agencies

 

43,307

 

 

43,307

 

 

Corporate debt securities/commercial paper

 

5,291

 

 

5,291

 

 

Total assets

 

$

144,637

 

$

89,244

 

$

55,393

 

$

 

Interest rate swaps

 

$

(3,818

)

$

 

$

(3,818

)

$

 

Total liabilities

 

$

(3,818

)

$

 

$

(3,818

)

$

 

 

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were presented on the Company’s Condensed Consolidated Balance Sheets as of October 31, 2009 (in thousands):

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Cash equivalents

 

$

106,582

 

$

89,244

 

$

17,338

 

$

 

Short-term investments

 

38,055

 

 

38,055

 

 

Total assets

 

$

144,637

 

$

89,244

 

$

55,393

 

$

 

Interest rate swaps

 

$

(3,818

)

$

 

$

(3,818

)

$

 

Total liabilities

 

$

(3,818

)

$

 

$

(3,818

)

$

 

 

Due to their short maturities, the reported amounts of the Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and other current liabilities approximate fair value. The fair values of the Company’s mortgage loan and term loan approximate book values as the underlying interest rates are based on risk-adjusted market rates.

 

Note 11 — Segment and Geographic Information

 

The Company identifies its business segments based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single reportable business segment.

 

18



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

The Company sells its image-sensor products either directly to OEMs and VARs or indirectly through distributors. The following table illustrates the percentage of revenues from sales to OEMs and VARs and to distributors for the three and six months ended October 31, 2009 and 2008, respectively:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

OEMs and VARs

 

53.4

%

60.0

%

52.1

%

59.1

%

Distributors

 

46.6

 

40.0

 

47.9

 

40.9

 

Total

 

100.0

%

100.0

%

100.0

%

100.0

%

 

Since the Company’s end-user customers market and sell their products worldwide, its revenues by geographic location are not necessarily indicative of the geographic distribution of end-user sales, but rather indicate where their components are sourced. The revenues by geography in the following table are based on the country or region in which the Company’s customers issue their purchase orders (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

China

 

$

154,027

 

$

129,074

 

$

242,443

 

$

257,100

 

Malaysia

 

6,784

 

12,123

 

11,136

 

30,657

 

United States

 

883

 

7,027

 

1,552

 

17,271

 

Taiwan

 

16,095

 

11,177

 

25,817

 

25,515

 

All other

 

5,555

 

4,534

 

7,956

 

7,671

 

Total

 

$

183,344

 

$

163,935

 

$

288,904

 

$

338,214

 

 

The Company’s long-lived assets, including its equity method investments, are located in the following countries (in thousands):

 

 

 

October 31,

 

April 30,

 

 

 

2009

 

2009

 

Taiwan

 

$

88,436

 

$

88,814

 

United States

 

61,987

 

65,276

 

China

 

57,637

 

54,166

 

All other

 

964

 

392

 

Total

 

$

209,024

 

$

208,648

 

 

Note 12 — Employee Stock Purchase, Equity Incentive and Stock Option Plans

 

2007 Equity Incentive Plan

 

In September 2007, on the recommendation of the Company’s board of directors, the stockholders of the Company approved the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan replaced the Company’s 2000 Stock Plan. The Company has reserved 6,000,000 shares of common stock for issuance under the 2007 Plan. The 2007 Plan provides for the grant of the following types of incentive awards: (i) stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) restricted stock units; (v) performance shares and performance units; and (vi) other stock or cash awards. In general, stock option and stock appreciation right awards under the 2007 Plan will be granted at a price not less than 100% of the fair market value of the Company’s common stock on the date of grant. With the approval of the Company’s stockholders in September 2009, the Company modified certain terms of the 2007 Plan. Under the modified 2007 Plan, the Company’s stock option awards generally have a maximum contractual term of seven years and vest over four years. Restricted stock units granted under the 2007 Plan generally vest over three years. The 2007 Plan also covers grants of equity-based compensation to the Company’s directors.

 

19



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

The Company’s equity incentive and stock-based compensation plans as of October 31, 2009 are summarized as follows (in thousands):

 

 

 

 

 

Shares

 

 

 

Restricted

 

Performance

 

 

 

Shares

 

Available

 

Options

 

Stock Units

 

Shares

 

Name of Plan

 

Authorized

 

for Grant

 

Outstanding

 

Outstanding

 

Outstanding

 

1995 Stock Plan

 

 

 

 

 

 

2000 Stock Plan

 

 

 

11,721

 

 

 

2000 Director Option Plan

 

 

 

287

 

 

 

2007 Plan

 

6,000

 

2,622

 

973

 

1,046

 

 

Total

 

6,000

 

2,622

 

12,981

 

1,046

 

 

 

2009 Employee Stock Purchase Plan

 

The 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”) was adopted by the board of directors in July 2009 and was approved by the stockholders of the Company in September 2009. The 2009 Purchase Plan will replace the Company’s 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”) in December 2009. The board of directors has reserved a total of 2,500,000 shares of common stock for issuance under the 2009 Purchase Plan. Each offering period under the 2009 Purchase Plan will have a duration of approximately 24 months, commencing on the first trading day on or after June 1 and December 1 of each year and terminating on the last trading day in the period ending 24 months later. Each offering period will generally consist of four six-months purchase periods in which shares may be purchased on a participant’s behalf. The purchase price will be 85% of the lesser of the fair market value of the common stock on the first trading day of the offering period or on the last day of the purchase period. If the fair market value of the common stock on the last day of the purchase period is lower than the fair market value of the common stock on the enrollment date of the associated offering period, all participants in such offering period will automatically be rolled over to the immediately following offering period. Employees may end their participation in an offering period at any time, and their participation ends automatically on termination of employment with the Company. The first offering period under the 2009 Purchase Plan will begin on December 1, 2009.

 

20



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Stock-Based Compensation Award Activity

 

The following table summarizes the equity award activities under the 2000 Stock Plan, the 2000 Director Option Plan and the 2007 Plan, for the six months ended October 31, 2009:

 

 

 

 

 

Options Outstanding

 

Restricted
Stock Units
Outstanding

 

Performance
Shares
Outstanding

 

Restricted Stock
Units and
Performance
Shares

 

 

 

Shares
Available
For
Grant

 

Number
of Shares

 

Weighted
Average
Exercise
Price Per
Share

 

Number of
Shares

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Market
Value Per
Share

 

 

 

(in
thousands)

 

(in
thousands)

 

 

 

(in
thousands)

 

(in
thousands)

 

 

 

Balance at April 30, 2009

 

4,376

 

13,501

 

$

17.98

 

520

 

 

$

11.37

 

Stock options granted

 

(413

)

413

 

10.41

 

 

 

 

Stock options exercised

 

 

(148

)

8.76

 

 

 

 

Stock options expired or forfeited

 

21

 

(785

)

16.41

 

 

 

 

Restricted stock units granted (1)

 

(1,460

)

 

 

732

 

 

10.47

 

Restricted stock units exercised (1)

 

 

 

 

(157

)

 

11.92

 

Restricted stock units expired or forfeited (1)

 

98

 

 

 

(49

)

 

10.55

 

Performance shares granted (1) (2)

 

 

 

 

 

 

 

Performance shares expired or forfeited (1) (2)

 

 

 

 

 

 

 

Balance at October 31, 2009 — shares available for grant

 

2,622

 

 

 

 

 

 

Balance at October 31, 2009 — options

 

 

 

12,981

 

17.94

 

 

 

 

Balance at October 31, 2009 — restricted stock units

 

 

 

 

1,046

 

 

10.70

 

Balance at October 31, 2009 — performance shares

 

 

 

 

 

 

 

Exercisable at October 31, 2009

 

 

10,640

 

18.38

 

 

 

 

Vested and expected to vest at October 31, 2009 — options

 

 

12,817

 

$

18.00

 

 

 

 

Vested and expected to vest at October 31, 2009 — restricted stock units

 

 

 

 

850

 

 

$

10.70

 

Vested and expected to vest at October 31, 2009 — performance shares

 

 

 

 

 

 

$

 

 


(1)   Shares subject to awards granted for less than fair market value on the date of grant count against the share reserve as two shares for every one share subject to such an award. When a share is returned to the plan, two shares will be credited back to the reserve. With the approval of the Company’s stockholders in September 2009, the Company modified certain terms of the 2007 Plan. Specifically, for restricted stock units granted after September 2009, the grant will count against the share reserve as 1.6 shares for every one share granted. When a share is returned to the plan which was granted after September 2009, 1.6 shares will be credited back to the reserve.

(2)   Represents targeted issuance. The actual number of shares of common stock that will be issued in connection with the performance shares will be determined at the end of a one-year performance period.

 

The total intrinsic value of options exercised during the three and six months ended October 31, 2009 was $0.6 million and $0.9 million, respectively. The total intrinsic value of restricted stock units vested during the three and six months ended October 31, 2009 was $116,000 and $1.7 million, respectively. The total intrinsic value of options exercised during the three and six months ended October 31, 2008 was $78,000 and $486,000, respectively. Total cash received from employees as a result of employee stock option exercises during the three and six months ended October 31, 2009 was approximately $1.2 million and $1.3 million, respectively.

 

21



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

As of October 31, 2009, net of forfeitures, there was $15.6 million of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted average period of 1.8 years. As of October 31, 2009, net of forfeitures, there was $9.0 million of unrecognized compensation expense related to unvested restricted stock units, which the Company expects to recognize over a weighted average period of 2.4 years. For the Company’s 2000 Purchase Plan, as of October 31, 2009, there was $90,000 of unrecognized compensation expense which the Company expects to recognize over a weighted average period of 0.1 years. As of April 30, 2009, net of forfeitures, there was $23.5 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize over a weighted average period of 1.8 years. As of April 30, 2009, net of forfeitures, there was $4.0 million of unrecognized compensation expense related to unvested restricted stock units, which the Company expects to recognize over a weighted average period of 2.4 years. For the 2000 Purchase Plan, as of April 30, 2009, there was $1.8 million of unrecognized compensation cost which the Company expected to be recognized over a weighted average period of 0.8 years. The Company’s current policy is to issue new shares to settle the exercise of stock options and prospectively, the vesting of restricted stock units.

 

Valuation Assumptions

 

The authoritative guidance for stock-based compensation requires companies to estimate the fair value of stock-based compensation awards on the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s Condensed Consolidated Statements of Operations.

 

For restricted stock unit awards, the per-share fair value is the closing market price of the Company’s common stock as reported on the NASDAQ Global Market on the grant date. For performance share awards, the per share fair value is also the closing market price of the Company’s common stock as reported on NASDAQ. However, the related stock-based compensation is adjusted by the estimated probable outcome of the predetermined performance conditions. The compensation will be adjusted for subsequent changes in the estimated and actual outcome. For stock option awards and rights issued under the 2000 Purchase Plan, the Company measures the fair value using the Black-Scholes option pricing model. Black-Scholes was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions. These assumptions differ significantly from the characteristics of the Company’s stock-based compensation awards. Black-Scholes also requires the use of highly subjective, complex assumptions, including expected term and the price volatility of the Company’s stock.

 

The fair value for these options was estimated using the Black-Scholes option pricing model. The Company did not grant any employee options in the three months ended October 31, 2009. The per share weighted average estimated grant date fair value for employee options granted was $4.49 in the six months ended October 31, 2009. The Company did not grant any employee options in the three months ended October 31, 2008. The per share weighted average estimated grant date fair value for employee options granted was $5.27 in the six months ended October 31, 2008. The following weighted average assumptions are included in the estimated fair value calculations for stock options granted in the three six months ended October 31, 2009 and 2008:

 

 

 

Employee Stock Option Plans

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Risk-free interest rate

 

%

%

2.00

%

3.11

%

Expected term of options (in years)

 

 

 

4.2

 

4.0

 

Expected volatility

 

%

%

56.0

%

48.2

%

Expected dividend yield

 

%

%

0

%

0

%

 

22



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

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 six months ended October 31, 2009 was $2.28 and $2.14, 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 six months ended October 31, 2008 was $5.97 and $5.77, 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 Plan

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Risk-free interest rate

 

1.90

%

2.21

%

1.90

%

3.90

%

Expected term of options (in years)

 

0.5

 

0.5

 

0.5

 

0.5

 

Expected volatility

 

56.0

%

49.2

%

56.0

%

42.8

%

Expected dividend yield

 

0

%

0

%

0

%

0

%

 

The definitions of the terms used to determine the above values are as follows:

 

·                  Expected term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is estimated based on historical experience.

·                  Risk-free interest rate: The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the Company’s stock-based awards.

·                  Expected volatility: The Company determined expected volatility based on an average between the historical volatility of the Company’s common stock and the implied volatility based on the Company’s traded options with lives of six months or more. Averaging two data sources may provide a better proxy to what market place participants would use to value the Company’s options. Previously, the Company determined expected volatility based on the historical volatility of the Company’s common stock.

·                  Dividend yield: The dividend yield assumption reflects the Company’s intention not to pay a cash dividend under its dividend policy.

·                  Estimated pre-vesting forfeitures: When estimating pre-vesting forfeitures, the Company considers forfeiture behavior based on actual historical information.

 

Note 13 — Additional Paid-in Capital

 

The following table shows the amounts recorded to “Additional paid-in capital” for the six months ended October 31, 2009 (in thousands):

 

 

 

Additional

 

 

 

Paid-in

 

 

 

Capital

 

Balance at May 1, 2009

 

$

403,159

 

Employee stock-based compensation

 

12,201

 

Employee stock purchase plan

 

2,321

 

Exercise of common stock options

 

1,289

 

Withholding tax deduction on restricted stock units

 

(53

)

Balance at October 31, 2009

 

$

418,917

 

 

Note 14 — Treasury Stock

 

In June 2005, the Company’s board of directors authorized the repurchase in an open-market program of up to an aggregate of $100 million of the Company’s common stock. At the time that the program expired in June 2006, the Company had cumulatively repurchased 5,870,000 shares of its common stock for an aggregate cost of approximately $79.6 million.

 

23



Table of Contents

 

OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

In February 2007, the Company’s board of directors approved an additional stock repurchase program that provides for the repurchase of up to $100 million of its outstanding common stock in an open-market program. As of October 31, 2009, the Company had cumulatively repurchased 6,671,000 shares of its common stock under this open-market program for an aggregate cost of approximately $99.1 million. The Company did not repurchase any additional shares after October 31, 2009, and the Company’s board of directors ended the program in November 2009.

 

Note 15 — Income Taxes

 

The Company recorded a provision for income taxes of approximately $1.0 million and a benefit from income taxes of $1.5 million for the three months ended October 31, 2009 and 2008, respectively, resulting in effective tax rates of 10.8% and 21.1% for the respective periods. The Company excluded from the current fiscal year’s overall estimation of the annual effective tax rate one jurisdiction with losses for which no benefit can be realized. During the three months ended October 31, 2009, the Company accrued an additional $0.4 million of interest related to the Company’s unrecognized tax benefits.

 

On September 3, 2009, one of the foreign jurisdictions in which the Company operates published new legislation that changed the computation of income attributable to that jurisdiction. This new legislation does not affect the Company’s computation of unrecognized tax benefits and has no impact on the Company’s financial position, results of operations and cash flows.

 

Note 16 — Commitments and Contingencies

 

Commitments

 

The Company maintains a wholly-owned subsidiary in Shanghai, China, OmniVision Technologies (Shanghai) Co. Ltd. (“OTC”) which provides assistance to the Company in various product design projects and in marketing and sales support. On January 10, 2007, OTC entered into a Land-Use-Right Purchase Agreement (the “Purchase Agreement”) with the Construction and Transportation Commission of the Pudong New District, Shanghai. The Purchase Agreement has an effective date of December 31, 2006. Under the terms of the Purchase Agreement, the Company agreed to pay an aggregate amount of approximately $0.6 million (the “Purchase Price”) in exchange for the right to use approximately 323,000 square feet of land located in Shanghai for a period of 50 years. Construction of the facilities on the land has commenced and according to the Purchase Agreement, construction must be completed by June 30, 2010. The Company may use the land solely for the purposes of industrial use and/or scientific research. As of October 31, 2009, the Company has already contributed $15.6 million of an estimated $33.7 million total investment. The remaining investment amount will be financed via the Construction Loan. (See Note 8.)

 

During the three months ended October 31, 2008, the Company formed Shanghai OmniVision Semiconductor Technology, Co. Ltd, a new wholly-owned subsidiary in Shanghai, China, for the purpose of expanding its testing capabilities. As of October 31, 2009, the Company had contributed $1.5 million, as required under the terms of its capital commitment. The Company is required to contribute the remaining $8.5 million of a $10.0 million commitment by October 2010.

 

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.

 

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OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

In 2007, a settlement that had been pending with the Court since 2004, was terminated by stipulation of the parties to the settlement, after a ruling by the Second Circuit Court of Appeals in six “focus” cases in the coordinated proceeding (the action involving the Company is not one of the six focus cases) made it unlikely that the settlement would receive final court approval. Plaintiffs filed amended master allegations and amended complaints in the six focus cases. In 2008, the Court largely denied the focus case defendants’ motion to dismiss the amended complaints.

 

The parties have reached a global settlement of the coordinated litigation.  Under the settlement, the insurers will pay the full amount of settlement share allocated to the Company, and the Company will bear no financial liability. The Company, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, will receive complete dismissals from the case. On October 5, 2009, the Court entered an order granting final approval of the settlement. Certain objectors are seeking to appeal.  If for any reason the settlement does not become effective, and litigation against the Company proceeds, the Company believes that it has meritorious defenses to plaintiffs’ claims and intends to defend the action vigorously.

 

On October 12, 2007, a purported OmniVision stockholder filed a complaint against certain of the Company’s underwriters for its initial public offering. The complaint, Vanessa Simmonds v. Bank of America Corporation, et al., Case No. C07-1668, filed in District Court for the Western District of Washington, makes similar allegations to those made in In re Initial Public Offering Securities Litigation and seeks the recovery of short-swing trading profits under Section 16(b) of the Securities Exchange Act of 1934. The Company is named as a nominal defendant, and no recovery was sought from it. The plaintiff filed an amended complaint in February 2008. On March 12, 2009, the Court granted the motion to dismiss without prejudice, filed by 30 of the issuer defendants, including the Company, and the motion to dismiss with prejudice, filed by all of the underwriter defendants. The plaintiff timely appealed the Court’s Order to the United States Court of Appeals for the Ninth Circuit, which remains pending. In accordance with the briefing schedule set by the Ninth Circuit on August 18, 2009, plaintiff filed her opening brief on August 26, 2009. On October 2, 2009, the underwriter defendants/appellees/cross-appellants filed their answering brief, and the moving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed her response and reply briefs on November 2, 2009.  The Ninth Circuit Court of Appeals has not set a hearing date. No discovery has taken place.

 

At the end of May 2009, plaintiff sent a Demand for Inspection of Books and Records to certain of the nominal defendants named in the Section 16(b) litigation seeking the companies to produce any tolling agreements entered into with the companies’ respective underwriters. Plaintiff’s counsel has agreed to an open-ended extension for certain nominal defendants who received such a demand. As of the date of this filing, the Company has not received a demand for inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC (“Panavision”) filed a complaint against the Company alleging patent infringement in the District Court for the Central District of California. The case is entitled Panavision Imaging, LLC v. OmniVision Technologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc. and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint, Panavision asserts that the Company makes, has made, uses, sells and/or imports products that infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High Speed Multi-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid State Imager with Reduced Number of Transistors per Pixel”). The complaint seeks unspecified monetary damages, fees and expenses and injunctive relief against the Company. The Company expects to vigorously defend itself against Panavision’s allegations. At this time, the Company cannot estimate any possible loss or predict whether this matter will result in any material expense to the Company.

 

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OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 17 — Related Party Transactions

 

In May 2006, the Company consummated a loan agreement with one of its employees. Under the terms of the agreement, which the board of directors approved in fiscal 2004, the Company extended to the employee a three-year $1.0 million loan with an imputed interest rate of approximately five percent per annum which carried an original maturity date of May 12, 2009. The loan is secured by a deed of trust and may be extended, subject to mutual consent of the parties. In April 2009, the Company extended the terms of the loan for one additional year. The loan has a nominal imputed interest rate and will mature on May 12, 2010.

 

The Company paid ImPac approximately $4.1 million and $5.5 million for manufacturing services for the three and six months ended October 31, 2009, respectively. For the three and six months ended October 31, 2008, the Company paid ImPac approximately $3.2 million and $5.9 million, respectively, for manufacturing services. During fiscal 2008, the Company loaned $1.3 million to ImPac for the purpose of expanding its manufacturing capacities for a term of one year, which has been extended upon mutual consent of the parties for one year. The loan is fully collateralized by assets held by ImPac. During the three months ended October 31, 2009, ImPac repaid the loan amount in full. In August 2008, the Company entered into an additional agreement with ImPac under which the Company agreed to place certain manufacturing equipment with ImPac on a consignment basis for a period of up to five years.

 

For the three and six months ended October 31, 2009, the Company paid $19.5 million and $30.5 million, respectively, to VisEra for color filter and other manufacturing services. For the three and six months ended October 31, 2008, the Company paid $19.3 million and $36.4 million, respectively, to VisEra for color filter and other manufacturing services.

 

For the three and six months ended October 31, 2009, the Company did not make any payments to WLCSP for chip scale packaging services. For the three and six months ended October 31, 2008, the Company paid zero and $433,000, respectively, to WLCSP for such services.

 

The following table summarizes the transactions that the Company’s consolidated affiliate, SOI, and its affiliate, VisEra, engaged with related parties in the three and six months ended October 31, 2009 and 2008 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

SOI transactions with:

 

 

 

 

 

 

 

 

 

ImPac:

 

 

 

 

 

 

 

 

 

Purchases of manufacturing services

 

$

120

 

$

204

 

$

240

 

$

501

 

Balance payable at period end, net

 

35

 

123

 

35

 

123

 

PSC:

 

 

 

 

 

 

 

 

 

Purchases of wafers

 

181

 

833

 

272

 

1,869

 

Rent and other services

 

7

 

19

 

26

 

35

 

Balance payable at period end, net

 

8

 

152

 

8

 

152

 

VisEra:

 

 

 

 

 

 

 

 

 

Purchases of manufacturing services

 

38

 

 

102

 

 

Balance payable at period end

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VisEra transactions with:

 

 

 

 

 

 

 

 

 

TSMC:

 

 

 

 

 

 

 

 

 

Sales to TSMC

 

303

 

444

 

572

 

1,102

 

Balance receivable at period end, net

 

169

 

245

 

169

 

245

 

SOI:

 

 

 

 

 

 

 

 

 

Sales to SOI

 

38

 

 

102

 

 

Balance receivable at period end

 

$

 

$

 

$

 

$

 

 

The Company purchases a substantial portion of its wafers from TSMC. The Company also purchases a portion of its wafers from PSC.

 

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OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three and Six Months Ended October 31, 2009 and 2008

(unaudited)

 

Note 18 — Subsequent Events

 

The Company evaluated events that occurred subsequent to October 31, 2009, for recognition or disclosure in the Company’s financial statements. The Company performed its subsequent event review through December 10, 2009, the date these financials were issued.

 

At the Company’s annual meeting of stockholders held on September 24, 2009, the stockholders of the Company approved a one-time stock option exchange program for employees to exchange eligible stock options for restricted stock units. Under the option exchange program, eligible employees may exchange their outstanding options granted before November 1, 2008 under the Company’s 2000 Stock Plan or the 2007 Plan with an exercise price greater than or equal to $23.01 per share, for new restricted stock units. The Company will issue one restricted stock unit for every 3.4 stock options tendered for exchange. The vesting schedule for these restricted stock units will be determined by the remaining vesting period of the exchanged options. The option exchange program commenced on November 18, 2009, and will expire on December 16, 2009, unless extended by the Company.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following information should be read in conjunction with our unaudited condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. 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. Forward-looking statements generally include words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “outlook,” “plans,” “seeks,” “will” and words of similar import as well as the negative of those terms. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q, including, but not limited to, statements regarding our projected results of operations for future reporting periods, the extent of future sales through original equipment manufacturers, or OEMs, and distributors, future growth trends and opportunities in certain markets, the capabilities of new products, the increasing competition in our industry, the continued importance of the mobile phone market to our business, continued price competition and the consequent reduction in the average selling prices of our products, anticipated benefits of our joint ventures and alliances, the development of our business and manufacturing capacity, future expenses we expect to incur, our future investments, our future working capital requirements, the effect of a change in market interest rates, the geographic distribution of our sales and end users of our products and the sufficiency of our available cash, cash equivalents and short-term investments are based on current expectations and are subject to important factors that could cause actual results to differ materially from those projected in the forward-looking statements. Such important factors include, but are not limited to, those set forth under the caption “Item 1A. Risk Factors,” beginning on page 47 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission, or SEC. 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.

 

OmniVision, OmniPixel and TrueFocus are registered trademarks of OmniVision Technologies, Inc. the OmniVision logo, CameraChip, CameraCube, OmniBSI, OmniPixel2, OmniPixel3, OmniPixel3-HS, OmniQSP and SquareGA are trademarks of OmniVision Technologies, Inc. Wavefront Coded is a registered trademark of OmniVision CDM Optics, Inc., a wholly-owned subsidiary of OmniVision Technologies, Inc. Wavefront Coding is a trademark of OmniVision CDM Optics, Inc.

 

Overview

 

We design, develop and market high performance, highly integrated and cost efficient semiconductor image-sensor devices. Our main products, image-sensing devices which we refer to as CameraChip™ image sensors, capture an image electronically and are used in a number of consumer and commercial mass-market applications. Our CameraChip image sensors are manufactured using the complementary metal oxide semiconductor, or CMOS, fabrication process and are predominantly single-chip solutions that integrate several distinct functions including image capture, image processing, color processing, signal conversion and output of a fully processed image or video stream. Recently, we have also integrated our CameraChip image sensors with wafer-level optics, which we refer to as CameraCube™ imaging devices. Our CameraCube imaging device is a small footprint, total camera solution that we believe will enable the further miniaturization of camera products. We believe that our highly integrated image sensors and imaging devices enable camera device manufacturers to build high quality camera products that are smaller, less complex, more reliable, more cost effective and more power efficient than cameras using traditional charge-coupled devices, or CCDs.

 

Technology

 

In May 2007, we announced the introduction of our OmniPixel3™ architecture. The OmniPixel3 architecture represents a further refinement and pixel size reduction of our OmniPixel2™ and OmniPixel® architectures, which we introduced in September 2005 and August 2004, respectively.

 

In February 2008, we announced our new OmniPixel3-HS™ architecture, which incorporates a new pixel design that doubles the sensitivity of our 1.75 µm OmniPixel3 architecture. The performance of the new OmniPixel3-HS architecture significantly enhances image capture under very low lighting conditions, and thereby, we believe, allows for a new generation of compact camera solutions for mobile phones, notebook computers and other applications that require exceptional low-light performance.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSI™ technology. OmniBSI technology is based on an idea called back side illumination, or BSI. Our first OmniBSI product, an 8-megapixel image sensor, is built using an advanced 1.4 µm pixel. We believe we are the first image sensor company to announce a viable process for the mass production of BSI sensors.

 

All traditionally designed CMOS image sensors capture light on the front side of the chip, so the photo-sensitive portion has to share the surface of the image sensor with the metal wiring of the transistors in the pixel and the metal wiring acts to limit the amount of image light that reaches the photo-sensitive portion of the image sensor. With our OmniBSI architecture, the image sensor receives light through the back side of the chip. As a result, there is no metal wiring to block the image light, and the entire backside of the image sensor can be photo-sensitive. Not only does this enable us to produce a superior image, it also permits the front of the chip surface area to be devoted entirely to processing, and permits an increase in the number of metal layers, both of which result in greater functionality. Capturing light on the back side of the image sensor also allows us to reduce the distance the light has to travel to the pixels, and thus provide a wider angle of light acceptance. Widening the angle of acceptance in turn makes it possible to reduce the height of the camera module, and thus the height of the device which incorporates the camera.

 

In February 2009, we announced the introduction of our CameraCube technology. This is a three-dimensional, reflowable, total camera solution that combines the full functionality of our CameraChip image sensors and wafer-level optics in one compact, small-footprint package. Our CameraCube devices can be soldered directly to printed circuit boards, with no socket or insertion requirements. We believe our CameraCube solution can streamline the mobile phone manufacturing process, thus resulting in lower cost and faster time-to-market for our customers.

 

Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected production or performance issues with future products. During the early stages of production, production yields and gross margins for products based on new technology are typically lower than those of established products.

 

New Products

 

In November 2008, we introduced two new devices based on our OmniPixel3-HS architecture. The first device is the OV6930, a SquareGA (400 x 400 pixels) CameraChip image sensor with a 1/10-inch form factor. It uses 3 µm OmniPixel3-HS pixels, which enables it to achieve low-light performance of 3,300 mV/(Lux-sec). OV6930 is positioned for the medical device market. The second device is the OV9710 in quad flat package, or QFP. It is a 1-megapixel image sensor designed specifically for advanced automotive vision and sensing systems.

 

In January 2009, we introduced the OV7740, a 1/5-inch VGA CameraChip image sensor with 4.2 µm pixels based on the OmniPixel3-HS architecture. It is capable of operating at 60 FPS in VGA resolution, and 120 FPS in QVGA resolution. OV7740 is appropriate for leading-edge notebook computer and webcam designs. OV7740 is also an ideal solution for security, surveillance, automotive and games and toy applications.

 

In February 2009, as part of our CameraCube technology announcement, we introduced two new CameraCube imaging devices. The first product is the OVM6680. It has a SquareGA resolution. The second product is the OVM7680, and it has a VGA resolution.

 

In February 2009, we also introduced the OV3650, a ¼-inch 3-megapixel image sensor with 1.75 µm OmniPixel3-HS pixels. This image sensor is designed for mobile phones, notebook, webcam and other applications that require exceptional low-light performance without the need for flash.

 

In March 2009, we introduced the OV9810, a new 1/2.3-inch 9-megapixel image sensor with 1.75 µm OmniPixel3-HS pixels. This sensor is designed for the digital still camera, or DSC, and HD camcorder markets. It combines 9-megapixel photography with 1080p HD video on a single chip, eliminating the trade-offs between high quality still photography and high performance HD video. The OV9810 is capable of operating at 8.9 FPS in full 9-megapixel resolution, and offers true HD quality, or 1080p, video at 30 FPS.

 

In April 2009, we introduced the OV7960, a 1/4-inch VGA image sensor with 6 µm OmniPixel3-HS pixels. It has a low-light sensitivity of 12V/(Lux-sec) and is optimized for interlaced NTSC/PAL formats to directly interface with TVs and LCD screens. With the ability to capture images in the most challenging lighting conditions, OV7960 can be used in both professional closed-circuit TV applications and automobile driver assistance applications.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

In June 2009, we introduced three new devices based on the OmniBSI architecture. The first device is the OV5650, a 1/4-inch 5-megapixel image sensor with 1.75 µm OmniBSI pixels. The OV5650 is designed specifically to address consumer demand for DSC quality imaging in a mobile phone. It’s low-light sensitivity exceeds 1,400 mV/(Lux-sec) and its signal-to-noise ratio is less than 70 lux. The second device is the OV2665, a 2-megapixel image sensor with the same 1.75 µm OmniBSI architecture. It has an integrated ISP with features such as lens correction, auto exposure, auto white balance, and auto flicker. The last device is the OV5653. It is also based on our latest 1.75 µm OmniBSI architecture, but designed specifically for the DSC and digital video market. In video mode, OV5653 can deliver 720p at 60 FPS and full HD 1080p at 30 FPS.

 

In July 2009, we introduced the OV9715, a 1/4-inch 1-megapixel image sensor with OmniPixel3-HS pixels. The OV9715 is specifically designed for advanced automotive imaging applications, such as advanced forward-looking, 360 degree bird’s eye view, and parking assistance systems. It is also optimized for use in automotive vision and sensing system combinations, such as rear view and trajectory based lane departure warning systems.

 

In July 2009, we also introduced the OV7739, a 1/7.5-inch VGA image sensor with OmniPixel3-HS pixels. The OV7739 is designed to address the low-light sensitivity demands of the notebook PC market. It supports high quality video conferencing and recording at 30 FPS in VGA resolution and 60 FPS in QVGA resolution.

 

In August 2009, we introduced the OV2710, a 1/3-inch 2-megapixel image sensor with 3 µm OmniPixel3-HS pixels. The OV2710 is a native 1080p HD image sensor with a low-light performance of 3,300 mV/(Lux-sec), dark current of 20 mV/sec and a dynamic range of 72dB. This allows the OV2710 to operate in low-light situations down to 15 lux and below, enabling it to deliver high-end video conferencing and recording capabilities in a wide variety of applications including notebooks, netbooks, PC cameras, digital video camcorders, DSCs, mobile phones and other ultra portable devices.

 

In September 2009, we introduced the OV2715, a 1/3-inch 1080p HD image sensor with OmniPixel3-HS pixels. The OV2715 is designed for the mainstream IP camera and HD closed caption television markets. It offers the HD video format with a display resolution of 1920 x 1080 pixels, and operates at 30 FPS.

 

In October 2009, we introduced the OV7675, a 1/9-inch VGA image sensor with 2.5 µm OmniPixel3-HS pixels. This image sensor is designed for the entry-level and mainstream mobile phone markets. The OV7676’s small form factor also enables ultra-thin camera modules that notebook, netbook and webcam manufacturers require. This device has a low-light sensitivity of 1,800 mV/(Lux-sec) and is capable of operating at 30 FPS in full resolution.

 

Joint Venture with Taiwan Semiconductor Manufacturing Company Limited

 

On October 29, 2003, we entered into an agreement with Taiwan Semiconductor Manufacturing Company Limited , or TSMC, to form VisEra Technologies Company, Ltd., or VisEra, a joint venture in Taiwan, for the purposes of providing certain manufacturing and automated final testing services related to CMOS image sensors. In August 2005, under an amendment to the original 2003 joint-venture agreement, we and TSMC formed VisEra Holding Company, or VisEra Cayman, a company incorporated in the Cayman Islands, and VisEra became a subsidiary of VisEra Cayman. We and TSMC have equal interests in VisEra Cayman.

 

Through April 2007, our contribution to VisEra and VisEra Cayman totaled approximately $51.6 million, effectively meeting our commitment under the terms of a January 2007 amendment to the joint-venture agreement, in which we and TSMC have agreed to commit a total of $112.9 million to the joint venture. We have not made any subsequent contributions into VisEra and VisEra Cayman.

 

We initially accounted for our investment in VisEra under the equity method. Between August 1, 2005 and December 31, 2006, VisEra was considered a variable interest entity, or VIE, and we were the primary beneficiary, as defined under the accounting guidance for consolidating VIEs. Accordingly, we consolidated VisEra’s operating results. On January 1, 2007, VisEra ceased to meet the definition of a VIE. Consequently, we deconsolidated VisEra on January 1, 2007, and has accounted for our investment in VisEra under the equity method. See Note 5 — “Long-Term Investments” and Note 17 — “Related Party Transactions” to our condensed consolidated financial statements.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Joint Venture with Powerchip Semiconductor Corporation

 

In May 2004, we entered into an agreement with Powerchip Semiconductor Corporation, or PSC, a Taiwan based company that produces memory chips and provides semiconductor foundry services, to establish Silicon Optronics, Inc., or SOI, a joint venture in Taiwan. The purpose of SOI is to conduct manufacturing, marketing and selling of certain of our legacy products. Toward the end of fiscal 2009, SOI began to investigate the market potential of touch panels that track touches with optical sensors. These devices compete with the current resistive and capacitive touch panels. We contributed approximately $2.1 million to SOI in exchange for an ownership percentage of 49.0%. In March 2005, we assumed control of the board of directors of SOI and we have consolidated SOI since April 30, 2005. As of October 31, 2009, we owned 43.9% of SOI. See Note 6 — “Consolidated Affiliate — Silicon Optronics, Inc.” and Note 17 — “Related Party Transactions” to our condensed consolidated financial statements.

 

Capital Resources

 

As of October 31, 2009, we held approximately $315.9 million in cash and cash equivalents and approximately $38.1 million in short-term investments. To mitigate market 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, and changes in market liquidity and in the pricing of risk. Our policy is to invest in financial instruments with short maturities, 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. We do not believe that the value of our cash and short-term investments will be significantly affected by recent instability in the global financial markets.

 

In June 2005, our board of directors authorized us to use up to $100.0 million of our available cash under an open-market program to repurchase our common stock. At the expiration of the program in June 2006, we had cumulatively repurchased 5,870,000 shares of our common stock for an aggregate cost of approximately $79.6 million.

 

In February 2007, our board of directors approved an additional stock repurchase program that provides for the repurchase of up to $100.0 million of our outstanding common stock. As of October 31, 2009, we had cumulatively repurchased 6,671,000 shares of our common stock under this open-market program for an aggregate cost of approximately $99.1 million. Our board of directors ended this program in November 2009. See Note 14 — “Treasury Stock” to our condensed consolidated financial statements.

 

Current Economic Environment

 

We operate in a challenging economic environment that has undergone significant changes in technology and in patterns of global trade. We 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 technology.

 

Within the past twelve months, general domestic and global economic conditions have been negatively impacted by several factors, including, among others, the subprime-mortgage crisis in the housing market, going concern threats to investment and commercial banks, other financial institutions and major automobile companies, reduced corporate and consumer spending, and decreased consumer confidence. These economic conditions have resulted in our facing one of the most challenging periods in our history. In particular, we believe consumers and businesses in markets into which we sell our products have reduced spending in response to the tightening of lending standards by financial institutions, negative financial news and the continued uncertainty in the global economy. This has negatively affected demand for all consumer electronic products, security products and products for the automotive industry. Consequently, the overall demand for image sensors also decreased relative to the prior year levels. This decrease in demand has had a significant impact on our revenues, results of operations and cash flows and overall business.

 

These conditions could also have a number of additional effects on our business, including insolvency of key suppliers or manufacturers, resulting in product delays, inability of customers to obtain credit to finance purchases of our products, customer insolvencies, increased pricing pressures, restructuring expenses and associated diversion of management’s attention, excess inventory and increased difficulty in accurately forecasting product demand and planning future business activities.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

We saw early signs suggesting that some major economies are returning to positive growth. However, it is uncertain whether the current resumption of economic growth will be sustained. If the economic recovery slows down or even dissipates, our business, financial condition and results of operations and cash flows could be further materially and adversely affected.

 

Market Environment

 

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. In order to ensure that we address all available markets for our image sensors, we organize our marketing efforts into end-use market groups, each of which concentrates on a particular product or, in some cases, customer within a product group. Thus we have marketing teams that address the mobile phone market, the notebook and webcam market, the DSC market, the security and surveillance market, the entertainment market, and the automotive and medical markets.

 

In the mobile phone market in particular, future revenues depend to a large extent on design wins where, on the basis of an exhaustive evaluation of available products, a particular mobile phone maker determines which image sensor to design into one or more specific models. The time lag between design win and volume shipments varies from as little as three months to as much as twelve months, which could cause an unexpected delay in generating revenues, especially during periods of product transitions. Design wins are also an important driver in the many other markets that we address, and in some cases, such as automotive or medical applications, the time lag between a particular design win and revenue generation can be longer than one year.

 

The overwhelming majority of our sales depend on decisions by the engineering designers for manufacturers of products that incorporate image sensors to specify one of our products rather than one made by a competitor. In most cases, the decision to specify a particular image sensor requires conforming other specifications of the product to the chosen image sensor and makes subsequent changes both difficult and expensive. Accordingly, the ability to timely produce and deliver reliable products in large quantities is a key competitive differentiator. Since our inception, we have shipped more than 1.5 billion image sensors, including approximately 145 million in the three months ended October 31, 2009. We believe that these quantities demonstrate the continuing capabilities of our production system, including our sources of offshore fabrication.

 

We currently outsource the wafer fabrication and packaging of our image-sensor products to third parties. We outsource the color filter and micro-lens phases of production to an investee joint venture company. With our new CameraCube products, we also collaborated with the industry’s leading wafer-level lens suppliers, and outsourced the assembly process. This approach allows us to focus our resources on the design, development, marketing and testing of our products and significantly reduces our capital requirements.

 

To increase and enhance our production capabilities, we work closely with TSMC, our principal wafer supplier and one of the largest wafer fabrication companies in the world, to increase, as necessary, the number of its fabrication facilities, at which our products can be produced. VisEra, our joint venture with TSMC, and our investments in two key back-end packaging suppliers are part of a broad strategy to ensure that we have sufficient back-end capacity for the processing of our image sensors in the various formats required by our customers.

 

We currently perform the final testing of the majority of our products at our own facility in China. As necessary, we will make further investments to expand our testing and production capacity as well as our overall capability to design additional custom products for our customers.

 

Since our end-user customers market and sell their products worldwide, our revenues by geographic location are not necessarily indicative of the geographic distribution of end-user sales, but rather indicate where the products and/or their components are manufactured or sourced. The revenues we report by geography are based on the country or region in which our customers issue their purchase orders to us.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Many of the products using our image sensors, such as mobile phones, notebook and webcams, DSCs and cameras for entertainment applications, are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. In addition, since a very large number of the manufacturers who use our products are located in China, Hong Kong and Taiwan, the pattern of demand for our image sensors has been increasingly influenced by the timing of the extended lunar or Chinese New Year holiday, a period in which the factories which use our image sensors generally close. Consequently, demand for our image sensors has historically been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. However, because of the global economic downturn, we experienced weaker than normal conditions in all of our markets in the third and fourth quarters of fiscal 2009. Recently, with the improvement in our business during the second fiscal quarter of 2010, we believe the historical seasonal cycle to our business has returned.

 

We believe that the market opportunity represented by mobile phones remains very large, although the opportunities presented will be deferred until the current global economic conditions improve. We also believe that, like the DSC market, mobile phone and notebook and webcam demand will not only continue to shift toward higher resolutions, but also will increasingly fragment into multiple market segments with differing product attributes. For example, we see the further expansion of the smartphone segment within the mobile phone market and the recent introduction of the netbook product segment within the notebook computer market. In addition, there is increased demand for customization, and several different interface standards are coming to maturity. All of these trends will require the development of an increasing variety of products.

 

As the markets for image sensors have grown, we have experienced competition from manufacturers of CMOS and CCD image sensors. Our principal competitors in the market for CMOS image sensors include Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba. We expect to see continued price competition in the image-sensor market for mobile phones, notebook and webcams and digital cameras as those markets continue to grow. Although we believe that we currently compete effectively in those markets, our competitive position could be impaired by companies that have greater financial, technical, marketing, manufacturing and distribution resources, broader product lines, better access to large customer bases, greater name recognition, longer operating histories and more established strategic and financial relationships than we do. Such companies 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. Many of these competitors own and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can or may allow them to respond more rapidly than we can to changing market opportunities.

 

In addition, from time to time, other companies enter the CMOS image-sensor market by using obsolete and available manufacturing equipment. While these efforts have rarely had any long-term success, the new entrants do sometimes manage to gain market share in the short term by pricing their products significantly below current market levels which puts additional downward pressure on the prices we can obtain for our products.

 

In common with many other semiconductor products and as a response to competitive pressures, the average selling prices, or ASPs, of image-sensor products have declined steadily since their introduction, and we expect ASPs to continue to decline in the future. Some of this ASP decline may be offset by the adoption of some of our newer and higher resolution products. Also, we recently introduced our new CameraCube products. Depending on the adoption rate and unit volume, we believe these products may partially mitigate the rate of ASP decline. In order to maintain our gross margins, we and our suppliers must work continuously to lower our manufacturing costs and increase our production yields, and in order to maintain or grow our revenues, we need to increase the number of units we sell by a large enough amount to offset the effect of declining ASPs. In addition, if we are unable to timely introduce new products that can take advantage of smaller process geometries or new products that incorporate more advanced technology and include more advanced features that can be sold at higher ASPs, our gross margin will decline.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected yield issues with future products. During the early stages of production, production yields and gross margins for new products are typically lower than those of established products. We can encounter unexpected manufacturing issues, such as unexpected back-end yield problems. In addition, in preparation for new product introductions, we gradually decrease production of established products. Due to our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of new products. Given the current economic uncertainty, the visibility of our business outlook is extremely limited and forecasting is even more difficult than under normal market conditions. As a result, it is possible that we could suffer from shortages for certain products and build inventories in excess of demand for other products. We carefully consider the risk that our inventories may be excess to expected future demand and record appropriate reserves. If, as sometimes happens, we are subsequently able to sell these reserved products, the sales have little or no associated cost and consequently, they have a favorable impact on gross margins.

 

Sources of Revenues

 

For shipments to customers without agreements that allow for returns or credits, principally OEMs and VARs, we recognize revenue using the “sell-in” method. Under this method, we recognize revenue when title passes to the customer provided that we have 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 material obligations. We provide for future returns of potentially defective products based on historical experience at the time we recognize revenue. For cash consideration given to customers for which we do not receive a separately identifiable benefit or cannot reasonably estimate fair value, we record the amounts as reductions of revenue.

 

For shipment of products sold to distributors under agreements allowing for returns or credits, title and the risk of ownership to the products transfer to the distributor upon shipment, and the distributor is obligated to pay for the products whether or not the distributor has sold them at the time payment is due. Under the terms of our agreements with such distributors and subject to our prior approval, distributors are entitled to reclaim from us as price adjustments the difference, if any, between the prices at which we sold the product to the distributors and the prices at which the product is subsequently sold by the distributor. In addition, distributors have limited rights to return inventory that they determine is in excess of their requirements, and accordingly, in determining the appropriate level of provision for excess and obsolete inventory, we take into account the inventories held by our distributors. For these reasons, prices and revenues are not fixed or determinable until the distributor resells the products to our end-user customers and the distributor notifies us in writing of the details of such sales transactions. Accordingly, we recognize revenue using the “sell-through” method. Under the “sell-through” method, we defer the revenue, adjustments to revenue and the related costs of revenue until the final resale of such products to end customers. The amounts billed to these distributors and adjustments to revenue and the cost of inventory shipped to, but not yet sold by, the distributors are shown net on the Consolidated Balance Sheets as “Deferred revenues, less cost of revenues.”

 

In order to determine whether collection is probable, we assess a number of factors, including our past transaction history with the customer and the creditworthiness of the customer. If we determine that collection is not reasonably assured, we defer the recognition of revenue until collection becomes reasonably assured or upon receipt of payment.

 

In addition, we recognize revenue from the performance of services to a limited number of our customers, under either the completed-contract or the percentage-of-completion methods. The percentage-of-completion method of accounting is used for cost reimbursement-type contracts, where revenues recognized are that portion of the total contract price equal to the ratio of costs expended to date to the anticipated final total costs based on current estimates of the costs to complete the projects. The amount of service-related revenue has not been material in any of the periods presented. At SOI, we recognize the limited amount of SOI-related service revenue on a completed-contract basis.

 

Critical Accounting Policies and Estimates

 

For a discussion of our critical accounting policies, please refer to the discussion in our Annual Report on Form 10-K for the fiscal year ended April 30, 2009. There have been no material changes in any of our critical accounting policies since April 30, 2009.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Results of Operations

 

The following table sets forth the results of our operations as a percentage of revenues. Our historical operating results are not necessarily indicative of the results we can expect for any future period.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 31,

 

October 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

76.0

 

75.0

 

76.6

 

74.9

 

Gross margin

 

24.0

 

25.0

 

23.4

 

25.1

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research, development and related

 

10.3

 

14.2

 

12.9

 

12.9

 

Selling, general and administrative

 

8.9

 

10.3

 

10.5

 

10.1

 

Goodwill impairment

 

 

4.6

 

 

2.2

 

Total operating expenses

 

19.2

 

29.1

 

23.4

 

25.2

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

4.8

 

(4.1

)

 

(0.1

)

Interest income (expense), net

 

(0.1

)

0.3

 

(0.2

)

0.5

 

Other income (expense), net

 

0.1

 

(0.5

)

0.3

 

(0.2

)

Income (loss) before income taxes

 

4.8

 

(4.3

)

0.1

 

0.2

 

 

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

0.5

 

(0.9

)

0.7

 

 

Net income (loss)

 

4.3

 

(3.4

)

(0.6

)

0.2

 

Net loss attributable to noncontrolling interest

 

(0.1

)

(0.2

)

 

(0.1

)

Net income (loss) attributable to OmniVision Technologies, Inc.

 

4.4

%

(3.2

)%

(0.6

)%

0.3

%

 

Three Months Ended October 31, 2009 as Compared to Three Months Ended October 31, 2008

 

Revenues

 

We derive substantially all of our revenues from the sale of our image-sensor products for use in a wide variety of consumer and commercial mass-market applications including mobile phones, notebooks and personal computers, security and surveillance cameras, DSCs, entertainment devices, automotive and medical products. Revenues for the three months ended October 31, 2009 increased by 11.8% to approximately $183.3 million from $163.9 million for the three months ended October 31, 2008. The increase in revenues was due to an increase in unit sales of our image-sensor products in nearly all product categories, which more than offset a 23% decrease in our ASPs.

 

Revenues from Sales to OEMs and VARs as Compared to Distributors

 

We sell our image-sensor products either directly to OEMs and VARs or indirectly through distributors. The percentage of revenues from sales to OEMs and VARs was lower in the three months ended October 31, 2009 than in the prior-year period. We expect that the percentage of revenues from sales through OEMs and VARs will vary from year to year in response to changes in the make-up of our customer list. The gross margin that we earn on sales to OEMs and VARs or through distributors is not significantly different. The following table shows the percentage of revenues from sales to OEMs and VARs and distributors in the three months ended October 31, 2009 and 2008:

 

 

 

Three Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008

 

OEMs and VARs

 

53.4

%

60.0

%

Distributors

 

46.6

 

40.0

 

Total

 

100.0

%

100.0

%

 

OEMs and VARs.   In the three months ended October 31, 2009, one OEM customer accounted for 10.3% of our revenues. In the three months ended October 31, 2008, two OEM customers accounted for approximately 11.3% and 10.2% of our revenues. For the three months ended October 31, 2009 and 2008, no other OEM or VAR customer accounted for 10% or more of our revenues.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Distributors.   In the three months ended October 31, 2009, one distributor customer accounted for approximately 27.5% of our revenues. In the three months ended October 31, 2008, one distributor customer accounted for approximately 26.2% of our revenues. For the three months ended October 31, 2009 and 2008, no other distributor customer accounted for 10% or more of our revenues.

 

Revenues from Domestic Sales as Compared to Foreign Sales

 

The following table shows the percentage of our revenues derived from sales of our image-sensor products to domestic customers as compared to foreign customers for the three months ended October 31, 2009 and 2008:

 

 

 

Three Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008

 

Domestic sales

 

0.5

%

4.3

%

Foreign sales

 

99.5

 

95.7

 

Total

 

100.0

%

100.0

%

 

We derive the majority of our foreign sales from 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 the production of consumer electronics products to Asia-Pacific manufacturers and facilities and to the increasing markets in Asia for consumer products. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our image-sensor products are sold globally, we believe that the geographic distribution of our sales does not accurately reflect the geographic distribution of sales into end-user markets of products which incorporate our image sensors.

 

Gross Profit

 

Our gross margin in the three months ended October 31, 2009 decreased to 24.0% from 25.0% for the three months ended October 31, 2008. The year-over-year decrease in gross margin reflected a general price decline as a result of usual competitive pressures, and an unfavorable mix shift between VGA and 1-megapixel products. The year-over-year decrease was partially offset by the decline in the write-down of inventories which totaled approximately $6.4 million during the three months ended October 31, 2009, as compared to $9.2 million in the similar prior year period, and the increase in the sales of previously written-down products in the three months ended October 31, 2009 which totaled $4.1 million, as compared to $1.1 million during the same period in the prior fiscal year. We recorded approximately $0.6 million in stock-based compensation expense to cost of revenues during the three-month period ended October 31, 2009, as compared to approximately $0.7 million in the similar prior year period.

 

Research, Development and Related Expenses

 

Research, development and related expenses consist primarily of compensation and personnel-related expenses, non-recurring engineering costs related principally to the costs of the masks we buy when we release new product designs to the manufacturing foundry, costs for purchased materials, designs, tooling, depreciation of computers and workstations, and amortization of acquired intangible intellectual property and computer aided design software. Because the number of new designs we release to the foundry can fluctuate from period to period, research, development and related expenses may fluctuate significantly. Research, development and related expenses for the three months ended October 31, 2009 decreased to approximately $18.9 million from approximately $23.2 million for the three months ended October 31, 2008. As a percentage of revenues, research, development and related expenses for the three months ended October 31, 2009 and 2008 represented 10.3% and 14.2%, respectively.

 

The decrease in research, development and related expenses of approximately $4.3 million, or 18.7%, for the three months ended October 31, 2009 from the similar period in the prior year resulted primarily from a $2.0 million decrease in non-recurring engineering expenses related to new product development, a $0.7 million decrease in salary and payroll-related expenses, a $0.6 million decrease in patent-related legal expenses, a $478,000 decrease in stock-based compensation expense, a $307,000 decrease in office and facility expenses and a $210,000 decrease in travel-related expenses. We anticipate that research, development and related expenses will increase slightly as we develop and introduce new products, including those employing our CameraCube and OmniBSI technologies and as we develop other new technologies related to image sensors.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Selling, General and Administrative Expenses

 

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 for the three months ended October 31, 2009 decreased to approximately $16.2 million from $16.9 million for the three months ended October 31, 2008. As a percentage of revenues, selling, general and administrative expenses for the three months ended October 31, 2009 and 2008 represented 8.9% and 10.3%, respectively.

 

The decrease in selling, general and administrative expenses of approximately $0.7 million, or 4.0%, for the three months ended October 31, 2009 from the similar period in the prior year resulted primarily from a $0.7 million decrease in fees for outside services, a $411,000 decrease in facility and office expenses, a $357,000 decrease in marketing expenses, a $333,000 decrease in travel-related expenses and a $233,000 decrease in stock-based compensation expense, partially offset by a $0.7 million increase in salary and payroll-related expenses, and a $0.6 million increase in legal expenses. We anticipate that our selling, general and administrative expenses may remain unchanged as we continue to control discretionary expenditures.

 

Interest Income (Expense), Net

 

We invest our cash, cash equivalents and short-term investments in interest-bearing accounts consisting primarily of money market funds, commercial paper, certificates of deposit, high-grade corporate securities and government bonds. Interest income (expense), net, declined to an interest expense, net, of approximately $244,000 for the three months ended October 31, 2009 from interest income, net, of $478,000 in the prior year period. The $0.7 million decline in interest income (expense), net, resulted from a $0.8 million reduction in interest income and a $114,000 reduction in interest expense primarily associated with long-term borrowings for the three months ended October 31, 2009 as compared to the corresponding period in the prior year. The decline in interest income was the result of lower interest rates on interest-bearing accounts than in the same period in the prior year.

 

Other Income (Expense), Net

 

Other income (expense), net, for the three months ended October 31, 2009 totaled $223,000. Other income (expense), net, for the three months ended October 31, 2009 included a $317,000 gain that represented our portion of the net income recorded by ImPac Technology Co., Ltd., or ImPac, and a $245,000 gain, that represented our portion of the net income recorded by China WLCSP Limited, or WLCSP, both of which we account for under the equity method of accounting, partially offset by a $235,000 loss on the interest rate swap agreements related to the mortgage on our complex of four buildings located in Santa Clara, California, or Santa Clara Property. Other income (expense), net, for the three months ended October 31, 2008 included a $0.6 million loss on the interest rate swap agreements related to the mortgage on our Santa Clara Property, a $0.7 million exchange loss, and a $140,000 loss that represented our portion of the net loss recorded by ImPac, partially offset by our $405,000 portion of the net income recorded by WLCSP.

 

Provision for Income Taxes

 

We generated approximately $8.9 million in income before income taxes and $7.1 million in loss before income taxes for the three months ended October 31, 2009 and 2008, respectively. We recorded a provision for income taxes of approximately $1.0 million and a benefit from income taxes of $1.5 million for the three months ended October 31, 2009 and 2008, respectively, resulting in effective tax rates of 10.8% and 21.1% for the respective periods.

 

Our quarterly income taxes reflect an estimate of the effective tax rate for the fiscal year and include, when applicable, the impact of discrete tax items. We excluded from the current fiscal year’s overall estimation of the annual effective tax rate one jurisdiction with losses for which no benefit can be realized.

 

Net Loss Attributable to Noncontrolling Interest

 

Net loss attributable to noncontrolling interest for the three months ended October 31, 2009 and 2008 was $166,000 and $287,000, respectively, which represents the 56.1% interest that we did not own in the net loss of SOI.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Six Months Ended October 31, 2009 as Compared to Six Months Ended October 31, 2008

 

Revenues

 

Revenues for the six months ended October 31, 2009 decreased by 14.6% to approximately $288.9 million from $338.2 million for the six months ended October 31, 2008. The decrease in revenues was due to a decline in our ASPs.

 

Revenues from Sales to OEMs and VARs as Compared to Distributors

 

The following table shows the percentage of revenues from sales to OEMs and VARs and distributors in the six months ended October 31, 2009 and 2008:

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008

 

OEMs and VARs

 

52.1

%

59.1

%

Distributors

 

47.9

 

40.9

 

Total

 

100.0

%

100.0

%

 

OEMs and VARs.   In the six months ended October 31, 2009, one OEM customer accounted for approximately 11.8% of our revenues. In the six months ended October 31, 2008, two OEM customers each accounted for approximately 10.7% of our revenues. For the six months ended October 31, 2009 and 2008, no other OEM or VAR customer accounted for 10% or more of our revenues.

 

Distributors.   In the six months ended October 31, 2009, one distributor customer accounted for approximately 27.9% of our revenues. In the six months ended October 31, 2008, one distributor customer accounted for approximately 24.1% of our revenues. For the six months ended October 31, 2009 and 2008, no other distributor customer accounted for 10% or more of our revenues.

 

Revenues from Domestic Sales as Compared to Foreign Sales

 

The following table shows the percentage of our revenues derived from sales of our image-sensor products to domestic customers as compared to foreign customers for the six months ended October 31, 2009 and 2008:

 

 

 

Six Months Ended

 

 

 

October 31,

 

 

 

2009

 

2008

 

Domestic sales

 

0.5

%

5.1

%

Foreign sales

 

99.5

 

94.9

 

Total

 

100.0

%

100.0

%

 

We derive the majority of our foreign sales from 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 the production of consumer electronics products to Asia-Pacific manufacturers and facilities and to the increasing markets in Asia for consumer products. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our image-sensor products are sold globally, we believe that the geographic distribution of our sales does not accurately reflect the geographic distribution of sales into end-user markets of products which incorporate our image sensors.

 

Gross Profit

 

Our gross margin in the six months ended October 31, 2009 was 23.4%, a decrease from 25.1% for the six months ended October 31, 2008. The principal contributor to the year-over-year decrease in gross margin was a decline in our ASPs. In the six months ended October 31, 2009, we recorded approximately $1.4 million in stock-based compensation expense to cost of revenues, as compared to $1.6 million in the six months ended October 31, 2008.

 

Revenue from sales of previously written-down products in the six months ended October 31, 2009 was $6.3 million, as compared to $3.6 million during the same period in the prior fiscal year. In the six months ended October 31, 2009, we recorded an allowance for excess and obsolete inventory totaling $10.1 million to cost of revenues as compared to $11.6 million during the same period in the prior fiscal year.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Research, Development and Related Expenses

 

Research, development and related expenses for the six months ended October 31, 2009 decreased to approximately $37.3 million from approximately $43.5 million for the six months ended October 31, 2008. As a percentage of revenues, research, development and related expenses for both the six months ended October 31, 2009 and 2008 represented 12.9%, respectively.

 

The decrease in research, development and related expenses of approximately $6.2 million, or 14.3%, for the six months ended October 31, 2009 from the similar prior year period resulted primarily from a $2.9 million decrease in non-recurring engineering expenses related to new product development, a $1.0 million decrease in patent-related expenses, a $0.9 million decrease in stock-based compensation expense, a $0.7 million decrease in salary and payroll-related expenses, a $418,000 decrease in travel-related expenses and a $399,000 decrease in office and facility expenses.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the six months ended October 31, 2009 decreased to approximately $30.4 million from $34.3 million for the six months ended October 31, 2008. As a percentage of revenues, selling, general and administrative expenses for the six months ended October 31, 2009 and 2008 represented 10.5% and 10.1%, respectively.

 

The decrease in selling, general and administrative expenses of approximately $3.9 million, or 11.4%, for the six months ended October 31, 2009 from the similar period in the prior year resulted primarily from a $1.8 million decrease in fees for outside services, a $0.8 million decrease in office and facility expenses, a $0.8 million decrease in commissions paid primarily to distributors and sales representatives, a $0.7 million decrease in travel-related expenses, a $0.6 million decrease in stock-based compensation expense, and a $477,000 decrease in marketing expenses, partially offset by a $1.0 million increase in legal expenses related to patent defense and a $0.5 million increase in depreciation expenses.

 

Goodwill Impairment

 

During the second quarter of fiscal 2009, based on a combination of factors, including the significant decline in our market capitalization and the then-existing global economic downturn, we concluded that there were sufficient factual circumstances for interim impairment analyses. Based on the analyses, we recorded a non-cash goodwill impairment charge of $7.5 million, or 2.2% of revenues, which we included in “Goodwill impairment” for the six months ended October 31, 2008.

 

Interest Income (Expense), Net

 

Interest income (expense), net, for the six months ended October 31, 2009 declined to an interest expense, net, of approximately $448,000 from interest income, net, of $1.8 million for the six months ended October 31, 2008. The reduction in interest income (expense), net, for the six months ended October 31, 2009 as compared to the corresponding period in the prior year was the result of a $1.8 million reduction in interest income and a $433,000 increase in interest expense associated with long-term borrowings.

 

Other Income (Expense), Net

 

Other income (expense), net, for the six months ended October 31, 2009 totaled $0.8 million. Other income (expense), net, for the six months ended October 31, 2009 included a $0.7 million gain, representing our portion of the net income recorded by WLCSP, a $0.6 million gain on interest rate swap agreements related to the mortgage on the Santa Clara Property, partially offset by a $0.6 million loss that represented our portion of the net loss recorded by ImPac. Other income (expense), net, for the six months ended October 31, 2008 totaled $(0.8 million). Other income (expense), net, for the six months ended October 31, 2008 included a $0.8 million exchange loss, a $0.5 million loss that represented our portion of the net loss recorded by ImPac and a $165,000 loss on interest rate swap agreements related to the mortgage on the Santa Clara Property, partially offset by our $412,000 portion of the net income recorded by WLCSP.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Provision for Income Taxes

 

We generated $321,000 and $447,000 in income before income taxes for the six months ended October 31, 2009 and 2008, respectively. We recorded a provision for income taxes of approximately $2.1 million and a benefit from income taxes of approximately $81,000 for the six months ended October 31, 2009 and 2008, respectively, resulting in effective tax rates of 669.5% and (18.1)% for the respective periods.

 

Our quarterly income taxes reflect an estimate of the effective tax rate for the fiscal year and include, when applicable, the impact of discrete tax items. We excluded from the current fiscal year’s overall estimation of the annual effective tax rate one jurisdiction with losses for which no benefit can be realized.

 

Net Loss Attributable to Noncontrolling Interest

 

Net loss attributable to noncontrolling interest for the six months ended October 31, 2009 and 2008 was $56,000 and $392,000, respectively, which represents the 56.1% interest that we did not own in the net income (loss) of SOI.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity at October 31, 2009 consisted of cash, cash equivalents and short-term investments totaling $354.0 million.

 

Liquidity

 

Our working capital increased to $401.6 million as of October 31, 2009 as compared to $380.3 million as of April 30, 2009. Our working capital increased as a result of: a $58.1 million increase in cash and cash equivalents primarily due to cash provided by operating activities; a $23.7 million increase in accounts receivable, net, resulting from a revenue increase of $94.3 million for the three months ended October 31, 2009 from the three months ended April 30, 2009; and a $21.1 million increase in short-term investments. These increases in working capital were partially offset by: a $56.3 million increase in accounts payable resulting from an increase in production activities; a $12.8 million decrease in inventories; a $8.8 million increase in accrued liabilities; a $2.6 million increase in income taxes payable; and a $2.2 million increase in deferred revenue, less cost of revenue.

 

In March 2007, we purchased the Santa Clara Property. In connection with the purchase, we obtained from a domestic bank a mortgage loan with a principal amount of $27.9 million, or the Mortgage Loan, and a term loan with a principal amount of $12.0 million, or the Term Loan. As of October 31, 2009, the principal amounts outstanding under the Mortgage Loan and Term Loan were $26.1 million and $8.5 million, respectively.

 

In August 2009, in order to finance costs associated with the construction of a research center for our wholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we entered in to a fixed asset loan agreement with a bank in China. The agreement provides for a fixed asset loan in the principal amount of approximately $20.5 million, or the Construction Loan. As of October 31, 2009, we borrowed approximately $6.6 million under the Construction Loan.

 

SOI maintains four unsecured lines of credit with three commercial banks, which provide a total of approximately $3.5 million in available credit. All borrowings under these lines of credit bear interest at the market interest rate prevailing at the time of borrowing. There are no financial covenant requirements for these facilities. At October 31, 2009 and April 30, 2009, there were no borrowings outstanding under these facilities.

 

Cash Flows from Operating Activities

 

For the six months ended October 31, 2009, net cash provided by operating activities totaled approximately $75.1 million as compared to $42.1 million for the corresponding period in the prior year. The principal components of the current year amount were: a net loss of approximately $1.8 million for the six months ended October 31, 2009; adjustments for non-cash charges of $12.2 million in stock-based compensation, $11.7 million in depreciation and amortization, $10.1 million in write-down of inventories, $1.4 million of gain in equity investments and $0.6 million from gain on interest rate swaps; a $53.7 million increase in accounts payable; a $7.7 million decrease in inventories; a $4.0 million increase in income taxes payable; a $3.0 million increase in accrued expenses and other current liabilities and a $2.2 million increase in deferred revenues, less cost of revenues. These increases were partially offset by: a $23.7 million increase in accounts receivable, net; a $1.3 million increase in deferred income taxes and a $1.0 million decrease in deferred tax liabilities. The $23.7 million increase in accounts receivable, net, reflects the increased level of revenues during the six months ended October 31, 2009, partially offset by faster collection, as reflected in days of sales outstanding which declined to 34 days as of October 31, 2009 from 44 days as of April 30, 2009. The $7.7 million decrease in inventories resulted in an increase in annualized inventory turns to 6.0 as of October 31, 2009 from 2.8 as of April 30, 2009.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

For the six months ended October 31, 2008, net cash provided by operating activities totaled approximately $42.1 million. The principal components of the current year amount were: net income of approximately $0.5 million for the six months ended October 31, 2008; adjustments for non-cash charges of $13.9 million in stock-based compensation, $11.6 million in write-down of inventories; $9.2 million in depreciation and amortization; $7.5 million in goodwill impairment charges; $1.2 million of gains in equity investments and a $21.3 million increase in accounts payable; a $4.9 million decrease in accounts receivable, net; a $4.5 million increase in deferred income. These increases were partially offset by: a $21.9 million increase in inventories; a $2.6 million increase in refundable and deferred income taxes; a $2.3 million increase in prepaid expenses and other assets; a $1.8 million decrease in accrued expenses and other current liabilities; a $1.2 million decrease in income taxes payable and a $1.0 million decrease in deferred tax liabilities. The $4.9 million decrease in accounts receivable, net, reflects the lower level of revenues during the six months ended October 31, 2008, with the days of sales outstanding remaining unchanged at 56 days as of October 31, 2008 and April 30, 2008. The $21.9 million increase in inventories resulted in a decrease in annualized inventory turns to 3.9 as of October 31, 2008 from 4.3 as of April 30, 2008.

 

Cash Flows From Investing Activities

 

For the six months ended October 31, 2009, our cash used in investing activities totaled $25.5 million as compared to approximately $14.9 million for the corresponding period in the prior year, due to $21.2 million in net purchases of short-term investments and $4.3 million in purchases of property, plant and equipment. For the six months ended October 31, 2008, our cash used in investing activities totaled $14.9 million, due primarily to: $21.3 million in purchases of property, plant and equipment and $1.4 million in a long-term investment in ImPac, partially offset by $7.8 million in net sales of short-term investments.

 

Cash Flows From Financing Activities

 

For the six months ended October 31, 2009, net cash provided by financing activities totaled approximately $8.4 million as compared to net cash used by financing activities of $5.6 million during the corresponding period in the prior year. This change was due to $6.6 million in borrowings and $3.6 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan, partially offset by $1.8 million used to repay long-term borrowings. For the six months ended October 31, 2008, net cash used in financing activities totaled approximately $5.6 million. This was primarily due to $12.9 million in repurchases of our common stock, partially offset by $4.8 million in proceeds from net long-term borrowings and $2.7 million in proceeds from the exercise of stock options and employee purchases through our employee stock purchase plan.

 

Capital Commitments and Resources

 

Over the next two years, we expect to invest a total of approximately $33.7 million in OTC, of which we have already contributed $15.6 million. The funding requirement arises from our execution of a Land-Use-Right Purchase Agreement with the Construction and Transportation Commission of the Pudong New District, Shanghai with a concomitant commitment to spend approximately $33.7 million to develop the land. The remainder of our capital commitments to OTC will be financed via the Construction Loan. See Note 16 — “Commitments and Contingencies” to our condensed consolidated financial statements.

 

We currently expect our available cash, cash equivalents and short-term investments, together with cash that we anticipate generating from operating activities, will be sufficient to satisfy our capital requirements over approximately the next twelve months. Other than normal working capital requirements and capital investment at OTC, we expect our capital requirements totaling approximately $10.0 million over approximately the next twelve months will consist primarily of funding capital investments in our wholly-owned subsidiaries, OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, and Shanghai OmniVision Semiconductor Technology, Co. Ltd, or OST. We formed OST during the three months ended October 31, 2008, for the purpose of expanding our testing capabilities in Shanghai, China.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Our ability to generate cash from operations is subject to substantial risks described below under the caption Part II Item 1A, “Risk Factors.” We encourage you to review these risks carefully.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our contractual obligations and commercial commitments as of October 31, 2009 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future periods (in thousands):

 

 

 

Payments Due by Period

 

 

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

Total

 

1 Year

 

1 - 3 Years

 

3 - 5 Years

 

5 Years

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

11,182

 

$

5,121

 

$

5,330

 

$

731

 

$

 

Debt obligations

 

41,235

(1)

3,554

 

8,072

 

5,501

 

24,108

 

Noncancelable orders

 

83,521

 

83,521

 

 

 

 

Total contractual obligations

 

135,938

 

92,196

 

13,402

 

6,232

 

24,108

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Commercial Commitments:

 

 

 

 

 

 

 

 

 

 

 

OST

 

8,500

(2)

8,500

 

 

 

 

Total commercial commitments

 

8,500

 

8,500

 

 

 

 

Total contractual obligations and commercial commitments

 

$

144,438

 

$

100,696

 

$

13,402

 

$

6,232

 

$

24,108

 

 


(1)   In March 2007, we entered into the Mortgage Loan with a domestic bank in the amount of $27.9 million. In March 2008, we borrowed $6.0 million under the Term Loan for building improvement of the Santa Clara Property. We drew down the remaining $6.0 million under the Term Loan in July 2008. In August 2009, we entered into the Construction Loan with a bank in China to finance costs associated with the construction of a research center for OTC. As of October 31, 2009, we borrowed approximately $6.6 million under the Construction Loan. See Note 8 —“Borrowing Arrangements” to our condensed consolidated financial statements.

 

(2)   During the three months ended October 31, 2008, we formed OST, a new wholly-owned subsidiary in Shanghai, China, for the purpose of expanding our testing capabilities. We contributed $1.5 million in January 2009, as required under the terms of our capital commitment. We are required to contribute the remaining $8.5 million of a $10.0 million commitment by October 2010. See Note 16 — “Commitments and Contingencies” to our condensed consolidated financial statements.

 

As of October 31, 2009, the long-term income taxes payable was $82.7 million. We are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond twelve months due to uncertainties in the timing of tax audit, if any, or their outcomes. Accordingly, we have excluded this obligation from the schedule summarizing our significant obligations to make future payments under contractual obligations as of October 31, 2009 presented above.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during the period covered by this Quarterly Report on Form 10-Q.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Recent Accounting Pronouncements

 

In August 2009, the Financial Accounting Standards Board, or FASB, updated the authoritative guidance for fair value measurements as it pertains to liabilities. The update clarifies what valuation technique a company should use when quoted prices in an active market for an identical liability is not available. We are required to adopt the guidance in our third quarter of fiscal 2010. We do not expect the adoption of this guidance to have any material impact on our financial position, results of operations or cash flows.

 

In October 2009, the FASB revised the authoritative guidance for revenue recognition for arrangements with multiple deliverables. The new guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for the undelivered elements. In allocating transaction consideration among the deliverables, the guidance also introduced the concept of using management’s best estimate of a standalone selling price as an alternate basis for allocation. The guidance is effective in fiscal years beginning on or after June 15, 2010, and we are required to adopt this guidance in our first quarter of fiscal 2012. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.

 

In October 2009, the FASB issued authoritative guidance addressing certain revenue arrangements that include software elements. This guidance states that tangible products with hardware and software components that work together to deliver the product functionality are considered non-software products, and the accounting guidance under the revenue arrangements with multiple deliverables is to be followed. The guidance is effective in fiscal years beginning on or after June 15, 2010, and we are required to adopt this guidance in our first quarter of fiscal 2012. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exchange Risk

 

We sell our products globally, in particular to branded customers, contract manufacturers, VARs and distributors in China, Japan, Korea and Taiwan.

 

The great majority of our transactions with our customers and vendors are denominated in U.S. dollars. The expenses we incur in currencies other than U.S. dollars affect gross profit, selling, general and administrative expenses, research, development and related expenses and income taxes, and are primarily incurred in China, where the Chinese Yuan, or CNY, is the local currency and in Taiwan, where the New Taiwan dollar is the local currency.

 

As of October 31, 2009, the functional currency of our wholly-owned subsidiaries located in Hong Kong, OmniVision Technologies (Hong Kong) Company Limited, OmniVision Trading (Hong Kong) Company Ltd., and OmniVision Holding (Hong Kong) Co., Ltd.; in the Cayman Islands, OmniVision International Holding, Ltd. and OmniVision Technology International Ltd. (formerly HuaWei Technology International, Ltd.); in China, OSC and OTC and OST, and in Taiwan, Taiwan OmniVision Technologies Co., Ltd., Taiwan OmniVision International Technologies Co., Ltd., and Taiwan OmniVision Investment Holding Co., Ltd., is the U.S. dollar. Our other wholly-owned subsidiaries have their respective local currencies as their functional currencies. The functional currency of our consolidated affiliate, SOI, is the New Taiwan dollar. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in “Other income (expense), net” for the periods presented. The amounts of transaction gains and losses for the three and six months ended October 31, 2009 and 2008 were not material.

 

Given that the expenses that we incur in currencies other than U.S. dollars have not been a significant percentage of our revenues, we do not believe that our foreign currency exchange rate fluctuation risk is significant. Consequently, we do not believe that a 10% change in foreign currency exchange rates would have a significant effect on our future net income or cash flows.

 

Because we do not believe that we currently have any significant direct foreign currency exchange rate risk, we have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although we transact the overwhelming majority of our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products and thus may impact our results of operations.

 

Market Interest Rate Risk

 

Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, from time to time, the fair market value of our investments. We manage our exposure to financial market risk by performing ongoing evaluations of our investment portfolio. We presently invest in money market funds, certificates of deposit issued by banks, commercial paper, certificates of deposit, high-grade corporate securities and government bonds maturing approximately 18 months or less from the date of purchase. In the past, we also invested in auction rate securities and in variable rate demand notes, which have a final maturity date of up to 39 years but whose interest rate is reset at varying intervals typically between seven and 35 days. As of October 31, 2009, we did not hold any auction rate securities or variable rate demand notes.

 

Due to the short maturities of our investments, the carrying value should approximate the fair market value. In addition, we do not use our investments for trading or other speculative purposes. Due to the short duration of our investment portfolio, we do not expect that an immediate 10% change in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates. We do not believe that the recent instability in global financial markets has significantly affected the value of our cash and short-term investments.

 

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During fiscal 2007, we financed the purchase of the Santa Clara Property with a $27.9 million mortgage loan. The mortgage loan is a variable rate loan which bears interest at LIBOR plus 90 basis points and changes in the interest rate affect our interest payments. However, concurrent with the mortgage loan, we also entered into an interest rate swap with a notional amount that approximates the principal outstanding under the mortgage loan. We are the fixed rate payer under the swap with a fixed rate of 5.3%. By July 2008, we drew down $12.0 million under a related term loan. Concurrent with the term loan, we also entered into an interest rate swap with a notional amount that approximates the principal outstanding under the term loan. We are the fixed rate payer under the swap with a fixed rate of 4.3%. Consequently, although we are required to mark the value of the swaps to market at each balance sheet date and record the associated non-cash cost or benefit as part of “Other income (expense), net,” a hypothetical 10% change in LIBOR would not have a material effect on our interest expense for the three and six months ended October 31, 2009.

 

In August 2009, in order to finance costs associated with the construction of a research center for OTC, we entered into a fixed asset loan agreement with a bank in China. The agreement provides for a fixed asset loan in the principal amount of approximately $20.5 million, or the Construction Loan. During the three months ended October 31, 2009, we borrowed approximately $6.6 million under the Construction Loan. Interest rate under the Construction Loan is based on an indicative rate as published by the Chinese government, and will be adjusted every September to the then current published rate. Interest rate under the Construction Loan was 5.3% at October 31, 2009. We do not hedge against the risk of interest rate changes for the Construction Loan. However, since the current interest rate is published by the Chinese government and will not be adjusted until September 2010, any hypothetical 10% shifts in yield will not cause a significant adverse impact to our results of operations, cash flows or to our financial position for the three and six months ended October 31, 2009.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, at the level of reasonable assurance, our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

 

(b)  Changes in Internal Controls.

 

There have been no changes in our internal control over financial reporting during the three-month period ended October 31, 2009, as covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

From time to time, we have been subject to legal proceedings and claims with respect to such matters as patents, product liabilities and other actions arising out of the normal course of business.

 

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 us, some of our directors and officers, and various underwriters for our initial public offering. Plaintiffs generally allege that the named defendants violated federal securities laws because the prospectus related to our offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in our offering. The complaint seeks unspecified damages on behalf of a purported class of purchasers of our common stock between July 14, 2000 and December 6, 2000. Substantially similar actions have been filed concerning the initial public offerings for more than 300 different issuers, and the cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. Claims against our directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court issued an order dismissing all claims against us except for a claim brought under Section 11 of the Securities Act of 1933.

 

In 2007, a settlement that had been pending with the Court since 2004, was terminated by stipulation of the parties to the settlement, after a ruling by the Second Circuit Court of Appeals in six “focus” cases in the coordinated proceeding (the action involving OmniVision is not one of the six focus cases) made it unlikely that the settlement would receive final court approval. Plaintiffs filed amended master allegations and amended complaints in the six focus cases. In 2008, the Court largely denied the focus case defendants’ motion to dismiss the amended complaints.

 

The parties have reached a global settlement of the coordinated litigation.  Under the settlement, the insurers will pay the full amount of settlement share allocated to us, and we will bear no financial liability. Our company, as well as our company’s officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, will receive complete dismissals from the case. On October 5, 2009, the Court entered an order granting final approval of the settlement. Certain objectors are seeking to appeal.  If for any reason the settlement does not become effective, and litigation against us proceeds, we believe that we have meritorious defenses to plaintiffs’ claims and intend to defend the action vigorously.

 

On October 12, 2007, a purported OmniVision stockholder filed a complaint against certain of the Company’s underwriters for its initial public offering. The complaint, Vanessa Simmonds v. Bank of America Corporation, et al., Case No. C07-1668, filed in District Court for the Western District of Washington, makes similar allegations to those made in In re Initial Public Offering Securities Litigation and seeks the recovery of short-swing trading profits under Section 16(b) of the Securities Exchange Act of 1934. The Company is named as a nominal defendant, and no  recovery was sought from it. The plaintiff filed an amended complaint in February 2008. On March 12, 2009, the Court granted the motion to dismiss without prejudice, filed by 30 of the issuer defendants, including the Company, and the motion to dismiss with prejudice, filed by all of the underwriter defendants. The plaintiff timely appealed the Court’s Order to the United States Court of Appeals for the Ninth Circuit, which remains pending. In accordance with the briefing schedule set by the Ninth Circuit on August 18, 2009, plaintiff filed her opening brief on August 26, 2009.  On October 2, 2009, the underwriter defendants/appellees/cross-appellants filed their answering brief, and the moving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed her response and reply briefs on November 2, 2009.  The Ninth Circuit Court of Appeals has not set a hearing date. No discovery has taken place.

 

At the end of May 2009, plaintiff sent a Demand for Inspection of Books and Records to certain of the nominal defendants named in the Section 16(b) litigation seeking the companies to produce any tolling agreements entered into with the companies’ respective underwriters. Plaintiff’s counsel has agreed to an open-ended extension for certain nominal defendants who received such a demand. As of the date of this filing, we have not received a demand for inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC, or Panavision, filed a complaint against us alleging patent infringement in the District Court for the Central District of California. The case is entitled Panavision Imaging, LLC v. OmniVision Technologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc. and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint, Panavision asserts that we make, have made, use, sell and/or import products that infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High Speed Multi-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid State Imager with Reduced Number of Transistors per Pixel”). The complaint seeks unspecified monetary damages, fees and expenses and injunctive relief against us. We expect to vigorously defend ourselves against Panavision’s allegations.  At this time, we cannot estimate any possible loss or predict whether this matter will result in any material expense to us.

 

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ITEM 1A.   RISK FACTORS

 

This Quarterly Report on Form 10-Q, including 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.

 

The following description of these risk factors includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our 2009 Annual Report on Form 10-K filed with the SEC on July 1, 2009. As a result of the following risk factors, as well as of other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

Risks Related to Our Business

 

Recent domestic and worldwide economic conditions have adversely affected and may further adversely affect our business, results of operations, and financial condition.

 

Recently, general domestic and global economic conditions have been negatively impacted by several factors, including, among others, the subprime-mortgage crisis in the housing market, going concern threats to investment and commercial banks, other financial institutions and major automobile companies, reduced corporate and consumer spending, and decreased consumer confidence. These economic conditions have resulted in our facing one of the most challenging periods in our history. The image-sensor market has been negatively impacted by the current global economic environment. In particular, we believe the current economic conditions have reduced spending by consumers and businesses in markets into which we sell our products in response to tighter credit, negative financial news and the continued uncertainty of the global economy. End customer demand has decreased significantly throughout the industry, affecting all consumer electronic products, security products and products for the automotive industry. Consequently, the overall demand for image sensors has also decreased. This decrease in demand has had a significant impact on our revenues, results of operations and overall business. For example, our revenues for the six-month period ended October 31, 2009 were lower than similar historical periods.

 

These conditions could also have a number of additional effects on our business, including insolvency of key suppliers or manufacturers resulting in product delays, inability of customers to obtain credit to finance purchases of our products, customer insolvencies, increased pricing pressures, restructuring expenses and associated diversion of management’s attention, excess inventory and increased difficulty in accurately forecasting product demand and planning future business activities. It is uncertain how long the current economic conditions will last or how quickly any subsequent economic recovery will occur. If the economy or markets into which we sell our products continue to slow or any subsequent economic recovery is slow to occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

 

We face intense competition in our markets from CMOS and CCD 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 selling 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 inability on our part to compete successfully would also adversely affect our results of operations and impair our financial condition.

 

Our image-sensor products face competition from other companies that sell CMOS image sensors and from companies that sell CCD 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, distribution, technical and other resources than we do. Many of them also have their own manufacturing facilities, which may give them a competitive advantage. 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 established CMOS image-sensor manufacturers such as Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as well as CCD image-sensor

 

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manufacturers such as Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp, Sony and Toshiba. Many of these competitors own and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can, respond more rapidly than we can to changing market opportunities or more easily meet increased demands for their products. In addition, we compete with a large number of smaller CMOS manufacturers including Foveon, PixArt, Pixelplus, Pixim, SETi and SiliconFile. Competition with these and other companies has required, and in the future may require, us to reduce our prices. For instance, we have seen increased competition in the markets for VGA image-sensor products with resulting pressures on product pricing. Downward pressure on pricing could result both in decreased revenues and lower gross margins, which would adversely affect our profitability. From time to time, other companies enter the CMOS image-sensor market by using obsolete and available manufacturing equipment. These new entrants gain market share in the short term by pricing their products significantly below current market levels, which puts additional downward pressure on the prices we can obtain for our products.

 

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. Such 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. Further, some of our customers could also become developers of image sensors, and this could potentially adversely affect our results of operations, business and prospects.

 

Reductions in our average selling prices may lower our revenues and, as a result, may reduce our gross margins.

 

We have experienced and expect to continue to experience pressure to reduce the selling prices of our products, and our average selling prices have declined as a result. Competition in our product markets is intense and as this competition continues to intensify, we anticipate that these pricing pressures will increase. We expect that the average selling prices for many of our products will continue to decline over time. Unless we can increase unit sales sufficiently to offset these declines in our average selling prices, our revenues will decline. Reductions in our average selling prices have adversely affected our gross margins, and unless we can reduce manufacturing costs to compensate, additional reductions in our average selling prices will continue to adversely affect our gross margins and could materially and adversely affect our operating results and impair our financial condition. Although we may decrease our research, development and related expenses in the short-term as we implement certain cost reduction measures, historically we have increased and may continue to increase our research, development and related expenses in the long-term to continue the development of new image-sensor products that can be sold at higher selling prices and/or manufactured at lower cost. If we are unable to timely introduce new products that incorporate more advanced technology and include more advanced features that can be sold at higher average selling prices, or if we are unable to successfully develop more cost-effective technologies, our financial results could be adversely affected.

 

Sales of our image-sensor products for mobile phones account for a large portion of our revenues, and any decline in sales to the mobile phone market or failure of this market and other emerging markets to continue to grow as expected could adversely affect our results of operations.

 

Sales to the mobile phone market account for a large portion of our revenues. Although we can only estimate the percentages of our products that are used in the mobile phone market due to the significant number of our image-sensor products that are sold to module makers or through distributors and VARs, we believe that the mobile phone market accounted for approximately 65% and 60% of our revenues in fiscal 2009 and the six months ended October 31, 2009, respectively. We expect that revenues from sales of our image-sensor products to the mobile phone market will continue to account for a significant portion of our revenues during fiscal 2010 and beyond. Any factors adversely affecting the demand for our image sensors in this market could cause our business to suffer and adversely affect our financial condition, operating results and cash flows. The digital image-sensor market for mobile phones is extremely competitive, and we expect to face increased competition in this market in the future. In addition, we believe the market for mobile phones is also relatively concentrated and the top five producers account for more than 80% of the annual sales of these products. If we do not continue to achieve design wins with key mobile phone manufacturers, our market share or revenues could decrease. The mobile phone image-sensor market is also subject to rapid technological change. In order to compete successfully in this market, we will have to correctly forecast customer demand for technological improvements and be able to deliver such products on a timely basis at competitive prices. If we fail to do this, our results of operations, business and prospects would be materially and adversely affected. In the past, we have experienced problems accurately forecasting customer demand in other markets. In addition, current domestic and global economic conditions could negatively affect the mobile phone market if consumers and/or businesses defer purchases in this market in response to tighter credit, negative financial news, and/or decreased corporate or consumer spending.

 

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We also expect that image sensors will become of greater importance in the security, medical and automotive industries. As image sensors begin to fill a greater role in these other markets, the challenges and risks that we face in these other markets could increase and could be similar to some of the challenges and risks that we face in the mobile phone market. If our sales to the mobile phone market and other emerging markets do not increase and/or the mobile phone market and other emerging markets do not grow as expected, our results of operations, business and prospects would be materially adversely affected.

 

Our future success depends on the timely development, introduction, marketing and selling of new products, which we might not be able to achieve.

 

Our failure to successfully develop new products that achieve market acceptance in a timely fashion would adversely affect our ability to grow our business and our operating results. The development, introduction and market acceptance of new products is critical to our ability to sustain and grow our business. Any failure to successfully develop, introduce, market and sell new products could materially adversely affect our business and operating results. The development of new products is highly complex, and we have in the past experienced delays in completing the development and introduction of new products. From time to time, we have also encountered unexpected manufacturing problems as we increase the production of new products. Consumers continue to expect the sophistication of image sensors in consumer products to increase, and the number of consumer products that use image sensors has continued to grow. This results in a requirement for us to continue to build and develop image sensors with advanced technologies that can be used in a variety of consumer products. As our products integrate new and more advanced technologies and functions, they become more complex and increasingly difficult to design, debug and produce. Successful product development and introduction depends on a number of factors, including:

 

·                  accurate prediction of market requirements and evolving standards, including pixel resolution, output interface standards, power requirements, optical lens size, input standards and operating systems for webcams and other platforms;

·                  development of advanced technologies and capabilities, including our new CameraCube and OmniBSI technology;

·                  definition, timely completion and introduction of new CMOS image sensors that satisfy customer requirements;

·                  development of products that maintain a technological advantage over the products of our competitors, including our advantages with respect to the functionality and pixel capability of our image-sensor products and our proprietary testing processes; and

·                  market acceptance of the new products.

 

Accomplishing all of these steps is difficult, time consuming and expensive. We may be unable to develop new products or product enhancements in time to capture market opportunities or achieve significant or sustainable acceptance in new and existing markets. In addition, our products could become obsolete sooner than anticipated because of a rapid change in one or more of the technologies related to our products or the reduced life cycles of consumer products.

 

Design wins are a key determinant of future revenues, and failure to obtain design wins adversely affects our revenues and impairs our ability to grow our business.

 

Our past success has been, and our future success is, dependent upon manufacturers designing our image-sensor products into their products. To achieve design wins, which are decisions by manufacturers to design our products into their systems, we must define and deliver cost effective and innovative image-sensor solutions on a timely basis that satisfy the manufacturers’ requirements. Our ability to achieve design wins is subject to numerous risks including competitive pressures as well as technological risks. If we do not achieve a design win with a prospective customer, it may be difficult to sell our image-sensor products to such prospective customer in the future because once a manufacturer has designed a supplier’s products into its systems, the manufacturer may be reluctant to change its source of components due to the significant costs, time, effort and risk associated with qualifying a new supplier and modifying its design platforms. Accordingly, if we fail to achieve design wins with key device manufacturers that embed image sensors in their products, our market share or revenues could decrease. Furthermore, to the extent that our competitors secure design wins, our ability to expand our business in the future will be impaired.

 

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We depend on a limited number of third party wafer foundries, which reduces our ability to control our manufacturing process.

 

Unlike some of our larger competitors, we do not own or operate a semiconductor fabrication facility. Instead, we rely on TSMC, PSC and other subcontract foundries to produce all of our wafers. Historically, we have relied on TSMC to provide us with a substantial majority of our wafers. As a part of our joint venture agreement with TSMC, 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.

 

In addition, we have entered into a foundry manufacturing agreement with PSC pursuant to which we and PSC have agreed to jointly develop certain pixel-related process technology and for PSC to process certain of our CMOS image sensors at PSC’s facilities in accordance with the scheduled development approved by both parties.

 

Under the terms of these supply agreements, we secure manufacturing capacity in any particular period on a purchase order basis. The foundries have no obligation to supply products to us for any specific period, in any specific quantity or at any specific price, except as set forth in a particular purchase order. In general, our reliance on third party foundries involves a number of significant risks, including:

 

·                  reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;

·                  lack of guaranteed production capacity or product supply;

·                  unavailability of, or delayed access to, next generation or key process technologies; and

·                  financial difficulties or disruptions in the operations of third party foundries due to causes beyond our control.

 

Because our foundries provide services to a number of companies, in the event they receive increased orders from us or one or more of the other companies that they service, they may be unable to provide us with the requested quantity of products or may subordinate our request to the requests of other larger companies. If for any reason the foundries are unable to provide a sufficient number of products to us on a timely basis, we may be unable to meet the demands of our customers, which could have a material adverse affect on our revenues and other financial results.

 

The current global economic conditions could materially affect our foundries and cause them to be unable to provide necessary services to us. If TSMC, PSC, or any of our other foundries were unable to continue manufacturing our wafers in the required quantities, at acceptable quality, yields and costs, or in a timely manner, we would have to identify and qualify substitute foundries, which would be time consuming and difficult, and could increase our costs or result in unforeseen manufacturing problems. In addition, if competition for foundry capacity increases we may be required to pay increased amounts for manufacturing services. We are also exposed to additional risks if we transfer our production of semiconductors from one foundry to another, as such transfer could interrupt our manufacturing process. Further, some of our foundries may also develop their own image-sensor products and if one or more of our other foundries were to decide not to fabricate our companion DSP chips for competitive or other reasons, we would have to identify and qualify other sources for these products.

 

We rely on a joint venture company for color filter application and on third party service providers for packaging and other back-end services, which reduces our control over delivery schedules, product quality and cost, and could adversely affect our ability to deliver products to customers.

 

We rely on VisEra, our joint venture with TSMC, for the color filter processing of our completed wafers and the assembly of our CameraCube imaging devices. In addition, we rely on Advanced Semiconductor Engineering, Inc. and on ImPac, our equity investee, for substantially all of our ceramic chip packages. We rely on XinTec and WLCSP, two investee companies, for chip scale packages, which are generally used in our products designed for the smallest form factor applications. We rely on several specialized service providers, one of which is ImPac, to perform the necessary wafer probe tests and prepare good die for use in a form called chip-on-board, a process called reconstructing wafers. The current global economic conditions could adversely affect these service providers’ ability to continue to fulfill our packaging, color filter processing and related requirements. If for any reason one or more of these service providers were to become unable or unwilling to continue to provide services of acceptable quality, at acceptable costs or in a timely manner, our ability to deliver our products to our customers could be severely impaired. We would have to identify and qualify substitute service providers, which could be time consuming and difficult and could result in unforeseen operational problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms.

 

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In addition, if competition for color filter processing, packaging, capacity or other back-end services increases, we may be required to pay or invest significant amounts to secure access to these services, which could adversely impact our operating results. The number of companies that provide these services is limited and some of them have limited operating histories and financial resources. In the event our current providers refuse or are unable to continue to provide these services to us, we may be unable to procure services from alternate service providers. Furthermore, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers on commercially reasonable terms, if at all. These factors may cause unforeseen product shortages or may increase our costs of manufacturing, assembling or testing of our products, which would adversely affect our operating results.

 

Fluctuations in our quarterly operating results have caused volatility in the market price of our common stock and also make it difficult to predict our future operating results.

 

Our quarterly operating results have varied significantly from quarter to quarter in the past and are likely to vary significantly in the future based on a number of factors, many of which are beyond our control. These factors and other industry risks, many of which are more fully discussed in our other risk factors, include, but are not limited to:

 

·                  adverse changes in domestic or global economic conditions, including the current economic crisis;

·                  the volume and mix of our product sales;

·                  competitive pricing pressures;

·                  our ability to accurately forecast demand for our products;

·                  our ability to achieve acceptable wafer manufacturing or back-end processing yields;

·                  our gain or loss of a large customer;

·                  our ability to manage our product transitions;

·                  the availability of production capacity at the suppliers that manufacture our products or process our products;

·                  the growth of the market for products and applications using CMOS image sensors;

·                  the timing and size of orders from our customers;

·                  the volume of our product returns;

·                  the seasonal nature of customer demand for our products;

·                  the deferral of customer orders in anticipation of new products, product designs or enhancements;

·                  the announcement and introduction of products and technologies by our competitors;

·                  the fair value of our interest rate swaps;

·                  the impairment of our intangible assets or other long-lived assets;

·                  the level of our operating expenses; and

·                  fluctuations in our effective tax rate from quarter to quarter.

 

Our introduction of new products and our product mix have affected and may continue to affect our quarterly operating results. Changes in our product mix could adversely affect our operating results, because some products provide higher margins than others. We typically experience lower yields when manufacturing new products through the initial production phase, and consequently our gross margins on new products have historically been lower than our gross margins on our more established products. We also anticipate that the rate of orders from our customers may vary significantly from quarter to quarter. Our operating expenses are relatively fixed in the short-term, and our inventory levels are based on our expectations of future revenues. Consequently, if we do not achieve the revenues we expect in any quarter, expenses and inventory levels could be disproportionately high, adversely impacting our operating results for that quarter, and potentially in future quarters.

 

All of these factors are difficult to forecast and could result in fluctuations in our quarterly operating results. Our operating results in a given quarter could be substantially less than anticipated, and, if we fail to meet market analysts’ expectations, a substantial decline in our stock price could result. Fluctuations in our quarterly operating results could adversely affect the price of our common stock in a manner unrelated to our long-term operating performance.

 

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Our use of derivative financial instruments to reduce interest rate risk may result in added volatility in our quarterly operating results

 

We do not hold or issue derivative financial instruments for trading purposes. However, we do utilize derivative financial instruments to reduce interest rate risk. We have a variable rate mortgage loan that totaled $34.6 million as of October 31, 2009. To manage the related interest rate risk, we entered into two interest rate swap agreements, effectively converting our mortgage loan into a fixed rate loan. Under generally accepted accounting principles, the fair values of the swap contracts, which will either be amounts receivable from or payable to counterparties, are reflected as either assets or liabilities on our consolidated balance sheets. Also, we have to record their fair value changes in our consolidated statements of operations, in “Other income (expense), net.” The associated impact on our quarterly operating results is directly related to changes in prevailing interest rates. If interest rates increase, we would have a non-cash gain on the swap, and vice versa. Consequently, these swap contracts will introduce volatility to our operating results.

 

We are also exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. However, we do not anticipate non-performance by the counterparties.

 

Our business is subject to seasonal fluctuations which may in turn cause fluctuations in our results of operations from period to period.

 

Many of the products using our image sensors, such as mobile phones, notebooks, netbooks and webcams, DSCs and cameras for entertainment applications, are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. Historically, demand from OEMs and distributors that serve such consumer product markets has been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. In addition, our gross revenues in our second and third fiscal quarters have typically been comparable. Recently, however, an increase in end-customer demand in North America related to the holiday season accelerated the timing of our customers’ purchases from our third fiscal quarter to our second fiscal quarter. If this trend continues in future years, it could result in the quarter-to-quarter fluctuation of our revenues differing from our historical seasonal cycles.

 

In addition, since a very large number of the manufacturers who use our products are located in China and Taiwan, the pattern of demand for our image sensors has been influenced by the timing of the extended lunar or Chinese New Year holiday, a period in which the factories which use our image sensors generally close. For example, we believe that the decline in revenues that we experienced in the fourth quarters of fiscal 2007 and 2008 is partly attributable to the fact that in 2007 and 2008 Chinese New Year occurred in mid-February, and manufacturing did not resume in full for several weeks.

 

Problems with wafer manufacturing and/or back-end processing yields could result in higher product costs and could impair our ability to meet customer demand for our products.

 

If the foundries manufacturing the wafers used in our products cannot achieve the yields we expect, we will incur higher unit costs and reduced product availability. Foundries that supply our wafers have experienced problems in the past achieving acceptable wafer manufacturing yields. Wafer yields are a function both of our design technology and the particular foundry’s manufacturing process technology. Certain risks are inherent in the introduction of new products and technology. Low yields may result from design errors or manufacturing failures in new or existing products. During the early stages of production, production yields for new products are typically lower than those of established products. Unlike many other semiconductor products, optical products can be effectively tested only when they are complete. Accordingly, we perform final testing of our products only after they are assembled. As a result, yield problems may not be identified until our products are well into the production process. The risks associated with low yields could be increased because we rely on third party offshore foundries for our wafers, which can increase the effort and time required to identify, communicate and resolve manufacturing yield problems. In addition to wafer manufacturing yields, our products are subject to yield loss in subsequent manufacturing steps, often referred to as back-end processing, such as the application of color filters and micro-lenses, dicing (cutting the wafer into individual devices, or die) and packaging. Any of these potential problems with wafer manufacturing and/or back-end processing yields could result in a reduction in our gross margins and/or our ability to timely deliver products to customers, which could adversely affect our customer relations and make it more difficult to sustain and grow our business.

 

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If we do not forecast customer demand correctly, our business could be impaired and our stock price may decline.

 

Our sales are generally made on the basis of purchase orders rather than long-term purchase commitments; however, we manufacture products and build inventory based on our estimates of customer demand. Accordingly, we must rely on multiple assumptions to forecast customer demand. We are continually working to improve our sales forecasting procedures. The current domestic and global economic conditions have made it extremely challenging to accurately predict customer demand because recent demand has decreased and historical models for predicting customer demand may no longer be reliable. If we overestimate customer demand, we may manufacture products that we may be unable to sell, or we may have to sell at lower prices. This could materially and adversely affect our results of operations and financial condition. In addition, our customers may cancel or defer orders at any time by mutual written consent. We have experienced problems with accurately forecasting customer demand in the past. For example, there was a significant decline in product demand in the third quarter of fiscal 2009, and as a result our inventories at the end of the third quarter of fiscal 2009 were higher than we intended them to be. We need to accurately predict customer demand because we must often make commitments to have products manufactured before we receive firm purchase orders from our customers. Conversely, if we underestimate customer demand, we may be unable to manufacture sufficient products quickly enough to meet actual demand, causing us to lose customers and impairing our ability to grow our business. In preparation for new product introductions, we gradually ramp down production of established products. With our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of our new products and the impact on inventory levels presented by the shorter life cycles of end-user products. The shorter product life cycle is a result of an increase in competition and the growth of various consumer-product applications for image sensors. Under these circumstances, it is possible that we could suffer from shortages for certain products and, if we underestimate market demand, we face the risk of being unable to fulfill customer orders. We also face the risk of excess inventory and product obsolescence if we overestimate market demand for our products and build inventories in excess of demand. Our ability to accurately forecast sales is also a critical factor in our ability to meet analyst expectations for our quarterly and annual operating results. Any failure to meet these expectations would likely lead to a substantial decline in our stock price.

 

We depend on the increased acceptance of mass-market image-sensor applications 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 image-sensor products, including the markets for mobile phones, notebook and webcams, digital still and video cameras, commercial and security and surveillance applications, entertainment devices, automotive and medical applications. If these markets do not grow and develop as we anticipate, we may be unable to sustain or grow the sales of our products. Each of these markets has already been, and may continue to be, adversely impacted by current global economic conditions where consumers and businesses have deferred purchases of products in these markets as a result of tighter credit, negative financial news, and decreased corporate or consumer spending. Such conditions have negatively affected, and may continue to negatively affect, our business.

 

In addition, the market price of our common stock may be adversely affected if certain of these new markets do not emerge or develop as expected. Securities analysts may already factor revenue from such new markets into their future estimates of our financial performance and should such markets not develop as expected by such securities analysts the trading price of our common stock could be adversely affected.

 

Our lengthy manufacturing, packaging and assembly cycle, in addition to our customers’ design cycle, may result in uncertainty and delays in generating revenues.

 

The production of our image sensors requires a lengthy manufacturing, packaging and assembly process, typically lasting approximately 12-14 weeks. Additional time may pass before a customer commences taking volume shipments of products that incorporate our image sensors. Even when a manufacturer decides to design our image sensors into its products, the manufacturer may never ship final products incorporating our image sensors. Given this lengthy cycle, we experience a delay between the time we incur expenditures for research and development and sales and marketing efforts and the time we generate revenue, if any, from these expenditures. This delay makes it more difficult to forecast customer demand, which adds uncertainty to the manufacturing planning process and could adversely affect our operating results. In addition, the product life cycle for certain of our image-sensor products designed for use in certain applications can be relatively short. If we fail to appropriately manage the manufacturing, packaging and assembly process, our products may become obsolete before they can be incorporated into our customers’ products and we may never realize a return on investment for the expenditures we incur in developing and producing these products.

 

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Our ability to deliver products that meet customer demand is dependent upon our ability to meet new and changing requirements for color filter application and image-sensor packaging.

 

We expect that as we develop new products to meet technological advances and new and changing industry and customer demands, our color filter application and ceramic, plastic and chip scale packaging requirements will also evolve. Our ability to continue to profitably deliver products that meet customer demand is dependent upon our ability to obtain third party services that meet these new requirements on a cost-effective basis. There can be no assurances that any of these parties will be able to develop enhancements to the services they provide to us to meet these new and changing industry and customer requirements. Furthermore, even if these service providers are able to develop their services to meet new and evolving requirements, these services may not be available at a cost that enables us to sustain our profitability.

 

The high level of complexity and integration of our products increases the risk of latent defects, which could damage customer relationships and increase our costs.

 

Our products are based upon evolving technology, and because we integrate many functions on a single chip, are highly complex. The integration of additional functions into already complex products could result in a greater risk that customers or end users could discover latent defects or subtle faults after we have already shipped significant quantities of a product. Although we test our products, we have in the past and may in the future encounter defects or errors. For example, in the third quarter of fiscal 2005, we recorded a provision of $2.7 million related to the possible replacement of products that did not meet a particular customer’s standards. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, product warranty costs for recall and replacement and product liability claims against us which may not be fully covered by insurance.

 

We depend for the majority of our revenues on a few key customers and, the loss of one or more of our key customers could significantly reduce our revenues.

 

A relatively small number of OEMs, VARs and distributors account for a significant portion of our revenues. Any material delay, cancellation or reduction of purchase orders from one or more of our major customers or distributors could result in our failure to achieve anticipated revenue for a particular period. Such a delay, cancellation or reduction could be caused by, among other things, such customers or distributors being materially and adversely affected by the current domestic and global economic conditions. In addition, if we are unable to retain one or more of our largest OEM, distributor or VAR customers, or if we are unable to maintain our current level of revenues from one or more of these significant customers, our business and results of operation would be impaired and our stock price could decrease, potentially significantly. In fiscal 2009, approximately 59.5% of our revenues came from sales to our top five customers. In addition, in the six months ended October 31, 2009, one OEM customer accounted for approximately 11.8% of our revenues, and one distributor customer accounted for approximately 27.9% of our revenues. Our business, financial condition, results of operations and cash flows will continue to depend significantly on our ability to retain our current key customers and to attract new customers, as well as on the financial condition and success of our OEMs, VARs and distributors.

 

We may be required to record a significant charge to earnings if our intangible assets or long-term investments become impaired.

 

Under generally accepted accounting principles, we are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include a decline in stock price and market capitalization, and slower growth rates in our industry.

 

We may be required to record a significant charge to earnings in our financial statements during the period in which we determine that our intangible assets or long-term investments have been impaired. Any such charge would adversely impact our results of operations. As of October 31, 2009, our intangible assets totaled approximately $4.1 million and our long-term investments totaled approximately $87.2 million.

 

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We maintain a backlog of customer orders that is subject to cancellation or delay in delivery schedules, and any cancellation or delay may result in lower than anticipated revenues.

 

Our sales are generally made pursuant to standard purchase orders. We include in our backlog only those customer orders for which we have accepted purchase orders and assigned shipment dates within the upcoming 12 months. Orders constituting our current backlog are subject to cancellation or changes in delivery schedules, and backlog may not necessarily be an indication of future revenue. Any cancellation or delay in orders which constitute our current or future backlog may result in lower than expected revenues.

 

If we are unable to maintain processes and procedures to sustain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and this could have a material adverse effect on our stock price.

 

We are required to comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section 404 requires that we prepare an annual management report assessing the effectiveness of our internal control over financial reporting, and requires a report by our independent registered public accounting firm addressing the effectiveness of our internal control over financial reporting.

 

We have in the past discovered, and may in the future discover, areas of our internal control that need improvement. For example, we restated our financial statements for the first, second and third quarters of fiscal 2004. If these or similar types of issues were to arise with respect to our internal controls in future periods, they could impair our ability to produce accurate and timely financial reports.

 

As our business changes, ongoing compliance with the provisions of Section 404 of the Sarbanes-Oxley Act and maintenance of effective internal control over financial reporting will require that we hire additional qualified finance and accounting personnel. Because other businesses face similar challenges, there is significant competition for such personnel, and there can be no assurance that we will be able to attract and/or retain suitably qualified employees.

 

Corporate governance regulations have increased our compliance costs and could further increase our expenses if changes occur within our business.

 

We are subject to corporate governance laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act, that impose certain requirements on us and on our officers, directors, attorneys and independent registered public accounting firm. In order to comply with these rules, we added internal resources and have utilized additional outside legal, accounting and advisory services, which increased our operating expenses. We expect to incur ongoing operating expenses as we maintain compliance with Section 404. In addition, if we undergo significant modifications to our structure through personnel or system changes, acquisitions, or otherwise, it may be increasingly difficult to maintain compliance with the existing and evolving corporate governance regulations.

 

We hold a significant amount of marketable securities which are subject to general market risks over which we have no control.

 

As of October 31, 2009, we held cash and cash equivalents totaling $315.9 million, and short-term investments totaling $38.1 million. These assets are managed on our behalf by unrelated third parties in accordance with a cash management policy that has been approved by our board of directors and restricts our investments to a maximum maturity of 18 months and to investment-grade instruments. As of October 31, 2009, we did not hold any illiquid investments and we have not realized any losses. However, recent uncertainties in global capital markets associated with a repricing of risk have caused disruptions in the orderly function of markets where ordinarily there is virtually unlimited liquidity. If we were to make a future investment in certain illiquid securities that are dependent on the orderly functioning of the capital markets, and if we were required to liquidate this type of securities at short notice, such liquidation could result in losses of principal.

 

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There are risks associated with our operations in China.

 

In December 2000, we established OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, as part of our efforts to streamline our manufacturing process and reduce the costs and working capital associated with the testing of our image-sensor products, and relocated our automated image testing equipment from the United States to China. We are currently expanding our testing capabilities with additional automated testing equipment, which will also be located in China. Through our wholly-owned subsidiary, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we are also developing land and constructing research facilities in Shanghai. There are certain administrative, legal and governmental risks to operating in China that could result in increased operating expenses or could hamper us in the development of our operations in China. More recently we invested in a company in China that is providing a portion of our chip scale package packaging requirements. The risks from operating in China that could increase our operating expenses and adversely affect our operating results, financial condition and ability to deliver our products and grow our business include, without limitation:

 

·                  difficulties in staffing and managing foreign operations, particularly in attracting and retaining personnel qualified to design, sell, test and support CMOS image sensors;

·                  difficulties in managing employee relations;

·                  increases in the value of the Chinese Yuan, or CNY;

·                  difficulties in coordinating our operations in China with those in California;

·                  difficulties in enforcing contracts in China;

·                  difficulties in protecting intellectual property;

·                  diversion of management attention;

·                  imposition of burdensome governmental regulations;

·                  difficulties in maintaining uniform standards, controls, procedures and policies across our global operations, including inventory management and financial consolidation;

·                  political and economic instability, which could have an adverse impact on foreign exchange rates in Asia and could impair our ability to conduct our business in China; and

·                  inadequacy of the local infrastructure to support our operations.

 

We may experience integration or other problems with potential future acquisitions, which could have an adverse effect on our business or results of operations. New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

 

We may in the future make acquisitions of, or investments in, businesses that offer products, services and technologies that we believe would complement our products, including CMOS image-sensor manufacturers. We may also make acquisitions of or investments in, businesses that we believe could expand our distribution channels. Even if we were to announce an acquisition, we may not be able to complete it. In addition, any future acquisition or substantial investment could present numerous risks, including:

 

·                  difficulty in realizing the potential technological benefits of the transaction;

·                  difficulty in integrating the technology, operations or work force of the acquired business with our existing business;

·                  unanticipated expenses related to technology integration;

·                  disruption of our ongoing business;

·                  difficulty in realizing the potential financial or strategic benefits of the transaction;

·                  difficulty in maintaining uniform standards, controls, procedures and policies;

·                  possible impairment of relationships with employees, customers, suppliers and strategic partners as a result of integration of new businesses and management personnel;

·                  reductions in our future operating results from amortization of intangible assets;

·                  impairment of resulting goodwill; and

·                  potential unknown or unexpected liabilities associated with acquired businesses.

 

We expect that any future acquisitions could include consideration to be paid in cash, shares of our common stock or a combination of cash and our common stock. If and when consideration for a transaction is paid in common stock, it will result in dilution to our existing stockholders.

 

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We may not achieve continued benefits from our joint venture with TSMC.

 

In October 2003, we entered into an agreement with TSMC to form VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services. In August 2005 and again in January 2007, we entered into amendments to the agreement with TSMC to expand the scope of VisEra’s activities and provide additional funding for the expansion of VisEra.

 

In January 2006, VisEra acquired certain color filter processing equipment from TSMC and assumed direct responsibility for providing the color filter processing services that had previously been provided to us by TSMC. We expect that VisEra will be able to provide us with a committed supply of high quality manufacturing services at competitive prices. However, there are significant legal, governmental and relationship risks to developing VisEra, and we cannot ensure that we will continue to receive the expected benefits from the joint venture. For example, VisEra may not be able to provide manufacturing services that have competitive technology or prices, which could adversely affect our product offerings and our ability to meet customer requirements for our products. In addition, the existence of VisEra may also make it more difficult for us to secure dependable services from competing merchant vendors who provide similar manufacturing services.

 

We may not achieve all of the anticipated benefits of our alliances with, and strategic investments in, third parties.

 

We expect to develop our business partly through forming alliances or joint ventures with and making strategic investments in other companies, some of which may be companies at a relatively early stage of development. For example, in April 2003, we made an investment in XinTec, a company that provides chip scale packaging services, and in June 2003 we made an investment in ImPac, a packaging service company. In December 2005, VisEra, our joint venture with TSMC, completed the acquisition of additional shares of XinTec. In May 2007, we acquired a portion of the registered capital of WLCSP, a company that also provides chip scale packaging services.

 

In addition, in May 2004, we entered into an agreement with PSC under which we established SOI, a joint venture as a company incorporated under the laws of Taiwan. The purpose of the joint venture is to conduct the business of manufacturing, marketing and selling of certain of our legacy products. In March 2005, we assumed control of the board of directors of SOI and we have consolidated SOI since April 30, 2005.

 

Our investments in these and other companies may negatively impact our operating results, because, under certain circumstances, we are required to recognize our portion of any loss recorded by each of these companies or to consolidate them into our operating results. We expect to continue to utilize partnerships, strategic alliances and investments, particularly those that enhance our manufacturing capacity and those that provide manufacturing services and testing capability. These investments and partnering arrangements are crucial to our ability to grow our business and meet the increasing demands of our customers. However, we cannot ensure that we will achieve the benefits we expect from these alliances. For example, we may not be able to obtain acceptable quality and/or wafer manufacturing yields from these companies, which could result in higher operating costs and could impair our ability to meet customer demand for our products. In addition, certain of these investments or partnering relationships may place restrictions on the scope of our business, the geographic areas in which we can sell our products and the types of products that we can manufacture and sell. For example, our agreement with TSMC provides that we may not engage in business that will directly compete with the business of VisEra. This type of non-competition provision may impact our ability to grow our business and to meet the demands of our customers.

 

Changes in our relationships with our joint ventures and/or companies in which we hold less than a majority interest could change the way we account for such interests in the future.

 

As part of our strategy, we have formed joint ventures with two of our foundry partners, and we hold a noncontrolling interest in three companies from which we purchase certain manufacturing services. Under the applicable provisions of generally accepted accounting principles in the United States of America, we currently consolidate one of these joint ventures into our consolidated financial statements and results of operations, and record the equity interests that we do not own as noncontrolling interests. For the investments that we account for under the equity method, we record as part of other income or expense our share of the increase or decrease in the equity of the companies in which we have invested. It is possible that, in the future, our relationships and/or our interests in or with these joint ventures or other investees could change. Such changes have in the past, and could in the future result in deconsolidation or consolidation of such entities, as the case may be, which could result in changes in our reported results.

 

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We may be unable to adequately protect our intellectual property, and therefore we may lose some of our competitive advantage.

 

We rely on a combination of patent, copyright, trademark and trade secret laws as well as nondisclosure agreements and other methods to protect our proprietary technologies. We have been issued patents and have a number of pending United States and foreign patent applications. However, we cannot provide assurance that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology. It is possible that existing or future patents may be challenged, invalidated or circumvented. For example, in August 2002, we initiated a patent infringement action in Taiwan, Republic of China against IC Media Corporation of San Jose, California for infringement of a Taiwanese patent that had been issued to us. In response to our patent infringement action, in October 2002, IC Media Corporation initiated a cancellation proceeding in the Taiwan Intellectual Property Office with respect to our patent. In July 2003, the Taiwan Intellectual Property Office made an initial determination to grant the cancellation of the subject patent, which decision was upheld by the Taiwan Ministry of Economic Affairs and the High Administrative Court. We decided not to appeal such decision by the May 31, 2005 deadline. Although we do not believe the cancellation of the Taiwanese patent at issue in the dispute described above has had a material adverse effect on our business or prospects, there may be other situations where our inability to adequately protect our intellectual property rights could materially and adversely affect our competitive position and operating results. If a third party can copy or otherwise obtain and use our products or technology without authorization, develop corresponding technology independently or design around our patents, this could materially adversely affect our business and prospects. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. Any disputes over our intellectual property rights, whatever the ultimate resolution of such disputes, may result in costly and time-consuming litigation or require the license of additional elements of intellectual property for a fee.

 

Litigation regarding intellectual property could divert management attention, be costly to defend and prevent us from using or selling the challenged technology.

 

In recent years, there has been significant litigation in the United States involving intellectual property rights, including in the semiconductor industry. We have in the past been, currently are and may in the future be, subject to legal proceedings and claims with respect to our intellectual property, including such matters as trade secrets, patents, product liabilities and other actions arising out of the normal course of business. These claims may increase as our intellectual property portfolio becomes larger or more valuable. Intellectual property claims against us, and any resulting lawsuit, may cause us to incur significant expenses, subject us to liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation against us would likely be time-consuming and expensive to resolve and would divert management’s time and attention and could also force us to take actions such as:

 

·                  ceasing the sale or use of products or services that incorporate the infringed intellectual property;

·                  obtaining from the holder of the infringed intellectual property a license to sell or use the relevant technology, which license may not be available on acceptable terms, if at all; or

·                  redesigning those products or services that incorporate the disputed intellectual property, which could result in substantial unanticipated development expenses and delay and prevent us from selling the products until the redesign is completed, if at all.

 

If we are subject to a successful claim of infringement and we fail to develop non-infringing intellectual property or license the infringed intellectual property on acceptable terms and on a timely basis, we may be unable to sell some or all of our products, and our operating results could be adversely affected. We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could also result in significant expense and the diversion of technical and management attention.

 

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The use of our image sensors in end user products in the medical and automotive industries could result in us being named as a defendant in product liability claims, which could adversely affect our business and reputation.

 

Our image sensors have been incorporated into certain end user products in the medical and automotive industries, and we expect that they will continue to increase as a percentage of our overall business.  The use of the medical and automotive industry products into which our image sensors are designed could result in an unsafe condition, injury, or even death as a result of, among other factors, component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information.  These factors could result in product liability claims seeking damages for personal injury, and we could be named as a defendant in such claims.  Because the outcome of product liability claims is not predictable and is difficult to assess or quantify, we cannot provide assurance that such claims will not materially adversely affect our business or damage the reputation of our products or our company.

 

If we do not effectively manage our growth, our ability to increase our revenues and improve our earnings could be adversely affected.

 

Our growth has placed, and will continue to place, a significant strain on our management and other resources. To manage our growth effectively, we must, among other things:

 

·                  continuously improve our operational, financial and accounting systems;

·                  train, manage and maintain good relations with our existing employee base in both our U.S. and international locations;

·                  attract and retain qualified personnel with relevant experience; and

·                  effectively manage accounts receivable and inventory.

 

For example, our failure to effectively manage our inventory levels could result either in excess inventories, which could adversely affect our gross margins and operating results, or lead to an inability to fill customer orders, which would result in lower sales and could harm our relationships with existing and potential customers.

 

We must also manage multiple relationships with customers, business partners and other third parties, such as our foundries and process and assembly vendors. Moreover, future growth could significantly overburden our management and financial systems and other resources. We may not make adequate allowances for the costs and risks associated with our expansion. In addition, our systems, procedures or controls may not be adequate to support our operations, and we may not be able to expand quickly enough to capitalize on potential market opportunities. Our future operating results will also depend, in part, on our ability to expand sales and marketing, research and development, accounting, finance and administrative support.

 

Our future tax rates and tax payments could be higher than we anticipate and may harm our results of operations.

 

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax law is subject to legal and factual interpretation, judgment and uncertainty, and tax laws themselves are subject to change. Consequently, taxing authorities may impose tax assessments or judgments against us that could result in a significant charge to our earnings.

 

A number of other factors will also affect our future tax rate, and certain of these factors could increase our effective tax rate in future periods, which could adversely impact our operating results. These factors include changes in non-deductible share-based compensation, changes in tax laws or the interpretation of tax laws, changes in the proportion and geographic mix of our revenue or earnings, changes in the valuation of our deferred tax assets and liabilities, changes in available tax credits and the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.

 

Our sales through distributors increase the complexity of our business and may reduce our ability to forecast revenues.

 

During fiscal 2009 and the six months ended October 31, 2009, approximately 42.0% and 47.9%, respectively, of our revenues came from sales through distributors. We expect that revenues from sales through distributors will continue to represent a significant proportion of our total revenues. Selling through distributors reduces our ability to accurately forecast sales and increases the complexity of our business, requiring us to, among other matters:

 

·                  manage a more complex supply chain;

·                  manage the level of inventory at each distributor;

 

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·                  provide for credits, return rights and price protection;

·                  estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and

·                  monitor the financial condition and creditworthiness of our distributors.

 

Any failure to manage these challenges could cause us to inaccurately forecast sales and carry excess or insufficient inventory, thereby adversely affecting our operating results.

 

We face foreign business, political and economic risks, because a majority of our products and those of our customers are manufactured and sold outside of the United States.

 

We face difficulties in managing our third party foundries, color filter application service providers, packaging and other manufacturing service providers and our foreign distributors, most of whom are located in Asia. In addition, our presence in Asia presents the challenge of managing foreign operations and maintaining good relations with our employees located there. Any political and economic instability in Asia might have an adverse impact on foreign exchange rates and could cause service disruptions for our vendors and distributors and adversely affect our customers.

 

Sales outside of the United States accounted for substantially all of our revenues for fiscal 2009 and the six-month period ended October 31, 2009. We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenues in future periods. Dependence on sales to foreign customers involves certain risks, including:

 

·                  longer payment cycles;

·                  the adverse effects of tariffs, duties, price controls or other restrictions that impair trade;

·                  decreased visibility as to future demand;

·                  difficulties in accounts receivable collections; and

·                  burdens of complying with a wide variety of foreign laws and labor practices.

 

Sales of our products have to date been denominated principally in U.S. dollars. Over the last several years, the U.S. dollar has weakened against most other currencies. Future increases in the value of the U.S. dollar, if any, would increase the price of our products in the currency of the countries in which our customers are located. This may result in our customers seeking lower-priced suppliers, which could adversely impact our operating results. If a larger portion of our international revenues were to be denominated in foreign currencies in the future, we would be subject to increased risks associated with fluctuations in foreign currency exchange rates.

 

Our business could be harmed if we lose the services of one or more members of our senior management team, or if we are unable to attract and retain qualified personnel.

 

The loss of the services of one or more of our executive officers or key employees, which has occurred from time to time, or the decision of one or more of these individuals to join a competitor, could adversely affect our business and harm our operating results and financial condition. Our success depends to a significant extent on the continued service of our senior management and certain other key technical personnel. None of our senior management is bound by an employment or non-competition agreement. We do not maintain key man life insurance on any of our employees.

 

Our success also depends on our ability to identify, attract and retain qualified sales, marketing, finance, management and technical personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. If we do not succeed in hiring and retaining candidates with appropriate qualifications, our revenues, operations and product development efforts could be harmed.

 

We substantially completed the implementation of the first phase of a new enterprise resource planning system, a process which presents a number of significant operational risks.

 

As our business grows and becomes more complex, it is necessary that we expand and upgrade our enterprise resource planning system, or ERP, and other management information systems which are critical to the operational, accounting and financial functions of our company. We evaluated alternative solutions, both short-term and long-term, to meet the operating, administrative and financial reporting requirements of our business. During the three months ended July 31, 2008, we substantially completed the implementation of the first phase of a new ERP based on a suite of application software developed by Oracle Corporation. We will continue to make further enhancements and upgrades to the ERP, as necessary. Significant management attention and resources have been used and extensive planning has occurred to support effective implementation of the new ERP system, however, such implementation carries certain risks, including the risk of significant design errors that could materially and adversely affect our operating results and impact our ability to manage our business. As a result, there is a risk that deficiencies may exist in the future and that they could constitute significant deficiencies, or, in the aggregate, a material weakness in internal control over financial reporting.

 

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Our operations may be impaired as a result of disasters, business interruptions or similar events.

 

Disasters and business interruptions such as earthquakes, water, fire, electrical failure, accidents and epidemics affecting our operating activities, major facilities, and employees’ and customers’ health could materially and adversely affect our operating results and financial condition. In particular, our Asian operations and most of our third party service providers involved in the manufacturing of our products are located within relative close proximity. Therefore, any disaster that strikes within or close to that geographic area, such as the earthquake and flooding that occurred in China, could be extremely disruptive to our business and could materially and adversely affect our operating results and financial condition. We are currently developing and implementing a disaster recovery plan.

 

Acts of war and terrorist acts may seriously harm our business and revenue, costs and expenses and financial condition.

 

Acts of war or terrorist acts, wherever they occur around the world, may cause damage or disruption to our business, employees, facilities, suppliers, distributors or customers, which could significantly impact our revenue, costs, expenses and financial condition. In addition, as a company with significant operations and major distributors and customers located in Asia, we may be adversely impacted by heightened tensions and acts of war that occur in locations such as the Korean Peninsula, Taiwan and China. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted. We are uninsured for losses and interruptions caused by terrorist acts and acts of war.

 

Risks Related to the Securities Markets and Ownership of Our Common Stock

 

Provisions in our charter documents and Delaware law, as well as our stockholders’ rights plan, could prevent or delay a change in control of our company and may reduce the market price of our common stock.

 

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:

 

·                  adjusting the price, rights, preferences, privileges and restrictions of preferred stock without stockholder approval;

·                  providing for a classified board of directors with staggered, three-year terms;

·                  requiring supermajority voting to amend some provisions in our certificate of incorporation and bylaws;

·                  limiting the persons who may call special meetings of stockholders; and

·                  prohibiting stockholder actions by written consent.

 

Provisions of Delaware law also may discourage, delay or prevent another company from acquiring or merging with us. Our board of directors adopted a preferred stock rights agreement in August 2001. Pursuant to the rights agreement, our board of directors declared a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common stock. The dividend was paid on September 28, 2001 to stockholders of record as of the close of business on that date. Each right entitles the registered holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $176.00, subject to adjustment. The exercise of the rights could have the effect of delaying, deferring or preventing a change of control of our company, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The rights agreement could also limit the price that investors might be willing to pay in the future for our common stock.

 

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Our stock has been and will likely continue to be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control that may prevent our stockholders from selling our common stock at a profit.

 

The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Since the beginning of fiscal 2002 through October 31, 2009, the closing sales price of our common stock has ranged from a high of $33.90 per share to a low of $1.26 per share. The closing sales price of our common stock on December 4, 2009 was $12.48 per share. The securities markets have experienced significant price and volume fluctuations in the past, and the market prices of the securities of semiconductor companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, including the current global economic situation, could reduce the market price of our common stock in spite of our operating performance. The market price of our common stock may fluctuate significantly in response to a number of factors, including:

 

·                  actual or anticipated fluctuations in our operating results;

·                  changes in expectations as to our future financial performance;

·                  changes in financial estimates of securities analysts;

·                  release of lock-up or other transfer restrictions on our outstanding shares of common stock or sales of additional shares of common stock;

·                  sales or the perception in the market of possible sales of shares of our common stock by our directors, officers, employees or principal stockholders;

·                  changes in market valuations of other technology companies; and

·                  announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

 

Due to these factors, the price of our stock may decline and investors may be unable to resell their shares of our stock for a profit. In addition, the stock market experiences extreme volatility that often is unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We did not repurchase any shares of our common stock in the second quarter of fiscal 2010.

 

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Our annual meeting of stockholders was held at our corporate headquarters at 4275 Burton Drive, Santa Clara, California on September 24, 2009 at 10:00 a.m. local time. The results of the matters voted upon were as follows:

 

1.               To elect two Class III directors to serve until the expiration of their respective three-year term or until their successors are duly elected and qualified.

 

 

 

Vote

 

 

 

For

 

Withheld

 

Joseph Jeng

 

40,519,231

 

3,927,415

 

Dwight Steffensen

 

41,460,490

 

2,986,156

 

 

The term of office of directors Xinping (James) He, Shaw Hong and Andrew Wang continued after the annual meeting.

 

2.               To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending April 30, 2010.

 

For

 

Against

 

Abstained

 

No Vote

 

45,507,506

 

575,223

 

363,917

 

 

 

3.               To approve the 2009 Employee Stock Purchase Plan and reserve 2,500,000 shares for purchase by our eligible employees.

 

For

 

Against

 

Abstained

 

No Vote

 

31,156,167

 

407,103

 

2,636,387

 

 

 

4.               To approve the stock option exchange program for employees and to make certain changes to the Company’s 2007 Equity Incentive Plan.

 

For

 

Against

 

Abstained

 

No Vote

 

25,971,999

 

5,756,161

 

2,471,497

 

 

 

5.               To approve the stock option exchange program for named executive officers.

 

For

 

Against

 

Abstained

 

No Vote

 

5,720,485

 

26,013,251

 

2,465,921

 

 

 

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ITEM 6.   EXHIBITS

 

Exhibit 
Number

 

Description

10.26

 

2007 Equity Incentive Plan (as amended July 30, 2009).

10.34

 

2009 Employee Stock Purchase Plan.

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

OMNIVISION TECHNOLOGIES, INC.

 

(Registrant)

 

 

 

 

 

 

Dated: December 10, 2009

 

 

 

 

 

 

By:

/s/ SHAW HONG

 

 

Shaw Hong

 

 

Chief Executive Officer, President and Director

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Dated: December 10, 2009

 

 

 

 

 

 

By:

/s/ ANSON CHAN

 

 

Anson Chan

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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Exhibit Index

 

Exhibit
Number

 

Description

10.26

 

2007 Equity Incentive Plan (as amended July 30, 2009).

10.34

 

2009 Employee Stock Purchase Plan.

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.