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OmniVision 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

 

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 July 31, 2007

 

 

 

 

 

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)

 

1341 Orleans Drive, Sunnyvale, California 94089-1136

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (408) 542-3000

 


 

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

 

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

 

Large accelerated filer  x Accelerated filer  o  Non-accelerated filer  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 August 31, 2007, 54,738,646 shares of common stock of the registrant were outstanding, exclusive of 6,435,700 shares of treasury stock.

 

 




OMNIVISION TECHNOLOGIES, INC.

INDEX

 

 

 

 

Page

 

 

 

 

 

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) — July 31, 2007 and April 30, 2007

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income (unaudited) — Three Months Ended July 31, 2007 and 2006

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) — Three Months Ended July 31, 2007 and 2006

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

 

 

 

 

 

Item 1A.

 

Risk Factors

 

44

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

Item 6.

 

Exhibits

 

58

 

 

 

 

 

Signatures

 

 

 

59

 

 

 

 

 

Exhibit Index

 

 

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32

 

 

 

2




PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

OMNIVISION TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 

 

 

July 31,
2007

 

April 30,
2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

176,936

 

$

190,878

 

Short-term investments

 

117,898

 

114,432

 

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

 

71,803

 

65,666

 

Inventories

 

138,334

 

119,663

 

Refundable and deferred income taxes

 

3,751

 

3,356

 

Prepaid expenses and other current assets

 

4,462

 

8,717

 

Recoverable insurance proceeds (Note 15)

 

13,000

 

13,000

 

Total current assets

 

526,184

 

515,712

 

 

 

 

 

 

 

Property, plant and equipment, net

 

79,305

 

64,363

 

Long-term investments

 

78,661

 

67,281

 

Goodwill

 

7,541

 

7,541

 

Intangibles, net

 

18,856

 

20,493

 

Other long-term assets

 

12,206

 

12,669

 

Total assets

 

$

722,753

 

$

688,059

 

 

 

 

 

 

 

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

85,999

 

$

56,290

 

Accrued expenses and other current liabilities

 

15,238

 

17,524

 

Litigation settlement accrual

 

13,000

 

13,750

 

Income taxes payable

 

4,686

 

61,617

 

Deferred income

 

7,225

 

8,873

 

Current portion of long-term debt

 

641

 

631

 

Total current liabilities

 

126,789

 

158,685

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term income taxes payable

 

59,758

 

 

Non-current portion of long-term debt

 

27,412

 

27,576

 

Other long-term liabilities

 

5,616

 

6,998

 

Total long-term liabilities

 

92,786

 

34,574

 

Total liabilities

 

219,575

 

193,259

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

4,485

 

4,344

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized; 61,037 issued and 54,601 outstanding at July 31, 2007 and 60,811 shares issued and 54,941 outstanding at April 30, 2007, respectively

 

61

 

61

 

Additional paid-in capital

 

338,080

 

329,012

 

Accumulated other comprehensive income

 

982

 

867

 

Treasury stock, 6,436 and 5,870 at July 31, 2007 and April 30, 2007, respectively

 

(89,184

)

(79,568

)

Retained earnings

 

248,754

 

240,084

 

Total stockholders’ equity

 

498,693

 

490,456

 

Total liabilities, minority interest and stockholders’ equity

 

$

722,753

 

$

688,059

 

 

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

 

3




OMNIVISION TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

Revenues

 

$

173,134

 

$

136,875

 

Cost of revenues

 

132,526

 

87,155

 

Gross profit

 

40,608

 

49,720

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research, development and related

 

17,426

 

16,842

 

Selling, general and administrative

 

15,165

 

12,451

 

Total operating expenses

 

32,591

 

29,293

 

 

 

 

 

 

 

Income from operations

 

8,017

 

20,427

 

Interest income, net

 

3,361

 

3,403

 

Other income, net

 

260

 

977

 

Income before income taxes and minority interest

 

11,638

 

24,807

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

(1,360

)

6,624

 

Minority interest

 

21

 

2,302

 

Net income

 

$

12,977

 

$

15,881

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.24

 

$

0.29

 

Diluted

 

$

0.23

 

$

0.28

 

 

 

 

 

 

 

Shares used in computing net income per share:

 

 

 

 

 

Basic

 

54,751

 

54,401

 

Diluted

 

55,294

 

56,704

 

 

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

 

4




OMNIVISION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

12,977

 

$

15,881

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,982

 

3,788

 

Change in fair value of interest rate swap

 

(628

)

 

Stock-based compensation

 

6,152

 

6,455

 

Minority interest in net income of consolidated affiliates

 

21

 

2,302

 

Equity investment gain, net

 

(1,461

)

(876

)

Affiliate stock grants

 

56

 

179

 

Write-down of inventories

 

4,690

 

883

 

Loss on disposal of property, plant and equipment

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(6,133

)

(6,117

)

Inventories

 

(24,631

)

(14,451

)

Refundable and deferred income taxes

 

582

 

 

Prepaid expenses and other current assets

 

4,263

 

(3,108

)

Accounts payable

 

25,006

 

7,047

 

Accrued expenses and other current liabilities

 

(29

)

106

 

Income taxes payable

 

(1,482

)

6,252

 

Deferred income

 

(1,648

)

939

 

Deferred tax liabilities

 

(890

)

(485

)

Net cash provided by operating activities

 

19,827

 

18,803

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(11,310

)

(58,122

)

Proceeds from sales or maturities of short-term investments

 

7,950

 

51,528

 

Purchases of property, plant and equipment, net of sales

 

(14,659

)

(6,137

)

Purchases of long-term investments

 

(9,000

)

 

Purchases of intangible assets

 

 

(548

)

Net cash used in investing activities

 

(27,019

)

(13,279

)

Cash flows from financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(154

)

(39

)

Cash contribution by minority shareholder

 

49

 

4,290

 

Proceeds from exercise of stock options and employee stock purchase plan

 

2,916

 

6,748

 

Payments for repurchases of common stock

 

(9,616

)

 

Net cash provided by (used in) financing activities

 

(6,805

)

10,999

 

Effect of exchange rate changes on cash and cash equivalents

 

55

 

(32

)

Net (decrease) increase in cash and cash equivalents

 

(13,942

)

16,491

 

Cash and cash equivalents at beginning of period

 

190,878

 

240,227

 

Cash and cash equivalents at end of period

 

$

176,936

 

$

256,718

 

Supplemental cash flow information:

 

 

 

 

 

Taxes paid, net

 

$

118

 

$

1,580

 

Interest paid

 

$

5

 

$

7

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Capital equipment financing obligation

 

$

4,687

 

$

44

 

Affiliate shares issued to affiliate employees

 

$

295

 

$

459

 

Affiliate cash dividend payable to minority shareholder

 

$

224

 

$

245

 

Change-of-interest benefit from minority shareholder cash contribution

 

$

 

$

1,229

 

Capitalized interest and other costs

 

$

141

 

$

 

 

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

 

5




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

Note 1 — Basis of Presentation

Overview

The accompanying interim unaudited condensed consolidated financial statements as of July 31, 2007 and April 30, 2007 and for the three months ended July 31, 2007 and 2006 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”). The amounts as of April 30, 2007 come from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited 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 annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2007 (the “Form 10-K”).

The results of operations for the three months ended July 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2008 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 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 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.

Change-of-Interest Benefit

Where an unrelated third party invests in one of the Company’s consolidated subsidiaries or affiliates, and the per share value of the investment exceeds the Company’s average per share carrying value in the entity, the Company will record the change-of-interest benefit as “Additional paid-in capital.” If the per share value is less than the Company’s per share carrying value, the Company will assess whether the investment has been impaired.

Foreign Currency Translation

For subsidiaries or consolidated affiliates with local currencies as the functional currencies, 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 denominated in currencies other than the functional currency, 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. Remeasurement gains and losses are included in “Other income, net” and have not been material in any of the periods presented.

6




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

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 commercial paper, government bonds, certificates of deposit and money market funds that are stated at cost, which approximates fair value.

The Company’s cash and cash equivalents amount is subject to concentration of credit risk. The Company maintains some cash and cash equivalent balances with financial institutions that are in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

Inventories

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

The Company records allowances 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 allowances 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. The recording of these allowances 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.

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. Comprehensive income for the three months ended July 31, 2007 and 2006 was $8.8 million and $16.1 million, respectively, and included net income, unrealized losses from available-for-sale securities, change-of-interest benefits and translation gains (losses) from foreign subsidiaries.

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 shipments to distributors under agreements allowing for returns or credits, the Company recognizes revenue using the “sell-through” method under which the Company defers revenue and the related costs of sale until the distributor resells the product to the Company’s end-user customer and the Company is notified in writing by the distributor of such sale. The amount billed to these distributors less the cost of inventory shipped to but not yet sold by the distributors is shown net on the consolidated balance sheets as deferred income.

In addition, the Company recognizes revenue from the performance of services to a limited number of customers by its wholly-owned subsidiary, CDM Optics, Inc. (“CDM”), and, through December 31, 2006, by its then consolidated affiliate, VisEra Technologies Company, Ltd. (“VisEra”). (See Note 5.) The Company recognizes the CDM-associated revenue 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. CDM-associated revenue has not been material in any of the periods presented. Until December 31, 2006, the Company recognized VisEra’s service revenue from third party customers when the production services provided by VisEra were complete and the product was shipped to the customer.

7




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

Income Taxes

The Company accounts for deferred income taxes using the liability method, under which the expected future tax consequences of timing differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit of deferred tax assets will not be realized.

On May 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation, (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”) which the FASB issued in June 2006. See Note 14 for the impact of FIN 48 on the Company’s consolidated financial statements. FIN 48 requires that the Company recognize in its consolidated financial statements the impact of a tax position that, based on the technical merits of the position, is more likely than not to be sustained upon examination. The evaluation of a tax position in accordance with this interpretation is a two-step process. In the first step, recognition, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criterion. The tax position is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold will be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold will be de-recognized in the first subsequent financial reporting period in which that threshold is no longer met. The differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN 48 and the amounts reported after adoption have been accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.

Stock-Based Compensation

Effective May 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”) which requires all share-based payments to employees, including grants of employee stock options and employee stock purchases under the 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”), to be recognized in the financial statements based on their respective grant date fair values. SFAS No. 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations and eliminates the pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). In March 2005, the SEC issued SAB No. 107, Share-Based Payment” (“SAB 107”), which provides guidance regarding the interaction of SFAS No. 123(R) and certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123(R).

The Company adopted SFAS No. 123(R) using the modified prospective method. The Company’s consolidated financial statements as of and for the fiscal year ended April 30, 2007 reflect the impact of adopting SFAS No. 123(R). (See Note 11.)

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements’’ (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands the requisite disclosures for fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather establishes a common definition of fair value to be used throughout generally accepted accounting principles. SFAS No. 157 is effective in fiscal years beginning after November 15, 2007 and the Company is required to adopt it in the first quarter of fiscal 2009. The Company does not expect its adoption of the provisions of SFAS No. 157 to have a material effect on its financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve

8




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. The Company does not expect its adoption of the provisions of SFAS No. 157 to have a material effect on its financial condition, results of operations or cash flows.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and expensing the payments when the research and development activities are performed. EITF 07-3 applies prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007. The Company currently recognizes these non-refundable advanced payments as an expense upon payment. The  Company does not expect its adoption of EITF 07-3 to have a significant impact on its financial condition, results of operations or cash flows.

Note 3 — Short-Term Investments

Available-for-sale securities at July 31, 2007 and April 30, 2007 were as follows (in thousands):

 

 

 

As of July 31, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Certificates of deposit

 

$

6,411

 

$

3

 

$

 

$

6,414

 

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

 

3,000

 

 

(1

)

2,999

 

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

 

10,022

 

 

(13

)

10,009

 

Municipal bonds and notes

 

62,988

 

 

(13

)

62,975

 

Commercial paper and bond funds

 

35,558

 

 

(57

)

35,501

 

 

 

$

117,979

 

$

3

 

$

(84

)

$

117,898

 

Contractual maturity dates, less than one year

 

 

 

 

 

 

 

$

25,248

 

Contractual maturity dates, one year to two years

 

 

 

 

 

 

 

49,650

 

Contractual maturity dates, two years to 39 years(1)

 

 

 

 

 

 

 

43,000

 

 

 

 

 

 

 

 

 

$

117,898

 

 

9




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

 

As of April 30, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Certificates of deposit

 

$

3,332

 

$

 

$

 

$

3,332

 

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

 

3,000

 

 

 

3,000

 

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

 

10,034

 

 

(12

)

10,022

 

Municipal bonds and notes

 

70,521

 

 

(23

)

70,498

 

Commercial paper and bond funds

 

27,623

 

 

(43

)

27,580

 

 

 

$

114,510

 

$

 

$

(78

)

$

114,432

 

Contractual maturity dates, less than one year

 

 

 

 

 

 

 

$

20,130

 

Contractual maturity dates, one year to two years

 

 

 

 

 

 

 

46,602

 

Contractual maturity dates, two years to 39 years(1)

 

 

 

 

 

 

 

47,700

 

 

 

 

 

 

 

 

 

$

114,432

 


(1)             Represents auction rate securities with a final maturity of up to 39 years and an interest rate reset no less frequent than every 35 days.

 

10




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

Note 4 — Balance Sheet Accounts (in thousands)

 

 

 

July 31,
2007

 

April 30,
2007

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

58,457

 

$

18,274

 

Money market funds and certificates of deposit

 

35,684

 

89,020

 

Commercial paper and government bonds

 

82,795

 

83,584

 

 

 

$

176,936

 

$

190,878

 

Accounts receivable, net:

 

 

 

 

 

Accounts receivable

 

$

77,315

 

$

72,113

 

Less:Allowance for doubtful accounts

 

(1,159

)

(980

)

Allowance for sales returns

 

(4,353

)

(5,467

)

 

 

$

71,803

 

$

65,666

 

Inventories:

 

 

 

 

 

Work in progress

 

$

81,044

 

$

64,159

 

Finished goods

 

57,290

 

55,504

 

 

 

$

138,334

 

$

119,663

 

Prepaid expenses and other current assets:

 

 

 

 

 

Prepaid expenses

 

$

3,433

 

$

2,967

 

Deposits and other

 

81

 

4,693

 

Interest receivable

 

948

 

1,057

 

 

 

$

4,462

 

$

8,717

 

Property, plant and equipment, net:

 

 

 

 

 

Land

 

$

26,074

 

$

26,074

 

Buildings and land use right

 

13,061

 

7,612

 

Buildings/leasehold improvements

 

5,117

 

4,666

 

Machinery and equipment

 

33,364

 

19,745

 

Furniture and fixtures

 

724

 

718

 

Software

 

2,680

 

2,546

 

Construction in progress

 

13,928

 

17,496

 

 

 

94,948

 

78,857

 

Less: Accumulated depreciation and amortization

 

(15,643

)

(14,494

)

 

 

$

79,305

 

$

64,363

 

Other long-term assets:

 

 

 

 

 

Deferred income taxes — noncurrent

 

$

6,268

 

$

6,869

 

Prepaid wafer credits

 

4,000

 

4,000

 

Long-term employee loan receivable

 

1,000

 

1,000

 

Other long-term assets

 

938

 

800

 

 

 

$

12,206

 

$

12,669

 

Accrued expenses and other current liabilities:

 

 

 

 

 

Employee compensation

 

$

5,644

 

$

4,713

 

Third party commissions

 

795

 

1,021

 

Professional services

 

1,903

 

1,830

 

Noncancelable purchase commitments

 

1,056

 

906

 

Pricing adjustments

 

3,698

 

4,022

 

Other

 

2,142

 

5,032

 

 

 

$

15,238

 

$

17,524

 

Other long-term liabilities:

 

 

 

 

 

Deferred tax liabilities

 

$

5,616

 

$

6,506

 

Other

 

 

492

 

 

 

$

5,616

 

$

6,998

 

 

11




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

Note 5 — Long-term Investments

 

Long-term investments as of July 31, 2007 and April 30, 2007 consisted of the following (in thousands):

 

July 31,
2007

 

April 30,
2007

 

ImPac

 

$

2,246

 

$

2,355

 

VisEra

 

63,105

 

60,265

 

WLCSP

 

8,649

 

 

XinTec

 

4,661

 

4,661

 

Total

 

$

78,661

 

$

67,281

 

 

ImPac Technology Co., Ltd.

In 2003, in order to enhance its access to plastic and ceramic packaging services that were in short supply, the Company purchased approximately 27% of the common stock of ImPac Technology Co., Ltd. (“ImPac”), a privately-held company based in Taiwan for a total of $2.0 million in cash. In December 2003, the Company made an additional cash contribution of approximately $0.8 million to maintain its equity ownership percentage in ImPac. Unrelated third parties own the balance of ImPac’s equity. During fiscal 2004, the Company’s equity interest declined to approximately 23% due to additional rounds of financing obtained by ImPac in which the Company did not participate. The Company’s purchases from ImPac are at arm’s length and the Company accounts for this investment using the equity method. The Company recorded an equity loss of $109,000 in “Other income, net,” for its portion of the net loss recorded by ImPac in the three months ended July 31, 2007 and income of $123,000 as its portion of the net income of ImPac in the three months ended July 31, 2006. (See Note 16.)

VisEra Technologies Company, Ltd.

In August 2005, the Company entered into an Amended and Restated Shareholders’ Agreement (the “Amended VisEra Agreement”) with Taiwan Semiconductor Manufacturing Company Limited (“TSMC”), VisEra, and VisEra Holding Company (“VisEra Cayman”). The Amended VisEra Agreement amended and restated the original Shareholders’ Agreement (the “VisEra Agreement”) that the parties entered into on October 29, 2003, pursuant to which the Company and TSMC agreed to form VisEra, a joint venture in Taiwan, for the purposes of providing manufacturing services and automated final testing services related to complementary metal oxide semiconductor, or CMOS, image sensors. In November 2003, pursuant to the terms of the original Shareholders’ Agreement, the Company contributed $1.5 million in cash to VisEra and granted a non-exclusive license to certain of its manufacturing and automated final testing technologies and patents. In order to provide greater financial and fiscal flexibility to VisEra, in connection with the Amended VisEra Agreement, the parties formed VisEra Cayman, a company incorporated in the Cayman Islands and VisEra became a subsidiary of VisEra Cayman.

Under the terms of the Amended VisEra Agreement, the parties reaffirmed their respective commitments to VisEra, and expanded the scope of and made certain modifications to the original Shareholders’ Agreement. The Company and TSMC have equal interests in VisEra Cayman. In the quarter ended October 31, 2005, the Company contributed $7.5 million to VisEra and VisEra Cayman.

As a result of the additional investment that the Company and TSMC made in VisEra during the quarter ended October 31, 2005, the Company’s and TSMC’s interest each increased from 25% to 43%, and consequently the Company re-evaluated its accounting for VisEra in accordance with FIN 46(R), “Consolidation of Variable Interest Entities.” The Company concluded that, as a result of its step acquisition of VisEra, and because substantially all of the activities of VisEra either involved or were conducted on behalf of the Company, VisEra was a variable interest entity. Since the Company was the source of virtually all of VisEra’s revenues, the Company had a decisive influence over VisEra’s profitability. In the quarter ended January 2006, the Company increased its interest in VisEra from 43% to 46% through purchases of $9.5 million of unissued shares. Accordingly, the Company considered itself to be the primary beneficiary of VisEra, and included VisEra’s financial results in its consolidated financial statements through December 31, 2006.

12




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

In January 2006, in accordance with the Amended VisEra Agreement, VisEra purchased color filter processing equipment and related assets from TSMC for an aggregate price equivalent to $16.9 million. In connection with the purchase, VisEra entered into a three-year lease agreement with TSMC. Under this agreement, VisEra leases from TSMC approximately 14,000 square feet of factory and office space where the assets are located at an annual cost of approximately $2.4 million.

In May 2006, VisEra purchased certain equipment and intellectual property from Dai Nippon Printing Co., Ltd., or Dai Nippon, for approximately $3.1 million. Dai Nippon also made an investment in VisEra Cayman of approximately $4.3 million. Because the per share value of the Dai Nippon investment exceeded the Company’s average per share carrying value in VisEra Cayman, the Company recorded a one-time change-of-interest benefit of $1.2 million directly to “Additional paid-in capital,” a component of stockholders’ equity. In November 2006, the Company invested another $6.1 million in VisEra.

On January 1, 2007, the Company assumed responsibility for logistics management services previously provided to the Company by VisEra. As a consequence of the change, the Company concluded that, as of the date of the change, it would lose its status as the primary beneficiary of the joint venture, VisEra would cease to be VIE as defined under FIN 46(R) and, as a result, the Company deconsolidated VisEra. Accordingly, beginning on January 1, 2007, the Company accounted for its investment in VisEra under the equity method. The deconsolidation of VisEra did not have a material effect on the Company’s reported revenue or reported net income for the fiscal year ended April 30, 2007. In April 2007, pursuant to a January 2007 amendment to the Amended VisEra Agreement that provided for an increase in VisEra’s manufacturing capacity, the Company and TSMC each made an additional investment of $27.0 million in VisEra. This additional investment is part of an ongoing capacity expansion program at VisEra. As of July 31, 2007, the Company and TSMC have agreed to commit a total of $112.9 million to the joint venture, which commitments may be made in the form of cash or asset contributions. Through July 31, 2007, the Company has contributed $51.6 million to VisEra and VisEra Cayman.

All other material terms of the Amended VisEra Agreement remain in effect. (See Note 16.)

China WLCSP Limited

In May 2007, the Company, through its wholly-owned subsidiary, OmniVision Trading (Hong Kong) Company Limited, consummated an Investment Agreement with China WLCSP Limited (“WLCSP”) (the “Investment Agreement”) and an Equity Interests Transfer Agreement with WLCSP and Infinity-CSVC Venture Capital Enterprise (“Infinity-CSVC”) (the “Transfer Agreement”), each with an effective date of April 6, 2007. WLCSP is in the business of designing, manufacturing, packaging and selling certain wafer level chip scale packaging related services, for which the Company is currently a customer. Pursuant to the Investment Agreement, the Company acquired 2,500,000 units of WLCSP’s equity interests from WLCSP at a per unit price of $2.00 for an aggregate purchase amount of $5.0 million. Under the terms of the Transfer Agreement, the Company purchased from Infinity-CSVC 2,000,000 units of WLCSP’s outstanding equity interests at a price per unit of $2.00 for an aggregate purchase amount of $4.0 million. Following the completion of the two transactions, the Company owns approximately 19.98% of WLCSP’s registered capital on a fully-diluted basis and 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 difference, $4.1 million represents equity method goodwill which the Company will not amortize, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”). The Company will amortize the remaining basis difference of $1.6 million, which is attributable to intangible assets of WLCSP,  over an average life of approximately three years.

The Company accounts for its investment in WLCSP under the equity method and, in the three months ended July 31, 2007, recorded an equity loss of $351,000 in “Other income, net,” consisting of an equity method investment adjustment partially offset by its portion of the net income recorded by WLCSP during the period.

XinTec, Inc.

Between October 2005 and March 2006, pursuant to the terms of the Amended VisEra Agreement (as defined above), VisEra Cayman completed the acquisition of approximately 29.6% of the issued and outstanding shares of XinTec, Inc. (“XinTec”), a Taiwan-based supplier of chip-scale packaging services, in which the Company already held

13




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

an approximate 7.8% interest. Since VisEra was a consolidated entity at the time, the Company’s beneficial interest in XinTec increased to more than 20%. Consequently, beginning in the three months ended October 31, 2005 and through December 31, 2006, the Company accounted for its investment in XinTec under the equity method.

In January 2007, TSMC purchased approximately 90.5 million previously-unissued shares from XinTec. The purchased shares represented approximately a 43.0% ownership interest in XinTec. Other existing shareholders, including the Company and the Company’s affiliate, VisEra, did not purchase additional shares. Consequently, the Company’s direct ownership percentage in XinTec declined to approximately 4.4%. VisEra’s ownership interest declined to 16.9%, and the Company’s beneficial ownership percentage in XinTec declined to 12.4%. Consequently, in accordance with APB 18, the Company began to account for XinTec as a cost method investment effective January 1, 2007. In addition, because the per share value of the TSMC investment exceeded the Company’s average per share carrying value in XinTec, the Company recorded a one-time change-of-interest benefit of $1.2 million directly to “Additional paid-in capital,” a component of stockholders’ equity. For the three months ended July 31, 2006, the Company recorded equity income of $0.8 million in “Other income, net,” for its portion of the net income recorded by XinTec.

The following table presents the summary combined financial information of ImPac, VisEra and WLCSP as derived from the ImPac, VisEra and WLCSP financial statements for the three months ended July 31, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended

 

 

July 31,
2007

 

July 31,
2006

 

Operating data:

 

 

 

 

 

Revenues

 

$

41,812

 

$

42,971

 

Gross profit

 

7,281

 

7,038

 

Income from operations

 

4,335

 

5,367

 

Net income

 

$

1,655

 

$

3,190

 

 

The summarized financial information for the three months ended July 31, 2007 and 2006 was derived from financial statements prepared under accounting principles generally accepted in the United States of America.

The amount of consolidated retained earnings that represented undistributed earnings of investees accounted for by the equity method totaled $7.1 million and $6.8 million at July 31, 2007 and April 30, 2007, 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 also provides semiconductor foundry services, to establish a joint venture in Taiwan. The purpose of the joint venture, Silicon Optronics, Inc. (“SOI”), is to conduct manufacturing, marketing and selling of certain of the Company’s legacy products. 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.

In July 2006, SOI declared a cash dividend of $482,000, of which the Company received $237,000. In July 2006, SOI also issued shares to its employees with an estimated fair value of $459,000 which caused the Company’s ownership percentage to decline from 49.0% to 46.6%.

In April 2007, SOI became listed on the Taiwan GreTai Securities Market, (“TGSM”). The TGSM is the approximate equivalent in Taiwan of the Over-The-Counter market in the United States. In conjunction with the TGSM listing, various employees of SOI exercised their options and increased the number of shares outstanding, which caused the Company’s ownership percentage to decline to 45.0% as of July 31, 2007. In June 2007, SOI declared a cash dividend of $409,000. (See Note 16.)

14




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

Note 7 — Intangible Assets and Goodwill

Intangible assets as of July 31, 2007 consist of the following (in thousands):

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Core technology

 

$

17,800

 

$

8,010

 

$

9,790

 

Patents and licenses

 

13,490

 

5,218

 

8,272

 

Trademarks and tradenames

 

1,400

 

630

 

770

 

Customer relationships

 

100

 

76

 

24

 

Intangible assets, net

 

$

32,790

 

$

13,934

 

$

18,856

 

 

Intangible assets as of April 30, 2007 consist of the following (in thousands):

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Core technology

 

$

17,800

 

$

7,120

 

$

10,680

 

Patents and licenses

 

13,460

 

4,520

 

8,940

 

Trademarks and tradenames

 

1,400

 

560

 

840

 

Customer relationships

 

100

 

67

 

33

 

Intangible assets, net

 

$

32,760

 

$

12,267

 

$

20,493

 

 

During the three months ended July 31, 2007 and 2006, the Company recorded $1.6 million and $1.7 million, respectively, in total amortization expense of intangible assets. The total expected future annual amortization of these intangible assets is as follows (in thousands):

Years Ending April 30,

 

 

 

2008

 

$

4,928

 

2009

 

6,532

 

2010

 

6,386

 

2011

 

973

 

2012

 

37

 

Total

 

$

18,856

 

 

Note 8 — Borrowing Arrangements

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

 

July 31,
2007

 

April 30,
2007

 

 

 

 

 

 

 

Mortgage loan

 

$

27,809

 

$

27,927

 

Capital lease obligations

 

244

 

280

 

 

 

28,053

 

28,207

 

Less: amount due within one year

 

(641

)

(631

)

Non-current portion of long-term debt

 

$

27,412

 

$

27,576

 

 

At July 31, 2007, aggregate debt maturities were as follows: (in thousands):

Years Ending April 30,

 

Mortgage
Loan

 

Capital
Lease

 

Total

 

2008

 

$

367

 

$

110

 

$

477

 

2009

 

515

 

134

 

649

 

2010

 

548

 

 

548

 

2011

 

583

 

 

583

 

2012

 

620

 

 

620

 

Thereafter

 

25,176

 

 

25,176

 

Total

 

$

27,809

 

$

244

 

$

28,053

 

 

15




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

Mortgage Loan

On March 16, 2007, the Company entered into a Loan and Security Agreement with a domestic bank. The Loan and Security Agreement provides for a term 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”). Borrowings under the Mortgage Loan accrue interest at the London Interbank Borrowing Rate (“LIBOR”) rate 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 September 30, 2012, respectively.

As of July 31, 2007, $27.8 million was outstanding under the Mortgage Loan. At July 31, 2007, the interest rate under the Mortgage Loan was 6.2%. The Company was in compliance with the financial covenants of the Loan and Security Agreement as of July 31, 2007.

In conjunction with the Mortgage Loan, the Company entered into an interest rate swap with the same bank to 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 5.27% per annum. The Company measures the swap at fair value and records it as either an asset or a liability, depending on whether the fair value represents a net gain or net loss. As of July 31, 2007, the Company recorded $136,000 in “Other long-term assets” and, for the three months ended July 31, 2007, income of $0.6 million in “Other income, net.”

Lines of Credit at SOI

SOI maintains four unsecured lines of credit with three commercial banks, which provide a total of approximately $3.4 million in available credit. All borrowings under the four lines of credit maintained by SOI bear interest at the market interest rate prevailing at the time of borrowing. There are no financial covenant requirements for these facilities and at July 31, 2007, there were no borrowings outstanding under these facilities.

Capital Lease Obligations

In February 2006, the Company leased telecommunications equipment under a three-year capital lease at an imputed interest rate of 7.5% per annum. Terms of the agreement require the Company to make monthly payments of approximately $14,000 through February 2009. Accordingly, the Company recorded a capital asset for $393,000 that is being depreciated over a five-year period in accordance with the Company’s capitalization policy. As of July 31, 2007, $244,000 was outstanding under the capital lease. As of July 31, 2007, $95,000 was classified as a long-term obligation.

Note 9 — Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted net income per share is computed according to the treasury stock method using the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares represent the effect of stock options. For the three months ended July 31, 2007 and 2006, 7,793,000 and 3,350,000  shares, respectively, of common stock subject to outstanding options were not included in the calculation of diluted net income per share because they were antidilutive (i.e., the per share exercise price for such options exceeded the average trading price of the Company’s common stock as reported on The Nasdaq Stock Market for the periods presented).

The Company’s earnings per share were calculated under the provisions of the Statement of Financial Accounting Standards (or “SFAS”) No. 128, “Earnings Per Share,” or SFAS No. 128. SFAS No. 128 requires that the Company take 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

16




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

 

Company’s consolidated earnings per share computations based on the consolidated group’s holding of the subsidiary’s securities. In February 2005, SOI issued options exercisable for 1,400,000 shares of its own common stock. Subsequently, in June 2006, SOI issued options exercisable for an additional 700,000 shares of its own common stock. In the calculation of its earnings per share for the three months ended July 31, 2007 and 2006, the Company included the effect of SOI’s options in its consolidated earnings per share.

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

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

Basic:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income

 

$

12,977

 

$

15,881

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares for net income per share

 

54,751

 

54,401

 

 

 

 

 

 

 

Basic net income per share

 

$

0.24

 

$

0.29

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income

 

$

12,977

 

$

15,881

 

Dilutive effect of SOI consolidation

 

 

(1

)

Net income for diluted computation

 

$

12,977

 

$

15,880

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic net income per share

 

54,751

 

54,401

 

Weighted average effect of dilutive securities:

 

 

 

 

 

Common stock options

 

543

 

2,303

 

Weighted average common shares for diluted net income per share

 

55,294

 

56,704

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.23

 

$

0.28

 

 

Note 10 — 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.

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 months ended July 31, 2007 and 2006:

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

OEMs and VARs

 

64.5

%

68.1

%

Distributors

 

35.5

 

31.9

 

Total

 

100.0

%

100.0

%

 

17




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

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 the products and/or their components are manufactured or 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
July 31,

 

 

 

2007

 

2006

 

China(1)

 

$

152,910

 

$

76,074

 

Taiwan

 

11,095

 

27,970

 

Japan

 

2,561

 

13,088

 

United States

 

1,392

 

2,493

 

South Korea

 

844

 

14,242

 

All other

 

4,332

 

3,008

 

Total

 

$

173,134

 

$

136,875

 


(1)    Prior year data reclassified to combine the results for Hong Kong and China.

 

The Company’s long-lived assets are located in the following countries (in thousands):

 

July 31,
2007

 

April 30,
2007

 

Taiwan

 

$

74,891

 

$

71,953

 

United States

 

44,256

 

41,896

 

China

 

43,275

 

22,053

 

All other

 

482

 

542

 

Total

 

$

162,904

 

$

136,444

 

 

Note 11 — Employee Stock Purchase and Stock Option Plans

Stock-Based Compensation Award Activity

The following table summarizes stock-based compensation award activity under the 2000 Stock Plan and the 2000 Director Option Plan, and the related weighted average exercise price, for the three months ended July 31, 2007:

 

 

 

Options outstanding

 

 

 

Options
Available
For Grant

 

Number of
Shares

 

Weighted
Average
Price Per
Share

 

 

 

(in thousands)

 

(in thousands)

 

 

 

Balance at May 1, 2007

 

1,743

 

12,537

 

$

18.54

 

Replenished

 

3,137

 

 

 

Granted

 

(2,527

)

2,527

 

14.93

 

Exercised

 

 

(90

)

11.82

 

Expired or forfeited

 

257

 

(257

)

20.09

 

Balance at July 31, 2007

 

2,610

 

14,717

 

17.93

 

Vested and expected to vest at July 31, 2007

 

 

 

14,213

 

$

17.89

 

 

As of July 31, 2007 and April 30, 2007, options to purchase 7,238,000 and 6,126,000 shares, respectively, were vested.

The total intrinsic value of options exercised during the three months ended July 31, 2007 and 2006 was $485,000 and $4.6 million, respectively. Total cash received from employees as a result of employee stock option exercises during the three months ended July 31, 2007 and 2006 was approximately $1.1 million and $5.4 million, respectively.

18




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

As of July 31, 2007, net of forfeitures, there was $59.0 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years. For the 2000 Purchase Plan, as of July 31, 2007, there was $3.0 million of unrecognized compensation expense which is expected to be recognized over a weighted average period of 1.2 years. The Company’s current practice is to issue new shares to settle share option exercises. As of April 30, 2007, net of forfeitures, there was $44.5 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.2 years. For the 2000 Purchase Plan, as of April 30, 2007, there was $1.2 million of unrecognized compensation cost which is expected to be recognized over a weighted average period of 1.1 years. The Company’s current practice is to issue new shares to settle share option exercises.

Valuation Assumptions

SFAS No. 123(R) requires companies to estimate the fair value of stock-based compensation awards on the grant date using an option pricing model. 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 Income. The Company measures the fair value of stock-based compensation awards using Black-Scholes consistent with the provisions of SFAS No. 123(R), SEC SAB No. 107. 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 per share weighted average estimated grant date fair value for employee options granted was $6.81 and $13.93 during the three months ended July 31, 2007 and 2006, respectively.

The following weighted average assumptions are included in the estimated fair value calculations for stock options granted in the three months ended July 31, 2007 and 2006:

 

Employee Stock Option Plans

 

 

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

Risk-free interest rate

 

4.84

%

5.05

%

Expected term of options (in years)

 

4.0

 

4.0

 

Expected volatility

 

52.0

%

66.8

%

Expected dividend yield

 

0

%

0

%

 

Using Black-Scholes, the per share weighted average estimated fair value of rights issued pursuant to the Company’s 2000 Purchase Plan during the three months ended July 31, 2007 and 2006 was $5.65 and $8.13, 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
July 31,

 

 

 

2007

 

2006

 

Risk-free interest rate

 

5.04

%

5.11

%

Expected term of options (in years)

 

0.5

 

0.5

 

Expected volatility

 

48.3

%

57.2

%

Expected dividend yield

 

0

%

0

%

 

19




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

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: Upon the adoption of SFAS No. 123(R), 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. 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 12 — Additional Paid-in Capital

The following table shows the amounts recorded to “Additional paid-in capital” for the three months ended July 31, 2007 (in thousands):

 

Additional
Paid-in
Capital

 

Balance at May 1, 2007

 

$

329,012

 

Exercise of stock options

 

1,072

 

Employee stock purchase plan

 

1,844

 

Compensation related to stock options granted

 

6,152

 

Balance at July 31, 2007

 

$

338,080

 

 

Note 13 — 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, and at April 30, 2007, the Company had cumulatively repurchased 5,870,000 shares of its common stock for an aggregate cost of approximately $79.6 million.

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. Subject to applicable securities laws, such repurchases will be at such times and in such amounts as it deems appropriate, based on factors such as market conditions, legal requirements and other corporate considerations. As of July 31, 2007, the Company had cumulatively repurchased 566,000 shares of its common stock under the open-market program for an aggregate cost of approximately $9.6 million.

Note 14 — Income Taxes

The Company adopted the provisions of FIN 48 on May 1, 2007. As a result of the adoption of FIN 48, the Company increased its net unrecognized tax benefits by $4.3 million, and accounted for the increase as a cumulative effect of a change in accounting principle by reducing retained earnings by $4.3 million. The Company also recorded a $2.7 million increase in its liability for net unrecognized tax benefits, a $1.3 million decrease in deferred tax assets and a $0.3 million decrease in other receivables. The total amount of gross unrecognized tax benefits as of the date of adoption was $70.1 million.

Historically, the Company classified the liability for net unrecognized tax benefits in current income taxes payable. As a result of the adoption of FIN 48, the Company reclassified $64.3 million of its liability for net unrecognized tax benefits from current to long-term income taxes payable because payment of cash is not anticipated

20




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

within one year of the balance sheet date. The Company’s net unrecognized tax benefits consisted of gross unrecognized tax benefits, reduced by the associated federal tax  benefits on state unrecognized tax benefits and interest.

The total amount of gross unrecognized tax benefits of $70.1 million as of the date of adoption includes $68.8 million that, if recognized, would reduce the Company’s effective income tax rate in future periods; and $1.3 million related to the federal tax benefit on state unrecognized tax benefits and interest, if recognized. One or more of these unrecognized tax benefits could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.

The Company’s policy to include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the Condensed Consolidated Statements of Income did not change as a result of implementing the provisions of FIN 48. As of the date of adoption, the Company had accrued $5.1 million and $7.4 million for the potential payment of interest and penalties, respectively. During the quarter ended July 31, 2007, the Company accrued approximately $0.7 million of interest. As a result of a change in tax law in a foreign jurisdiction during the first quarter of fiscal 2008, the Company reduced the total amount of gross unrecognized tax benefits, as well as its accrual for penalties, by $4.5 million.

The Company files U.S. federal, U.S. state, and foreign tax returns. For U.S. federal, U.S. state and foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to fiscal 2003. Over the next twelve months, the Company does not anticipate any material change to the balance of gross unrecognized tax benefits.

Note 15 — Commitments and Contingencies

Commitments

In December 2000, the Company formed a subsidiary, Hua Wei Semiconductor (Shanghai) Co. Ltd., or HWSC, to conduct testing operations and other processes associated with the manufacturing of its products in China. The registered capital of HWSC is $30.0 million and, as of July 31, 2007, the Company had fully funded the registered capital commitment. The funds were used primarily for payment to building contractors for the construction of facilities and for the purchase of equipment.

The Company also maintains a subsidiary in Shanghai, SDC, which provides assistance to the Company in various product design projects and in marketing and sales support. On January 10, 2007, SDC 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. In addition, the Company is obligated to invest a minimum of approximately $30 million to develop the land and construct facilities, which amount includes the Purchase Price. As of July 31, 2007, the Company has contributed $7.5 million of the $30 million total investment. Construction of the facilities on the land must be completed by June 30, 2009, pursuant to contractual agreement, subject to an additional one-year extension under limited circumstances. The Company may use the land solely for the purposes of industrial use and/or scientific research. The Company intends to use SDC’s registered capital to partially fund its commitment to this project.

The Company has various commitments arising from the Amended VisEra Agreement, and the subsequent amendments to it. In particular, as of July 31, 2007, the Company and TSMC have agreed to commit a total of $112.9 million to the joint venture, which commitments may be made in the form of cash or asset contributions. Additional contributions may be made by additional investors, additional contributions by the Company and TSMC, or a combination thereof, provided that the Company and TSMC have and will maintain equal interests in VisEra and VisEra Cayman.

Through July 31, 2007, the Company has contributed $51.6 million to VisEra and VisEra Cayman. To the extent, if any, that the value of assets contributed in the future exceeds the value of the Company’s commitment, the Company will receive cash from VisEra Cayman. (See Notes 5 and 16.)

21




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

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.

In June 2004, the issuer defendants and plaintiffs negotiated a stipulation of settlement for the claims against the issuer defendants, including OmniVision, that was submitted to the Court for approval. In August 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement.  Plaintiffs have indicated that they will seek to amend their allegations and file amended complaints.  It is uncertain whether there will be any revised or future settlement. If the litigation proceeds, the Company believes that it has meritorious defenses to plaintiffs’ claims and intends to defend the action vigorously.

On June 10, 2004, the first of several putative class actions was filed against the Company and certain of its present and former directors and officers in federal court in the Northern District of California on behalf of investors who purchased its common stock at various times from February 2003 through June 9, 2004. Those actions were consolidated under the caption In re OmniVision Technologies, Inc., No. C-04-2297-SC, and a consolidated complaint was filed. The consolidated complaint asserts claims on behalf of purchasers of the Company’s common stock between June 11, 2003 and June 9, 2004, and seeks unspecified damages. The consolidated complaint generally alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by allegedly engaging in improper accounting practices that purportedly led to the Company’s financial restatement. On July 29, 2005, the Court denied the Company’s motion to dismiss the complaint. The parties engaged in settlement discussions and in November 2006, the parties reached an agreement in principle to settle this litigation. The total amount of the proposed settlement is approximately $13.8 million, of which approximately $0.8 million would be contributed by the Company and the remainder would be funded by insurance carriers that issued Directors and Officers Liability Insurance Policies to the Company. During fiscal 2007, the Company accrued $3.3 million as its share of the settlement, including unreimbursed defense costs, net of the $13.0 million in recoverable insurance proceeds. The parties have executed a Stipulation of Settlement that was filed with the Court on May 15, 2007. On May 25, 2007, the Court issued an Order preliminarily approving the settlement and providing for notice of the settlement to be provided to the purported shareholder class. The Order granting preliminary approval scheduled a hearing on September 7, 2007 to determine whether the settlement is fair, reasonable and adequate to the purported class. The hearing was held on  September 7, as scheduled, but the Court had not issued a ruling on the matter as of the date of this filing. As a part of the Stipulation of Settlement, the parties agreed to stay discovery and other proceedings. The Company believes that ultimate settlement is probable at the currently estimated amount.  If the settlement does not  become final and litigation against it continues, the Company believes that it has meritorious defenses and intends to defend the case vigorously. If the litigation continues, the Company cannot estimate whether the result of the litigation would have a material adverse effect on its financial condition, results of operations or cash flows.

22




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

On October 20, 2005, a purported shareholder derivative complaint, captioned Hackl v. Hong, No. 1:05-CV-050985, was filed in Santa Clara County Superior Court for the State of California. This derivative action contains allegations that were virtually identical to the prior state court derivative actions that were voluntarily dismissed, and which were based on the allegations contained in the securities class actions. The complaint generally sought unspecified damages and equitable relief based on causes of action against various of the Company’s present and former directors and officers for purported breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and violations of California Corporations Code. The Company was named solely as a nominal defendant against whom no monetary recovery was sought. Pursuant to a January 20, 2006 Court Order, plaintiff furnished a bond for reasonable expenses in order to proceed with his derivative action. On May 15, 2006, the Court sustained the Company’s demurrer to the complaint with leave to amend on the grounds that the plaintiff failed to make a pre-litigation demand on the Company’s board of directors and fails to sufficiently plead that demand is futile. On October 4, 2006, the Court sustained the Company’s demurrer to the complaint as well and again granted plaintiff leave to amend. On May 10, 2007, the Court sustained the Company’s demurrer contending that plaintiff’s complaint failed to allege adequately why no pre-litigation demand had been made on the  Company’s board of directors, but granted plaintiff leave to further amend the complaint. Simultaneously, the parties advised the Court that they had reached a settlement in principle. The parties executed a Stipulation of Settlement that was filed with the Court on June 18, 2007. On June 26, 2007, the Court entered an order approving the settlement, pursuant to which the Company agreed to pay a settlement fee in the amount of $200,000. The Company expensed this amount in the quarter ended July 31, 2007.

Note 16 — 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 matures on May 12, 2009. The loan is secured by a deed of trust.

In the second quarter of fiscal 2006, the Company entered into an agreement with ImPac (see Note 5) under which ImPac agreed to provide certain management and support services to HWSC. The Company compensates ImPac for the services provided in accordance with the Company’s policy regarding related party transactions. The Company’s board of directors approved the agreement, which may be cancelled by either party at any time. During the three months ended January 31, 2007, the Company and ImPac agreed to phase out ImPac’s management and support services over a period of several months beginning on January 1, 2007. During the three months ended July 31, 2006, the Company paid ImPac approximately $211,000 as compensation for management and support services. During the three months ended July 31, 2007, the Company paid ImPac approximately $45,000 as software licensing fees.

The Company consolidated VisEra’s operating results from August 1, 2005 to December 31, 2006. Subsequently, the Company accounted for its investment in VisEra under the equity method. For the three-month period ended July 31, 2007, the Company paid $34.3 million to VisEra for color filter and other manufacturing services.

In May 2007, the Company purchased a 19.98% ownership in WLCSP for $9.0 million. For the three-month period ended July 31, 2007, the Company paid $2.3 million to WLCSP for chip scale packaging services.

23




OMNIVISION TECHNOLOGIES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the Three Months Ended July 31, 2007 and 2006

(unaudited)

The following table summarizes the transactions that the Company’s consolidated affiliate, SOI, and its affiliate, VisEra, engaged in with related parties in the ordinary course of business in the three months ended July 31, 2007 and 2006 (in thousands):

 

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

SOI transactions with:

 

 

 

 

 

ImPac:

 

 

 

 

 

Purchases of manufacturing services

 

$

563

 

$

1,325

 

Balance payable at period end

 

422

 

958

 

PSC:

 

 

 

 

 

Purchases of wafers

 

1,540

 

1,174

 

Rent and other services

 

 

14

 

Balance payable at period end

 

478

 

254

 

 

 

 

 

 

 

VisEra transactions with:

 

 

 

 

 

ImPac:

 

 

 

 

 

Purchases of manufacturing services

 

 

3,433

 

Balance payable at period end

 

 

3,235

 

TSMC:

 

 

 

 

 

Sales to TSMC

 

615

 

432

 

Purchases of manufacturing services

 

243

 

271

 

Rent, utilities and other services

 

1,859

 

982

 

Balance payable at period end

 

1,917

 

509

 

WLCSP:

 

 

 

 

 

Purchases of manufacturing services

 

$

1,531

 

$

 

 

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

 

24




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 “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,” “outlook,” “intends,” “believes” 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 the extent of future sales through distributors, future trends and opportunities in certain markets, the development, introduction and capabilities of new products, the establishment of partnerships with other companies, increased unit volume sales, the increase of competition in our industry, the continued importance of the camera cell phone market to our business, continued price competition and the consequent reduction in the average selling prices of our products, future gross margins and future expenses, our effective tax rate for fiscal 2008, our future investments, our working capital requirements in fiscal 2008, 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 44 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission (“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 and OmniPixel are registered trademarks of OmniVision Technologies, Inc. CameraChip,  OmniPixel2, OmniPixel3, Square Graphics Array and TrueFocus are trademarks of OmniVision Technologies, Inc. Wavefront Coded is a registered trademark of CDM Optics, Inc., a wholly-owned subsidiary of OmniVision Technologies, Inc. Wavefront Coding is a trademark of 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 by the name 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. We believe that our highly integrated image sensors 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 August 2004, we announced the introduction of our OmniPixel® technology. In September 2005, we announced the introduction of our OmniPixel2™ architecture. The OmniPixel2  architecture, which is based on a 2.2µ x 2.2µ pixel and uses a 0.13µ process geometry, is less than half the size of the OmniPixel architecture introduced in 2004, but with improved performance. With the OmniPixel2 architecture, we significantly improved sensor performance in three key areas: the improved fill-factor and zero-gap micro-lens structure increased the sensor’s capacity to capture light and the sensor’s improved quantum efficiency improved its dynamic range, that is its capacity to capture widely differing light levels in a single image; and its capacity to rapidly adjust to changes in light levels.

In February 2007, we introduced our first TrueFocus™ camera with Wavefront Coding™ technology for the mobile handset market. Our patented Wavefront Coding technology is a method of optically encoding light using a special lens to form an intermediate image on the sensor, and decoding this intermediate image with digital processing to create a picture that is in focus across virtually the entire image. TrueFocus technology offers true ‘point-and-shoot’ capability where the entire image is always in focus and always available for instant one-click capture in real time, with no waiting for the lens to focus. TrueFocus technology is designed to provide our customers with a product that effectively targets the mobile handset market by being small, durable, easy to manufacture and cost-competitive.

25




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

In May 2007, we announced the introduction of the latest generation of our OmniPixel architecture, our OmniPixel3™ architecture. The OmniPixel3 architecture is based on a new 1.75μ x 1.75μ pixel and uses a 0.11μ process geometry which further reduces the size of a given sensor array without any reduction in image quality.

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 September 2006, we introduced the OV7720, a high sensitivity digital video graphics array, or VGA, CameraChip sensor designed specifically for security and surveillance applications. Unlike the sensors used in conventional analog security cameras, the new sensor produces high quality digital output and eliminates the need for A/D converters while simplifying post processing. The OV7720 is one of the first high performance sensors capable of running at 60 frames per second and delivers, we believe, exceptional low-light sensitivity and performance without sacrificing the speed required for advanced security applications. In September 2006, we also unveiled the new OV7949 advanced CMOS CameraChip sensor designed specifically for commercial closed-circuit television/video monitoring security systems. The highly integrated, single-chip OV7949 video camera chip sensor is based on our proprietary OmniPixel architecture. The OV7949 combines a high level of functionality with a brand new design that we specifically engineered to operate extremely well in low-light conditions, a feature especially critical to indoor and night security monitoring systems.

In October 2006, we announced the availability of our new all digital OV7710 CameraChip advanced CMOS image sensor developed specifically for automotive applications. The OV7710 is a highly integrated CMOS video camera that combines a high level of functionality with all digital output. Digital output is a key requirement for automotive machine-vision applications such as airbag deployment, lane departure warning, collision avoidance/pedestrian detection, windshield wiper control, and drowsiness detection. The OV7710 features a dual dynamic overlay function, which permits text or graphics within the image.

In February 2007, in addition to the first TrueFocus camera described earlier, we announced the details of two other new products. The first was a 5.17-megapixel auto-focus camera module for mobile handsets based around the OV5623 CameraChip sensor. The new module provides the basis for high resolution cameras to enter the mainstream mobile handset market. Our introduction of the 5.17-megapixel camera module with auto-focus capability, a function previously associated only with digital still cameras, or  DSCs, and expensive camera phones, brings high image quality and camera performance closer to the mainstream camera phone market. We expect that our new 5.17-megapixel camera module will enable our handset customers to continue to move up the ‘megapixel curve’ in order to provide DSC-quality imaging on mass market camera phones.

The second new product was the OV7680, a new 1/10 inch VGA CameraChip sensor designed for ent